Each person, for at least once, should own a business. Whether you make it or break it, it will be a rewarding experience. Becoming an entrepreneur might not be everyone’s dream but letting this kind of opportunity pass has been proven as a very common regret later in life, as often mentioned by the older generation. In this article, we’re going to look at one of the first decision one will be forced to make before going into the world of business. It’s to answer the question of finding and buying a fixed upper company or build one from the ground up?
A lot of people think that distressed businesses should be avoided at all cost, however, there are actually people out there who are experts in turning around companies that are a bit struggling. You’re probably confused why would anyone want to take on all the risks? Well, you’d be surprised how many millionaires out there have amassed their fortune by collecting companies that aren’t able to turn a profit. They get a thrill in rehabilitating a fledgling business into profitability.
Generally speaking, plucking out a business out of muck is very risky in nature. If you think that it could be done by anyone, then you are grossly mistaken. This will lead us to what type of entrepreneur gravitate towards setting up shop by buying existing companies that need help. Typically, they are the ones who have vast experience in the business they would like to invest in. And like experienced investors, they love to swoop into opportunities that everyone else is running away from. It’s investing 101, buy low and sell high!
Either you take this as advice or a warning, if you are deciding to buy a business in distress, you must be absolutely sure that you are several times more experienced in that industry than the owner who’s selling it to you. Otherwise, if your knowledge is minimal or at par with the current owner in dilemma of losing his business, you’re very likely to suffer the same fate.
Now let’s talk about another big benefit of acquiring a struggling business. It already has trained employees. Do you have any idea how difficult it is to find a group of people who shares your vision, have the necessary skills and are willing to give their energy and time in exchange for money? Having an established workforce whom you don’t have to train anymore is a godsend! Rather than finding skilled employees from regular people who you still must pay, while they are getting acquainted with the job is probably one of the biggest expenses in a startup and what usually burns capital the most.
What Are Things To Watch Out For When Acquiring A Distressed Business?
The tempting price for one and the promises that will be made by the seller. As a buyer, you have to distance yourself emotionally when making a deal. A seller will say all the right words and will be the most tempting salesman you’ll ever meet. He’ll have the perfect pitch; why wouldn’t he? He has spent countless hours building that business and then some more trying to save it. He’ll be emotionally charged because of all the history he’s had with its assets, people and real estate that he now wants to pass on to you. And probably his most important motivator, he’s going to be ruined financially if he’s unable to find a buyer, which he’s praying that is you.
Listen to what he has to say, stay humble and never come across as being arrogant. But the company’s books will draw a more accurate picture of the business. Doing proper due diligence of the company’s cash flow, suppliers, liabilities, etc. is what you’ll be working on in replacement to building the same business from scratch. Rather than the owner, talk more to employees and find out the ultimate reason why the seller wants to sell.
Below are some business tips on where to find these hidden gems of a business in distress.
● Be a long-time player in the industry and follow competitors. Find out the strengths and weaknesses of competitors.
● Befriend more experienced business leaders who may have already been keeping track of struggling businesses but are unable to swoop in because they’re already tired of the game.
● Build relationships with suppliers, since they can provide you insights of potential competitors having problems.
Distressed Business vs New Startup: Which Will You Choose?
Starting a business usually entails two to three years of bootstrapping before you’re really able to bring your hypothesis into actual profitability. You’ll burn through a lot of capital and will have to become an expert in finding financing until you build a brand and a loyal customer base. Buying an existing business, albeit a struggling one, dodges some of those workloads. However, above we’ve discussed the risks that replace the replaces learning curve and the struggles of starting a new business.