Could you turn around a failed business?
Is it a good idea to buy a failed business or are you risking failure yourself?
Woolworths was one of the 15,535 businesses to go into
administration in 2008. Since the chain went into liquidation in
November, it's been hard not to feel a bit sad walking past one of
its empty stores, dirt accumulating around that big red W once
synonymous with the British high street.
But while the nostalgic Pick 'n' Mix
crew argued Woolies could have been a great turnaround
opportunity for some wily entrepreneur and their millions, most
agree its £250m debt and 30,000 employees made it an opportunity
If you've got a phenomenal business idea and you get in
touch with the right people, there's a chance you might get
What of the other 15,534 insolvencies, though? Surely some of
those can be salvaged? Woolworths aside, aren't there now 15,534
brand new business opportunities for a savvy entrepreneur with a
bit of cash behind them and a glass-half-full attitude?
For many entrepreneurs, turnarounds are an attractive
proposition. If you've made a success of one business, why not
sprinkle some of that magic dust on a failing business and watch it
flourish - particularly in the current climate, where there are
"It's clearly a buyers' market," confirms Ben Gordon-Smith,
corporate and strategy lawyer at Hammonds LLP. "There are
businesses we're aware of which last year were worth £350m on paper
and are now worth just £4m. They're still perfectly viable
businesses, but because of share prices and what's happening in the
markets they're knocked down on price."
Unsuprisingly, reviving a failed business is far from
straightforward - indeed, it's riddled with risk. Remember no
matter how high your stock of magic dust, the business you've got
your eye on failed for a reason. You'll need resource (time as well
as cash), patience to deal with disgruntled staff, suppliers and
customers and really should expect the unexpected. Whatever
the potential reward, there's sure to be double the risk.
However, there are some rules you can stick to, which will help
to stack the cards in your favour:
Don't be tempted by a bargain
Now is not a time to venture outside your area of expertise.
When buying a failed business you're often
buying partly blind, so doing that in a sector you have
no prior experience or knowledge of is a huge gamble.
Diversification is also a bad idea. Now is the time to focus
strengthening your core business, not risking it by reaching out to
new areas. Christine Elliot, chief executive of the Institute for
Turnaround, cites supermarket Morrisons as a business which turned
itself around by focusing on its core proposition. "They are a food
retailer. They haven't diversified into clothing, and they don't
have an internet offering which you could say is a lost
opportunity, but it's absolutely right at the moment.
So don't be blinded by a bargain. Instead look at businesses
which will fit well with your proposition, existing
strategy and add value.
Entrepreneur Dan Wagner, who won Ernst & Young turnaround
entrepreneur of the year in 1998 for his transformation of
information solutions company Dialog, sees the opportunities
presented by the recession as a chance to add value to your
business. "Acquisitions can be very useful in building market
share," he says.
"They don't have to be big. Even if you are a hairdresser in
Fulham and there's another hairdresser over the road, you could
acquire them as a strategic way to increase your ability to service
Due diligence pays
Staying within your niche will also make it easier when it comes
to that all-important due diligence.
Because of the state of the market at the moment, you will have
less competition from other potential buyers, so you can afford to
go over the figures thoroughly and, crucially, ask around.
"You can probably get hold of balance sheets and see how much
borrowing they've got, and also when and why they've refinanced,"
says Gordon-Smith. "If you're in that industry or that sector, you
will probably know who or what is in trouble from market gossip and
by looking at trends in the marketplace.
Your best sources for due diligence may be the least likely: "It
could just be up to the fact that you make a call," advises
That call can be to anyone: from clients to suppliers to
customers and even staff, everyone with a stake in the business
will have something to say about it. If you know a long-term
customer stopped buying from the business, find out why. Why has it
stopped buying from a supplier? How does it treat its staff? If the
managerial structure isn't in place, you'll need to bring in new
people - do you have the resources to do so?
Most important: remember knowledge is power. The more you
can glean about the state of the business, the better-informed your
buying decision is, the fewer nasty surprises
there should be cropped up post-sale. In short,
up your due diligence and lower your risk.
