Businesses struggling to gain traction can find themselves staring down the barrel of failure. Some entrepreneurs – determined not to let their brand die – decide to sell up and give someone else a try at the helm. This can turn businesses around and propel them to new heights of success.
For example, take the story of Jaguar Land Rover. In 2008, Ford sold both brands to Indian company Tata Motors, resulting in Jaguar Land Rover becoming one of the fastest-growing car manufacturing companies in the world by 2017.
However, the process of selling a failing business is more complex. Let’s discuss how to go about it.
What determines if a business is failing?
Failure is a strong word and doesn’t always mean the same thing. It depends on your goals and the context of that perceived failure. Spoiler alert: It doesn’t have to mean being on the verge of bankruptcy.
Instead, the signs of failure can be displayed by:
· Insufficient capital.
· Soaring liabilities.
· Poorly performing senior management team.
· Business models that are no longer relevant.
· Failed marketing campaigns.
Failure does not mean no value left to be gleaned from a business. In some cases, revamping an existing marketing strategy or changing out key leadership positions can turn a bad business into a great one.
Is it difficult to sell a failing business?
Sometimes, yes. Sometimes, no.
Businesses that were successful in the past are much easier to sell. Likewise, businesses considered unsalvageable due to massive debts may find the best option is to pick them clean for their assets.
For example, Gucci sold 50% of its shares to Bahrain-based Investcorp for $170 million in 1993 after years of losses due to the squabbling grandchildren of founder Guccio Gucci. Investcorp only took a year to return the company to profitability because, other than ineffective leadership, the business was sound.
Finding a buyer for a failing business
Truthfully, it’s easier than you think. Many entrepreneurs have made names for themselves by turning around failing businesses. Take Steve Jobs, for example. He resigned in 1985 and returned in 1997 to save Apple from collapse, cementing his reputation as a once-in-a-lifetime business genius.
Finding a buyer works the same way as selling a successful business. Consult a business broker and identify the reasons for the business’s problems. Gather documentation to prove it and practise honest marketing to attract buyers.
How do you get a failing business on the market?
The best way to get a failing business on the market is to hire a business broker experienced in selling failing businesses. They can prepare a marketing plan that explains the business’s issues and promotes the company as a golden opportunity.
Any business can be listed for sale, regardless of its circumstances or performance. Whether a buyer is interested depends on how it’s marketed, so it’s wise to consult professional help.
Evaluate what you are offering
Depending on the state of the business, you may need to reconsider what you’re offering. Straightforward sales involving transferring your ownership to someone else are ideal, but may not be viable.
Some businesses face insolvency, meaning they become unworkable if a sale isn’t made. In these cases, owners may consider selling off critical assets to a buyer wanting to take advantage of high-value technology. These types of sales can also include transferring highly talented teams.
Unfortunately, alternatives to straightforward sales often mean the brand ceases to exist. If this matters to you, you may want to rethink how you’re packaging your business’s value proposition.
Estimating potential profitability of a failing business
Entrepreneurs cashing out of a successful venture need only point to their years of increasing profitability to demonstrate the opportunity. Doing the same with a struggling entity is different.
Since you cannot use profitability, you must focus on the potential profitability if the proper steps are taken to turn it around. Like all projections, some guesswork is involved. What matters is that you can use facts and figures to back up these forecasts.
Follow these steps to get a handle on potential profitability.
- Identify the business’s core strengths.
- Discuss the business’s weaknesses and what it might take to turn the situation around.
- Perform a market analysis to show the potential for the company’s products and services.
- Discuss your closest competitors to demonstrate what is possible.
- Produce a restructuring plan and execution strategy to provide a roadmap for what a buyer can do to realise the company’s potential profitability.
Just because a firm isn’t doing well doesn’t mean it lacks potential. For example, to go back to the Gucci example, the issue was leadership. The market still loved its products, and the brand remained sound, so it only took the new owners one year of impactful leadership to reverse years of losses.
Determining the market value of your company
Valuing a business that’s bleeding capital is more complex than doing the same for a profitable business. Generally, your business broker will guide you on the best way to determine the market value of your company.
Here are four ways a valuer may do this:
Asset Valuation—This method assesses the value of tangible and intangible assets. If there’s little more to give, asset valuation may be the primary figure used.
Cash Flow Analysis – Losing capital doesn’t mean negative cash flow. Analysing cash flow provides insights into whether a company can repay its liabilities and generate future revenue.
Industry Comparables – Valuers will examine other businesses on the market to determine the value of your venture. This will include recent transactions and how your competitors are performing.
Future Earnings Potential – Buyers want to know about your company’s future earnings potential. Thorough assessments of your prospects and the broader market can provide a realistic overview of the opportunity.
Negotiating the price of a failing business when selling
Understand you’re unlikely to get the price you wanted when considering your original exit strategy. Failed businesses require substantial work, and buyers expect to be compensated with a lower sales price.
Estimating a suitable price requires examining the work involved and the potential gains for the new owner if successful. Likewise, this is why it’s essential to order a risk assessment in partnership with your restructuring and execution plans.
Hiring a business broker helps you settle on a fair price, as your broker will have experience selling similar failing ventures within the current market climate.
Key steps to take when selling a business that’s losing money
The reality is that the current economic climate provides both opportunities and challenges for investors. High-interest rates can make securing financing difficult, and many buyers may be reluctant to take on the extra risk of buying a struggling firm.
None of this means selling a failing business is impossible. Let’s discuss the key steps to take when offloading your company:
1. Understand
Understand why your business is failing, how bad it is, and what positives you can draw from the current situation.
2. Qualification
Don’t waste time throwing your business onto the open market. Work with a business broker to identify “qualified” buyers who could gain from the transaction.
3. Correct
Resolve as many problems as possible before you sell. Taking the time to whittle down your debts and rectify existing issues means less work for buyers, which can bump up the sales price.
4. Honesty
Above all, be honest with buyers. These transactions are risky, meaning buyers are likelier to pull out if they don’t believe you’re being 100% honest about the reality of the business’s issues.
5. Negotiate
Expect to sell at a discount when you’re not a hot commodity. Look to make concessions, but don’t sell to the first buyer who comes along, either. You absolutely can walk away if the deal isn’t right.
6. Highlight the Value
Be patient and highlight the value in your company at every stage. Just because you’re haemorrhaging money doesn’t mean there’s nothing good to talk about.
Selling any business is complex, but a flagging firm is even more so. Make your life easier and increase your chances of landing the right buyer with Hilton Smythe. Our experienced business brokers have the know-how and experience to ensure your business finds the right home, so speak to the team to learn more.
