How to Buy and Nurture an Existing Business

Big businesses that fail make news headlines, and in today’s unprecedented economic climate, there may unfortunately be many more of those. In normal times the headline is often because they are being bought for a pound or two, along with all liabilities.

As lockdown eases, economic revival will depend on entrepreneurs willing to see value in businesses adversely affected by coronavirus. You may be able to find a smaller business that is struggling that you can buy for a reasonable price that you can then turn around. It is vital, however, that you do your research before you go ahead as there is a fine line between a money pit and a great investment.

A BUSINESS OPPORTUNITY?

In 2018 the Australian owners of the UK DIY retail business Homebase sold the whole company for £1 to restructuring specialist company called Hilco Capital, having originally paid £340 million for it. In only a year Hilco turned a whopping £128 million loss into a turnover of £1 billion.

It wasn’t an easy task to turn the ailing Homebase brand around. Hilco closed many stores and sold off the old stock. They came back to the consumer with a refreshed, more upmarket offer and fewer product lines.

Most entrepreneurs are not going to be in the market to rescue a business the size of Homebase. However, the approach taken by Hilco demonstrates what a fresh approach can do to revive the business.

If a business is up for sale because it’s in trouble, it presents both a risk to the buyer and an opportunity. The ability to weigh up the risks against the opportunity is vital if you want to make sure that it is an opportunity. No matter what the asking price, it’s critical to analyse what has gone wrong with the business before investing. On the other hand, in lockdown a fundamentally sound business might be in difficulty through no fault of its own. Professional due diligence saves money in the long run.

Companies face many challenges in today's markets. There are a number of factors that can affect their capacity to trade successfully. Understanding those variables and having strategies to mitigate them is essential to success.

THE IMPORTANCE OF BUYER QUESTIONS.

There are a couple of key questions that any prospective buyer should ask themselves. You will need to ask the vendor why the business is failing. Be mindful that the seller might not be totally honest, or they might not have the expertise to understand what has gone wrong. Always see what any concrete evidence suggests and if it matches up with the vendor’s version of events. Make sure the effect of coronavirus isn’t masking underlying poor performance.

Other questions that need consideration include:

  • Is the business proposition a good skills, knowledge and experience fit for you? If it’s not, it might be too much of a challenge to turn the business around.

  • How much would it cost to get the business structure right? Is this cost feasible within the total financial envelope when the sale price is factored in?

  • How long is it likely to be before the business is back in profit?

  • How has the business and its sector been affected by coronavirus? Are there medium to long term opportunities if you can ride out the storm?

Look at how the business was doing before the current crisis. There can be a number of variables that cause businesses to take a downturn in fortunes. These might include changing consumer trends, rising raw supply costs, or changes in the economy affecting interest rates or the cost of importing or exporting goods. In some cases, company owners may lack the time, energy or appetite for risk to continue. This is when a well-informed buyer with some fresh ideas can step in.

BE DECISIVE.

You will need to have all your finances in order before you make the move of buying the business. As you take over you will probably need to use it in order to turn the business around.

Once you have identified the right business to buy and done the research to know what it is that you will need to when taking over, get going as soon as possible. You may need to take immediate steps to reduce liabilities. On assuming control of the business, you will need to carefully review all the areas in which the amount that is being spent can be reduced. Any expense that doesn’t generate value should be cut. This may mean making some staff redundant or cutting back on overheads in other ways.

Then you will need to move onto acquiring new customers. Ask existing customers what the business is doing right and where they need to do better. You might also need to refocus marketing and sales so that you can drum up new business.

Buying an existing business may be a better option for you if you are hoping to grow your business. For example, you may be looking to add an online marketplace to your retail business. If this is the case, finding a business that will not break the bank can be a way to expand your offerings.

While locked in your home for the foreseeable future, there are worse ways to spend your time than considering buying a business. It could turn out to be time very well spent.

 


If you'd like to get in touch with Robert you can reach him at robert.flint@carbonlawpartners.com by calling him on 07961 536 337

Author
Robert Flint
Robert Flint

Carbon Law Partners’ Robert Flint is a Corporate and Commercial lawyer with particular experience advising start-ups and small businesses.