Should you ever buy a business that’s losing money or barely squeaking by?  Sometimes, yes – under the following conditions:

• You have already decided that this kind of business is exactly what you want.
• The cost of replicating the business in terms of furniture, fixtures, equipment and build-out far outweighs the price of the business. 
• The  location is favorable.
• Sales of the business are acceptable but profit margins are below average.
• The property is appropriate for other types of business and the landlord is not likely to maintain the premises as is.
• The equipment is in good condition and you like the ‘look and feel’ of the current buildout.
•  After careful research on a company, you have identified the ‘fatal’ flaws in their business model and know how to remedy (also see Valuation Factors)

         To determine if the sales price is reasonable,  obtain a list of the equipment & furniture of the business and research current costs.  Buildouts are a bit more problematic but you can generally get a rough ball park figures from contractors or ask the owner for his investment in the buildout and extrapolate – the more recent the investment, the closer to your anticipated costs to replicate.  

           Bear in mind that many failing small businesses are simply looking for someone to assume a lease – a particularly heavy burden when they are already losing money.  FF&E are usually the only assets they can sell and they would prefer to sell the business as a whole rather than auctioning off each piece at pennies on the dollar.

            A word of caution:  Never treat the seller(s) as if they have no other choice than to accept your offer.  If you attempt to take advantage of their dire circumstances, you might discover that they would rather shut down the business and get what they can for the assets than to capitulate to such predatory behavior.  I’ve seen it happen.