Tips for Buying and Growing a Struggling Business

Many entrepreneurs like the idea of buying a struggling business and turning things around by making better management decisions. After all, owners of distressed businesses are often willing to sell for cheap so they can recoup some of their investment and avoid further debt. This could be a great opportunity for experienced entrepreneurs with financial liquidity to buy a struggling business at a great price.

Of course, there are several legal and logistical issues to consider when buying a struggling business. You must conduct due diligence, do market research, and create a new business plan to ensure the business has a realistic chance at success under the right management.

Consult Legal Professionals

If you’re new to the process of buying a business, it’s a good idea to consult a few legal specialists before moving forward. A great lawyer will help you determine which questions you should ask the business owner to ensure this purchase is a smart move. This will help you get a clear sense of the strengths and weaknesses of the business you will be buying. You may also want to consult the intellectual property attorneys at Miller IP Law for questions about patents, trademarks, and copyrights.

Have a Business Plan

Writing a business plan will help you prove that you can achieve success with the business you intend to purchase. Your plan should include details regarding how you’re going to adapt the business to the current state of the market, including which new services or products you can offer to the existing audience. Perform an examination of the business's target market and the economics of the industry. The current business owner should be able to provide you with a lot of this information, but you may also be able to uncover data on the business by searching online.

Your business plan should also include a thorough evaluation of the business’ competitors. Perform a competitive market analysis on the business to identify gaps in the market that you could leverage to help the business get back on its feet. Be sure to research the competitors’ sales tactics to get an idea of the kind of competition you’re up against and how you might be able to target customers in a unique way.

Establish a Marketing Plan

Your business plan should also include a description of how you plan to market your new-to-you business. Do your research to ensure your marketing plan aligns with the business's existing customer base. A little rebranding is a great way to bring a fresh, modern flare to a struggling business, but you don’t want to go so far as to alienate customers who identify with the old brand. KickoffLabs suggests involving your customers in the rebranding process asking for feedback, suggestions, and concerns.

If you decide to rebrand the business, start by creating new graphics for the business website and social media pages. An eye-catching banner is great for highlighting a fresh, new brand image. You can hire a graphic designer to create a banner for you or save some money using an online banner maker to DIY your own graphics. Use a banner maker to find a Twitter, Facebook, or YouTube banner template you like and customize it with your own text and images.

Decide on a Business Structure

The business structure will affect the transfer of ownership when you buy the business. Sole proprietorships, for example, cannot be sold. The sole proprietorship dissolves and the buyer can use the assets for any new type of business structure. Even if the business is structured as an LLC, you may prefer just to buy the business’ assets to avoid hidden liability concerns. Purchasing the entire entity means adopting all loans, lawsuits, and other liabilities.

Unless you purchase an entire business entity, you will need to choose a structure for your business. LLCs enjoy several benefits over sole proprietorships. For example, LLC owners are not personally liable for their company's actions. LLCs are also pass-through entities, which means profits go directly to members instead of being taxed at the company level. If you decide to go this route, you can file an LLC yourself using an online formation service. Just be sure to review your state rules first!

Negotiate the Purchase Price

Before you make an offer to purchase a business, make sure you’re ready to negotiate the sale price. Beyond price, these negotiations should also include the details of the transaction, including warranties, liabilities, and other responsibilities. Do your own research to determine what the business is worth instead of taking the seller’s word for it. Consider why the seller is selling the business, whether they’re willing to stay on and help with the transition, the economic climate, what assets are included in the sale, and your reason for buying. Remember to also look at comparable sales.

Consider Your Funding Options

Unless you have cash on hand to buy a business, you’ll need to explore your funding options. The U.S. Chamber of Commerce lists several different financing options, many of which are often used in collaboration with others:

• Seller financing: The seller loans you the money that you pay back over time.
• Bank loans: These can be hard to attain for business acquisitions.
• SBA loans: Provide guarantees for banks, encouraging them to loan money for business acquisitions.
• Leveraged buyout: Leveraging some of the business’ assets to help cover the purchase price.
• Assumption of debt: You purchase both the business’ assets and liabilities.

Talk to a lawyer and a financial advisor for help deciding which funding method is best for your situation.

Rather than starting a business from scratch, buying a struggling business at a deep discount could help fast-track your path to entrepreneurship. Just make sure you do your research before jumping into this big investment. Talk to a legal professional, write up a business plan, do market research, create a rebranding plan, consider how you will structure the business, review your funding options, and learn how to negotiate. You can never be too prepared for a business acquisition!