Some say nearly anything can be turned around, but not everyone has the expertise needed to perform commercial miracles.
Nevertheless, some flawed outfits listed for sale may not be beyond repair even though the present owners are tired of trying.
Buying any business is a gamble, but you can find yourself favorable odds by checking the numbers carefully and making certain you understand the issues involved.
Why buy a business with faults?
Essentially, because it’s already cheap – or because you know you can negotiate a cut-price deal by exposing the underlying weaknesses.
It follows that you must also have a workable plan for turning around the fortunes of any small business that catches your eye.
Deliberately targeting an ailing business may be OK for the experts. But, what about those who are keen to buy a business only to find that hidden faults appear during pre-sale due diligence?
What happens in this scenario depends on what advice your professional team offer and your own gut feeling, as well as on what explanation the vendor offers, and how the revelations affect the asking price.
In any event, many problems are fixable, while others should signal the end of your interest.
What can be fixed?
Your due diligence team will be aware of the need to sniff out business debt, but it’s equally important to know what kind of money is owed.
If your business kept employees on payroll during the COVID pandemic and you have not filed for Employee Retention Credits (ERC), you may qualify for up to $26,000 per W2 employee. ERC rewards businesses and nonprofits that maintained their employee payroll even in the face of economic challenges.
For instance, where convenience store customers have some dollars outstanding on unpaid tabs, the position may be entirely retrievable.
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As mentioned on Businessesforsale.com: “… too much in the receivable column could indicate a serious problem with collecting on invoices.”
But rather, perhaps it’s a matter of a software solution, reminders and appropriate persistence – something that an exhausted owner may not have had the time or energy to set up.
A lot can depend on the actual content of the feedback.
Customers have expectations when making a purchase, and staff attitudes play a major part in how satisfied the customer will be with the outcomes.
So if the reviews primarily suggest staff are disinterested, lack empathy, show irritation or arrogance and other examples of poor customer care, this will give you a ready-made action plan to turn things around.
A strong, ‘under new management’ marketing campaign which also addresses these concerns, plus a customer-care strategy which encourages positive feedback and some active, customer-focused social media initiatives, should help to turn the tide in your favor.
Remember that reviews are rarely neutral, so to be effective you can only stop bad reviews by winning good ones.
Too many overheads can kill a small business. Purchasing strategies need to secure the right quantity, at the right time, for the best price.
If you can optimize your buying, and keep things under regular review then the business will gain some much-needed stability.
And if you must add value to compete, make absolutely certain you have everything properly costed.
Ask yourself tough questions too, such as identifying when you can make a saving by using pre-owned equipment rather than new.
What can’t be fixed?
A bad location
If lack of footfall caused a business to fail, it’s likely the same will happen again.
Unless due diligence throws up some hidden positives – e.g. new developments round the corner and/or factors resulting in a rapid up scaling of the neighborhood – it’s a risk you won’t want to take.
And even if you are lucky enough to catch a new wave of gentrification, be very sure the business won’t still fail because it’s seen as part of the area’s problems.
Are the business’ premises locked into a long lease with evidence of steep rent rises?
That’s certainly a red flag issue, which is why professionals advise: “… you should review the lease carefully before you buy, and insist on meeting the landlord in advance.” (allbusiness.com)
Too much debt
Your due diligence may reveal unpaid taxes and outstanding loans which can’t be repaid. That, business experts warn, is the time to walk away:
“Carefully review the current debt and debt ratio of the business you are considering purchasing, and make sure the amount of debt is manageable.” (allbusiness.com)
Don’t be too dismayed by a due diligence report which exposes a less-than-perfect business with a few warts. It may throw up some hidden treasure too.
However, what you and your team must do is spot what can be repaired whilst ensuring any potential red flags are exposed before a deal is contemplated.
By Bruce Hakutizwi, USA and International Accounts Manager for BusinessesForSale.com, the world’s largest online marketplace for buying and selling small and medium size businesses. Bruce has over 7 years’ experience working within the US business transfer marketplace connecting buyers and sellers.