Selling a failing business may seem impossible, but it is entirely legal and achievable with the right approach. Many entrepreneurs and investors look for struggling businesses with potential, hoping to turn them around for profit.
However, selling a business in financial distress requires careful planning, legal compliance, and a clear understanding of the risks involved.
This guide answers common questions about selling a failing business in Australia, explaining legal considerations, valuation methods, potential risks, and strategies to make your business more appealing to buyers.
I. Can You Legally Sell a Failing Business in Australia?
Yes, you can legally sell a failing business in Australia. However, there are important legal factors to consider before making a sale.
First, you must ensure full transparency with potential buyers. Australian consumer and corporate laws require that sellers provide accurate information about the business’s financial status, debts, and any legal issues. Misleading a buyer could result in legal consequences under the Australian Consumer Law (ACL) and Corporations Act 2001.
Second, if your business is struggling with significant debt or insolvency, you may need legal advice. It is crucial to know that under Australian law, directors of a company must not engage in insolvent trading, meaning the selling or operating of a business when it cannot pay its debts.
If your business is insolvent, you may need to consult an insolvency practitioner before proceeding with a sale.
Despite these challenges, many buyers are interested in distressed businesses due to the potential for a turnaround or asset acquisition at a lower price. If you follow the legal guidelines and disclose all relevant details, selling a failing business is completely legal.
II. What Are the Key Factors Buyers Consider When Purchasing a Struggling Business?
Even if your business is struggling, buyers may still see value in certain aspects. Here are some key factors they consider:
1. Assets and Equipment
A buyer may be interested in your business because of its physical assets, such as machinery, inventory, or real estate. These tangible assets can have value even if the business itself is unprofitable.
2. Customer Base and Brand Recognition
A business with an established customer base, even if it’s losing money, may still be attractive. Buyers may see an opportunity to improve operations and retain loyal customers.
3. Location and Lease Agreements
If your business is in a prime location or has a favourable lease agreement, a buyer may be willing to take over to benefit from these advantages.
4. Intellectual Property and Licensing
Trademarks, patents, proprietary software, and exclusive licences can hold significant value. Buyers may purchase a failing business just to acquire these rights.
5. Financial and Legal Liabilities
A buyer will carefully assess your business’s financial health, including outstanding debts, tax obligations, and employee entitlements. The fewer liabilities, the more appealing the business.
6. Potential for Turnaround
Some investors specialise in turning around failing businesses. If your business has strong fundamentals but is struggling due to poor management or temporary market conditions, a buyer may see it as a worthwhile investment.
III. How Do You Value a Business That Is Losing Money?
Valuing a failing business can be challenging, as traditional valuation methods may not apply. Here are some approaches that can help:
1. Asset-Based Valuation
If your business is unprofitable, its value may be based on its physical and intangible assets. This method involves calculating the total value of the business’s equipment, inventory, intellectual property, and other tangible resources.
2. Revenue-Based Valuation
If your business still generates revenue despite financial struggles, a buyer may be willing to pay a multiple of the revenue, particularly if they believe they can improve profitability.
3. Discounted Cash Flow (DCF) Analysis
If your business has potential for recovery, a buyer may estimate its future earnings and discount them to present value. This method is commonly used for businesses that need restructuring.
4. Market-Based Valuation
Comparing your business to similar businesses sold in Australia can provide insight into its market value. However, if your business is struggling, expect a lower valuation than profitable competitors.
5. Liquidation Value
If no buyer is willing to purchase the business as a whole, the business can be valued based on its liquidation worth—the amount generated from selling its assets individually.
A professional business valuer or accountant can help determine the most realistic valuation based on your business’s financial position.
Also Read: How to Value a Business: 5 Effective Methods You Need to Know
IV. What Legal Risks Should You Be Aware of When Selling a Business in Financial Distress?
Selling a failing business involves several legal risks that must be managed carefully.
1. Insolvent Trading Liability
Under the Corporations Act 2001, directors must not trade while insolvent. If your business is unable to pay its debts, you must seek professional advice before proceeding with a sale.
2. Misrepresentation and Non-Disclosure
You are legally required to disclose all relevant information about your business’s financial health. Misleading statements or withholding crucial details can result in legal action from the buyer.
3. Employee Entitlements
If your business has employees, you must ensure their entitlements (such as wages, leave, and superannuation) are addressed before the sale. Some buyers may agree to take on these obligations, but this must be specified in the sale agreement.
4. Existing Contracts and Liabilities
If your business has ongoing contracts (such as supplier agreements, leases, or customer contracts), you need to determine whether these can be transferred or if the buyer must renegotiate them.
5. Tax and Debt Obligations
The Australian Taxation Office (ATO) and other creditors may have claims against your business. Before selling, check if outstanding debts must be cleared or transferred to the buyer.
A business sale lawyer can help draft an agreement that protects you from future legal disputes.
V. What Are the Best Strategies to Make a Failing Business More Attractive to Buyers?
If you want to maximise your chances of selling, consider these strategies to make your business more appealing:
1. Improve Financial Records
Ensure your financial statements are accurate and up to date. Buyers will want to review balance sheets, profit and loss statements, and tax records before making an offer.
2. Reduce Expenses and Liabilities
If possible, cut unnecessary costs, negotiate with creditors, and settle outstanding debts to make the business more attractive.
3. Offer Seller Financing
Some buyers may be more interested if you offer financing options, such as instalment payments instead of a lump sum purchase.
4. Highlight Growth Potential
If your business struggles due to temporary market conditions, highlight potential opportunities for growth that a buyer could take advantage of.
5. Sell in Parts if Necessary
If selling the entire business is difficult, consider selling assets separately, such as equipment, intellectual property, or customer lists.
Working with a business broker or lawyer can help present your business in the best possible light.
Also Read: Asset Sale vs Share Sale: 7 Things You Need to Know
Selling a Failing Business the Right Way: We Can Help
Selling a struggling business is challenging, but it is possible with the right strategy. By understanding legal requirements, valuing your business accurately, and addressing potential risks, you can increase the chances of finding a buyer.
Transparency is key—honest discussions about financials, liabilities, and growth opportunities will help attract serious buyers.
If you need legal assistance in selling your business, Walker Pender is here to help. Our experienced business sale lawyers can guide you through the process, ensuring legal compliance and protecting your interests. Contact us today for expert advice on selling your business with confidence.
