Finding a Business in All the Wrong Places
Consider buying an existing business.
Entrepreneurs looking for opportunities to start, expand, or enter new markets can start a new business or buy an existing company. Starting a new business comes with great uncertainty, while buying an existing company allows a new owner to continue an operation that is established and already profitable. However existing businesses usually come with a higher price tag. An alternative path may be to buy a company that is in bankruptcy or distressed. Although this path may seem counterintuitive, a buyer may find an eager seller, competitive bids, and a business that can be purchased at a bargain. Other opportunities such as a management buyout may also be worth considering.
Buying a company or assets in bankruptcy may provide an opportunity for an investor to acquire an established business with technology, product line, services, customer base, and an established market. A bankruptcy buy, even of a large company, is common, and the purchase is handled by and through a bankruptcy trustee under the court’s supervision. Such purchases result in reduced costs, time, and uncertainty. In many ways purchasing in bankruptcy can be more attractive than a traditional merger and acquisition because buyers have the added protection from most creditors’ claims. Also, there are plenty of opportunities to buy businesses in bankruptcy because of the recent economic recession. The key to buying a company in bankruptcy is that the buyer must understand why the business is currently in trouble and know how to turn it around. Finally, to quote Steve Katz, CEO of Nationwide Cellular, “You will never find a better deal than in a bankruptcy court because you’ve got the ultimate motivated seller.”
A business in distress but not yet in bankruptcy is also an opportunity. Companies in distress may still have sound business models, and the cause of their distress may not be related to the underlying value of the business. A distressed business may be mismanaged or have a cash flow problem that can be resolved by bringing in the right investment team. An obvious advantage of buying a distressed company is that the distressed seller is typically looking to get out quickly and does not have the time to negotiate or consider multiples offers. The investor with the right expertise to run the business and turn it around would help both the exiting owner and themselves. The buyer may also be able to renegotiate employment agreements and contracts with vendors to reduce overhead. Unlike assets in bankruptcy, an entrepreneur purchasing a distressed company must conduct proper due diligence on existing liabilities and claims that may continue following the purchase. However, buying a distressed company allows an investor the chance to achieve rapid growth at lower costs while avoiding the uncertainty and high cost of starting up.
Another opportunity to consider is buying the company that you work for. Management buyouts are fairly common, especially in certain industries dependent on the knowledge and expertise of key employees, such as technology and manufacturing. Some buyouts are structured more formally through buy-sell agreements between owners and employees, while others may be structured only when the current owners are ready to retire or sell. The biggest advantage is the buyer’s familiarity with the business, customers, and operations. The difficulties often arise in the valuation of the business and the method of payout, since even the highest level employees may not have the resources to provide a quick cash-out to the sellers. To address these issues, third parties such as valuation companies and investment advisors are often brought in to help with the deal and to negotiate terms on a professional and arms-length basis.
There are many roads to ownership and a smart investor should consider every option. While starting a new business from scratch can be very rewarding, buying an existing business may be more efficient and the perfect opportunity for a savvy investor to exploit.
Business Insights is hosted by the Law Firm of
Kumar, Prabhu, Patel & Banerjee, LLC (KPPB).
Sonjui L. Kumar is a founding partner of KPPB Law, and a corporate transactional lawyer representing companies in all aspects of corporate law, including cross-border transactions.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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