When most people think about being an entrepreneur, that imagine starting a business from scratch.
In their mind, they build it from the ground up, nurture it, and bring it to smashing success.
Except that usually, they don’t. What percentage of businesses fail?
More than 60% of Australian businesses cease operations within the first three years. Often this is due to poor strategic management, inadequate cash, or trading losses.
Other entrepreneurs decide that they’ll avoid the high failure rates by buying an already-existing successful company. While that can have some advantages, they often pay a significant premium, and very few successful businesses are looking to sell.
I took an entirely different approach. I chose to approach one of the many failing businesses around me and take it over.
Why would I buy a business that isn’t doing well? Is it something you should do? Quite possibly!
Here are the reasons I had. Do they apply to you as well?
Excellent Price Point
The number one reason I chose to target a failing business is that I could get an excellent price. When a company fails, the owners want to get out quickly to stop losing money. This allows a savvy investor to come in with a low — though fair — offer and save the day.
Because I can buy low, I have a great chance to improve my investment. If I can fix what’s going wrong within the company, whether it’s the management style, the way talent is handled, or resource use, I am likely to recoup enough to make a profit.
Buying a successful business is expensive, assuming you can even find one. Buying a failing business is cheap, and if you do your research and create a solid action plan, you get excellent returns.
The Infrastructure is in Place
Obviously, a failing business isn’t doing well, but the founders have made a go of it, so there’s a basic structure there. Often the name of the company, business licenses, foundational products, and staff are already in place.
Having those elements ready to go saves me a tremendous amount of time and money. This is one of the reasons it makes more sense to buy a business than start one yourself.
Because you already have at least some assets, you’re getting tangible value from day one. The company may not be operating at a profit, but you have a base value even if you choose to liquidate.
If you need help with financing, having those tangibles will make it much easier to get approved as well.
I Have an Outside Viewpoint
Why do businesses fail? There are a host of reasons, and many of them come from within.
There are many times that people are simply too close to a problem to be able to solve it. Often the founders of a struggling company are in that position. Or, they could be facing the uncomfortable truth that they themselves are the real issue.
As an outside buyer, I don’t have the same emotional attachments to products, personnel, or processes that founders do. That allows me to make difficult changes and decisions to bring the company back to profitability.
Whether it’s downsizing, changing the product focus, using a new marketing strategy, or letting go of toxic staff, I have the courage to act because I have a neutral, external viewpoint.
If you’re considering a business purchase, make sure you do it with a clear vision. A failing business is going to need a lot of challenging changes, and you have to ensure you’re strong enough to take quick and firm action.
My Business Expertise Allows Me to Thrive
Sometimes the reason a company is going under is that the founders simply don’t understand the industry or the real work of a startup. Unfortunately, there are many unethical people out there that sell a false pipe dream of what entrepreneurship is.
I’ll tell you what it is — a lot of hard work! It’s not working just a few hours a week and then sipping cocktails on the beach. If that’s why you found a company, you’re going to struggle quickly.
My experience running Bubblegum Casting, which is now Australia’s longest-running youth talent agency, gave me a lot of the lessons I needed about business success. I have decades of experience running various successful startups, so I’ve seen how business works in a variety of industries.
I’ve been in a position to give failing business advice and mentor new startup founders as well. Because I’ve seen a lot of different situations, I have a strong understanding of what it takes to be successful.
If a failing business purchase is something you’re considering, think about your own business experience. It’s not a move for someone who’s just getting started as an entrepreneur! However, a seasoned business owner who understands the market can do very well turning around a struggling firm.
The Opportunity to Grow and Diversify
Many times the reason a business fails has nothing to do with the product or service. The market may be there, but poor choices or leadership have left the company floundering.
This is one of my choices opportunities. I love to buy a failing business that has the opportunity to grow and diversify its market. Sometimes it just takes a new direction, a refresh of the brand, or a better marketing approach to get back on track.
Once you’ve made the changes required to move toward profitability, you can move beyond survival and focus on growth. Exploring the possibilities within the market is the exciting part of being an entrepreneur, and it’s one of the reasons I’m involved in so many business ventures.
Buying a business can also help you diversify as an entrepreneur. If you run multiple companies in a single sector, you’re highly exposed to downturns. A two-year hiccup in the industry could ruin you.
