Distressed businesses exist in every industry. Some can be great opportunities, especially when they're purchased for a low price and can be infused with small amounts of capital and simple managerial knowhow to bring about better outcomes. Others should be avoided at all costs. In this article, we’ll help you make an informed decision about whether it's a smart move to buy a distressed business.
What causes a business to become distressed?
There are lots of reasons businesses can become distressed. Some are poorly managed. Others are overburdened by debt or need capital to market, redesign their products, or update their systems or critical machinery. Still others become distressed because of poor market conditions or changing buyer preferences.
For prospective buyers, the reason for a business’s distress is very important. Some causes may be difficult to overcome; some impossible. But you may find that others can be navigated with specific forms of knowhow, capital, and involvement in the business.
How can I tell if a distressed business has value?
The best way to take on this task is through due diligence, a process you can use to assess whether a distressed business is worth the time, energy, and resources you’ll put into it. Here, you’ll look for signs of value—and vitality—that can be developed to bring life back to the business. These signs could include a loyal and diverse customer base, high-caliber employees, or capabilities other firms don’t have.
You’ll also need to pinpoint why the business is distressed. To do this, you'll look beyond the obvious symptoms the business is experiencing and find the source of its biggest issues. The business’s financial documents will give you some clues. You can also learn a lot by talking with the management team, employees, customers, and others involved with the business.
Once you uncover the root of the problem, you might see how to restore the business’s financial, legal, or reputational health. Clear solutions can build confidence. Here's what you'll want to look for:
- Solutions that are reasonable and attainable
- Strategies that are financially smart
- Next steps with favorable odds of success
- Tactics can help you to address the core problem and its emerging symptoms
If you can form a plan built on all four of these ingredients, you may have a business worth investing in.
|Plan to buy a distressed business, but the problems seem too big to take on? Consider another tactic: Look into buying the business's high-value assets, including its customer lists, intellectual property, or a profitable division, rather than the entirety of a business.
This smart move can help you avoid assuming the business’s unwanted liabilities, but it can also introduce some tax concerns. A tax attorney can help you to understand the risks and benefits.
I'm ready to buy, but how do I find a distressed business?
Few businesses will announce their distress, but there are some strategies that can help you find businesses worth looking into:
- Pay attention to changes in industry trends, costs of inputs, legislation, tariffs, licensing requirements, and prevailing ideas. Then, identify businesses that may be suffering because of them.
- Talk to lenders, customers, suppliers, competitors, and others in your target industry to keep up to date on who’s performing well and who’s struggling to stay afloat.
- If you already own a business, talk to your vendors and suppliers. Some may be facing insurmountable problems in parts of their business and open to an acquisition. Consider any option that could be valuable to your operations, save your business money, or boost your business’s performance.
Guidance to buy a distressed business
It can be risky to buy a distressed business. Because of this, an attorney is a great resource. Be sure to work with an attorney who can help you understand the liabilities, judgments, and recourses of a distressed business. Then, lean on their expertise as you work through the complex process of acquisition. Their work will likely include negotiating with the business and its creditors, equity holders, bondholders, landlords, and others.
An accountant also deserves a place on your acquisition team, too. Lean on your accountant’s expertise to evaluate the business’s debt and tax issues, examine revenue streams, and help you to determine the right offer price for the business.
Here are a few accounting firms other business owners love using. Check them out here (and be sure to click the logo to learn more about them):
Is there anything else to know before I buy a distressed business?
It can be much more complicated to finance a distressed business than one that’s solvent. Traditional means of funding, including bank loans and SBA loans, may not be available to you. However, there are other options. You may be able to arrange seller financing or an earnout scenario to reduce your upfront costs. Work with your attorney or accountant to model these scenarios and find the option that’ll work best for you.
Learn more about these options here:
Whether you choose to buy a distressed business or purchase one that’s financially solvent, you’ll need to follow specific steps to make your purchase a success. We can help you with every part of this process. Log into your owner’s portal for free articles and advice to source and assess businesses, negotiate terms, and complete your acquisition.