The arrival of the crisis in world commerce brought with it many financial problems, especially for those who have a business. In regular times it is difficult to control the situation, but in the crisis, it gets worse, and many ask themselves: how to sell a failing business? The answer to this question has been perfectly answered below.
Furthermore, most people who decide to sell their failing business do not expect this mission to be easy. But many are also surprised at how difficult it is to close a fair deal at a reasonable price, especially in today’s economic environment.
If you find yourself in this situation, avoid letting frustration keep you from getting the most out of it. You can easily avoid much of the frustrations and difficulties that sellers of failing businesses experience.
Is it Impossible to achieve? The answer is no.
To do this, make use of our tips below. In the end, you will reach your goals and ensure your peace of mind.
Causes of Business Failures
Before checking the steps on how to sell a failing business, it’s best to be informed about the causes of business failures.
Today, businesses’ disappearance or failure is more and more numerous, and the creation or success of new companies. Several factors can cause the loss of a company. This includes its management, its product, or even its environment and market. The most frequent are of commercial, financial, legal, or judicial origin.
Others are linked to the organization or the circumstances and supplier risks. All these usually result in the failure and sale of such businesses. These have further been elaborated thus:
One of the leading causes of failures in business and subsequent sales are often related to commercial problems. Young companies have little knowledge of the market, including customers and their needs, although these are the key to the project’s success.
Indeed, no one will consider services and products valuable if they are not suitable for satisfying consumer needs. The study of the competition is another point that some entrepreneurs do not sufficiently consider.
Business creators also neglect market research. Consequently, they make bad choices about their locations, their investments which are insufficient at the start, and they lack of marketing strategy to optimize the search for prospects from these facts, the company risks colliding with failure by reducing turnover.
When it comes to selling a failing business, financial problems are primarily the root causes. Insufficient funds can cause them to start a business or the inability to manage its cash flow properly.
The results are often the same in both cases. The company can no longer meet its expenses and takes it to bank overdrafts, new loans, or private investors. Yet, these may be too high debts relative to the size of the business and its level of profitability.
Young companies sometimes underestimate the investments made at start-ups. Therefore, they fail in their first years of incorporation. The personal contributions of managers are often limited. Business creators disdain the financial forecast, then leading them to poor cash management.
This also encompasses excessively high salaries for managers or staff, late payment of suppliers and tax or social charges, and non-compliance with deadlines for payment of customers and invoices.
Legal reasons can cause a business to fail. The founders themselves often carry out the company’s statute without resorting to a professional such as a chartered accountant. If it turns out to be poorly drafted, it makes the company unmanageable if there is a conflict between partners or a wrong choice of partners, thus leading to the cessation of activity.
Sometimes, the legal form chosen when setting up the business is not in line with the activity and the objectives set. Thus, the company risks too high a tax rate, and the entrepreneur may not protect his assets (in particular incurred for the individual entrepreneur). As a result, the company can be challenging to manage.
In addition, entrepreneurs often do not comply with regulatory standards relating to business creation. This can lead to legal or financial penalties or even the sale of the company.
Read more about Personal Finance Ratios.
How to Sell a Failing Business
Prepare a strategy
The absence of preparation is one of the most common mistakes made by owners of small and medium-sized businesses (SMEs). Just as you spruce up your home a bit before putting up the “for sale” sign on the front, it is essential to consider several critical aspects of your business before announcing that it is for sale.
Financial documentation (such as balance sheet and income statements), profitability, open lines of credit, and even personnel problems will influence the viability of the sale and the price that the organization will reach in the market.
Thus, it’s best to start with this preparation process once you have decided to sell your business. Most professional sellers think that you should do this at least two years before the transaction is made.
Don’t be overconfident.
It is worth being sure that you will be successful and sell your failing business at a reasonable price. This attitude ceases to be positive when that confidence becomes the cause of putting aside the tasks necessary to make your goals come true.
So don’t think that you will close a fair deal just because you think your business is worth it from your perspective.
