Fixing a flat tire is much easier than building an entire car. Using that same logic, repairing a struggling business is often easier than creating a new one from scratch.
This helps explain why even the most driven entrepreneurs struggle to succeed when founding new ventures. Indeed, it has been shown that as many as 9 in 10 businesses fail, often because entrepreneurs run out of money, the product-market fit is weak or the scalability just isn’t there.
A frequently overlooked alternative? Flipping an existing business. When you already have the framework, logo, letterhead, budget and brand recognition in place, success can be a straightforward endeavor. With a little foresight, it’s possible to take the helm of a struggling business, make some much-needed changes and catapult it to stardom.
When flipping beats founding
Finding a business to flip is relatively simple. Start by identifying a trend that has the potential to dramatically alter an industry. Next, look for businesses in that industry that aren’t prepared to capitalize on the impending disruption and voila: You have a list of potential candidates.
In my case, the industry was Detroit’s real-estate market and the disruptive force was collapsing home prices. At the time I was working at Marketplace Homes, and I realized that if the business was going to succeed in such a volatile climate, it needed a fresh start. The business’s value was extremely low, and I pounced at the first opportunity to purchase it.
Because Marketplace Homes had been around for about five years, it had a Google history that helped its search results ranking. Further, it already had an established client list in Detroit, and a payroll structure in place. In addition, since I had the privilege of seeing how the company worked before buying it I had a realistic sense of its potential. Perhaps most importantly, had a great relationship with the original founder, and he served as a built-in mentor once I took the reins.
After purchasing the company, I immediately cleared house and relieved everyone (except for one assistant) of their duties in order to create a fresh start for the company. We cut down on side operations in order to focus solely on Marketplace Homes’ core business: working with builders to sell new construction. Once we made the change, profitability followed due to cash-heavy commissions and low costs.
Be warned: Despite the positive outcome, flipping a business is no cakewalk
Here are a few things you should know before you prepare to flip business.
It takes effort. Flipping a business takes a lot of hands-on work. The idea that you can just outsource everything and hire a phenomenal manager to turn the whole thing around is misguided. It's vital that you -- the person ultimately responsible for the turnaround -- are deeply and personally involved in the process.
After purchasing Marketplace Homes, I set up an IVR system that urged callers to press “1” for billing, “2” for sales and “3” to list a property. Regardless of which number was pressed, the call came to my desk. I wanted to create the illusion of a large company, but the reality was I was the person doing all the work.
Even though you technically aren’t founding a business, the same mindset, skills and energy levels are required.
And money. Revamping a business can be expensive. For starters, you’ll likely inherit unexpected costs incurred by the previous owner -- everything from unprofitable clients to risky investments. Regardless there will be loose ends that need to be tied up and paid for. Even if the company comes with a cheap price tag, the entire flipping process will likely be a drain on your income for some time before you get things moving in the right direction.
To prepare for this, you need to be willing and able to raise cash and embrace fundraising opportunities. In the first few years, flipping a business is all about finding and closing deals as quickly as possible.
And energy. Because the flipping process requires a large emotional and time commitment, make sure the company you’re targeting is in a field that stimulates and motivates you. If you find something you’re organically passionate about, you can harness that preexisting enthusiasm and apply it to rebuilding the business.
Don’t be scared of risks. Remember to successfully flip a business, you need to be flexible enough to try new strategies, and you can’t be afraid to try off-the-walls ideas.
With hard work, humility, proper research and a desire to succeed, shaping up a struggling business often proves to be a more lucrative option than starting one from scratch. With the infrastructure that’s already in place, entrepreneurs who decide to flip instead of found have a major leg up over their peers.