Understanding the Difference Between Selling a Distressed Business Versus a Profitable One
There are many reasons why a business fails but accepting that your business is failing can be a difficult thing to do.
Seeing all the hard work and the long hours you have put into your business go down the drain can be heart-wrenching. You have tried different strategies, perhaps called in business gurus and nothing has worked. Unfortunately, all your efforts have been to no avail and you’re left with no choice but to sell your struggling business.
A small business is more susceptible to changing markets and broader economic conditions, as well as aggressive competition. It is worth analyzing in detail some of the reasons for business failure because selling a business that’s losing money should be a last resort.
Firstly, you could try weathering the storm if it’s a general market downturn. However, if it’s due to any of the other reasons explained below, perhaps putting your business up for sale is the best exit strategy. Some of the top reasons why businesses fail include the following:
- Lack of funding or working capital - when a business can’t generate enough cash flow to service immediate debts, this often leads to failure. A business needs adequate working capital to avoid getting its accounts into arrears. The inability to negotiate terms with suppliers can also contribute to stretched cash flow.
- Lack of business experience - as much as being a business owner is an attractive prospect, the demands of running a successful business can be too much for some. Also, the inability to delegate the day to day running to more qualified personnel can often be the death blow to a business with the potential to thrive.
- Inadequate or ineffective business plan - a failure to fully address the business requirements within the first year of its life can lead to a premature failure of the endeavor. A poorly executed or non-existent business plan will leave the owner without direction and an inability to identify the critical aspects of successfully running the business.
Can you sell a business that is not profitable? You certainly can, although the process may differ from selling a profitable business.
For one, a potential buyer will need to have a deeper understanding of why the business is failing. The enhanced due diligence may mean the process takes a little longer than it would, were the business in profit. If you’d like to understand the process of selling a stable business, you can do so by reading our selling a business guide. However, we have prepared this guide with some tips to help you sell a business that’s struggling and losing money.
Top Tips to Help You Sell Your Failing Business Fast
Now that you are aware that a failing business can be an opportunity for the right buyer, let’s take a look at what you need to do to kickstart that process.
While there are similarities in the mechanics of listing a distressed business and a profitable one, there are several additional steps necessary to ensure you get the best possible offer for your business.
Why is your business losing money?
If you have been agonizing over how to sell an unprofitable business, it is essential that you at least have an idea of why the business is losing money.
Are your products or services overpriced and you’re struggling to make sales? Have you been running an unsuccessful marketing campaign that’s not making any returns? Are your products underpriced so that you are making sales but failing to turn a profit? Perhaps it’s poor management and bookkeeping that’s preventing your business from turning a profit.
Knowing why your business is losing money will give you adequate information as you prepare your business for sale. You could use this information to bolster your valuation. As an example, a simple shift in pricing could turn a failing business profitable. For a brick-and-mortar establishment, perhaps introducing ecommerce as another revenue stream will add more revenue to the bottom line.
Understand the value of your assets
Although your business may be strapped for cash and struggling to meet its financial obligations, there is likely more value within, which your trading profit and loss accounts do not show.
Obtaining a valuation for your business assets will give you firm figures to take into any negotiations during the sale of the business. Your assets can make the difference between exiting your business and recouping some of your investment or walking away with nothing.
As an example, suppose you own a fully equipped laundromat but for whatever reason have been unable to turn a profit. While you can’t use the profitability of the business as a selling advantage, the equipment can be worth a lot to an investor who is looking to get into a laundry business. Additionally, owning the business premises would also add to the value of the whole business.
Get advice on valuing your distressed business
There is still some value in a failing business. This can take the form of valuable assets, intellectual property or even your customer mailing list. Working with a specialist or using a tool such as ValueRight to accurately value your business will help with selling a limited company with debt.
Be transparent with your financials
Have up to date accounts available for scrutiny by potential buyers upon signing of an NDA. Being open with your financials may well work in your favor during negotiations because you have been proactive and put everything on the table.
Maintain healthy relationships with potential buyers
Being professional throughout the sales process means you will come out with your integrity intact. Take every measure to protect your business by signing non-disclosure agreements with prospective buyers before opening your books.
Always be transparent with interested parties and provide any evidence for the potential profitability of the business. Understanding why the business is losing money will provide you with enough information on the strategies and measures a new owner can implement to turn around the business’s fortunes.
Negotiating with interested parties - know your strengths
The best approach to take when negotiating the sale of your business is to consider the perspective of the buyer. After all, you have done the valuation, know your numbers and know what your business is worth despite its failings.
Go into the negotiations with a bottom-line figure and stick to it. If you have received a fair valuation then you can be confident that you are asking for a fair price.
Working with a broker to sell your distressed business
A good business broker can help sell your business, whether it’s profitable or you’re selling an insolvent business. Choosing the right broker will put your business in front of motivated buyers and investors who are seeking opportunities to rescue a viable business.
An excellent broker will also provide assistance in performing the valuation that can make a huge difference in how much you can receive in a sale. The failing health of your company may mean that the pool of prospective buyers is smaller, however, with the support of a broker, you increase the odds of a successful sale.
How BusinessesForSale.com Can Help You
Watching your business fail is a painful experience. More so if you have grown the business from scratch and it is a labor of love and effort. Your business could be losing money because of the prevailing economic conditions, a lack of business acumen on your part or poor target audience selection for your products or service.
Whatever the reason for your business failure, there is still a chance you can secure a buyer and walk away with some of your initial investment. If you can apply the tips shared in this guide to your failing business, then you stand a good chance of getting a sale.
Choosing the right business broker will open many doors toward securing the best deal for your insolvent business. BusinessesForSale.Com offers the platform to get your business in front of many prospective buyers.
You can categorise your business as “distressed” and “quick sale”, exposing your listing to relevant buyers who are targeting those types of businesses. Take the first step to selling your distressed business and contact the customer service team for more support.