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According to research, up to 90% of startups fail. It is no secret that making it in the business world is tough, but what does this statistic mean for business buyers? It may be concerning to think that the buyer's market is flooded with failing businesses. However, this statistic is not always a negative for buyers.
First of all, a troubled business will almost always cost less to buy than its successful counterpart. Most times the amount of capital required is less than the funds needed to build one's own start up. Of course, keep in mind that while the upfront costs of a failing business will be low, a substantial amount of capital may be required to promote the success of the business. Make sure to have extra money put away for after the closing, since the profits of a failing business might not be enough to cover necessary costs of running the business.
Buying a distressed business can be beneficial for a buyer that is having trouble finding sufficient financing but who is willing to put in a lot of their own hours and sweat into the business in exchange. However, the business should have the exact criteria that the buyer is searching for. A buyer that settles for a failing business simply due to its low price point could have difficulty bringing it into a successful mode. However, if the buyer is already accomplished in the specific industry, then they could be just what the business needed to turn it around. However, it is important to ensure that it is not an outside factor (such as industry trends) that has negatively affected the business. These issues can be almost impossible to remedy.
Make note that the longer the business stays on the market and the longer that the deal takes to close, the better chance that the profit margins will continue to go down. Acting quickly is more vital in these kinds of deals.
Due diligence is extremely important when looking to purchase a business that has some fatal flaws in its design. Find out where the business went wrong and what can be done to combat these errors. It is important to have a plan set in place on how exactly to remedy the business before closing on the deal. Failing to fully understand the scope of the company's downfalls will make it difficult to make it prosperous. Fortunately, sometimes all a business requires is an outside viewpoint to determine what changes need to be made.
Another important step to take if one plans to buy a business is to consult with an M&A advisor or expert business broker. If a lack of experience or poor management were what caused the business to go downhill, then chances are that the original owner did not have a good advisor. Do not make that mistake as well. Not only will an M&A advisor be able to assist in coming up with a better business strategy, but they will also be able to help determine whether or not a target is a viable option.
George & Company has a staff of certified M&A advisors that can help you through the entire business buying experience. We are members of The Turnaround Management Association. Contact us today to learn more.