Buying a distressed business – Is it sensible?

The current economic climate has created more opportunities to buy distressed businesses. The risks are obviously high with such a venture and entrepreneurs will need to do their home work but there are ample rewards for the bold.

Why buy a distressed business? A business in distress or at high risk of failure is obviously less valuable than a healthy business however the fact it is a bargain alone should never be the motivating force towards the purchase of a business in trouble.

Buying a distressed business can offer a quick method of growth and opportunities to return to profit as well as prevent a competitor from seizing the opportunity and a chance for capital growth through purchase, turnaround and controlled sale. It also offers the opportunity of controlled disposal of parts of the business at a premium and is cheaper than buying a successful business. However, buying a distressed business requires a high level of commitment and preparation is crucial.

An entrepreneur needs to ask themselves why they want to do it and what businesses they are interested in buying. Focusing on a particularly industry will ensure they are taken more seriously. They also need to understand why the business failed, what are the costs of making it viable, whether there is room in the market for the business and whether key stakeholders are likely to support the purchase.

The buyer of a distressed business needs to have funding immediately available. The discounted price is there for those who can act quickly and many offers fail because the buyer cannot show proof of funding. Upfront payments secure better deals than staggered payment.
Buyers need to ask themselves who is going to run the business? Consider bringing in a specialist who has a track record of turning businesses around.

Seek the help of a professional

Seeking the services of an advisor can be an important move. Buying a distressed business is different to a normal purchase and using lawyers and accountants who are familiar with the process and can deal with the liquidators will protect your position.

There are various types of sales from asset only to a going concern or a pre-pack (a deal for the sale of an insolvent company’s business and assets which is agreed in principle before the company goes into a formal insolvency process).

How do you find distressed business sales? Seek out business for sale adverts – the London Gazette lists insolvencies. If you are a supplier, look out for change of trading patterns and listen out for opportunities by keeping your ear to the ground.