Well, this topic should be fun. Should you buy a business that is losing money, in general, I would say probably not… but, there could be a few situations in which it could make sense.
This is one of those situations where you need to proceed with a bunch of caution. Many people have tried and failed going down this road. What looks like a few fixes here and there ends up being a total rebuild.
Reasons not to buy a business that is losing money
It is hard enough finding a business to buy, but then buying one that is losing money makes it even more difficult. These businesses are called “turnarounds” because it is just like it sounds, you will have to fix all the things the previous owner did to screw up the company.
If this is the first time you are buying a company, I would stay away from this situation. Here is a partial list from a very long list of reasons why this is a bad idea:
- Losing – You are losing money on day 1 after you buy the business
- Hidden Problems – No telling what types of problems could be under the surface (IRS, sales taxes, payroll taxes, liens, partner problems, ex-spouses, you get the picture)
- No Flow – You are not putting money in your pocket on Day 1
- No Loans – You would not be able to get financing from the SBA or a bank for a money-losing company
- Tough job – You need special skills and abilities to turn around a company
- Buying Junk – You don’t pay for other people’s problems
- Smart Money – You don’t want to be the “dumb money”
Now I know it is tempting to buy a company that loses money because they are giving you a “great deal” and they tell you it is just about to turn the corner. It is always just about to turn the corner.
Well, if it is just about to turn the corner, why are they selling it now? Save yourself a bunch of time, trouble, and money, and don’t be tempted to buy a business that loses money.
Why it could make sense to buy a business that is losing money
Yeah, I know, I just told you not to do it, danger danger, but there are certain limited situations in which it could make sense to buy a company like this. For this to make sense you would need a great price, experience in the industry, and a bunch of faith in yourself, kind of like “I could have been an astronaut” type of faith in yourself.
Here are a few reasons why it could make sense:
- Experience – You are already in the industry and you are just buying the assets
- Expansion – You are looking to buy another location for your existing business
- Assets – You just need the assets of the business
- Detective – You are very, very good at due diligence
- Fixer – You are VERY experienced with turnarounds
- History – You have done this before in this industry
- Expertise – You know something about the industry that the seller does not
- Capitalized – The business loses money because it was under-capitalized and you have the capital to invest
- Crazy – You are wealthy and you are looking for a challenge
Go deeper on turning around a business
If you are interested in learning how to fix a business that is losing money, this book: Small Business Turnaround Plan: Your Complete Guide to Getting Back to Profitability While Saving Your Sanity will help you learn the skills and secrets to be successful.
Click on the book image to learn more.
The bottom line on buying a business that is losing money
So, unless you are wealthy, crazy, have a bunch of money, or are already successful in this industry, do not buy a business that is losing money.
I don’t care how much of a “discount to market value” they are offering, you should walk away, actually, run away. Your chances of turning around a business that is losing money successfully are slim.
Not to mention, you will not be able to get any business financing to do the deal. Like those drug commercials used to say, Just Say No.
Now go out there and own your destiny!
