It probably wouldn’t surprise you to say that we live in an uncertain economy. After all, it is normal for an economy to cycle through highs and lows. While the lows can be devastating to some, they can provide an incredible deal for others. This is certainly the case when it comes to distressed businesses for sale. When a business owner sells a distressed business to recoup the losses, there’s a buyer on the other side who is thrilled to secure such a good deal.
3 Things to Consider When Buying a Distressed Franchise Business
While investing in a distressed franchise business can reap many benefits, you don’t want to buy just any distressed business that’s for sale. There are a number of factors to consider.
Understand the Levels & Areas of Distress
Whether or not you should pursue buying a business in distress depends on the reasons it is failing. Consider the following questions:
- What are the current market factors that may have led to business failure?
- Where is the business located and has that negatively impacted its performance?
- Are there any management or labor issues?
- Has the business been unable to obtain payment deferrals?
- Has the business undergone refinancing to pay off maturing debt?
- Has the business been forced to engage in mergers and acquisitions (M&A) transactions?
- What are the assets and potential liabilities?
- Are there supply chain risks that the target business may be facing?
The answers to these questions will help you evaluate if buying a particular business in distress will be a fruitful investment.
Out-of-Court Acquisition Versus Bankruptcy Court
When deciding if you should buy a distressed business, another matter you should assess is if the acquisition will be out-of-court or if it will go through the bankruptcy process. Both scenarios have their pros and cons.
Out-of-Court Acquisition Pros:
- Faster & less expensive
- Reduces the risk of competition
- Protects the business’s reputation
Out-of-Court Acquisition Cons:
- Carries the risk of a fraudulent transfer if the buyer does not adequately consider if the business is insolvent
- Torts and claims might arise later regarding the business’s pre-acquisition conduct
- While the acquisition starts out-of-court, it’s possible that the company could go into bankruptcy during the process, which would complicate matters
If you are looking to buy a distressed business through an out-of-court acquisition, receiving a third-party valuation of the business could help prevent challenges down the road.
Bankruptcy Court Pros:
- The business could potentially rid itself of legal obligations or debts it owes to others, as long as the bankruptcy proceedings are done correctly
- Shareholder approval is typically not required, which makes it easier for the business to make structural changes without extensive consultation and deliberation
Bankruptcy Court Cons:
- It can be time-consuming and expensive
- Getting sufficient financial protection in case something goes wrong post-sale can be more difficult to obtain
- A competitive bidding process will delay the sale and increase the total cost
- Creditors may be involved in negotiating the deal terms, which could complicate matters
Whether or not you should pursue purchasing a business in or out-of-court will depend on your specific goals and circumstances.
Because of liquidity problems and imminent defaults due to debt obligations, it is essential to act quickly in a distressed business sale. If you want to secure first-mover advantages, promptly work with experienced advisors while also doing your due diligence to evaluate the financial, operational, and legal implications of buying that particular business.
5 Steps to Take Before Buying a Distressed Business
If you are considering buying a distressed franchise business, then you should take the following steps to make sure you find the right opportunity.
- Evaluate the history of profitability – Even if a business is currently in distress, you want to at least see that it has a history of growth and success along with solid management and leadership.
- Update yourself on market conditions – Understanding the rising costs, legislative changes, and licensing requirements in the market you are looking to buy a business in will help you make strategic decisions as you seek to turnaround a distressed business.
- Speak to the right people – Gaining insight from lenders, customers, and suppliers about the business you plan to enter will also add to your ability to make smart business decisions.
- Participate in industry & business-related events – Doing this will give you access to insider information on distressed businesses for sale.
- Consult with small business deal advisors – Expert advice is critical to your success when buying a distressed business. Make sure you speak with a lawyer and business consultant if you plan to buy a distressed business.
Pros & Cons to Buying a Distress Business
Buying a distressed business can be a highly profitable move, provided you find a business that still has the potential to recover. However, it is also one of the riskiest ways you can obtain a business due to all of the financial and legal complications involved. Whether or not you should do it comes down to your specific goals, abilities, and resources.
If a distressed business is not for you, then you might consider buying a new franchise. Not only does this carry much less risk, but it also allows you to complete the necessary research without the time constraints of a distressed sale.
Are You Ready to Own a Franchise Business?
If you are looking into buying a franchise business, FranNet will guide you every step of the way. Our franchise consultants will give you everything you need to make an informed decision from when you start looking for the perfect opportunity all the way until you buy a franchise and start your journey as a business owner. Our services are free to you, so don’t wait! Schedule your free consultation today!