Why Buying an Underperforming Business Could Pay Dividends
If you’re in the market to buy a business, you may be looking for opportunities where the company is making a lot of money. Who wouldn’t want to buy a business that is turning a significant profit already?
There’s a lot of potential challenges with that line of thinking, though. It may be hard to find these types of businesses for sale, and if you do, the asking price for such a business could be too rich for your blood.
While you may not be looking at businesses that are underperforming as viable options for you to purchase, you probably should, as they could pay huge dividends in the end.
Think of this scenario from a real estate perspective. Everyone would want a brand new house that was customized and built just for them — one with marble countertops, an in-ground pool, a luxurious master suite and top-of-the-line appliances. But there aren’t many people who can afford such a house.
Many people choose to purchase what are known as fixer-uppers — houses that have good bones but need some sprucing up and personalization to make it their own. Oftentimes, these fixer-upper properties are the ones that yield the biggest return to their buyers in the long run. That’s because they bought low, put in sweat equity over the years and sold high.
In this way, purchasing an underperforming business can be the same thing. These businesses will often have a much lower asking price, but come with “good bones” that you could build upon and take to the next level.
Here are some things to look for if you’re considering purchasing an underperforming business.
Identify Those with Good Bones
What are “good bones” when it comes to a business? The “foundation” or “structure” of the business — to use real estate terms — are any liens, lawsuits, litigation or outstanding taxes owed. Like a cracked foundation of a home, the presence of any of these would be a huge red flag.
Next, analyze the financials of the company, including their accounting software and bank statements. Then, analyze the sales of the company and its customers. Do they have a solid customer base? Do any of their customers make up more than 20% of their overall sales? If the answer is yes to the latter question, then that would be a red flag, too.
Finally, take a look at the employees. Are they leaving the company left and right? If so, that would be a red flag as well. While you may not be keeping everyone on staff after you purchase the business, you’ll want a solid stable base of current employees to help you through the transition.
Have the Seller Finance the Purchase
Underperforming businesses often don’t have a lot of people knocking down their door to purchase them. This means that they may be a little desperate to sell. In addition to resulting in a potentially lower sales price, you could also benefit from alternative financing options.
One challenge to buying an underperforming business is that it may be hard to get traditional financing through a bank or credit union. If you don’t have the cash in hand to purchase the business outright, then, you’ll need to look for other ways to do so.
One effective way would be to have the seller finance the purchase for you. You would most likely give the seller some upfront cash — acting as a down payment — while agreeing to a repayment plan over a set number of months. This would give you the flexibility of hanging onto some cash that you’ll most likely need for improving the business, plus it won’t bog down your credit if you want to apply for a different loan in the future.
Cut Down on the Spending
Once you take over the business, the easiest way to get close to break-even is to cut any excess spending. This doesn’t mean that you should simply axe every area of spending you can. Instead, this is a process akin to trimming the fat.
It’s likely that your fresh set of eyes on the business will reveal some areas of spending that are just not necessary. What those things are, and in one departments they come from, will differ from business to business.
But your first goal in taking over an underperforming business is to get the company out of the red. Even if you don’t turn a profit right away, making sure that you’re not losing tons of money as fast as possible is what will help sustain you for the long run.
Gain New Customers
Ultimately, the way you are going to take an underperforming business and turn it into a success story is to gain new customers. While doing so isn’t easy, figuring out where you stand now is.
If you’ve purchased a company that does have a loyal customer base, one of the first things you’ll want to do is to set up a meeting with some of your top customers and figure out why they are loyal to you.
What has the company done well for them? What has the company not done well? What is the company doing that is irrelevant or doesn’t excite them? What could the company improve?
Once you have the answers to those questions, you’ll be able to make improvements to your product and/or service offering to your most loyal customers. Then, and only then, can you take what you’ve learned and apply it to attracting new ones.
If you follow these four steps, you could find yourself an underperforming business to buy that will pay great dividends in the end.
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.