Buying a failing business can be an excellent opportunity

Times are still tough for a lot of businesses. According to recent figures from The Insolvency Service, there were 5,055 liquidations in England and Wales in the second quarter of this year.

This was a 39.1% increase on the same period last year and a 2.9% increase on the first quarter of 2009. So the trend may be slowing but it is still a marked problem. In addition, the number of administrations, receiverships, and company voluntary agreements (1,529 in total) rose by 22.7 per cent on the same quarter last year.

1,027 of these were administrations, slightly down from 1,311 in the first quarter.

So, while companies are still falling by the wayside like victims of a modern-day plague, in the 'survival of the fittest' world of capitalism, this can represent an excellent opportunity for smarter entrepreneurs. For all businesses it is important to stay fit and lean in order to survive.

Drastically cutting costs is one way to stay afloat. But if you want to develop as an organisation, it is important to progress and be in a position to take opportunities as they arise.

And with so many struggling businesses out there, a failing business might represent an attractive investment opportunity. Businesses can fail for a number of reasons, not all of which mean the business cannot be saved as a going concern.

You really need to look under the bonnet to see what is going on. Incapable or tired management, insufficient knowledge or skill-base in the company, or overriding debts and stifling interest payments can bring a business to insolvency or the brink of insolvency, and all of these can be correctable by the right buyer.

For example, a start-up business could have a healthy and increasing turnover, but may fail due to a difficulty in raising capital.

Perhaps the owner is an ineffective manager, without the necessary skills to structure the business, the marketing skills to capitalise on sales opportunities or the discipline to manage inventory levels. An investor with sufficient financial resources and expertise could turn around such a company; and although capital is not exactly abundant at the moment, the cost of a deal is often a lot less now than it would have been just a couple of years ago. What is vital when considering such an investment is to be able to act quickly and carry out vigilant due diligence.

It is not just the balance sheet of the proposed acquisition that needs to be examined carefully. All financial records should be checked, plus anything else that is material to the sale. This means in essence that all aspects of the business need to be properly analysed.

Commercial due diligence should cover everything from operations to company strategy, and should include a comprehensive analysis of the company's accounts, including past and forecast financial performance, a valuation of all property and other assets, major customer contracts, intellectual property protection, legal and tax compliance and any outstanding legal issues or action against the company.

In the past, vendor due diligence (VDD) was quite common. But it is a slight contradiction to rely on a report written by the vendor of the business you are buying. Best to do your own legwork.

And it cuts both ways. Vendors could also consider performing a due diligence analysis on the buyer, to review their ability to purchase, as well as reviewing other issues that could affect the business or the vendor following the sale.

Forced sellers are abundant at the moment and there are bargains to be had if you choose carefully and do your homework. Sectors that have been hardest hit, such as retail, hospitality and financial services, can offer good value. Now is not a time for the faint-hearted. If you have the confidence, the expertise, and of course the financial means to take opportunities as they arise, you could be a winner in the Darwinian game.

It is not down to chance that over half (52%) of the 50 top companies in the United States were started in a recession year. And of the top 10 companies, an astounding 8 of them were incorporated in a recession year. It is likely that the tough start-up environment in a recession forms a company culture that thrives by exploiting opportunities whenever and wherever they arise.

Of course none of this is easy. Finding the right acquisition can be a lengthy process, requiring a lot of time and effort. And there is risk involved. But the results speak for themselves. And when we do eventually emerge from this recession, it may be those who have had the entrepreneurial confidence during the hard times to take risk and effectively consolidate that ultimately come out on top.


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