In the Distressed Businesses page within our Listings on this website, we discuss some of the characteristics of distressed businesses, and lay out a number of reasons why buying a distressed business in Tucson could prove to be a sound investment strategy for you to consider. Businesses can become distressed for many reasons, and if some relief and resolution is not found for the underlying problem, once possible outcome is that they could end up in bankruptcy. In this article, we are going to talk about taking advantage of buying a distressed business before it gets to bankruptcy.
1. Perform Extra Thorough Due Diligence. Whether a business is distressed or not, performing a thorough due diligence is a central component of any aquisition from the buyer's perspective. In the case of a distressed business, it takes on heightened importance because it is less likely you as the buyer will have any recourse against the seller should things not go as planned after the closing. That makes it essential for you to dig in deep to understand the reasons why the business in questino is distressed in the first place. Is it overloaded with debt? Did it lose several key players who took large pieces of business with them? Has it failed to execute on its targets due to incompetence, or because they were unrealistic? Without knowing the causes of the business' failure, it will be nearly impossible to develop a comprehensive post acquisition game plan. If the business is totally hopeless, you may conclude that you'd only be interested in a post bankruptcy scenario. A qualifed business broker can assist you in this assessment.
2. Buy The Business Assets Only, But Not Stock (Equity). Whenever your'e considering buying a distressed business, it's going to be important to have access to competent advisors, including those who can advise you on the tax implications of the different ways you might approach the transaction. In most instances, when you're buying a distressed Tucson business, you will first want to look at the possibilty of doing a deal that only involves the purchase of the business' assets. There are several reasons why for this: (a) you could obtain an accelerated tax basis for the acquired assets; and (b) it may minimize your need to acquire unwanted liabilities of the distressed business for sale.
That said, if the business for sale is very distressed, there may not be any tax benefits to an asset deal. Nevertheless, it is prudent to pursue this angle of inquiry as far as you can until the seller pushes back. Of course, it is to be expected that the seller will push back strenuously and try to get you to acquire the entire company, problems and all. If you are able to do an assets only purchase, it is your surest safeguard in terms of risk and liabliity that you willl be able to avoid unknown or undisclosed liabilities of the business that derive from the stressed circumstances it finds itself in, including unpaid taxes, pending lawsuits, and ongoing fraud or negligence in the operation.
3. Do Your Best To Avoid A Fraudulent Transfer Challenge.
If you try to buy the assets from a distressed business prior to it eventually filing for Chapter 11, you need to be aware that you may face the risk of a fraudulent transfer challenge. There are several classes of fraudulent transfer challenges covered by federal law, state law and/or the Bankruptcy Code. The first is called "actual fraud," and can be claimed when dissatisfied creditors or a bankruptcy trustee can show that the sale of assets (to you) was conducted in order to hinder, delay or defraud the seller's creditors. The second, which can be easier to claim, is known as "constructive fraud," in which case the creditors will try to show that you acquired the assets for less than fair market value or reasonably equivalent value and that the seller was either insolvent at the time of the sale, or made insolvent by the sale. or sale was made for less than fair consideration or reasonably equivalent value and the target was insolvent at the time of, or rendered insolvent by, the sale. Indeed, Section 544 of the Bankruptcy Code empowers bankruptcy trustees to utilize applicable state law to void such asset transfers for "reach-back" periods of six years or more.
So, how can you protect yourself from a transfer fraud challenge if you're the one buying a distressed Tucson business? First, do everything possible to get a third party validation (from a bank or business valuation expert) to show that you paid "fair consideration" or "reasonably equivalent value for the distressed business' assets. Second, structure your purchase so that the terms of the deal specify that the proceeds of the sale stay within the Seller's company as opposed to being distributed to shareholders or partners and insist that arrangements be in place that ensure the Seller's creditors will be paid off.
4. Don't Allow For Time Between Signing And Closing.
If you're considering buying a distressed Tucson business, and go so far as to sign a contract to buy one, then you need to close on it immediately. Do not allow for months or even weeks to transpire before closing, because the Seller could conceivably file for Chapter 11 during this interim period. If that were to occur, the Seller could reject the purchase agreement leaving you, the Buyer, with little more than an unsecured pre-petition for claim for damages that would likely be worth pennies on the dollar, if that.
The Seller, on the other hand, would still retain the right to "assume" the purchase agreement, thereby locking you into a deal that might suddenly not look so good if weeks or months have passed and the business may not look so good after weeks/months of the deterioration of the target's business. Eliminate the risk of any of this happening by insisting that signing and closing occur simultaneously.
5. "Hold-back" or Escrow a Significant Portion of the Purchase Price.
