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Buying a Failing Business

written by: •edited by: Michele McDonough•updated: 10/2/2009

Interested in buying a failing business? Before you sign that buy/sell agreement do you know why the business failed or what you plan to do to make it successful? Jean Scheid offers tips on buying a failing business.

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    Tips on Buying a Failing Business

    For the right entrepreneur, there are good reasons to buy a failing business. You may have business management skills the current owner doesn't possess. A failing business may be unable to adjust to a new market or take on the challenge of Internet marketing. Before you decide on buying an existing business, consider why the business is failing.

    • Product or Service - Is the product or service the business offers obsolete or lacking customer interest?
    • Location - Is the business in a location that isn't prudent for what products or services it offers?
    • Building - Is the building in need of improvements; in other words, does it look closed down?
    • Customer Service - How does the business do in the customer service area? Do customers complain or avoid the business?
    • Money - Is the business owner in debt to vendors or lenders and needing so much money that the only choice is bankruptcy?
    • Advertising - Do people even know the business exists? Identify its customer base.
    • Retiring - Is the business owner ready for retirement but has no heirs to run the business?

    All of these are good questions to analyze and find answers to before you make an offer on an existing business. Once you've determined you can turn a failing business into a successful business, how do you do it?

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    Reviving a Failing Business

    Open for Business by Saaam So you've made up your mind and you want to give that failing business a try. Here are some tips on negotiating the deal and reviving the business:

    Price - The business may be failing due to non-interest if a person is retiring or due to poor management. The poor management business owner may need money to pay off debts. Do some research on what the same types of businesses cost to start-up and then negotiate with the seller. Often, if the business is in dire straights you can get it for half of what you anticipated. Keep in mind that if you are left with cash you didn't think you'd have to spend to buy that failing business, write a good business plan on how you plan to utilize it.

    New Management - Advertising new management is important when a business exchanges hands, especially if it is a failing business. No one will visit your new business if you don't advertise. Seek the help of local newspaper and radio advertising reps who know their audience and come up with some great slogans people will sing in their car. Make the business your own.

    Customers - Every business would close if there were no customers. If the reason the business failed was due to a poor customer base or bad customer service, it will fall to you to improve these areas. Open houses, give-aways, mailers with discounts, and talking to your new customers is essential if you want to succeed. Get the customer's input on what they would like to see and implement their ideas.

    Revamp - Remember it is not wise to use that extra cash (your working capital) to turn the business into a palace. Renovations will eat up your working capital fast, so find ways to revamp your business while keeping the bulk of your working capital in tact. You will more than likely need some of that working capital to pay new vendors, order inventory or hire new employees.

    Start-Up Expenses - When you buy an existing business that is failing, more than likely, you'll have all sorts of ideas. Write these ideas down and see which are essential and which ones can wait. After all, the business was already started once, don't beat a dead horse or throw good money after bad.

    Make It Your Own - Analyze what the old business owner did. Ask honest questions of the prior owner. Even if they seem like complaints, you can use those complaints to your advantage. If they had one item that never sold, don't stock it. If they have a bookkeeper that was inefficient, get a new bookkeeper. If they experienced bad vendors, find new vendors.

    Business Planning - Write an initial business plan and write one yearly. The Small Business Administration has a great online seminar that is free to help business owners write business plans, especially if they need funding. Bad business planning is what makes businesses fail, so plan, and then plan some more.

    Buying a failing business is not for everyone. To be successful, analyze the business and don't forget the due diligence period. Brand your new business, sell yourself, delight your customers, and offer new and innovative ideas to keep those customers coming back.