Considerations When Selling a Distressed Business

Unfortunately, a year into the COVID-19 pandemic, the current economic world is no stranger to distressed businesses. So what does this mean if you’re trying to sell your distressed business? Maybe you were already anticipating selling your business before the chaos that is 2020 hit. Or maybe you’re wanting to exit now after a rough year that’s got you burnt out. Either way, here are some tips.

Acknowledge the distress.  We realize there may be a lot of emotions involved with this – anxiety over selling, regret, maybe even feelings of failure. However, it’s important that you try to detach and look at the situation as objectively as you can. 

Could you have done things differently? Maybe.

Would you do differently if you knew then what you know now? Most likely. 

Were there a lot of things that weren’t in your control? Our guess would be, yes.

But before you get into a rut, it is still very possible to have a successful sale of your business. But you may need to adjust your expectations, and your approach.

A lot of business blogs and brokerage firms will give you tips on how to focus on the positive as you sell your company at a lower valuation than you’d hoped. While we’re not contradicting this, here’s something you may not realize: There are buyers who are specifically after distressed businesses. So while you don’t want to paint too bleak of a picture, it’s important to remain pretty transparent.

You’re a business person, right? So you in particular know that when you’re trying to sell something, you’ve got to go where there’s demand. If you try to sell your business to a bright-eyed young entrepreneur hoping to turn a profit in their first year or two, your potential buyers will want to trim off as much of your asking prices as they can. Additionally, they will approach traditional lenders who will quickly distance themselves from the opportunity. Or, they’ll simply turn their nose up entirely when they see your financials in hopes of a faster and easier return on investment.

There are investors specifically looking for distressed businesses. And if you are selling because you are over leveraged or burned out by the weight of debt, many distressed business buyers are those that are specifically interested in taking over your debt! Sure, this doesn’t change the fact that your valuation is probably lower than what you’d hoped when you first decided to sell. But where there’s demand there’s often competition, and if you’re in a position to receive multiple offers, you’ll have a relative upper hand in the negotiations.

So stay transparent. Make sure your potential buyers know up front that this is a distressed sale–but use prettier terms. “Turn-around” is one we like, and buyers will know what this indicates.

There are a few types of buyers for a distressed business. Firstly, there are entrepreneurs who are confident in their own business savvy who may see the distressed business on the market, identify the pitfalls that have brought it to where it is, and believe that they can bring it back to profitability.

Strategic investors might seek to integrate the distressed company into their own business, in order to reduce overhead and boost their business’ profitability.

There are also investors who have high reserves of capital and specialize in acquiring and turning around distressed businesses. These types of buyers are the ones you should aim for in your marketing campaign.

Move efficiently. As much as we’d like to believe otherwise (and this is often the case with owners of distressed businesses), distressed businesses are like raw meat: they’re not going to smell better the longer we leave them on the counter. 

When selling a distressed business, it’s important to move as quickly as possible. It’s common for business owners to want to move slowly with the distressed sale process, hoping that somehow the company’s value will magically increase the longer that you hold onto it. Get on market as quickly as you can, and make sure to market strategically.

Stay imaginative. When marketing your business, you have to help potential buyers envision what they can make from the acquisition. Think outside the box about some ways your company could grow and become profitable again, which you yourself haven’t been able to do. These are the things you want to highlight when you’re marketing your business. These are the “good bones” of your run-down house.

In the unique time of the COVID-19 pandemic, imagination is particularly important, and potential buyers may see something you don’t. There have been a lot of businesses that have turned around by pivoting away from marketing their original products, demand for which has gone down when the general public has less flexible spending and limitations on what they can do with pandemic safety compliance in mind, and temporarily marketing pandemic-essential products. Plexiglass barriers, hand sanitizer, sheltering-in-place entertainment, delivery services, and comfortable and reusable face coverings are all examples of items that have gone up in demand. 

A new buyer coming into your business may look around and see how they can tap into the temporary demand, or even make a nonessential business into an essential one for the time being. Stay open to these ideas as you market your distressed business. You know what they say about necessity and invention and all that.

Click here to read about financing a distressed business.

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