You’ve heard those stories from people who’ve bought a business for next to nothing, rescued that business, and made a seven-figure sum when they exited a year later.
It’s definitely possible to do this, but it’s not a strategy I recommend.
Why?
The number one reason is time.
Your time is precious, and our goal at the Business Buyers Club is to ensure you don’t buy a business that becomes your full-time job.
In most cases you’ll already own a successful business or a property portfolio, or both. You’ll be devoting a fair amount of time to your current commitments, and the last thing you need is to add in something else that requires all of your attention.
The reality of a troubled business is that it will often take up a lot of your time while you get it back onto a good footing. That’s assuming you can get it back on track – it might end up folding anyway.
Most businesses are in trouble for a reason. They have a whole legacy of problems and there’s no quick fix.
When you COULD buy a distressed business
There may be unique circumstances that mean investing in a distressed company is worthwhile. Maybe the owner of a successful business has died and the business has run into trouble since – so it just needs someone to come in and steady the ship.
Or if one of your competitors is in trouble, you know the industry inside out and you know exactly how to fix their problems, then that could be a good investment. But you’d need to do your due diligence to avoid any nasty surprises down the road.
More reasons NOT to buy a troubled company
The second big reason not to buy a troubled company with the intention of turning it around is the risk to your reputation. What if you can’t rescue the business? It’s easy enough to go into a deal thinking you’ve only spent £1 so it’s not the end of the world if the business fails, but the reality is it’s not that easy to shrug your shoulders and walk away.
A distressed business will give you headaches and hassle, and there’s a risk it will consume all of your time meaning you can’t look at other, potentially more lucrative deals.
What’s the opportunity cost of buying a distressed business?
Let’s say you do decide to invest your time in a distressed business. It’s important to look at the opportunity cost of that. While you’re focusing on this troubled business, what else could you have been doing?
That’s my third reason for not buying a troubled business. Because you’ll definitely miss out on other great deals while your head is consumed with your turnaround project.
Sure, £1 is nothing, but you can never get back those missed opportunities.
It’s why I recommend buying profitable companies. I’m absolutely not saying it isn’t possible to make a good return on your investment when you buy a distressed business. But you need to go into it with your eyes open and remember that everything takes longer than you think it will and costs more than you think it will.
Your goal is to acquire an asset
If your goal is to acquire an asset, and you want to free up your time rather than spend even more time working, then buying a profitable business makes sense. It’s the best way to make sure you’re not buying yourself a job.