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Should I Buy A Business That is Losing Money?

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Comments & Replies: 8     Views: 3855     Posted By: Peter Siegel MBA  



Topics: Business Purchase Financing, Buying A Business     Tags: buying a business, financing



When considering buying a business that is losing money one has to be very careful. The first thing you need to do is find out why it is losing money. This should be done by your CPA or Due Diligence Specialist Advisor during the due diligence period. There are reasons that the business could be losing money that aren't fatal or extremely difficult to fix and there are other reasons that should send you running in the other direction.

If the business is losing money due to poor management, accounting, employees, ownership or marketing and branding then there is hope if everything else is strong and you have the experience and skills to turn it all around.

If the business is losing money because the market no longer desires its products or services or because the competition is doing everything better and cheaper or because the demographics of the local area have permanently changed then there is probably nothing you can do to turn things around. In a situation like this it is advisable to just walk away and find a different business.

 
Contributor: Business Broker: LA County Area

Peter: I want to echo your thoughts about overcoming business difficulties. I sold a gas station in the Inland Empire awhile back where I came across one of the smartest, shrewdest buyers I've met. It was a deal with tons of "hair" on it where, as listing agent, I thought my chances were bleak to nowhere. Poor management, terrible signage, employee theft, crime issues. Everything you'd want in a gas station, this didn't have.

Some would call this buyer a bottom-feeder. I call him creative and insightful. He was able to see what others couldn't, not even the current owner. He saw the need for a well-lighted, safe, mini-market in a sub-market where customers could feel comfortable grabbing a soda or fresh coffee 24 hours. He re-branded the station, expanded the store, signed a long term lease with multiple options and spent about $100K in rehab. He also worked carefully with the city and local police on safety. Today, his station and mini-mart are turning nice (some would say modest) profits on a business he bought very inexpensively.

Sometimes even market conditions that seem insurmountable for a business can be overcome with expertise and creativity. This is why finding a lane of expertise and staying in it, year after year, pays off handsomely.


Thank you for the excellent question. Yes, under the right circumstances, a loosing business can sometimes offer the highest rewards. However, Peter is correct, You have to know the business thoroughly, what its doing wrong? how much it will cost to bring it up to the standards and model you expect to operate the business with? In analyzing these costs be very realistic. Saving old equipment and like fixtures can end up costing more later in terms of both sales, unanticipated costs and considerable personal hardship.
Most importantly, ask yourself if the market is right for your plan. Learn about the competition and develop your intended opening model effectively. You only get one Grand Re-Opening so make it right and account for it in your anticipated start up costs. This brings up the required capitol. Measure your risk carefully. Avoid over leveraging. If you end up making a mistake it will resolve easier if you are not burdened with debt. If you are starting out with your first business and you are younger, opportunity is often worth a higher risk. Youth needs experience and is also advantaged with time to correct the mistakes they make and earn back any losses made from those mistakes. Be wise though. Learn well and minimize your risk. Work your plan, Perfect your model and the rewards are often much higher than buying a business already performing at higher levels.

Lastly, be sure to seek advice from experts in addition to those that may be directly involved with the transaction. Verify everything possible and never sign off if you are not either comfortable or prepared to accept the conditions that make you uncomfortable.


"Maybe" is the right answer. But, to cut through all of the great advice in this thread, it's only for the experienced business owner/entrepreneur who is not relying on the business for his sustenance, who has excess money to invest that he is willing to risk (and lose), and who has the time, talent, and additional money for the long, arduous, frustrating job of turning a business around. Fortunes have been made using this approach, sometimes amounting to many times the investment. But, far more likely is that the purchase investment (in both money and effort) will be lost.

 
Contributor: Due Diligence, Valuations Advisor

"Turn around's rarely turn" - Warren Buffet

If you know the industry and can personally pinpoint the issues, formulate a plan , finance the journey, and tolerate the headaches along the way, then you have chance. If you don't fit the profile then you are a gambler.

"Beware of experts" - Colin Powell

Not all accountants and attorney's are all the same, although they all have plaques on the wall. I have seen some absolutely basic errors made by professionals. There is such a thing as a transaction accountant and transaction attorney. Find them.

But you must know the business in order to effect a turnaround, in my opinion.


I agree that "maybe" is a good answer.

I think most brokers would agree that, all too often excited entrepreneurs miss a step in planing the business they want to open. They plan the design, the rent, the concept, the social media etc.. but they forget that most businesses lose money for about 2 years before they really become profitable.

When they are anxiously trying to figure out their start up capital, it often doesn't include this important piece and, like so many before them, they run out of money and that's where you come in. If there is something you can bring to table and you see the light at the end of tunnel then it could be a great deal.

One huge benefit, verses starting something from scratch is that often it is less than it would be for you to do it, and second, you have some income from day one.The trick in deciding is to be sure that the issue isn't something that you can't fix, like a bad location or crazy high rent. In the end you are always buying potential.


In many cases a business that is losing money is picked up by a competitor or as an expansion method. Most businesses that are losing money are rarely losing money because of inadequate gross profit. In most cases the overhead required to run the business isn't covered by the amount of gross profit created by the sales generated in the business. Speaking in very general terms, most businesses that are losing money have an overhead problem.

I was involved with a transaction where a business was essentially "breaking even" or had in some months minor losses. The mark-up on the product was 40 percent and overhead was about 40 percent so they were having a hard time making the business work. The plan was to increase sales, while maintaining the same overhead expense. This was very doable, except, at a break-even situation, there was no money left over for marketing and advertising so sales were remained steady but stagnant.

The only choice was to close or to sell to someone else, after all, nobody likes to work for free, at least not for very long. The owner decided to sell the business, but obviously a business that doesn't make any money is extremely hard to sell. However we were able to find a larger competitor who came in and purchased the business. This competitor ran a company with an overhead rate of 20 percent, so with a stroke of the pen, they changed the business from small losses / break-even to handsome profitability. While the deal and on goings of the business were of course much more complicated than I am able to explain here, the basic premise remains valid.

If you find yourself in a situation similar to what I described here, it might be worth your while to enlist someone to help you approach some larger competitors to explore buying the business before closing shop. Many business buyers are looking at gross profit over net profit, while they are fewer and further between, it may be worth the effort to try and find them and create a win-win situation for both of you.


The answer to this question also depends on who you are. Craig provides a good example.
It's what I call the "strategic buyer" -- a company already in the business that wants to "roll up" synergistic companies to gain market share, customer base, skilled employees, operational capacity, purchasing volume, etc. The corollary question is: "Can I SELL a Business That is Losing Money?" The answer is "yes"; if properly packaged and marketed to a targeted audience of strategic buyers that can appreciate the intrinsic value despite the lack of profit.


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Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

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Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.


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