3 Things to Consider Before Buying a Business in Recession

During the recession, business valuation goes down, and also, buyers would not have to negotiate much while buying a company; thus, this time is considered the right to get hold of a business
  • BY Jaspreet Kaur

    Feature Writer, BusinessEx

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  • Sep 30,2020
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  • 16 Mins Read

The pandemic has changed the business landscape entirely. Companies have been disrupted and torn down by the storm. This pandemic-led recession was an unforeseeable event for which entrepreneurs were not prepared. As a result, various business deals did not strike down and organizations had to close their shutters.  

Bankruptcy has become an end solution to various company problems that have arisen so far. While the current time is unfair to businesses, it can be employed in the other way round as well. Aspiring entrepreneurs can make use of the current situation and look after business opportunities to start during the recession or buying a business in the recession. 

As companies are widely opting for insolvency, there would be a large mass of organizations looking for buyers. During the recession, business valuation goes down, and also, buyers would not have to negotiate much while buying a company. Thus, this time is considered the right to get hold of a business. However, it is important to consider a few things before buying a business during the recession, which is as follows: 

Identify a Prospective Business 

In such an unfavorable situation, businesses are suffering huge losses and closing down permanently. Apart from showing empathy toward debt-laden entrepreneurs, aspiring entrepreneurs can offer help to the company owners by taking hold of their business. 

Before taking the decision to buy a business, one needs to ascertain which type of business is turning profitable even during the downturn. Companies dealing in essential services and commodities such as online delivery platforms, e-commerce, grocery shops, and logistic services are working normally even when the business landscape is badly hit by the pandemic. 

According to McKinsey's report, there could be solvency risk within the Indian financial system, as almost 25 per cent of MSME and small- and medium-size-enterprise (SME) loans could slip into default, compared with 6 per cent in the corporate sector (although the rate could be much higher in aviation, textiles, power, and construction) and 3 per cent in the retail segment (mainly in personal loans for self-employed workers and small businesses). Liquidity risk would also need urgent attention as payments begin freezing in the corporate and SME supply chains. 

Opt for Franchise Over Other Companies 

Similar to other companies, businesses that are working under a franchise would certainly be facing problems. If such businesses are up for sale, one should immediately grab this business opportunity in recession. 

By procuring such a business, one not only gets hold of a running business but also receives various advantages such as well-established goodwill, trained management, and well-structured business. Further, training would be rendered to the new business owner so he can understand the business and manage it effectively. Such advantages cannot be offered if one buys a non-franchise business. 

According to a case study authored by Vanessa Pilla Galetti Bretas and Ilan Alon, the impact of COVID-19 on the BRICS nations—Brazil, Russia, India, China, and South Africa—are of concern because they account for a large share of the global GDP and population.

The study further states, according to the World Franchise Council's 2017 survey on the economic impact of franchising worldwide, India, Taiwan, and Brazil rank among the top five countries worldwide in the number of franchise brands.

Research Well Before Buying a Business 

If an entrepreneur is selling a business at a low price, one should not be tempted as it can be a bait as well. Before reaching a decision, it is important to investigate the business. One should check the financial record of the business and understand the market it is situated in. Understanding the ambiance and competition that prevails in that market are some vital points to cover in the investigation.

If all answers come positive, then one can think of buying that business or in an alternate case, leave the idea despite how tempting its price is. 

These are a few important things that one should consider before buying a business in a recession. These steps are crucial in understanding the worth of business proposals and narrowing down the right business that one should purchase. If there are some other points that you want to suggest while buying a business in a recession, then please comment below. 

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