Instead, buy companies that give you a hedge and a way to grow and be profitable even if your primary investments struggle. It’s a balance to do this without getting outside of your expertise, but it can be done.
I Learned From the Current Owners
One of the realities of doing business is that you generally learn by failing — sometimes over and over. This can be a painful and expensive process.
When you buy a struggling business, you have the opportunity to learn from what’s already gone wrong. Rather than making mistakes yourself, you can find out what’s happening now and how they got there.
This helps you understand the current situation and make decisions about whether to buy the business at all, as well as assess what needs to be done to turn things around. But there’s more to it than that.
I’ve learned a lot of lessons that I can apply to my other operations. Sometimes the things that cause business failures are subtle, or they build up over time. Other times, the founders didn’t plan for a critical circumstance, such as the departure of a partner or key employee.
Seeing what’s happened to others allows me to see gaps in my own management and plans. I might decide to set up an exit clause for specific leaders. Perhaps I need better communication, or I should offer more flexibility in work setups.
Interviewing struggling businesses is an education in itself. It’s an essential part of my research into whether I want to buy a company, but it also helps me improve my existing operations.
When you review your options for buying struggling companies, talk to them about what’s going wrong. Don’t be led astray by overly-optimistic appraisals by those who want to sell. Instead, ask very specific questions and do in-depth research to understand the situation fully.
Should You Buy a Failing Business? What to Consider
I’ve shared the reasons that buying a failing company was a good choice for me. Is it something you should do?
If you see yourself in the reasons I’ve shared above, you may think that it’s a good option. That’s great! However, make sure you take these key steps before you make a final decision.
1. Do Very Thorough Research
I reviewed dozens of struggling companies before I made my final decision to buy. I walked away from deals for a variety of reasons. One of the most important was that I didn’t trust what I was being told.
If your gut says things are worse than they appear, be sure to listen. Founders may try to mislead you in an attempt to get more money than the company is worth, or simply to escape the situation.
Your due diligence for a failing company needs to be even more thorough than it would be for a regular business purchase. You don’t want to get stuck with legal liabilities, significant brand issues, or a non-existent or defective product.
2. Consider Your Current Financial Position
Buying a failing business is a long-term investment. You’re likely to need to put a lot of money into it — even after the purchase — to turn things around. If you’re not already in excellent financial shape, it’s probably a poor decision.
An entrepreneur looking for a quick buck or a way to solidify themselves financially should stay far, far away from struggling companies. They are very rarely a “quick fix” or the founders would do it themselves!
3. How Much Time Do You Have?
A failing business requires a lot more time and attention than any other venture. If you’re already stretched thin with your current business engagements, now is not the time to buy a struggling company.
You’re going to need a lot of time to research to make the buying decision and put in an offer. Then, if you’re successful, it will take a lot of time and energy to get to know the staff and get a more clear picture of what’s going wrong.
Finally, you’ll need to make difficult decisions about resources, staff, and operations. That is both emotionally and logistically taxing.
Make sure you have the bandwidth to make your investment successful before you take the leap.
4. What Does the Leadership Look Like?
The founders are trying to sell the company, but what about the other leadership that is in place? Are they onboard with a turnaround and a new vision? If not, they could become a thorn in your side.
If the entire leadership team is toxic and needs to be replaced, think carefully about whether this is an investment you want. Removing the leadership and bringing in new folks affects the employees at every level, and you may lose them too.
Also, it’s difficult to find one capable leader, much less a whole team. If the entire leadership team is the problem, you may want to look for another opportunity.
5. Is There Room For Growth or Expansion?
Sometimes a business you look at buying is in your current industry. In that case, taking over a struggling competitor can give you access to additional customers, new markets, or additional production.
Other times it’s a different industry, but you’re knowledgeable about it. You can evaluate the business and see ways that it can grow or expand once you fix specific issues inside the company.
If neither one of these is the case, you’re probably not looking at a great opportunity. You don’t want to buy a business just to get it back to survival mode. You want a company that can grow and becomes a profitable part of your business portfolio.
Taking Over a Failing Business Can Be a Great Opportunity
Many people look at the signs a business is failing and run the other way. Not me. I see a distressed company as an excellent opportunity for growth.
However, a failing business isn’t the right investment for everyone. If you don’t have the financial stability, business background, or time to turn a company around, it may not be a good choice for you.
Are you interested in more career advice? Check out our article on Leadership Training Programs today!