Purchasing a Struggling Business and Turning It Around

by Naomi Johnson

When you have some extra liquidity in the bank and a dozen or more hours to spare each week, you’re nicely positioned to purchase a business. If you have limited capital or experience (or both), you could pick up a struggling small business as opposed to something established. The former would be something low-investment but potentially high value. You could pick it up dirt cheap, fix what’s broken, and, possibly, turn it into a significant source of income down the road.  

Of course, all this is easier said than done. Luckily, Holistic Home Office has put together this mini-guide to help you avoid common pitfalls and increase your chances of becoming successful. 

Choose the right business type – Top considerations  

Purchasing a struggling business is a significant risk. Not every business can be turned around. Choose wisely and avoid making common mistakes:  

• Unicorns don’t exist: If it’s struggling, there’s something broken. Don’t expect a cash cow – nobody sells those cheap. Expect to put significant time and work into making it successful. Watch out for scams.     
• Choose what you know you can mend: You’re more likely to be successful if you choose a business type that you have experience with – something that’s in line with your experience and skill set. Learning as you go is an option but will take extra time and effort. In all cases, you need a solid plan.  
• Consider approaching a broker: Talking to a broker can be worth your time. They keep track of businesses with established processes, the kind that is likely to make it through due diligence.  

Do your due diligence with the help of an experienced attorney   

You are required to investigate any business before purchasing as part of the due diligence. A good attorney can help you ask the right questions and dig up any potential red flags. Some other legal considerations are the stock purchase vs. asset purchase agreement, the terms of the agreement, the financing (promissory note), tax considerations, and more.  

Consider the financials and negotiate a price 

Small businesses tend to sell for 3 times the SDE (Seller’s Discretionary Earnings). Supposing a business has an SDE of $100k, the purchase price would be around $300k plus RE/FE & Inventory. You may be able to secure a business loan (SBA or other) with a down payment that’s about 20 percent of the purchase price, which would translate to debt service of $3k per month, approximately. Needless to say, you should attempt to negotiate a good price. Vet the market, figure out the maximum you’re willing to pay, and persuade the seller to go low. MidStreet explains SDE and EBITDA here.  

Start fixing what’s broken  

Businesses tend to fail or get stuck in a rut for similar reasons – lack of cash flow, inadequate management, poor business planning, and marketing issues. You will need to figure out what the exact issues are and then begin troubleshooting them. Some good suggestions from Shopify are understanding your target audience (and why they’re leaving), performing a Strengths Opportunities Weaknesses Threats (SWOT) analysis, and setting concrete goals to make things right.      

Look into getting accounting software  

Getting a good overview of your finances is how you can budget better, including figuring out how to make cutbacks and finding growth opportunities. Good accounting software can help in this regard. Not only will it help you get a solid grasp of your finances, but also avoid accounting errors that may cost your company money. You don’t necessarily need to pay a monthly fee for accounting software. There are free programs with basic features like invoicing and tax deduction tracking available to download online.  

Reconsider your business structure 

To make the transition easier, it is wise to consider altering your business structure. One of the most popular options is forming an LLC (limited liability company). This type of business provides plenty of flexibility and provides benefits such as tax savings and enhanced personal asset protection. Here, investors in the LLC only risk the amount they invest in it, meaning that their personal finances and assets are held separately from those of the business should anything go wrong. An LLC also offers some unique tax advantages, providing a more profitable end result than other common entity types. Registering an LLC typically requires five steps, depending on which state you reside in. 

Market your new business  

If the business you’re acquiring is somewhat established, marketing will help you secure stakeholder buy-in, both internally from employees and investors and externally from customers. If not, you’ll need marketing to generate leads and raise your profile.   

Use business process management to optimize workflows  

Data analytics can be your best friend when you’re trying to turn your business around. Business process management (BPM), for instance, is a digital process automation technique; check it out for more info on how to make your workflows smooth and productive. Basically, it works by analyzing how people, systems, and data interact. Then, it optimizes and automates where possible. The result is less laborious business operations. When creating a BPM framework, constantly monitor its effectiveness and then act on that information to improve the process and output.  

Conclusion  

You likely won’t be able to turn a business around overnight. Be prepared to put in time and energy – it could take a handful of years. In business, persistence is the key to success. A good legal team, powerful marketing, the right business structure, and techniques like business process management can make your goal easier to reach.   

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