Should I buy a business that is losing money?

Whether to buy a business that loses money is your decision, and one for your advisors. What a buyer can do is find out whether the losses have a cause that can be fixed or priced. BDC notes that business valuation often begins with assessing operating earnings; when a business is losing money, ask your advisors what that means for the price, and look closely at causes, assets and risk.

Find out why it loses money and why the owner is selling

BDC’s guide to the steps in buying a business says to find out why the owner wants to sell. For a loss-making business, add a second question: why is it losing money? Ask for monthly results over several periods, and compare the owner’s explanation with the records. A cause you cannot confirm is a risk to carry into your negotiation.

Separate one-time items from the structure

BDC says due diligence goes beyond standard financial statements to identify and adjust for non-recurring items, accounting irregularities and risks, and that it helps the buyer evaluate the advantages and risks involved. A one-time write-off is different from a cost structure that cannot cover itself. Your accountant should say which is which.

Look at assets, liabilities and financing

BDC notes that asset-based valuation considers both tangible and intangible assets the business owns, an approach to ask your advisors about when earnings are weak. It also says buying shares brings a very different set of responsibilities from buying assets, and that an indemnity agreement from the seller can protect you against unforeseen liability for a period after the sale. BDC’s guide to the steps in buying a business says to meet with potential lenders and investors before approaching a business, to help you avoid negotiating a deal you cannot finance. Your funding needs go beyond the price, as covered in how much money you need to buy a business.