What to expect when buying a struggling business

Why buying a failing business may leave you in difficulties too

It can be tempting to buy a business that is in financial difficulties. One route to buying a business involves acquiring it from a liquidator or administrator. The idea is that you turn the business around, making a substantial return on investment.

But unless you have extensive experience in making failing businesses profitable, this route is best avoided. The initial outlay may seem a bargain, but there are so many hurdles that it’s likely you will never recoup the money. If the business has already gone bust once, it’s important you’re very honest with yourself about whether you have the skills and experience necessary to make it work.

More important than this even, is whether you have the finances to turn a business around. Yes, the outlay will be substantially cheaper, but extra costs will almost inevitably be substantial.  Whatever your strategy to turn a business around, it will need as much liquidity as possible.  

Other hurdles include relationships with staff and suppliers. Buying a profitable business means you benefit from an experienced team and suppliers already in place, but a failing business means the benefits disappear. Relations could be extremely bad – especially if the business is in substantial debt and there have been payment problems with suppliers.  Staff could be extremely demoralised. There’s a strong chance that staff may leave and suppliers may not want to do business with you after the deal has gone through.

It can be difficult to identify the cause of the business’ failure – and without that knowledge you could be in danger of making the same mistakes. Perhaps there’s not even a market any longer for the products or services offered by the firm.

Buying a business out of insolvency is one of the riskiest propositions available; for this reason, most insolvent businesses are bought in trade sales. If you’re depending on a return on investment from your business, it’s advisable to leave failing firms well alone and secure a business without the myriad of problems an attempted turnaround may bring.

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