How To Take Over A Failing Business And Run It Properly
Failing businesses aren't always a liability; sometimes they can be an opportunity. Often, companies go underwater not because of something fundamentally wrong with the business model, how they operate, or their customers, but just because they've been run poorly and people haven't thought strategically about how to win. If you go into a new business, you'll need a turnaround plan. You'll also need to set realistic expectations and prepare thoroughly. Here's everything you need to know.
Evaluate the opportunity
The first step in a process like this is to evaluate the opportunity in front of you. You'll need to look for a distressed business for sale via business brokers, online marketplaces and bankruptcy filings.
The nice thing about these methods is that you can often pick up businesses for next to nothing. If they have no cash flow or they have a lot of debt, then you may not have to pay anything for them at all, or at least they'll be very cheap.
When evaluating an opportunity, ask why the business is failing. Sometimes there is nothing you can do and it needs to fail and go out of business. However, it could just be market shifts or management. In these cases, that may get work around that's profitable.
You also want to think about whether it has redeemable assets. If a company has intellectual property and a brand that people recognise, then it's much more valuable than a business that nobody has heard of. Of course, if the core business model can't be fixed, you'll want to leave it alone. Mentally changing how a company operates might seem feasible, but it's often very challenging to carry out in practice.
Perform Due Diligence
Performing due diligence is, of course, a non-negotiable when you're taking over a failing business. You need to find out what's gone wrong and why specifically it requires your help. This means going over the last three to five years of the company's financials in detail. If you need to do this with the help of an accountant, then hire one. Check things like the amount of debt the company has and how much payables age on average before the transaction finally occurs. Also, do the proper legal and compliance stuff. Make sure you assess the regulatory issues that the firm faces and any lawsuits that might be pending against it.
Another aspect of due diligence is to ask why customers are leaving. This doesn't usually happen by chance and it could be because of the firm's lack of growth control or competitive landscape.
Structure the Acquisition Properly
Lastly, you want to think about how you are going to structure the acquisition. You might want to make an asset purchase because these limits inherited liabilities. Another option is a stock purchase where you take shares in the equity of the firm. This is riskier because you are more responsible as the owner. Make sure you plan for immediate post-close needs. Check things like supplier renegotiations and rebranding. Sometimes you can rescue existing structures without having to form them from scratch again.
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