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Buying a business, the quick and easy guide for MSPs. Part four, chapter three B.

The type of business you want.

Distressed businesses. A profitable business makes money. That’s easy to see. What’s a lot harder to see is a business that appears profitable, but which has underlying problems that are neither current, contingent, or imminent. A business can be distressed for any number of reasons. Naturally, the easiest way to tell if the business is distressed is if the owner tells you. Hopefully, the owner will be transparent about the issues involved and you can make a judgement call, upfront, about whether or not you can fix the business and profitably turn it around. Factors causing businesses to become distressed are numerous, although some common causes are listed below. In general, the reasons are either attributed to issues that have affected the business directly or issues that have affected the owner or a key member of staff, such as bereavement, illness (including depression, alcoholism or other disorders), divorce, family problems and so on. Issues that involve the business owner directly may well mean that the business could simply become healthy and viable again when sufficient time running it properly is re-established. Issues directly affecting the business can include: Overcompetition, underpricing, undertrained or poorly trained staff, incompetence or indifference, management or staffing costs are too high, overburdened with debt, increase in expenses, loss of income, loss of a key customer, supplier, or staff member, general industry turndown, and an unexpected event such as litigation, tax liability, or a security hack. Some of these issues can be fixed relatively easily, such as underpricing or staffing, whilst the other ones may prove unsurmountable, such as loss of key contracts, industry downturn or litigation, and you’re either better off walking away or considering purchasing the assets only.

Signs that a business is in distress. Remember, the business may well be distressed or about to become distressed without the owner telling you. If, acting on the information you’ve been given so far, you decide to move forward from this stage towards making an offer, then hopefully these problems will be picked up in the due diligence stage outlined later in this text. Who is going to be managing the company? Will you be managing it? Does the company manage itself? Do note, smaller businesses are often owner-operators and therefore the person selling the business may be the key to its operations. It’s one of the biggest challenges when trying to expand if you’re too involved in the day-to-day running of your own business. Will your existing company manage the acquired business? Will you hire someone to manage the business? Or will you outsource everything to an outside agency, for example, an outsourced HR company? Again, for the purposes of this text, I’m assuming that you’re simply looking to grow your customer base and add the new business to your existing business to grow by acquisition. However, you have other choices of what to do for your newly acquired business. Manage it as is and simply bolt on to your existing business. Fix it, then manage it as is and simply bolt it on to your existing business. Sell it after adding value, i.e. flip it, or a combination, i.e. retain part of the business or assets and sell the rest.

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