Make tough decisions quickly
When you're attempting to turnaround a business, the adage time
is money has never been truer. You need to act fast
- especially if the business you've bought is losing money (which
it probably is). "Every day that goes by when hard decisions are
not being taken is a day nearer the abyss," says Elliot.
One of the first decisions you'll need to make when you complete
a takeover will be on its staff. "By day two, your
turnaround executive will have already decided what the key working
team will be," she explains.
A failed business' staff aren't always as receptive as you might
expect, warns entrepreneur Theo Paphitis, whose successful
turnarounds include stationary retailer Ryman and lingerie chain La
"These are people who are normally demoralised, worrying about
their job, have a total fear of your and will tell you whatever you
want to hear - so they don't instil a huge confidence at the
"You could easily say, well, they're not for me - but it's about
making sure they believe in you."
In reality, however, the revival of any failing business is
highly likely to involve redundancies. "Part of restructuring
a business is about making the numbers work - and if there are
surplus resources, you have to make changes," says Wagner. "I have
no issue with that because it's unfortunate - but by getting rid of
one person, it means more people are able to stay. It's the right
thing to do."
Make tough decisions as quick as possible, try and be fair and
communicate both your reasons for any redundancies and your vision
for the business. You'll need people on-side if it's going to
Plan how you'll resource it
Grabbing a bargain and realising a hugely inflated value later
on is the raw appeal of a turnaround. But just because turnarounds
are cheap to buy, it doesn't mean they're cheap to make work.
Serisouly, if you think this, think again. The business you're
buying won't just need money spent on it, you'll need to ensure
you've resourced your absence from your existing businesses as
turnarounds are notoriously time-consuming.
Especially in the current climate, a lack of finance to
turnaround the business will mean the wrong decision could cripple
it - taking your other businesses with it. Gordon-Smith says it's
essential to be clear about this.
"There are a lot of businesses failing at the moment simply
because they can't raise money or keep themselves going.
Previously, when the market was very bullish, if something didn't
back up, you'd negotiate a price but you'd still get the deal done
- now, though, you've got to do your due diligence properly."
If you don't already have the cash, raising it for a turnaround
could be a challenge. As Elliot points out, since several banks are
focussed on their own turnarounds, unless you have a watertight
plan, they are unlikely to be enthusiastic about financing a
business which has already failed, and while we are seeing some
activity from private equity houses, it still isn't especially
"Whereas a business might have had two, maybe three chances to
sort itself out, we're now in a scenario where it's one hit and
you're out. You either get it right or the business goes," she
One solution to the problem might be to opt for a 50-50
approach. By raising half the capital from private equity, the bank
may have more of an incentive to lend to you, and vice versa.
"If you've got a phenomenal business idea and you get in touch
with the right people, there's a chance you might get lucky - but
money is very, very hard to come by at the moment," says
Some businesses shouldn't be saved
As passionate as you may be about a business, during a
recession, some are doomed to failure, so make sure you are doing
it for the right reasons, cautions Paphitis.
"There was a business I loved and I was desperate to do, but my
concern was I was doing it for all the wrong reasons and it wasn't
the financial opportunity I thought it was. I asked my wife, and
she said 'I don't know if it's a good business or a bad business,
but the fact is, you just want to do it.
"Sometimes it takes someone who knows you, who understands you
and knows the things you get excited about to understand exactly
why you'd want to do something."
That said, as with many things in life, just because a
turnaround might seem a good idea, it doesn't necessarily mean it
Before you attempt a turnaround, take some of these factors into
- What's wrong with the business? Find out why it
failed in the first place.
- How can you fix it? Come up with a rescue strategy
before you make the deal.
- Why are you buying it? Ask yourself if passion is
- Is the price right? If it sounds too good to be
true, it probably is.
- Can you afford it? Remember, the turnaround will
cost time as well as money
- How long will it take? Can you afford to take your
eye off your core business?
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