Buying a failing business – even one that was once very profitable – screams risk to many potential buyers, but if you’re made of steelier stuff, it is a tactic that could bring a number of benefits to your investment portfolio. While it is not for the faint-hearted, acquiring a business that is in a tough spot can give huge returns provided the right strategy is adopted, will often represent great value, and provides a foot in the door to what could be a new-to-you market, all at a price much lower than you’d pay for a thriving organisation.
Yes, it is a gamble, but there are several motives for buying a failing business. Here are four reasons why you should consider buying a business that is in difficulty.
1. To Gain Valuable Assets
It’s always a good rule of thumb to never invest in any business if you cannot see it adding value to the one you already have. However, if the failing business has intellectual property that could benefit you, such as patents, trademarks, or copyrights, it is worthwhile acquiring the business to gain access to these assets. Just because their business is struggling to stay afloat, it does not mean that their intellectual property does not hold value, meaning you could purchase potentially very valuable assets at an affordable price.
2. To Hinder Your Competition
You should also consider buying a failing business if its assets could benefit a direct competitor who, if they got access to certain intellectual property, would have a significant market advantage. By purchasing something that could benefit the competition you are removing this risk. An example of this is when search engine Google acquired Waze – not because it specifically needed Waze but to prevent Apple from gaining Waze’s assets and mounting a challenge to Google.
3. To Gain Talented Staff
As with gaining valuable assets, despite a business struggling to stay afloat they may have incredible staff that are proactive, creative, and work exceptionally well together. You can acquire this talent by purchasing the business and these intelligent minds can then work towards making your company a financial success.
4. To Turn Things Around
Lastly, it is worthwhile acquiring a failing business if you can see the potential it has to be profitable and can recognise where mistakes were made. If you are purchasing a failing business for this reason, you need to thoroughly evaluate the business and the deal to see if any prospects do lie there. This always carries risk, but as failing businesses are often deemed unwanted, you can acquire the organisation for much less than you would normally pay and often, at a lower rate than it would cost you to set up a brand new business doing the same thing. This low-investment means that if you can successfully turn the business around, your returns will be handsome.
