Could you turn around a failed business?

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 best avoided.

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.

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 bargains a-plenty.

"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 the market."

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 Gordon-Smith.

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 Senza.

"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 beginning.

"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 work.

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 promising.

"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 warns.

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 Gordon-Smith

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 is.

Turnaround checklist

Before you attempt a turnaround, take some of these factors into consideration

  • 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 enough.
  • 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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