19 February 2024: Selling a Business That’s Losing Money
Can a business that’s losing money be sold? The answer is a qualified “yes”.
We did two posts on this topic last year. The first one focused on smaller businesses; those that would be of interest to financial buyers. The second one discussed larger businesses that might attract strategic buyers.
Those posts were general in nature and gave a number of scenarios and situations to consider as well as ideas for the business owner to give some thought to as possible solutions to what might otherwise appear to be a pretty daunting problem. And, of course, when selling a business, this is only one of many aspects that has to be considered but when the business is losing money, it’s critical.
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All of this came to mind this past week as a result of inquires from the owners of two companies that, according to those owners, were operating at a loss and from an article published in Investor Times a business and investment journal based in southern Europe.
Though there’s no need for us to elaborate on the article’s points (as we discuss them in our earlier posts), it loosely addressed certain steps that should be considered or questions that owners of any business losing money should ask themselves:
- Determine why the business is losing money
- Identify any ideas for future growth
- Make sure financial statements are accurate and clear
- Determine and illustrate any value the business might have beyond financial
- Enlist the proper advisors
- etc.
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Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. Instead of enrolling in the complete course, could you enroll only in the module(s) you wanted? We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
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One aspect that the article mentions in passing but did not elaborate on was the need to consider creative ways to structure a deal with a potential buyer. That’s what we want to discuss here.
Deal Structure
Selling a business that’s losing money requires some creative thinking and one aspect of the deal where a seller or advisor might be able to create value is in the structure of that deal.
For example, seller financing has value in and of itself. Even in the case of a non-distressed sale, if a buyer is unable to secure financing from a conventional lender and the seller is willing to provide that financing, that willingness has value above whatever the value of the business might be.
But there are other methods to consider when trying to sell a business that’s losing money; methods that, like seller financing, have value.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
As with seller financing, these alternatives require the seller to wait for some period of time before realizing any significant proceeds from the sale. If the business is losing money, a buyer will have to determine how much money and/or time will be needed to turn things around. That might be their initial investment and, unless the business’ assets have significant value, the seller might have to wait for any return.
There are several deal structures that might allow a buyer and seller to come to an agreement that will, ultimately, give the seller an opportunity to realize some value from a money-losing business.
- Seller financing; briefly discussed above.
- Bringing on a partner: this assumes that the seller wants to stay in the business and would be an ideal way of solving a problem if the problem’s solution is additional capital to turn things around. (If you’re interested in this approach, we’re planning a webinar/workshop planned for late March or early April on buying into or selling part of a business.)
- Earn-outs: We’ve written about earn-outs here, here and here.
None of these options are exclusive; more than one can be used on any deal.
When selling a business that’s losing money, the structure of any deal will usually be dictated by the amount of time and money required to bring the business to profitability. In some cases, the buyer may agree to pay the seller some modest amount when the deal closes, though this is more likely of the business is hard-asset heavy.
The Bottom Line
Last week, we posted a short dissertation on asset value. And, depending on the business in question, that might be the value the seller will realize. If a business is “sold” for its asset value, it is often being liquidated and shuttered.
But a sale of the business’ assets is not necessarily the only way out when selling a business that’s losing money. Creative deal structures are a method for the seller to recoup value in excess of the asset value.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com