How to Buy Businesses with No Money Down
Buying a business with no money down is one of the most difficult ways to obtain ownership of a business; however, that doesn’t mean it’s impossible. You just need to make sure that it takes place under the right circumstances.
Before we proceed, here’s a word of caution: entrepreneurs who express interest in buying a business with no money down tend to be scrutinized closely by many business brokers. This is usually due to many entrepreneurs arriving unprepared and having the unrealistic expectation that it’s easy to buy businesses with no money down. This is why, to be taken seriously, you must educate yourself so that you are fully prepared to face all the obstacles that come with buying a business with no money down. Keep reading so that you are thoroughly educated on the subject.
The first step in buying a business with no money down is to review your financing options.
1) 100% Seller Financing
Seller financing means that financing will be taken care of by the person who is selling the business. The seller will create a note that will become payable after X amount of years.
Seller financing is usually beneficial due to keeping the seller tied to the business in some capacity. This is due to most buyers wanting to make their payments using the cash flow of the new business they’ve acquired. Keep in mind that very few sellers are ever going to agree to finance 100% of the total. Most of them will demand that the buyer give up finds for payment.
2) Friends and Family
One easy financing option is to ask your friends or family to contribute to buying the new business so that their money covers the down payment. You can do this in tandem with seller financing so that you’re not spending your own money.
3) Leveraged Buyouts
You can finance a business with no money down by implementing a small business leveraged buyout. This means that you leverage the assets of the new business (and also more funds) in order to make financing become a reality.
Leveraged buyouts can only be deemed “no money down transactions” if one factor is in place: The business must be sold at lower price than the combined total value of the assets. Opportunities like this exist, but you must search diligently because they are not easy to locate. Most people are not going to agree to sell their businesses for a lower total than its assets; thus, you must be careful with how you approach current owners concerning a possible leveraged buyout.
Keep These Factors in Mind Before Buying a Business
1) You must make sure that the success of the business you want to buy isn’t primarily due to the current owner. For example, if his or her name is in the name of the business, it means many customers are flocking to that business because of the specific owner.
2) You’ve got to do all you can to ensure that the business will be just as profitable as it has been once you take ownership. Do plenty of research and seek the advice of your connections.
Is 100% Seller Financing Likely to Happen?
Suggesting 100% financing to a buyer is usually frowned upon by sellers. This is simply due to sellers not wanting to have to, essentially, role-play as a bank. Sellers just want to be compensated as fast as they possibly can be, and usually, in cash; however, there are reasons why an owner would offer one hundred percent financing:
1) His or her business is in trouble.
Sometimes businesses are in a lot of trouble and owners want to unload them as fast as they possibly can to just about anyone willing to take over. An owner in this predicament may offer aggressive financing so that he or she can immediately move on.
2) The business isn’t worth the trouble.
A current owner may agree to 100% financing if he or she thinks their business isn’t worth much. The business could have a multitude of problems, not make enough in profit, or the owner could think the business has no longterm future.
3) The owner can’t secure a buyer with a deposit.
Sometimes, even though a business is successful, the owner can still face difficulties finding a buyer that can secure financing. This creates a great deal of leverage for the buyer.
If you want full financing, make sure you utilize these techniques:
-Prove that it’s likely you will be successful. This means showing off your proven experience, contacts, etc.
-Consider offering very aggressive terms, such as a three year note.
-Work closely with a reputable broker.
-Prior to buying the business, serve as a consultant to the seller for at least half of a year so that you increase their income.
Is Small Business Administration financing a possibility?
SBA financing should definitely be considered as an option when it comes to potentially purchasing a small business. The SBA is committed to backing institutions that provide financing to people and small companies. Programs vary from micro-loans that are under $50,000 to traditional loans of up to $5,000,000.
Financing Your New Business’ Operations
Remember that buying a new business is only the first step. You’ll then need to immediately begin running it—and running a business is never cheap. Here are your main three options when it comes to financing the operations of your new business:
1) Factoring the Invoices
Commercial clients usually pay invoices in thirty to sixty days. This is a huge problem because most newly acquired companies can’t afford to wait that long. You’ll need adequate funds to pay employees, suppliers, etc. Here’s the solution: utilize accounts receivable factoring. This will ensure that you can finance your invoices accordingly. You’ll be given immediate funds so you won’t have to worry as much once you own your new company.
2) Take Advantage of Micro-Loans
Even if you weren’t able to take advantage of SBA financing to buy your business, that doesn’t mean you can’t use it to operate your business. This is especially effective for small businesses that need less than $50,000. If that’s you, consider getting an SBA micro-loan. Not only will you cash flow be improved, but they are much easier to get than regular SBA-backed loans.
3) Lease Equipment
If you’re in need of equipment but can’t afford to purchase it, there’s nothing wrong with leasing it. You’ll be able to get the tools and equipment you need without the hassle of securing a loan. If you go this route, be sure you try to set up the elating agreement so that you have the option to purchase the equipment at a discounted price after the lease ends.
Common Reasons People Do Not Want to Put Money Down
There are usually four reasons why buyers don’t want to use their own money:
1) Bad Credit
This is the most common reason why people refuse to put money down—it’s because they can’t. It’s hard to make a huge purchase when you have little to no credit to borrow against. If this is you, don’t despair. Buying a business with a bad credit rating is hard but not impossible.
2) Money in Investments
Many potential buyers have their money tied to investments and they want to keep them in place without having to leverage them. Some buyers have illiquid investments that are almost impossible to leverage, such as owning another business, like a service business that doesn’t have many assets. Some buyers have liquid investments that they convert to cash, such as stocks, mutual funds, real estate, or bonds; however, a taxable event usually has to occur in order for cash conversion to take place.
3) Low on Funds
Bad credit isn’t always the factor. Some people have great credit but don’t have enough cash to buy a company or make a down payment. Also, many potential buyers don’t have enough money in their savings accounts or don’t have enough money to make big investments.
4) Don’t Want to Take the Risk
There are plenty of potential buyers and investors that simply don’t want to risk their money. They would rather play with other people’s money than their own. This is what usually makes brokers and sellers skeptical. If you are a potential buyer that doesn’t want to risk his or her own money, you must be very cautious with how you approach sellers and lenders so that they are willing to give you a chance.
Don’t listen to those who tell you that it’s impossible to buy a business with no money down. Though the odds may not be in your favor, you must continue to work hard to research and educate yourself on the subject so that you have a fighting chance. One of the easiest ways to make it happen is to simply just be in the right place at the right time; thus, do all you can to seek out as many potential opportunities as possible.
Disclaimer: This article is exclusively for informative purposes and does not give any advice. If you are in need of financial advice, please contact a professional.