Can this business be saved: buying a business in distress

Turn on your television any day of any week and you are bound to find at least one “rescue” show where an expert whips a struggling individual, a family or small business into physical, emotional or financial shape.  Oh, and let’s not forget the tough talk for owners of out-of-control pets!

In Kitchen Nightmares, for instance, Chef Gordon Ramsay visits troubled restaurants, offering their owners his expert advice to turn their business around. They are given one week to do so.

The transformations are dramatic. But they only happen when the individuals are willing to turn their business or life over to the experts and follow the blueprint they are given for success.

The “winners” are those that are willing to put in the effort required to keep their dreams alive.

But most small businesses don’t have such access to professionals. And some struggling owners give up and put their business on the market.

Would you buy a struggling business? Should you?

A recent state-of-the-industry survey found that four out of ten buyers would purchase a struggling business if it was realistically priced.  

Based on the biz for sale report, 41.8% of the buyers surveyed said they would be “prepared to buy a struggling business if it’s reasonably priced” and 29.1% said they would “enjoy the challenge of turning around such a business.”

Weighing the opportunity against the risk

Clearly such a buyer would be taking on more risk. Would it be worth it?

We need to determine the underlying reasons that caused the decline in the first place.

Is the business declining because of the economy or because of something systemic in it?

If it’s the lagging economy, is the business positioned to take off when the economy does? Does the business have the fundamentals— trained employees who want to make the it successful and are willing to help; an existing customer base; a product or service that is saleable at margins that can yield a profit; cash flow, systems, processes, and technology that work; a market niche that can be capitalized upon; and the resources to withstand the change process. Corporate culture can change, marketing can change, the availability of funds can change but without the basic elements needed for success we have a difficult task.

If the decline in business is systemic, will you be able to turn it around?

At Sunbelt we do not take on a struggling business unless we can see that it can be turned around and neither should you.

Can you identify the issues and how to address them? Can the business be saved by new expertise, new capital, better staff or a new location? Do you have the right skillset to make it happen?

As an article in Inc recently asked: What’s the dead weight we need to eliminate?

“Every business has something that drains resources without delivering value back. This is dead weight the business is fighting against to stay afloat. Dead weight could be the rock star sales rep of three years ago that now spends more time on Farmville than rainmaking. It could be a product that never launched but is held onto for sentimental value. It could be an expensive vendor that no one takes the time to replace. The dead weight that’s the hardest to recognize and drop, though, is a philosophy that no longer matches the reality of the business or its customers.” Charlie Gilkey”

Perhaps the owner was the dead weight. If they have given up and let things slide or stagnate, a new committed owner with the right attributes for success might make all the difference.

Somewhere along the line, people started calling owners entrepreneurs. While they can be, many are not, and sometimes the business outgrows them:

Many business owners are happiest applying the technical skills that got them there in the first place – the mechanic who started a garage or a baker who opened a bakery. They are in their comfort zone. Dealing with their vision, market segmentation, planning, process development, systems development, documentation, training programs, quality standards, sales processes and collateral, developing customer feedback mechanisms, employee encouragement, tracking systems and the like is not what got them started and it may not be what they enjoy. Yet it’s what makes the difference between a successful very small business and a great business that is poised for growth and highly saleable. The existence of these processes and systems adds great value to a business.

If such assets don’t exist, the opportunity is there to create them and thus improve the performance, growth potential, and value. That’s where entrepreneurial skills come in—with the knowledge, purpose and passion to meet the challenge.

And so it’s back to you. Would you buy a struggling business? Should you?