Is It Worthwhile to Purchase an Underperforming Business
If you have been looking at businesses for sale for any length of time, you are probably aware that many of those that are on the market are going to come with various challenges. There is a reason that the owner is selling, after all, and unless they are leaving for retirement, health concerns, or the need to relocate to a different area, they are not likely to let go of a profitable and growing enterprise too easily.
To be clear, there are businesses available for purchase that are in very good shape overall and the owner has good reasons for stepping away, but they will tend to come at a significantly higher price tag than businesses that may not be performing at the level that they could be. If raising capital to purchase a highly successful business is going to be a challenge, should you consider purchasing an underperforming business?
This of course depends on several different factors, not the least of which being your own passion towards the business and industry, as well as your skill set and level of confidence that you can turn it around. Underperformance can also mean a lot of different things, so you will need to examine the shape of the business that you are looking at.
What Does Underperformance in a Business Look Like: While every business has unique challenges, there are several general characteristics that may define an underperforming business:
- Low profit margin versus comparable businesses in that industry.
- Declining sales/lack of sales growth.
- Expenses that are too high.
- Outdated/ineffective marketing and advertising strategies.
- Lack of consistent and effective business processes.
- Inconsistent quality of operations.
- Aging/outdated IT infrastructure.
- No well-defined plan to turn things around.
There are a lot of reasons why an established business underperforms. One common scenario is when the founder is no longer around, and the business is now being run by a spouse and/or other family members. Another thing that happens sometimes is differences between partners over how to grow the business. When partners are at an impasse, oftentimes nothing new gets implemented and things remain at a standstill.
Turning Underperformance into Opportunity
In many situations, an underperforming business could present a strong opportunity for the right buyer. Think of it like a real estate investor who purchases distressed properties, fixes them up, and either rents them out or sells them for a profit. If you have the skills to turn the business around, then your new business can become a highly successful enterprise.
As with real estate investing, however, not every underperforming business is worth the investment of your time and resources. Some are so far gone that they will require a fundamental transformation if there is any hope of turning them around at all.
Others may be struggling because of outside factors such as a shrinking market. For example, you probably are not looking to purchase one of the few remaining video rental stores out there as this market is going the way of the horse-drawn carriage and other dying industries.
Another thing to look out for is an owner who has an unrealistic view of their business. Maybe it was doing great five or 10 years ago, but sales have been declining for the past few years. You may be able to turn it around, but the problem is that the owner wants to sell the business based on its sales from three years ago, insisting that things will “bounce back” if some new blood is injected into the operation.
In a case like this, you might have to pass up a potential opportunity if the owner refuses to sell at a reasonable price. Or in some instances, you might be able to come up with a creative solution such as the seller accepting a lower price with a clause that you agree to pay more if future sales reach certain benchmarks (such as meeting or surpassing previous highs).
The Importance of Working with a Local Business Broker: Purchasing a business is one of the largest transactions anyone will ever make, and it involves a major commitment of time and money to ensure that the venture is successful. Whether you are looking for a strong and profitable business to buy or you are open to an underperforming business, it is critical to work with a reputable business broker who can help you find the right fit and navigate the complexities of this type of purchase. Business brokers are specialists in this field, and they have an in-depth understanding of what it takes to match buyers with the right business opportunities.