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How Do I Sell a Distressed Business?

The first step is probably the most important. It’s critical to step back from the business to be clear where it is at. If sales are declining rapidly then that business will be very hard to sell. If sales are flat then that is good. If sales are starting to increase that’s better. To help with this step, look at the cash flow. If a business has positive cash flow it has so many more options to a business that has no cash flow and/or no chance of this improving.

The second step is to look at the finance in place. If the business has no loans, that is great as the assets can be sold free and clear. If the business has loans from family and friends, it is time for heart to heart discussion about who gets how much. If the business has loans from a bank it can be well worth having a discussion with them. Take care with this approach as you need to be sure the bank will partner with you. Banks are in the business of lending so talk to their Asset Protection manager whose job is to protect the interests of the bank by getting bad loans off their books.

The third step is to move forward with selling the business. As I mentioned above, the sale will be around the hard assets. As the seller of the business you may be tempted to think there is value in customer lists, software, a website or the business phone numbers but the reality is these assets are not producing enough cash from the business sales. Do not get me wrong, a buyer will want them but they will not be willing to pay for them; only the hard physical assets or fixtures, furniture and equipment.

Make a detailed list of all the fixtures, furniture and equipment so you can clearly show a buyer what you have including the make, model, date of purchase and any other positive points you would like to make.

Step four is to start marketing the business and the assets. This is probably the hardest part. If the business has employees you do not want them to find out the business is for sale as they will likely fear their job and leave. Customers will be unsettled as well. The other party to worry about is suppliers. If their current terms include credit then they move to require cash only on all sales, so care needs to be taken.

If a suitable buyer comes along, it will be important to run the sale through an escrow company. This protects all parties in the transaction especially the buyer as they want to acquire the assets free and clear.

The process to sell a distressed business can be beyond the skill set and patience of the owner and there is a need to find expert or professional help. There is a cost to this professional help but it can be minimized and pushed to the end of the transaction so they only get paid if the assets are sold. Depending on the business, there may be options such as the expert taking an equity position that does not cost money. The critical step is to find the right expert that can evaluate the business and offer a viable solution.

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