When faced with a failing business, many owners believe that their only option is to liquidate their assets and attempt to oversee an orderly winding-up of their company. But it’s worth knowing that there is a market for businesses that have the potential to be turned around or ones that may provide a ready-made, bolt-on operation to add value to an existing business.
Some investors are always on the look-out for businesses that have growth potential, even if they are going through a bad patch financially. Buyers will want to understand why the business has failed so they can weigh up likely costs against any future gains, but as long as they can successfully balance risk against reward, any business could be ripe for acquisition and investment.
Buying a failing company has its advantages
Simply put, a buyer may get a bargain with a failing company. If historic profits are good and the company’s current problems are a result of cash-flow issues, inefficient practices or underinvestment, for example, there could be a golden opportunity for an experienced buyer to fix what’s wrong and quickly turn its fortunes around. There’s also likely to be less competition from other buyers and enough financial wiggle room to factor in an improvement and development budget.
How do you calculate the value of a failing business?
The usual methods – applying a standard multiple of earnings to profits, for instance – won’t work with an unprofitable business. If a business has previously operated successfully but has a bad year or two, you may be able to use an average multiplier plus an agreed discount, depending on the level of risk. It’s worth checking out the sale prices of other similar businesses operating in the same niche to get an idea of a typical profit multiplier figure.
Another approach may involve using the estimated liquidation value or employing a discounted cash flow method (with a deep discount) on projected positive future cash flows.
Whatever method you use, you’ll need to recognise that while you won’t get the best price for a business that’s failing, you may be able to salvage enough to move on to your next venture.
Discover more about how to value, market and sell your failing business at Bizdaq.