Can You Sell a Failing Business: 7 Top Advice to do it Correctly

There are always businesses that are underperforming and failing to live up to expectations, therefore, putting the owners under pressure. When entrepreneurs and business owners try to turn the fortunes of a company with no result, they mostly count their losses and decide to sell it, especially if the company starts to move towards bankruptcy or insolvency, with the hope that new person in charge will have all the resources and knowledge to turn the company around.

Related: How to Sell a Business That is Losing Money

While there is a market for selling your business, there are ways to do it correctly, so, you can make the most out of it and also avoid future problems (mostly legal suits) from selling your company.

1. Point out the value in the business’ asset

It is only logical that a buyer would want to be sure of how much a failing business is really worth before they invest their money in it. The worth of a company in this state is mostly the assets that it has and how valuable they are. But this, of course, depends on the type of business.

In different types of business, it may have physical assets that might be valuable to a new owner. For instance, a dying restaurant would still have assets such as a well-furnished kitchen and dining hall, utensils, permits and licenses (which are expensive and take a lot of time for a new business to get), inventory, signage, a transferable lease, etc.

All of these things collectively will cost hundreds of thousands if you are starting a new restaurant and it will still take a lot of time. So, if there is someone trying to go into the restaurant business, these are things that you point out to them. It is a lot more profitable for them to buy a "failed" or "failing" restaurant than build it from scratch. It is also more profitable to sell the business as a whole than trying to sell the assets off individually as scrap.

If it is a tech business, it may have assets such as IP, web domain, existing customer list, possible inventory, carefully crafted SEO, etc. These are also assets that the buyer might find valuable and would be willing to pay for.

So, figuring out how much you can make from the assets of a failing business is important when trying to sell the business. Write all the assets out and shop for a buyer interested in the business and its assets.

2. Identify the problem and solve it

I do not think any investor in their right mind will be willing to buy a failing business in which the owners of the business have not been able to ascertain the cause of its failure and have, therefore, done nothing to address the issue. This should be one of the first things to deal with before actively trying to sell the business. Things were going well, the business was booming, then suddenly things fell apart. What was the cause? Was it a disastrous event? The death of a CEO? Was it due to poor financial decision making? What went wrong?

These are the questions that you might have asked yourself before you decided to sell the company. But if you have not answered these questions, then you should not try to sell it. Because it wouldn’t be wise for anyone to buy the business in this case. Otherwise, they would inherit the same problems and would accumulate even more of them trying to rectify something they do not understand. So, it is your responsibility to go to the root of the problem, for yourself and the prospective buyers. Whatever it is, do not try to hide it. Lay it bare and allow the investor to make their choice.

3. Be honest and patient with the buyer

Just like every other business, you need trust for everything to go smoothly. To win the trust of your investors in this case, you have to be very honest with them. They will require information from you. They would want to know if the business is profitable, why it failed etc. You have to be totally honest and transparent with them. As much as you want to point out the assets and other parts that might favour you and pitch on them, you also should tell them the bad parts of the business. Did it run down because of bad management, lack of funds, or debt? Be honest as much as you can.

At this point, you do not need to sugar-coat anything. Tell them as it is. Let them know first-hand from you, because they will definitely find out over time, and the things that you did not tell them might become the basis for a fraud case. It is good for both parties that you are honest from the beginning.

You might have some difficulty getting buyers due to the failing state of the business. But whatever it is, honesty, transparency, accountability are words that must be common in your dictionary.

4. Show that the business was once profitable

If you are going to convince an investor to buy your failing business, then you have to show them that there is a lot of prospects in it. The fact that it is failing and requires a buyer is a reason for them to be suspicious and they will be justified to move back or decide against taking a risk on your business. In order to reduce the amount of risk that they are taking and convince them further, you should show them the past figures and facts of the business. Let them see how much the business was generating when it was booming, let them know why it failed and convince them that it can go back to making those figures again.

You should show them evidence in the form of an average amount of transactions, a number of customer traffic, and monthly or weekly receipts.

5. Clear all outstanding debts and legal issues

Before you sell your business to someone else, it is important that you clear all the legal issues surrounding the business. It would be unfair to sell your business with numerous legal issues to an unknowing investor. This is completely wrong, unethical and is a good ground for a suit against you. If you are unable to clear all litigations before the process of selling the company begins, you should at least inform prospective buyers about the cases that you are dealing with if they will be willing to go ahead with buying it. In many cases, the investors will be sceptical and might not want to buy legal troubles for themselves, so, it just makes sense to clear all litigations first in order to put you in a stronger position in selling the company and negotiating the price.

Video: Dealing with Debt in a Business Sale or Acquisition | Brett Cenkus

If your business is almost bankrupt and is unable to clear all the debts, let the investor know what they are involving themselves in. There are investors that have bought a business with debt in the past and have cleared it.

Releted: How to Sell a Business With Debt

The point is, you have to tell it all to them. Let them know what they are in for. If they consider the risks and benefits involved and decide to go ahead with buying it, then that is good for you. Otherwise, you move on to other buyers.

If you are selling your business with debt, then you should as well know that the selling price will be very minimal because it has to also involve the cost of the debts the investor will be paying. So, you can’t expect to get as much as you want to. But if you find a way to clear the debts first before selling, this can be more profitable for you as it gives you more room for manoeuvre during negotiations.

6. Get a broker to handle the deal

Your business is not the first one that will be sold. This is something that has been done a lot in history and there are people that have made a living from helping people sell their businesses and companies. These people are called brokers. These brokers are the ones responsible for brokering a deal between you and a prospective buyer. One advantage that you have when you’re dealing with brokers is that they have experience doing this job, so, they are likely to get a better deal for you than you would get yourself. Secondly, because they have been doing it for a long time, they have developed a network of people that they can contact very easily when a business is available for sale. So, they connect you with a lot more prospective buyers than you can meet if you are trying to sell the business on your own. So, they make the deal faster and help you get as much as you can.

Related: Consider ExitAdviser - Your Contact-free Business Broker

However, when selling your business, you must know first of all, that you can’t get a "top of the roof" price for it. The major reason being that it’s a failing business and there will be limited buyers. So, you have to trust the broker to get the best deal for you. It makes sense to bring in valuators to help you determine the worth of the business, so, you have an idea of the price to sell it for.

7. Promote management buy-in

When you are trying to sell a failing company, if you don’t want it to continue to fail, one of the things that you must do before you sell it is to encourage management of the company to agree with whoever the buyer is and be dedicated to changing the company’s fortunes. Takeovers are not usually a difficult step but what happens at the boardroom is an important factor in determining the ease or difficulty of taking over. When the company has a management structure that is committed to seeing the company do well, irrespective of who is at the top seat and have a dedication to turning things around for the company, the new man finds it easy to discuss his plans for the company’s development and they can all decide on how the company can progress. But without a willing management structure, even the best businessmen will struggle to do well at the company.

Related: How to Sell a Company to Key Employees

Conclusion

When business owners sell their companies, it is mostly because that is the only choice left for them. While I understand the situation and sympathize with people that have had to or will have to do this, it is best that they do it the right way so they can at least get some value for their asset and some peace of mind too.

More on the topic: How to Sell an Underperforming Business

Author Bio

Leon Collier is a freelance writer from the UK currently working at my assignment help Australia. He loves to write about everything: pop-culture, travel, self-development, and marketing. He enjoys reading and playing tabletop games on Saturday with his friends. Follow him on twitter @LeonCollier12.



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