How to Buy a Struggling Company

Acquiring a "workout" is a risky though potentially lucrative game. Stick within an industry you know, then do your due diligence

I would like to buy a business and turn it around. Can I approach banks about their nonperforming business loans, as people are doing who are buying up repossessed properties? How else could I find struggling companies to purchase? —A.V., San Francisco

This is an excellent time to be looking for business bargains, says Mark Rittmanic, chief executive of ForteCEO, a business consultancy based in Northbook, Ill. "Many businesses are available at what could be considered bargain prices, because lots of Baby Boomer owners no longer want to work 60 or 80 hours a week, and this economic climate has taken the wind out of their sails," he says.

However, it's also a time for even more caution than is normally recommended in business acquisition. "It used to be that with a clean legal bill of health and honest numbers, you could predict a company's continued success. But in today's environment you need extensive business continuation due diligence," Rittmanic says. That means you must also analyze whether the industry itself will survive the downturn and continue in what may be a substantially changed economy.

You won't be able to get information from banks about struggling companies, however, since they are not allowed to share information about borrowers without their consent. You might talk to accountants who specialize in small businesses in your area and let them know of your interest, says John Bates, president of Avalon Advisors, a business valuation firm based in Dana Point, Calif.

Once banks take over companies that have defaulted on their loans, they may be tough to salvage. Plus, you'll have lots of competition. "In this economy, the banks are being besieged by people who are newly minted workout experts. It would be difficult for you to get a bank's attention unless you work through someone in whom the bank has confidence or already has a relationship," says Stanley D. Crow, president of S. Crow Collateral of Boise.

A Large Inventory

Typically with small firms—those under $10 million in annual revenue—banks sell the assets and do not worry about maintaining the customer base. Larger firms, or those considered to have more potential, are given to experienced turnaround specialists to run while buyers are sought by business brokers.

Those brokers are extremely busy currently, says Ron Hottes, president of the California Association of Business Brokers. "The banks keep us supplied with these kinds of opportunities. As you might imagine, during the current economic condition we have a much larger inventory of these business opportunities."

Your best bet is to work with a certified business broker, who is likely to have a list of struggling or repossessed companies looking for new owners. Crow suggests the International Business Brokers Assn. as a starting point. Call every broker specializing in the type of company you are interested in buying and be prepared to sign a confidentiality agreement and to show a financial statement that proves you can buy, says Greg Caruso, an attorney and principal of Harvest Associates, a mergers and acquisitions firm based in Baltimore.

And stick to an industry you know well, so you can figure out what has gone wrong with the businesses you consider purchasing. "Experience allows you to estimate what the gross margins and operating costs should be vs. what they are," says Caruso.

Buying a workout is a difficult, high-risk, high-reward process, and the devil is in the details. Caruso says he knows of a buyer currently purchasing $2 million in assets for $400,000. "There are decent revenues, but of course the thing is currently losing money," he says. "If he can cut costs and create profitability, he will have gotten quite a deal."

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