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Should You Buy a Business with Declining Revenue/Profit?
As always, it depends. It depends on the business; it depends on the reason for the decline; it depends on you…and a lot of other issues.
Initially, you have to look at the business itself: Why are sales declining? Is the current Owner simply tired and has given up? You see this sometimes with older people who are just physically, emotionally or intellectually tired. You also see it with people of any age who have decided to sell or get out of the business; sometimes, even though they are physically there, because they have decided to move on, their minds are no longer on the business and the business itself suffers.
Is the business well managed? Not only do attitudes like those above change, but the business or industry can change, and the Owner cannot or simply does not change with it. There are still people out there that do not use computers, or if they do, they do not take advantage of the tools needed to keep their businesses up-to-date with the trends of the market. The nature of Employees changes, over time. It is tough to keep some Employees motivated and positive. If the more mature Owner cannot cope with the culture of the younger people she/he manages, there is a problem brewing that can translate into poorer Customer Service and thus, lowered Revenue and Profit.
Technology can change, radically – particularly in today’s high tech world! Is the business you are considering suffering from functional or technological obsolescence? That means that a given device (or service) is no longer relevant; that it has been rendered less useful, because of newer technology or methods of working or living.
Perhaps no better example of this kind of trend can be found with the Mobile Phone, and how it has changed dozens of products and services, and the very way we live. Back before the Mobile Phone, we used CB Radios in the car, to communicate on a limited basis with other drivers and other CB owners who happened to be relatively close at hand. The Mobile Phone quickly trounced the CB Radio with so many superior characteristics: Clearer transmission; allowing for communications around the World rather than the limited coverage the Radio permitted; portability, both because of advances in batteries that were spawned by the Phone and the smaller size that Mobile Phones represented. (Early Mobile Phones consisted of “phones in a bag”, which were large, heavy devices, encased in a bag that was much like a purse, and which was required before the electronics and – in particular – batteries were miniaturized.) CB Radios are still around, but are a fraction of the market they once represented.
And they were not the only items that were replaced by the Mobile Phone. Coin-operated Public Phones once dotted the land, but are now largely outmoded and almost non-existent. Even the home, land-line Telephone is potentially becoming extinct; with the features that Mobile Phones offer, the standard land-line is often redundant and offers a far lesser value in the monthly fee that is normally paid to maintain it.
Technology is not the only reason that causes changes in Consumer purchases. Buying habits often change as a function of new fads or tastes, and sometimes because of new information that is available to the public. Donut shops were increasing in popularity, particularly with the Krispy Kreme brand. The brand itself became a fad and seemed to threaten the old standard in Donuts, Dunkin Donuts. Then, the no-carbohydrate diet came into play, and the Donut industry, in general went belly up – so to speak – for a while. Donuts have made a bit of a comeback, but the damage has been done, to many businesses.
Bagel Shops also became a huge part of the market, partially because of taste and partially because Bagels were thought to be healthier and less caloric than breads. Then, every Grocery Store that had space for another display brought in a line of Bagels. Bagel Shops around the Country took a nose dive, because the market suddenly became oversaturated.
Coffee Shops have always been a big part of many communities. Local operators, catering to the locals within those areas offered not only Coffee and a Donut or Bagel, but a sense of intimacy and community that seemed to add to the neighborhood culture. They were gathering places…
Then came Starbuck’s. In Washington (DC), it seemed like there was a Starbuck’s on every block, and sometimes, more than one. They drowned out the local Coffee Shops, in many areas. Landlords and Developers became enamored with Starbuck’s, feeling that the brand would bring shoppers into their Malls or Shopping Centers, and the traffic created by branded stores like Starbuck’s would contribute to the sales enjoyed by other stores. In doing so, the Landlords in many locations would refuse to extend or renew Leases for local Coffee Shops, and put in a Starbuck’s in their places. This is an all, too common experience, and not just with Coffee. We are aware of a number of successful, local Coffee Shop operators whose leases were not renewed because Starbuck’s brand.
Several years ago, when Starbuck’s closed 600 or so stores, the trend seemed to change a bit, but stores like Panera Bread and Cosi still hinder the local Coffee operator, in many areas. Not only do they offer the brand that Landlord’s prefer, but they provide for a much larger range of food offerings than the average, Coffee-only Shop can or routinely does.
Finally, Gas Stations and Convenience Stores (C-Store) are undergoing a radical change in business culture. Mammoth Gas Stations with 18 pumps or so, in combination with adjoining, 5000 square foot-plus C-Stores are becoming a huge part of the commercial scenery. This has already eliminated a huge number of both neighborhood Gas Stations, but C-Stores like older 7-11s, as well. High’s Stores closed the doors of many, if not most of its Stores, and it is now revamping its entire business approach. Neither the local Gas Operator, nor the average C-Store can compete against these behemoth operations with their ability to buy (and thus sell) at such discounted prices, which are based on their much larger purchasing power.
The point of these examples are: What of these can you turn around, to your benefit? Which of them are beyond your, or anyone’s control? Do you have the understanding, the skill and the funding that would enable you to do such a turn-around? If a business is suffering, you need to know how to dissect the problem, have the knowledge to find the solution and pockets that are deep enough to fund the solution. You also need to know and make a discriminating decision about whether that business can even be saved, at all.
Just because a business is cheap, does not mean it is a good buy! (Check out another of our blogs on this subject: https://combrokerbusiness.wordpress.com/2012/04/10/looking-for-a-cheap-business/) Sometimes, it is cheap because there is no solution to fixing the problem, or that it would cost too much to warrant trying!
Getting a loan for such a turn-around is next to impossible, from the SBA or another conventional funding source. You will either need to have your own money at risk, or try to get the Seller to finance the deal. If the business is going south, as they say, she/he may be very willing to hold a note.
Some people make a LOT of money, buying problematic businesses. But there can be a LOT of risk, in doing so. But to understand the opportunity and how it is balanced against that risk, you have to do a LOT of research and a LOT of homework. It is not for the amateur, in the vast majority of cases.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)