Buying a business that you wish to operate yourself is one thing. However, buying a business that you intend to grow or improve, in order to sell at a profit within five years, is something else altogether. This is flipping, and it can make you a lot of money if you do it right.
What is flipping?
Flipping involves buying businesses that are either struggling financially, are insolvent or in administration, before being ‘fixed up’ and sold on within a reasonably short space of time.
Buying a business, building on it and selling it on is similar to house-flipping, as you are buying into a business you don’t necessarily want to operate yourself as a long-term project. When you buy a property to flip, you’re not buying it because it’s your dream home, you’re buying it because it has the potential to make money. You will need to adopt this same objective viewpoint to make a success of business-flipping.
Why should you consider flipping?
Entrepreneurs are sorely aware of the statistics for small-business failures. Some 90 per cent of start-ups fail, while half of small businesses fail within the first five years. These statistics don’t paint the best picture of the chances of success, when starting a venture from scratch. This is why more entrepreneurs are, instead, buying existing businesses.
It’s true that flipping distressed businesses is not the same as simply buying a successful business. Instead, this is all about purposely buying a failing business in the hope that you can spot the missing magic ingredient it needs to become profitable. If you can do this, you won’t even need to operate the business for long, before selling it onto someone who wants to make a longer-term project of it. You walk away with the cash – as simple as that.
How can you spot a business ripe for flipping?
There are several signs that a business could have the potential to be easily returned to profit. It takes expertise and experience to be a successful flipper, but at the same time, everyone has to start somewhere, and if you find the right opportunity, jump on it.
Here are some of the main signals that a business is ripe for flipping:
- It generates a healthy cashflow, despite being asset-poor
This is a sign that the business has something going for itself. Its general financial situation might look dire, but if it is bringing in money from somewhere, with the right management and a rejigging of the business model, it might start to make profits once more.
- It makes money, despite being poorly managed/presented
If a business is managing to generate sales without trying, i.e. it is poorly presented, disorganised, chaotic, badly marketed, or has poor customer service, then it has masses of potential to turn into profit. If you can identify a business that attracts customers despite itself, so to speak, you may be onto a winner.
- It has a high percentage of sales made up from repeat customers
Repeat customers drive profits and you can spot a business that has the potential to be successfully flipped, if it is generating cash flow from this source.
- It is poorly marketed
If the distressed business target you are interested in is currently falling short in the marketing stakes, it could be given a major boost with better marketing and sales materials. Enhancing things like digital marketing can make a huge difference to the bottom line of a small business, it just takes the right skills to make it happen.
- It is a simple business that requires few skills to operate
If you can find a business that requires few skills to run, this could be a sign that it can be flipped easily. Although returning a business to profit does require skill, if the actual operational side of the business is simple, it will be easier and quicker to flip. You may even be able to make a success of the buy, build and sell approach, without having any experience in the exact industry, providing it’s a simple enough business model.
- It is available at a knockdown price
Paying the right price for a distressed business is a key factor in making a profit, when you come to sell it on. It’s a good idea to start negotiations as early as possible, as your position as a buyer is likely to grow stronger as the process goes on, while the distressed seller will grow weaker.
- Make sure it’s worth the risk
In other words, is the potential worth the risk? If you are looking to buy a business that could turn a massive profit, and sell for a large sum once flipped, then taking a risk might be worthwhile, whereas risking your cash on a business, which profit potential is actually limited to just a few thousand pounds, simply may not be worth it.
There is, of course, a level of risk involved in flipping, but providing you can identify a target that fits some of the above criteria, you can minimise the risk and maximise the chances of success. Starting a business from scratch is, arguably, far more risky, in light of the failure rates, and could also cost you a lot more time and money than a flipping project.
It’s clear that flipping businesses isn’t for the faint-hearted, but the potential returns on investment are hard to ignore for any entrepreneurs out there who are able to let their heads rule over their hearts.