Companies Going Out of Business
Purchasing a company that is going out of business makes it easy to enter an industry or marketplace. Depending on the situation, transition into the new business may be easy or you may need some time to get it back into financial shape.
Where to Find Available Companies
Online search engines can help you locate companies anticipating shutting down. These sites state if a company announced that they are going out of business, seek investors or are reducing their available products or services. Investment, news and financial websites often provide this information about larger companies.
Auction bulletin boards and your local newspaper provide the same information, but usually for smaller companies. An advertisement that a business seeks to liquidate its assets because the owner anticipates shutting down or is up for auction due to insolvency indicates that you may be able to purchase the company.
Business brokers, similar to real estate brokers, sometimes have companies listed for sale that are listed because they are going out of business. An online search for business brokers can yield local or national businesses available for purchase.
Legal Considerations
Buying a company that is going out of business means that you acquire its legal responsibilities and debts. As the new purchaser, you usually become responsible for every facet of the business, including any:
- Debts
- Lawsuits
- Other problems
It is irrelevant that you did not cause the problems; as the new company owner, they are your responsibility.
Usually, due diligence research provides all the information you need to know about a company. Depending on your contract with the business seller, you may be able to break the contract for sale if these issues are severe. Due diligence, however, cannot uncover every type of problem. This is mainly because not every aspect of a business can be researched. For example, the company's books tell you whether the company is insolvent, but they do not tell you whether its product or service is unmarketable or no longer in demand. For that you may need to hire a consultant or someone who specializes in researching companies and markets. A scan or search of trade journals, business news and Better Business Bureau reports are just some of the ways you can uncover additional information.
Buying a Troubled Company
A troubled company is one with a lack of financial resources, including income, or with a product or service that is no longer in demand. Many times, a company is troubled because of a lack of organization, poor decision making or bad accounting practices. While you may need to treat a troubled business with tender loving care and invest money into it, doing so may be worthwhile if you think you can overcome its problems and make it profitable. If you have any managerial experience or previously owned a business, a troubled company allows you to use your supervisory skills to revitalize it and help it function the best way it possibly can.
The process of buying a troubled company differs slightly from buying a non-troubled one. This is because investors may not be comfortable taking on too much debt or too many problems and may not be willing to lend capital to purchase a troubled or failing company. This is particularly true if the company is on the verge of bankruptcy or has already declared bankruptcy.
Is the Time Right?
If you have money to invest and want to own a business, it might be time to purchase a business on the verge of closing its doors. If the company you are interested in is a troubled company, consider whether you need immediate income. If so, it might not be the best type for you to purchase. A troubled company requires that you work hard to fix something that another owner has broken, and recognize that you might fail. Risk is inherent in buying a company that is going out of business for financial reasons, so you should also be comfortable with taking it.
Seek Professional Help
Seek legal and financial advice before purchasing a troubled company. These professionals will review the company's history, accounting practices and overall operations and discuss whether its purchase would be a good investment for you.
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