QUESTION: I am considering buying a local business that is losing money. Other than acquiring it at a bargain price, what other factors should I consider?
ANSWER: The major factor to consider is why the business is losing money and do you possess the management skills to turn the business around?
The following is a list of factors to consider:
- Are the products or services provided obsolete, out of favor or being replaced by new and better competing products?
- Who is the competition?
- Is the business in an area that is in decline? Is the building in disrepair? Is lighted and safe parking available to customers?
- Is customer service an issue? Are the employees friendly and helpful? If not, why not?
- Is the business taking advantage of the latest innovations in technology? Does it have a viable marketing plan and a budget for advertising?
- Is the current management complacent and slow to embrace change? This is a problem with many older owners who are tired of the daily grind and reluctant to invest more money in the business.
- Is cash flow a problem? The business may have increasing sales but is lax in the collection of money owed. Customers should understand and agree to prompt payment terms. Creditors want to be paid in a timely fashion, and failure to do so can result in an unfavorable credit rating.
Any of the above factors can be resolved with a proactive business plan.
They are all good reasons you should place a discounted value on the business being considered.
If an all-cash sale is requested from the seller, a sum equal to the depreciated value of current inventory, building, furniture, fixtures and equipment might be reasonable.
However, in the case of a failing business, an earn-out method of payment is desirable. In this instance, the buyer agrees to pay a set percentage of income generated, on a monthly or quarterly basis, for a specified time.
Do all due diligence before signing any contract for purchase, and have the terms and conditions reviewed by a qualified accountant and an attorney specializing in the purchase and sale of businesses.
Gray Poehler is a volunteer with the Richmond Chapter of SCORE, Counselors to America’s Small Business. To ask a question or request free and confidential business counseling, go to Richmond.score.org/mentors. Learn more about SCORE’s workshops on the website or by calling (804) 350-3569.