In the event that the Seller of a distressed Tucson business files for bankruptcy after you have closed on the purchase of their assets, if you seek an adjustment to the purchase price, or indemnification of the entire sale itself, your claim will again be treated as an unsecured, pre-petition claim. In some cases, claims for indemnification can be completely disallowed if they are contingent at the end of a Chapter 11 process. Unless you have a guarantee from a creditworthy affiliate or stockholder of the Seller to make good on the deal, then the best way you as a buyer can protect yourself from this risk is to hold-back or escrow a significant portion of the purchase price. Escrow/ holdbacks are frequently used as part of deals, including deals involving healthy companies. By putting in place an escrow/holdback as part of your deal you are protecting yourself. In normal circumstances, 10-15% is the usual amount held back. But, if the company is distressed, the buyer should consider a greater amount, up to perhaps 25% or more.
We hope this information about buying a distressed business will be helpful to your efforts to buy a Tucson business. Give us a call at 502-909-8242 or contact us if you're interested in further exploring the possibility of buying a distressed business. And, of course, keep an eye out for updates to our Listings page, which includes a link to distressed business listings that we may have from time to time.
If you'd like more information on this subject, please Contact Us.
If you're like most small business owners in Tucson and Southern Arizona, you started your company because you had a passion for what the business does, or you were seeking a certain balance between a desired lifestyle, your skills, and your desired return on investment.
No matter how much you have loved owning and operating your business, and no matter how much you have prospered from doing so, the reality is that the day will come when you need to to sell it. The need to sell could arise for a variety of reasons. You may simply be at a place in your life where you want to retire. Or, another incredible opportunity may arise that arouses your passions anew, but requires you to divest of your current business in order to pursue it. You may also need to exit the business for personal reasons, including health or divorce. You can never be certain about any of this, except the fact that one day you or your heirs will need to sell the business.
And when you do sell the business, your objective of course will be to get as much for it as you can. Here are a few very important things for you to consider well in advance of the time you need to sell your business in Tucson.
Organize and Run The Business So That It Can Run Without You
While this may sound easy, it is actually very challenging because it requires a great deal of discipline on your part. Start out by asking yourself: "If I needed to be away from my business for a month, could it run smoothly in my absence? If you can't answer "yes" to this question confidently, then it’s definitely time for you to focus on your processes and systems. By processes and systems, we mean "the way you do things." Do have clear and thorough written documentation of how to perform all the major tasks that must be completed within your business?
Such documentation could be as basic as writing down the steps to perform a task like cleaning a machine, or producing a report on a piece of paper or in a Word document. For other more complex processes, it could involve highly detailed and specific instructions on how to operate a machine, or use a software tool to perform certain critical functions. Are there critical processes in the business that only you know how to perform? A good way to answer this question would be to see what a member of your staff would do if asked to perform a given task or procedure when you are not around to answer any questions they may have. What happened? Did they do it the way they were supposed to? Did the make the same decision, arrive at the same conclusion, or produce the same result as you would have? If they did not, then you have uncovered an area where documentation would have been useful. If there are too many sucg areas across your business, where nobody but you could achieve a required outcome, then your business could fall off the tracks in your absence. That means that a buyer acquiring your business is at risk, because you're not always going to be there and nobody knows what you know. Having standard, written processes makes your business more robust, more stable, and therefore more valuable. With your critical processes documented important projects and daily operations can continue even when you or another staff member are absent or call in sick, and it will be easier to train new hires as well. A business that can run without you is one that by definition has more efficient operations, and to a buyer that translates into more predictable cash flow. That is a key component in the valuation of your business.
Make It Easy For The Buyer To See What The Future Holds For Your Business
A buyer is not likely to run your business the same way you have. They are buying it because they have a plan, see an opportunity, and want to make it into something more in order to generate value for themselves. As the seller, one of the most important things you can do to ensure that your business sells is to show them how confident you are that they will be able to achieve their plans once the deals closes. In general, these opportunities that a buyer may have in mind fall into the categories of cost reduction or revenue enhancement.
In the case of cost reduction, a buyer is naturally going to be looking for ways to reduce overhead by looking for tasks that they themselves, a family member, or a lower cost employee could perform. They will also be looking for cost savings in the areas of procurement and operations. To assist them, make sure that your books are prepared with sufficient detail to ensure that your salary and operational costs can be fully broken out and understood by the buyer. The buyer is not the only one who will benefit from your efforts to break out these details, because in doing so you're likely to uncover opportunities to wring savings from the business long before you sell.
In the area of revenue enhancement, the buyer will likely have his or her own new, creative ideas and see new opportunities in certain areas of your product and service offerings, or within a segment of your customer base, that you may not have considered. In order to permit the buyer to estimate the potential upside of the new initiatives they may be envisioning, you will need to have an accurate customer database and detailed historical transaction data about customer's purchases. In other words what they bought, how much they paid, and how much the customer has been worth to you during their lifecycle with your business. A business that knows who its customers are, and can market to them effectively, affordably and electronically, is worth more than a business the same size that lacks an understanding of its customers. If you can let the buyer see that you're giving them the keys to a control panel of tools and predicatable ability to keep selling to known customers, you've just increased the future visibility of the business, and with it the buyer's confidence in its value and willingness to pay you more for it.
