Why Turnaround Businesses Are a Hidden Gem for Entrepreneurs and Investors

In the world of venture capital and entrepreneurship, the common narrative revolves around high-growth startups—the “next big thing.” However, Walker Deibel’s book Buy Then Build presents a contrarian approach: acquiring existing businesses, particularly those struggling, and turning them around. This strategy aligns with the principles of Warren Buffett’s value investing, where the goal is to buy undervalued assets, fix what’s broken, and generate substantial returns. Let’s explore why turnaround opportunities are gaining momentum as an attractive investment strategy.

1. Acquiring Existing Businesses Reduces Startup Risk

In Buy Then Build, Walker Deibel highlights a striking statistic: only about 4% of all businesses in the U.S. ever exceed $1 million in annual revenue. This is a crucial figure because it reveals the difficulty of scaling a startup to meaningful financial success. While many entrepreneurs aim for explosive growth, the vast majority of businesses remain small, either failing or plateauing long before they reach this revenue milestone.

For major private equity firms, businesses under $10 million in revenue often aren’t attractive due to lower margins and limited scalability, which leaves a gap in the market. These companies, often flying under the radar of major investors, are ripe for acquisition at more affordable valuations. This can create a significant opportunity for acquisition entrepreneurs—by purchasing an existing business with an established revenue stream, entrepreneurs can bypass the high-risk startup phase and capitalize on undervalued companies that have proven potential.

2. Fixing Known Problems Offers Immediate Upside

Turnaround opportunities, like value investing, hinge on fixing what’s already there rather than creating something entirely new. Existing businesses often struggle not because their products or markets are flawed but because of inefficiencies, poor leadership, or outdated processes. These are problems that can be fixed—and quickly.

Buffett often refers to this as investing in companies with a “margin of safety”—businesses that have the potential to improve with the right interventions. Similarly, Deibel advocates for acquiring businesses where operational expertise can be applied to address known issues, leading to faster returns. This is in stark contrast to high-growth investments, where the upside is based on scaling an unproven idea that may take years to materialize.

3. Turnarounds Offer Lower Competition and Entry Costs

One of the best ways to create value is by entering markets where competition is low. Most investors flock to high-growth opportunities, driving up valuations and creating fierce competition for deals. Turnarounds, by contrast, are often overlooked because they seem riskier or less glamorous.

The lack of competition in the turnaround space creates favorable acquisition conditions, allowing investors to negotiate lower purchase prices. This resonates with Buffett’s approach, where he famously looks for “great companies at fair prices.” Buffett has long favored investments where the competition for shares is low, giving him better entry points and a greater chance for long-term success. Similarly, a well-executed turnaround can provide significant returns with far less initial capital.

4. Immediate Cash Flow is a Game Changer

One of the greatest benefits of acquiring an existing business is immediate cash flow. Even struggling companies usually generate revenue, which can be stabilized and improved. It is important to emphasize that cash flow is a critical advantage of buying rather than building. This reduces the financial pressure on entrepreneurs and investors, providing breathing room to make strategic changes without constantly raising new capital—something that plagues many startups.

Buffett’s preference for cash-generating businesses echoes this sentiment. He often stresses the importance of investing in companies with solid cash flows because they provide stability and flexibility. In a turnaround, this existing cash flow becomes the foundation for improvement, allowing investors to reinvest profits back into the business to fuel growth and recovery.

5. Leveraging Undervalued Assets for Growth

Many turnaround businesses possess undervalued assets, such as intellectual property, customer loyalty, or strong market positioning. These assets may not be reflected in the company’s current valuation, making them ripe for investment. By leveraging these assets, entrepreneurs can unlock new growth potential that the previous management failed to capitalize on.

Buffett’s value investing similarly focuses on finding hidden gems—companies whose assets or market position are stronger than their current stock price suggests. In both approaches, the key is recognizing value that others overlook and then using strategic adjustments to increase that value over time.

6. Turnarounds as a Scalable Model for Entrepreneurs

Once an entrepreneur has successfully turned around one business, they can replicate the process with other underperforming companies. This is what Deibel refers to as a scalable acquisition strategy. Much like Buffett’s method of building a portfolio of undervalued companies, turnaround entrepreneurs can create value across multiple businesses by applying the same operational expertise repeatedly.

By acquiring businesses with existing structures, reducing inefficiencies, and focusing on profitability, investors can scale this strategy far more effectively than by betting on growth-stage startups, which often require years of scaling before turning a profit.

Conclusion: The Overlooked Potential of Turnarounds

Both Walker Deibel’s Buy Then Build and Warren Buffett’s value investing principles point to the immense opportunity in acquiring and turning around underperforming businesses. This approach offers entrepreneurs and investors a faster path to profitability, lower risk, and immediate cash flow—all while tapping into undervalued assets that are often ignored by the market.

While high-growth startups may capture headlines, turnarounds present a more grounded, tactical investment strategy with substantial upside. For entrepreneurs looking for a practical path to success and for investors seeking to maximize their returns with less competition, turnarounds are a powerful and scalable opportunity.

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