Selling a distressed business is tricky, but it's possible with the right approach.
Insolvency doesn't mean your business is worthless. Various assets will continue to hold value. Plus, there's the potential for your business to become profitable. So, you don't have to take the first offer that a buyer makes either.
In this guide, we'll teach you how to sell an unprofitable business so that you can move on to bigger and better opportunities.
Selling a Distressed Business Versus a Profitable One - The Difference
About 60% of small businesses fail within the first three years. And in certain situations, like when Covid-19 first sprung up, the small business failure rate was much higher.
Some reasons that businesses fail include:
- Not keeping track of critical metrics, such as cash flow and profitability.
- Running out of cash due to long payment cycles.
- Market forces, such as shifting consumer demands or new regulations.
- Management decisions
- Unforeseen events, e.g. Covid-19 or natural disasters.
However, owning an insolvent business isn't the end of the world. Many entrepreneurs have turned previously unprofitable companies into successful, thriving organisations. That's why selling a failing business is a common transaction, and many buyers see it as an opportunity to own an established brand at a discount.
Businesses also have an intrinsic value, e.g., contracts, intellectual property, and other assets like equipment. These factors have value regardless of whether a company is profitable.
But there are some differences between selling a business that's losing money and a profitable one.
Selling a struggling business requires that you:
- Focus on the potential of the business, e.g., strong market demand.
- Identify the issues with the business. Most buyers will want to know what problems they need to fix before buying your business.
- Are patient and transparent as buyers will be more cautious about closing a deal.
If you plan to revive your business or it's still profitable, you can check out our selling a business guide for more relevant information.
Top Tips to Help You Sell Your Failing Business
If you choose to sell your struggling business, here are some tips to follow:
1. Know why your business is losing money
Reviving a distressed business isn't an easy feat, and investors will want to know why your company isn't profitable. Without this knowledge, they'd have no idea if they're making a good investment.
If you don't identify the issue, you may receive low-ball offers or have trouble finding interested buyers. Plus, if you identify the problem, you may discover that it's possible to save the business yourself.
2. Remember that your assets have value and value them correctly.
Assets have value regardless of the state of your business. Highlighting these assets can entice buyers and improve the sale price as buyers may repurpose them for their own business or sell them for cash.
Examples of valuable assets include:
- Product designs
- Real estate
3. Value your assets correctly
When a business is failing, every penny counts. Buyers will likely conduct extensive due diligence, so you must value your business accurately. Failing to do so can result in a lack of trust, causing the sale to fall through.
An accurate valuation will also ensure you get the correct amount for your company. It's good to start with physical assets since their value is less subjective. Then you can move on to other assets like usage rights and intellectual property.
To get an initial valuation of your business, you can use ValueRight, our free valuation tool. You'll get a personalised valuation in less than an hour, so you can focus on selling your business.
4. Always be transparent and open during the selling process
Investors will be extra careful when buying a distressed business. For example, if you're selling a limited company with debt, you'll need to show every cent that your company owes. If you don't disclose information like this, you may be vulnerable to future lawsuits.
During the process, you should do your best to demonstrate the company's potential for profitability.
You can highlight factors like:
- Important contracts
- Innovative technology
- Customer lists
- Market size
- Lack of competitors
5. Maintain healthy relationships with potential buyers
Professionalism and transparency are vital for maintaining a healthy buyer-seller relationship. Without a solid relationship, it will be challenging to communicate, making negotiation difficult and ultimately increasing the deal's chances of falling through.
6. Be ready for negotiations
Even if your business is struggling, it's valuable, and you should be ready to defend that value. The best way to negotiate from a position of strength is to know what your business is worth. When you know this number, you can confidently counter low offers.
7. Use a broker to support you during the sale
When selling anything of significant value, brokers play a vital role in ensuring a smooth process. They know the current market conditions, and they're skilled at negotiation, which will help you get the most for your business. And since selling a distressed business is trickier than a profitable one, it helps to have a professional on your side.
If you’d like extra support in selling your distressed company, you can find a business broker with our matching service. We screen potential brokers to ensure they're skilled at what they do, but there's no obligation to work with them if you don't find a good fit.
How BusinessesForSale.com Can Help You
Between managing day-to-day operations and preparing a distressed business for sale, the process can be stressful. And you may be feeling pressured to sell the business as soon as possible, but it's important to complete each step correctly to ensure a smooth sale.
Remember, to sell your unprofitable business, you should:
- Be prepared for extensive due diligence.
- Be honest and transparent about financials and the state of the business.
- Conduct an accurate company valuation.
- Nurture buyer relationships to improve communication and trust.
- Be ready to negotiate for a fair price.
- Use a professional broker to reduce your stress and support the sale.
Ready to sell your company? Then you can list it on our website under the “distressed” or “quick sale” categories. Listing there will ensure that relevant buyers can find your business.
If you need a hand with selling your insolvent business or want to work out your next best move, you can contact us at any time. We understand that owning an unprofitable business is difficult, so we'll do everything we can to help.