Be Prepared To Answer Questions During Due Diligence
Every buyer will conduct due diligence in a slightly different way. Nevertheless, there are certain questions that will predictably asked. Working with a qualified business broker can help ensure that you're adequately prepared to anticipate and respond successfully to these know areas of questioning.
Buyers will often begin the due diligence process by auditing your business' contracts. A contract review will allow them to quickly determine what intellectual property your business may own, what obligations you may have to banks, creditors, landlords, vendors and employees. A buyer may wish to hire different people, or transact with different vendors and service providers, and a review of contracts will assist them in determining how much latitude they actually have in each of these areas, and when. A buyer will also want to review the terms in the agreements themselves, and what the drivers were that caused you to agree to those terms and not others. By having all of this information readily avialable right from the start, you will demonstrate to the buyer that you are detail oriented and have placed important on contractual matter. From the buyer’s perspective, that should indicate that you've run a "tight ship," and there are no hidden surprises.
While each of the areas we have discussed here will add value to your business, as well as make it more desirable to potential buyers, keep in mind that these are not easy recommendations to implement, and that doing so well requires years of advance preparation. In other words, don't wait until you need to sell your business to begin preparing yourself for the inevitable day when you will sell it. By preparing in advance, the process should go more smoothly and have a higher likelihood of your being satisfied with the outcome.
Ready to start planning now to sell your business? Schedule a free consultation with one of our experienced business brokers to discuss these and many other ways to begin preparing in advance to sell your business.
If you'd like more information on this subject, please Contact Us.
If you have visited the Buyer's Section of this website, then you should have a clear idea about whether or not you're really ready to buy a business in Tucson or Southern Arizona.
It may not be as clear to you, however, why you should want to speak to a business broker face to face and consider working with one throughout the process of seeking and acquiring the right business for you. The fact is that whether you are actively seeking to buy a business now, or just getting started with your initial research now for a possible purchase a few years down the road, speaking with a business broker is one of the first steps you should take. It may sounds self-serving of us to tell you that, since we are business brokers, but hear us out because we're confident that an in person conversation will benefit you whether or not you decide to use a business broker when you proceed to buy a business, or not. There are times when a brief perusal of a website, or short telephone conversation, just doesn't provide a complete enough picture of the advantages a service can offer, and this is one of them.
To begin with, start out by putting yourself in the shoes of the seller. Most business owners planning to sell a business in Tucson are doing so because really want to, or really need to. In that respect, once they've made the decision to sell they would obviously prefer for their business to sell as soon as possible. And since it's a numbers game, they realize that they will need their listing to be put in front of as many qualified buyers as possible. The more buyers they reach, the faster their business is likely to sell. Business brokers serve sellers by marketing their business for sale listings professionally, and confidentially.
What that means to you as a buyer is that a licensed business broker is going to provide you access to a large number of Tucson business for sale listings that you would never have been able to find on your own. Brokers commit to their sellers that they will closely guard the confidentiality of the listing, and obtain signed non-disclosure agreements (NDA's) from potential buyers before making known any details about their business for sale. If you have not met with the broker in person, they will not be able to make you fully aware of the opportunities to buy a business in Tucson that are actually out there on the market.
If you're seriously interested in buying a business in Tucson, then you probably have a good idea what type of business you're looking for. If that is still kind of hazy for you, then let us suggest again that you go through the Buyer's Section on this website, which is designed to help you refine your focus. The helpful videos and questionnaires listed there will assist you narrowing in on the business that best fits your investment parameters, lifestyle priorities, and professional skills. Once you've clarified these things for a business broker, most brokers will try to keep you up to date on their own new listings that match your criteria, as well as other listings that come on the market that only a short list of brokers are actually aware of (remember, the seller wants this to be confidential until a deal is completed). In our case, we post our listings on our blog, so subscribing to our RSS feed will ensure that you're notified of new listings.
Finally, if you conclude that there are sufficient good reasons to work with a business broker, it's important to find one who you "click" with and will enjoy working with. Beyond that, you'll also want to be on the lookout for "red flags" and filter your choices of broker. An experienced broker will have solid references and a track record, and will increase your confidence by sharing their knowledge about the kind of business you're looking for and the industry it's in, as well as the purchase process itself. Your broker is also the person that will be representing you in a transaction with the Seller, so you will want to be comfortable with their style and approach, as well as completely certain of their competence, integrity, and clarity about your goals.
How can you properly evaluate these qualities in trusted advisor unless you've met with them in person? The good news is that most business brokers will gladly meet with you with no obligation to understand your objectives and share their expertise. We certainly will, at least.
Ready to Schedule a Consultation? Just click here.
If you'd like more information on this subject, please Contact Us.