From the November 2001 issue of Entrepreneur

You've got guts. That's right-you've got some serious cojones if you're planning to buy a business that's failing and, armed with only your brilliance, turn it around. Some may call it arrogance. On the contrary, we at Entrepreneur know you're just confident in your skills. You're eager to learn and willing to believe that not only can it be done, but you're just the person to do it.

OK, now that we've exhausted all the high school counselor platitudes, you're going to need to know the nitty-gritty, down-and-dirty practical side of buying a struggling company and turning it around. For starters, before you put everything you have into buying a business, make due diligence a top priority. Look closely at the company's financial statements, customers, location, competitors, licenses and zoning, as well as its reputation. Check whether there are any lawsuits or liens against the company, and find out why the business is for sale in the first place. "If the person who's selling the business won't open up [or] give you everything you need to know, don't walk-run away," advises Marc Kramer, author of Small Business Turnaround (Adams Streetwise).

In your investigation, research the market you're about to enter as well. "You don't want to buy a business in a declining market," says Kramer. If the industry is stagnant or declining, or if all your competitors run the same kind of business, this probably isn't the right opportunity. You can look for warning signs by checking out trade associations, talking to industry experts, going to trade shows and reading trade and general interest publications. If you end up discovering, for example, that trade show attendance has been declining or that industry leaders aren't even able to put a trade show together, that's a big clue.

Making Changes

Ira Jackson Jr. thought he had done all his due diligence when he bought Perfect Image, an Atlanta printing company, back in 1991, but he was in for a few surprises. Jackson, 37, discovered Perfect Image was having problems only after he got in the door. "There was a lot that due diligence didn't reveal," he says. The company was facing slumping sales, and employee morale was way down.

Jackson did know going in that the previous owner had lost his largest customer right before the purchase was completed. Even after he found out, he underestimated the impact it would have on the company. "I didn't know how much [that customer] accounted for the company's success," he says.

Jackson suddenly found himself with a company in need of a drastic turnaround. The virtue of the company, in his eyes, was the quality of its printing service. To boost sales, he pushed that quality aggressively and went after Fortune 500 companies as well as companies with in-house print purchasing divisions. "We wanted to focus on doing business with accounts that brought in a significant amount of printing over the course of the year," Jackson says.

To do that, Jackson had to make the marketing push the previous owner wasn't making. Kramer's suggestion for any company making the same move is to get current, potential and former customers to sample your new offering under new management so you can show them how the business has improved.

In addition to marketing, Jackson also had to trim fat from the business. He streamlined production, updated machinery and eliminated brokers and third parties. He also got employees involved in the turnaround, attacking a growing morale problem the previous owner had left him with. "We spent a lot of time talking internally-sharing ideas about what we wanted to be 'when we grew up,'" remembers Jackson. What Perfect Image has become is a strong company with more than $2 million in sales annually.

BUSINESS REPAIRS

101 BEFORE YOU BUY SOMETHING OLD, TRY LEARNING SOMETHING NEW.

Use this mini-checklist from author Marc Kramer to determine what must be done before you make someone else's business your own:

  • Check out the market. Is the business in a growing market or a declining one? Trade publications and associations are essential resources.
  • Do a background check. Are there lawsuits against the company? Liens? Have the current owners been paying their taxes? Enlist a lawyer or private investigator to help with your research.
  • Examine the money situation. Thoroughly check a company's financial statements, from accounts payable and receivable to tax returns and sales and operating costs. Your accountant can help you.
  • Get mentally prepared. Are you ready for the emotional, physical and financial demands of buying this business? "If you're going to buy a business, you have to have a strong stomach for it," warns Kramer.
  • Pick a business you can get excited about. Because you'll be spending every waking hour making this business succeed, it's essential to have a fiery passion for it. Says Kramer, "When you buy this business, it's going to be your life-so you'd better get used to it."

Learning the Hard Way

Cody-Kramer Imports was in need of a serious makeover when Reid Chase and Scott Semel, both 40, purchased the candy importer in 1994. At the time, the company was the sole importer of a very high-end candy from Switzerland, but the previous owners really didn't have any distribution. The company had a good product, but it wasn't even close to reaching all the customers it could.

To add another challenge, the previous owners had only a handshake agreement with the candy-makers in Switzerland-nothing was on paper. Furthermore, the candy-makers refused to ink an agreement with Chase and Semel. "They told us, 'We don't know you, and we're not going to trust you with a long-term contract. You need to prove yourselves first,'" remembers Chase.


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SOURCE: Dun & Bradstreet

Even with no guarantee that they'd be allowed to sell their key product, Chase and Semel pressed forward. With nary a candy background between them, the pair started a crash course in all things candy-related and decided the real profits would be in exclusivity and expansion. If Cody-Kramer Imports could become the sole distributor of more than one candy product, Chase and Semel knew they'd see some serious turnaround.

They extended their line to include private-label mints and other candies. "We did things [the previous owner] never did," Chase says of the differences between the company's new and old ownership. In 2000, the pair had their biggest coup yet when they licensed the Snapple name and began distributing an exclusive line of Snapple candy.

Now that sales have grown from $600,000 under the old owner to about $40 million today, it's clear that Chase and Semel have not only turned Cody-Kramer Imports around-they've made it their own.

Listening to Customers

If you're a little bit apprehensive about making the leap to an entirely new business, you can get started on a slightly smaller scale. Follow the example of Tom Caldwell and Todd Blaudow of TDI Products Inc., who founded the Jacksonville Beach, Florida, company in 2000 specifically to find undermarketed or poorly manufactured products and make them profitable.

Focusing on the boat and RV industry, the partners found that securing their first product line from an ailing company was not an easy task. The inventor of the product, a cord-and-hose system for boats and RVs, had licensed the patent, so there was a third party involved. "We had to buy the patents from the designer as well as acquire the manufacturing rights from the people he [had] licensed it to," says Caldwell.

Once they finally had a struggling product to revamp, Caldwell, 34, and Blaudow, 32, knew they would have to design and manufacture it from scratch. "We had to completely redesign the thing," remembers Caldwell. They retooled the design and manufacturing elements to achieve a more desirable price point and ensure that the product worked reliably every single time.

Armed with a new and improved offering, TDI Products sought out old customers first-even those who'd stopped buying from their predecessors. "We took the old product, showed them [the] problems we'd identified and showed them our new working product," says Caldwell.

Experts agree that approaching your customer base is crucial to turning a business around. "Talk to [people] in the market," says Kramer. "Ask them, 'What are you planning to spend your money on in the future?' Find out what customers can use more of."

Caldwell and Blaudow were so successful in their customer-courting that they're now inundated with suggestions for new product lines and ways to expand their first line-though at the moment, they have their hands full with building their customer base and slowly increasing their nearly $1 million in sales.

As these entrepreneurs have demonstrated, turning around a business is never easy-but with some energy and innovation, even the most troubled business can be transformed into a shining success story.

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