In the real world, value is based on criteria that can be quantified, not the owner’s calculation. To prevent your point of view from being imposed, ask a third party (specialized in the matter) to make an appraisal. When you have this calculation ready, please write down the factors that could cause its value to increase.
Develop a presentation file for the company
This file, also called “Information Memorandum,” is an essential element that will save you precious time. It aims to present your business in an attractive way for buyers. It also aims to bring together the information from the previous stages. This includes diagnosis, choice of disposal method, forecasting elements, and company assessment.
The company’s presentation file may contain confidential information, so the buyer must sign a confidentiality agreement before its availability. In most cases, it includes the following elements: the presentation of the managers and the company, its activity, its customers, its means of production, its organization, and its significant figures.
Find a buyer
There are diverse profiles of buyers. This includes salespersons, managers, investors, technicians, etc. If the upstream preparation work has been done well, the profile of your future buyer begins to emerge.
You can catch a glimpse of those who are most likely to be interested in your business. As for a commercial offer, it is reasonable to write an announcement of transfer and identify the distribution channel that will put you in contact with the maximum number of serious candidates in the shortest possible time.
The distribution channels are the bases of buyers, the company stock exchanges to be taken over, and the direct approach.
Learn to set a fair price
Inexperienced sellers tend to price (usually higher) before they have determined the value. This practice is a big mistake because price alone is the most critical factor in determining how long a business stays on the market.
Sellers who take the time to do a process assessment before setting a base price are more in touch with market values. In this way, they are better positioned to defend that price and enjoy the benefits of an expedited and hassle-free sale.
Negotiate the MoU
When working on how to sell a failing business, the memorandum of understanding is usually indispensable. This is the act that formalizes your agreement with the transferor. It represents the most important legal act of the repossession operation because it usually deals with all the points of the negotiation one by one. It constitutes a definitive commitment, the only reservations of which are conditions stipulated within it.
Sign the final transfer deed
The signing of the deed of sale concretizes months of effort. Generally, the buyer sets the signing date since he will only be ready once the acquisition audit has been carried out, the financing has been granted in writing, and the legal structure created.
Whether it is the sale of a business or a transfer of securities, the presence of a notary in his mission of public authority is not mandatory. Thus, the sale can be recorded by a deed said “private agreement.”
However, it seems evident that the legal implications of operation make essential the presence of professional legal advisers (notary and lawyer specialized) with the buyer and the seller throughout the process.
On the day of signing, many deeds have to be signed, in as many copies as there are signatories. Their list varies according to the nature of the operation (sale of shares, units, or business).
See this post: How to Start a Commercial Fishing Business.
Frequently Asked Questions
Can you sell a business that is losing money?
Yes. You can sell a business that is losing money through the steps highlighted above.
Can a company survive without profit?
No. Every company needs a reasonable amount of profit to survive. Coffee vending has one of the highest markups in the vending industry at over 300% per vend.
How can I sell my business fast?
You can sell your business fast via the following tips:
- Review of Accounting Records
- Document the Business Operations
- Have a Marketing Plan
- Hire a Broker. Business brokers usually charge a 5%-10% commission on the price of the business.
- Plan to Target Buyer Prospects
- Collaborate for Successful Transition
How do you sell a distressed business?
You can sell a distressed business via the following tips:
- Prepare a strategy.
- Don’t be overconfident.
- Develop a presentation file for the company
- Find a buyer
- Prequalify buyers
- Learn to set a fair price
- Offer payment options
- Negotiate the MoU
- Sign the final transfer deed
What happens when businesses are not profitable
When businesses are not profitable, they are usually sold or closed down.
Why is my business not making a profit?
Your business is not making a profit due to the following reasons:
- Commercial failures
- Financial failures
- Legal failures
In conclusion, selling a failing business comes with various hassles. But upon making use of the steps highlighted above, you can achieve success quickly.
I am Lavinia by name and a financial expert with having a degree in finance from the University of Chicago. In my blog, I help people to educate by making wise choices regarding personal investment, basic banking, credit and debit card, business education, real estate, insurance, expenditures, etc.