There are a lot of businesses out there that are failing. But, should you let them, or should you snap them up for a dime and turn them around? It all depends on a few factors. Here’s what savvy serial entrepreneurs do to successfully flip a business.
Look For A Good Structure
A bad business might be bad because of how it’s run. But, it may have a good structure — good customer base that’s loyal, a solid legal foundation, and a good distribution or manufacturing system.
Check the legal standing of any business you’re considering. Liens against the company or a pending litigation or outstanding payroll and income taxes are a bad sign. According to Tate Law Offices, a Dallas truck accident lawyer, personal injury suits can drain a company’s bank account fast.
If a business owner wants out because of pending litigation that he’s trying to hide, you may be buying into a company that’s about to be drained of all its cash. So, don’t just look at the financials. Dig deeper.
Review The Financials
Make sure the financials are good, too. It’s not enough to go over printed records, however. You need to comb through the QuickBooks files and bank statements. See if there are any discrepancies in those.
When you examine a company’s assets, look at the assets but also look at the physical location. Make sure the business has happy and loyal customers. If there are no sales, that’s a problem. You don’t want to try and be a hero in the sales and marketing department. Maybe the company has a terrible R&D department. Maybe the product stinks. Maybe the target market is thinning out and the company is losing market share because they have nothing else to sell.
If a customer accounts for more than 20% of sales, then that’s another red flag. If that customer goes away, the business is going to drop like a stone.
Go for businesses where the customer base is wide and deep.
How Are Customer and Employee Relations?
Another thing to look at is customer and employee relations. When employee turnover is high, that’s a bad sign. Why are they leaving? Is management doing something they shouldn’t be? Are the employees unhappy for some other reason? Figure that out and then make your decision. Most of the time, what you will discover is that it’s a problem that’s beyond your ability to solve and you should pass.
And, customer relations are also key. How is the customer service department? Are customers constantly calling in, angry? Does the business have loyal customers that keep coming back, or are they spending money every month trying to get new customers? Look at retention rates versus new business.
When retention is low, that points to a problem.
Push For Seller Financing
You don’t want a bank financing your purchase because, if they do give you financing (which is unlikely in the first place), they’re not going to give you great terms. Push for seller financing. The seller will lend you a percentage of the asking price. The owner of a business that hasn’t sold for 6 months to a year will be very flexible and may agree to this arrangement.
Sellers do often want more than what their company is worth. The key is to not pay more than what it’s actually worth. Be flexible, but also be fair to yourself and the seller.
George Mason is a freelance business consultant who works mostly with businesses which are struggling to stay afloat. When time permits he writes articles on the subject, offering his insider tips and tricks to other business owners.
