How to buy and turn around a
distressed business or 'roll-up' competitors

On this site you’ll read real life stories of how 23 entrepreneurs find, fix and then sell small companies on the edge of failure. Sometimes we buy our weak competitors in a roll-up and get new clients cheaper by acquisition then organic growth. If you like these concepts, come to the next workshop. Learn how we...

✓  Find distressed companies that are worth saving for capital gains
✓  "Roll-up" your competitors for rapid growth with little cash or risk  
✓  Why buying a distressed business is the BEST way to do a start up

From KC Truby Lonesome Cowboy Publishing Inc. 301 Thelma Drive #426, Casper WY 82609 (760) 207-6385

5 critical things to know before you bid on a distressed company

By on May 20, 2014

5 critical things to know before you bid on a distressed company

By: KC Truby
We love buying companies in trouble. Since the sale price of a small business is based on a multiple of 1 to 3 times trailing net profits, all we have to do is find the business with a good idea but poor financial controls and results. Double the net profit in that type of business and you immediately double the value of the business. The fastest way we know to create net worth.

However, remember a company is in trouble because something is wrong – and you MUST have a clear picture of what you’re getting into before you start. The only exception to intense due diligence is when you’re getting a good customer list for ‘walk away’ money.   Then we just randomly check to make sure the customers are real and hand over the envelope of cash.

For this example were assuming we’re buying an ongoing concern and I am going to keep the company location, name and employees after the deal is done.

Here is what we need to be aware of before you start

  1. The seller is not going to see you as a saving hero. They are angry about failing, they are sad to see years of work go down the drain. Be very kind and don’t make ANY comments about the mistakes the seller has made or how you’re going to do so much better.
  1. Did the business fail because the owner made errors or was the business model flawed? The easy answer, ‘is anyone else in the same business, and doing very well.’ If someone says ‘were the only ones who do it like this.’ You have just discovered a major reason to get out fast.
  1. Is the business failing because the current customers do not like the product or service? If so, you are going to have 48 hours to convince them that you will go to the ends of the earth to fix the problems. We generally do this before we sign the final paperwork. By the way, never say anything bad about the old owner, it will get back to them.
  1. Are the best employees leaving or have they recently left. Interview the team. Without them you have very little chance of keeping the business afloat long enough to fix the problems.
  1. Did a vendor or major customer cancel? Go back into the accounting. If you see big payments to a vendor that all the sudden stopped – you have a problem that you need to address. Same for big customers, get them on the phone and ask why.

The rewards are high for getting a company cheap, fixing it and then reselling for capital gains or keeping it for lifetime income. But the risks are high as well. Luckily you can mitigate your risk with a little due diligence.

Plus, never forget that you can WALK AWAY if anything looks fishy. We put a line item in our sales agreement that states we can get our deposit back if we find a ‘material’ error in the operation that would affect the future viability of the company, during our due diligence. Generally we put the deposit into escrow with the business broker or the sellers lawyer if needed.


About KC Truby

From their ranch in Wyoming, KC and his wife Linnea have bought or started 21 companies as a side line to their accounting business leading them into M&A as a full time business in 2012. These companies are located all over the Western Rocky Mountains, London and India. Since 1969 through their accounting and training companies, KC has taught 18,000 business owners how to improve cash flow and find more customers by installing standardized systems in their small business. Since 1989 KC has presented over 1,000 seminars and training classes to the small business owner.

8 Comments

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    • KC Truby

      June 8, 2014 at 6:46 pm

      Although it is obvious that this is a solicitation comment to get me to hire the ‘poster’ for SEO work, I wanted to reply here with some important observations. Over the past 10 years many small business owners have been sucked into the vortex of internet riches by simply getting to the ‘top of google’ most of it is a total waste. In our own business we invested over $200,000 over the last 5 years trying to beat the Google Game. When we did find a unique angle it only took our competitors about 10 days to figure it out and duplicate what we did. The Internet is a flat world, you have a tough time developing a unique position in the market. Now we do have web sites for our companies but we DO NOT depend on them for lead generation. It is simply a online presence so people who are interested in us (and heard about us from speaking, advertising or referral) can learn more about what we do before calling.

      EXCEPTION: As in all things there are exceptions. The local business that is looking for a search like “Tucson Home health care.” should have a web site that is updated at least once a week with some small article, the address should be all over your web site and tie it to Google places with the local sharing sites like Yelp and Pinterest. These are cheap to do and any college kid can pull it off at low cost. Don’t go crazy, spend less then $50 a week on updates. The geographic search that includes city or zip is your best local bet. PLUS, use a separate phone number for these local web sites so you can track inbound calls and ROI on your $50 efforts.

  2. Oren

    June 21, 2014 at 2:57 am

    Keep on writing, great job!

  3. Tim

    June 27, 2014 at 8:23 pm

    “Double the net profit”, you make it sound so easy, is it really?

    • KC Truby

      June 28, 2014 at 4:17 pm

      Well nothing good is easy. But it is very doable in most situations to double the cash flow. If we look at a very well company that we can not move the net profits to double, we often don’t buy it.

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