Call of Distress: Considerations For Selling A Distressed Business

In a perfect world, businesses would only be sold when they are healthy and attractive to buyers. Unfortunately, this is not always the case, and trying to market a business as an appealing acquisition while the business is in decline can be difficult. However, it's not impossible. Here are some strategies to utilize when selling a business in less than ideal circumstances.

Focus on the Positive

Concentrate on the strong points of your business when meeting with potential buyers. Even if your current financial situation is not what you would like it to be, think about other areas of the business that aren't distressed. Perhaps your business is established within its trade sector and is known throughout the community. That rapport and community presence is hard to achieve, and buyers should be aware of it.

Likewise, trained employees can be one of the most valuable, attractive assets when selling a business. The work of finding, hiring, and training new employees is already done, so the buyer can use the employee base as a springboard and focus their efforts on future growth. If you have a core group of employees that are invaluable to the business, bring that to the attention of potential buyers as well.

Synergies

In distressed business sales, it is important to uncover the synergistic value of the business. As a stand-alone entity your business is failing. However, if your business was folded into another operation, what might the value of that business be to the new owners? Would the business be immediately accretive to the new owner or, despite many synergies, will the business still lose money or barely breakeven? Some of these questions may be hard to answer until an actual buyer shows up, but an experienced intermediary can help you think through various scenarios so that you can determine the various price, terms, and deal structures.

Price Your Business to Sell

Though it is important to not undervalue your business (distressed or not), there is no sense in touting a false bravado either. Be honest with buyers: they will likely know what a fair price looks like. Given your situation, consider pricing it at the lower end of reasonable. It may be counterintuitive, but a low price can potentially attract several buyers and keep the price and the terms at a higher level. A third-party business valuation with pre-approval from a bank is also recommended to gain an accurate picture of your business's worth. Lastly, in distressed sales be prepared to offer very favorable terms to the buyer. For example, much of the sales price may be tied to the future performance of the business or key milestones being met. Being flexible on the terms will increase the odds of your return assuming the business has a good foundation and is salvageable.

Clean House

Having the books and finances of your business in order is a simple way to instantly make a business acquisition more attractive to the buyer. No one wants to take over a business that is disorganized, especially when it is in rough economic shape. Have a legal review of your client and vendor contracts, employment agreements, and other business documents to ensure that the business can be easily transferred. Even take the time to spruce up your facilities, showing that you are still confident in your business and its future.

Maintain Confidentiality

It is important to keep quiet about selling your business. Spreading the word freely in hopes that someone will come along and make you an offer is a long shot approach. That may happen, but in reality that method often spooks employees, clients, and vendors, who then start looking for a new employer or partner. As mentioned before, your employee base and pre-existing relationships with clients and vendors are attractive assets of your business - it is important to keep those intact. Also, consider the benefit of working with an experienced business broker who can help safeguard the confidentiality of your business.

Stay Focused

Even though you are looking to sell your business, it is vitally important that you ensure all your efforts are focused on running the business. It can be difficult to avoid pulling back from everyday tasks to put effort into the sale, but it is essential to stay committed to the day-to-day responsibilities. It is important to show buyers that the business has future and potential, even if it is distressed. Staying focused on the business will help you maintain that confidence, and keep yourself and your employees fully engaged. Your efforts may even yield rewards in business performance, which can be an added bonus for when buyers come knocking.

Finally, it's worth noting that buyers often have a sixth sense for desperation, so it is important to be level-headed and confident throughout the sales process, otherwise they will likely exploit your weaknesses in order to gain leverage in the transaction. But being confident in your business is just as important as being honest about it and maintaining it. If you are considering selling your distressed business, take some time to follow the above steps and get everything from the facilities to the books together. Doing so will help to make your business more attractive to buyers, and in turn, make selling your distressed business a much easier process.

Domenic Rinaldi is president and managing partner of Chicagoland Sunbelt, a business brokerage firm that focuses on helping people buy, grow, and sell businesses in Chicago and the surrounding Midwest area. Domenic holds the professional designation of Certified Business Intermediary (CBI) from the International Business Brokers Association and is considered an expert in the business brokerage field. He is a seasoned executive who brings more than 24 years of proven experience in merger/acquisition, sales, service, marketing, and operations to the business brokerage arena.