Profitability is not the main factor that drives companies out of business, a lawyer has said, suggesting that there are “enormous opportunities at the moment around distressed businesses”.
Dominique Grubisa, a barrister turned founder of wealth advisory firm DG Institute, previously told My Business about her own path in overcoming a multimillion debt mountain and how she now advises other Australians on how to manage their finances and avoid the dreaded bankruptcy if things do go wrong.
According to Ms Grubisa, the current market has created “enormous opportunities” for existing firms and entrepreneurs to buy and turn around distressed businesses.
“We have an extraordinary demographic change taking place in which millions of Baby Boomers – who own 75 per cent of small businesses – are retiring,” she told My Business.
“Many of these businesses are distressed, and with a shortage of entrepreneurial young people, it’s a buyer’s market.”
Pros and cons of buying a distressed business
Ms Grubisa said that one of the major benefits is a fairly obvious one – the lower pricepoint.
“Because the business is struggling, the owner may be open to creative, no-cash-down acquisition strategies,” she said.
“You might negotiate to receive shares or control in the company once you meet certain financial or sales targets, or you might agree to buy out the owner over time with the additional profits you generate.”
She said that as an outsider, a new owner is able to see the business and its operations from a different perspective, one which the current owner may not be capable of seeing for themselves. This can deliver upside for profit.
“You stand every chance of turning the business around and making it a profitable concern,” said Ms Grubisa.
She added that little or no-cash buyout options are also very low-risk, as there isn’t money paid out should a turnaround fail to materialise.
Having said that, Ms Grubisa warned that there are potential disadvantages to weigh up before launching any buyout bid.
“When you buy into a healthy going concern, you will get a complete set of financial records and an understanding of where the business stands,” she explained.
“[But] when you buy into a distressed business, you will likely encounter a chaotic accounting system. There will be numerous challenges for you to address as you execute your turnaround in terms of poor accounting practices, angry creditors and a potentially toxic work culture, so you will have your work cut out for you.”
Advice on avoiding your own distressed sale
For business owners on the flip side who may be struggling and contemplating a fire sale to bring their struggles to an end, Ms Grubisa has some words of advice.
“Businesses typically don’t go broke from a lack of profitability; they go broke from a lack of cash flow. If your business is struggling, you need to focus on the time value of money, and make your money works harder for you,” she said.
“If you’re trying to turn things around, one of the first things you’re going to want to do is build a war chest of funds. Slow the flow of money out of your door by negotiating with creditors. Seek time extensions, and, if you can, pay off your old debts for cents in the dollar.
“At the same time, look for ways to increase the flow of cash coming in. Increase sales by offering customers special offers, offer your debtors a discount for paying their overdue bills now, and sell off floor stock and redundant equipment.”
She added: “If the business is seriously distressed and potentially trading insolvent, use the safe harbour provisions to devise and implement a strategy to trade your way out. You can use the fact that insolvent businesses must not make priority payments to certain creditors to freeze all payments for a while and buy yourself some breathing space.”
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