A Guide to Selling a Struggling Business

When you’ve invested blood, sweat, tears, and probably no shortage of money into a business, the prospect of getting nothing or very little in return when you exit is not one you should accept willingly. And the good news is, you don’t have to. 

Selling a struggling business is achievable thanks to an active market of investors who specialise in acquiring distressed companies and returning them to profitability. They understand that many struggling businesses still hold real value, and with the right help, it is possible to maximise your return. 

But how do you sell a failing business? Here we show you the steps you can take to prepare the business for sale, attract the right buyers and achieve the best possible outcome.  

Can I sell my struggling business? 

Whether you can sell a failing business and generate a return largely depends on its financial position. The primary consideration is whether the business is solvent. 

There are two tests you can do to determine the company’s solvency:

• The cash flow test

Can the business pay its debts when they become due? If it can’t pay supplier invoices, employee wages, lease payments, bank debts or other bills on time, it is likely to be insolvent.

• The balance sheet test

Does the value of the business’s liabilities exceed its assets? If it does, the business does not have sufficient value to cover its obligations and is likely to be insolvent.

My business is insolvent

If your business is insolvent, you are legally obliged to act in the best interests of the parties the company owes money to (known as its creditors). You should seek advice from a licensed Insolvency Practitioner. They will assess the business’s financial position, advise you on whether you can keep trading and explain your options.  

It may be possible to return the business to solvency through informal restructuring, formal insolvency procedures or the sale of underperforming or non-essential assets. You could then sell it as a going concern.

If you cannot rescue the business, rather than closing it, you could opt for a pre-pack sale. That involves transferring its operations and contracts to a new owner while preserving value and jobs. An Insolvency Practitioner will handle this type of insolvent sale, and the proceeds will be used to repay the creditors. In most cases, the owners will receive little or no return when selling an insolvent business.

My business is solvent

Selling an unprofitable business that’s still solvent gives you a far better chance of making a return. As it can meet its financial obligations, you have more leverage to attract buyers, negotiate better terms and maximise the value of your exit.

In this situation, you should consult an experienced business transfer agent. They can assess your sales prospects, enhance the business’s appeal and help you achieve the best possible outcome when selling.

How to structure a distressed business sale 

Once you have determined that a sale is possible, the next step is to consider the most effective way to structure it. 

Share sale

A share sale transfers ownership of the entire company to the buyer, including all its assets and liabilities. This approach is best when the business is fully operational, holds valuable contracts, licenses or goodwill, and the buyer is happy to take on all of its existing responsibilities.

This method keeps the business running smoothly and protects relationships with customers and suppliers. It also delivers a favourable outcome for the seller by combining the financial benefit with a seamless transition.

Asset sale

An asset sale means selling specific parts of a business, such as equipment, inventory or intellectual property, rather than the company as a whole. This approach works well when some parts of the business aren’t performing well, or when the business has debts and obligations the buyer doesn’t want to take on.

If you cannot sell the remaining part of the business, the best option may be to liquidate it. That allows any remaining cash or assets to be distributed to the owners (if it’s solvent), or the creditors (if it’s insolvent). 

Pre-Pack Administration

Pre-Pack Administration is a way to sell an insolvent business quickly and efficiently. The sale is pre-arranged and takes place as soon as the company formally enters Administration. That ensures the business can continue operating without interruption. Buyers often include connected parties, such as existing managers or directors, as well as external investors and turnaround specialists who see value in keeping the business running.

The business owner does not usually receive a return, as the money paid by the buyer is used to repay the creditors. However, a pre-pack sale can protect jobs, preserve the brand and allow you to make a clean exit while meeting your legal obligations.

Preparing a failing business for sale

When your company is facing challenges, careful preparation can make the difference between a failed sale and a successful outcome. These are the steps to take:

• Assess the strengths of the business

Even distressed businesses have positive elements that can make them attractive to buyers. Understanding where that value lies is the key to identifying a buyer and optimising your return. Examples include valuable physical assets, long-term contracts, recurring revenue streams and a recognisable brand. 

• Get a valuation 

Obtaining a professional and independent valuation is critical when selling a struggling business, and it’s a legal requirement in insolvent sales. A professional valuation adds credibility to the transaction, reassures the buyer and sets a realistic benchmark that strengthens the negotiation. 

• Stabilise its position

If you can still trade the business, it’s often beneficial to take steps to stabilise its position before going to market. That may include cutting unnecessary costs, improving cash flow, addressing key operational issues and maintaining debt repayments. Even modest improvements can increase buyer confidence and market value.

• Retain key staff

Many businesses rely on the skills and experience of key staff members. Even if you are struggling financially, there may be measures you can take to keep them on board, such as retention bonuses and other incentives tied to continuity. That will make your business more appealing to buyers and help to ensure a smooth handover.

• Prepare the documentation

When selling an unprofitable business, buyers will expect to see a thorough and transparent due diligence pack. Preparing the documents in advance will speed up the sales process, build credibility and protect value.

Prospective buyers will want to see:

• Financial documents - Recent management accounts, Cash flow forecasts, aged debtor and creditor reports, details of assets and liabilities and an independent valuation.

• Legal documents - Details of disputes, claims and contingent liabilities, IP ownership and licences, and key customer, supplier and lease agreements.

• Operational documents - A business overview and turnaround plan, a list of key customers and suppliers, and employee details.

• Details of the company’s current position - Advice from Insolvency Practitioners and advisers, details of any arrears or defaults, correspondence with creditors and evidence of the business’s solvent or insolvent position.

Finding the right buyer

Selling a struggling business depends on your ability to target and market to the right buyers. Even underperforming companies with solid core operations can attract serious interest. 

Turnaround investors and private equity firms actively seek businesses they can stabilise, restructure and return to profitability. Trade buyers, including competitors, may be drawn by the chance to expand market share or gain new capabilities. And management teams and strategic acquirers often see value in operational efficiencies or complementary products.

Working with experienced business transfer agents can make all the difference. They have established methods of targeting these buyers, and many have existing networks of investors who actively seek this type of opportunity. 

Specialists in distressed business sales

If you want to sell a struggling business, please do not hesitate to contact our team. We have decades of experience navigating complex sales, managing risks and optimising returns for business owners. 

At Eddisons Business Sales, we support you through every stage of the process, from valuations and preparing for sale to marketing, targeting buyers and negotiating the right deal. Find out more about our sales process and get in touch for a free business appraisal.