Buying a business with no money down is one of the hardest ways to acquire a business. However, it is possible to buy a business with no (or little) money down under the right circumstances. In this article, we examine:
- Reasons why you can’t or won’t put money down
- Options for financing the acquisition
- If seller financing is realistic
- If SBA financing is an option
- Options for financing operations
Keep in mind that entrepreneurs who want to buy a business with “no money down” tend to be viewed with caution by business brokers. This is because a number of these entrepreneurs have unrealistic expectations. These expectations come from having little actual knowledge.
To be taken seriously, you must be prepared. Have realistic expectations and be knowledgeable. Do your due diligence. Show owners, brokers, and potential investors that you have done your homework.
Reasons why you can’t or won’t put money down
Generally, there are four reasons why business buyers can’t or won’t put money down for an acquisition. Let’s examine each option.
1. Bad credit
In our experience, the most common reason that potential buyers can’t put money down is bad credit. The potential buyer simply has no money to put down and no credit to borrow against.
This can be one of the most challenging situations for an individual. However, buying a business with bad credit is possible. It’s just very hard.
2. Money tied in investments
Another common scenario is that the potential buyer has the money tied to investments. They want to keep their investments intact and don’t want to leverage them.
Some potential buyers have illiquid investments that can’t be easily leveraged. An example of this type of investment is owning another business (e.g., a service business with few assets).
Others have liquid investments that can easily be leveraged or converted to cash, such as stocks, bonds, mutual funds, and real estate. However, converting the assets to cash may lead to a major taxable event.
3. Low on money
Some potential buyers don’t have savings or any money to invest. Their credit may be decent. They just don’t have the funds to buy the business or make a down payment.
4. Don’t want to risk your own money
Lastly, some investors have money – but don’t want to risk it. Instead, they prefer to use “other people’s money.” We understand this position. However, it is likely to generate skepticism among business brokers and potential sellers.
Think about it this way. Would you finance an investor who is not willing to put their own money down? Frankly, this type of buyer is not likely to be taken seriously by most sellers/lenders.
Financing options
Getting a no-money-down transaction is usually very difficult. Successful transactions of this type tend to be few and far between. However, there are ways to finance a business acquisition with no money down, including the following:
a) 100% seller financing
As the name implies, seller financing is provided by the person that is selling the business. The seller provides financing by creating a note that is payable within a certain number of years.
Having a seller financing component is usually a good idea for most acquisitions. They keep the seller indirectly tied to the business. This is because buyers usually make the payments using the cash flow of the new business.
However, few if any sellers are ever willing to finance 100%. They often demand that the buyer contribute funds as a payment.
b) Friends and family
We don’t encourage business buyers to get funds from friends and family. The easiest way to derail a relationship with a friend or family member is to ask for money.
If you decide to use friends and family, ask for the least amount possible. Combine it with seller financing and use friends and family to cover only the down payment. Also, do your best to repay them quickly.
Get information on how to get friend and family financing.
c) Leveraged buyouts
One way to finance a business with no money down is to do a small business leveraged buyout. In a leveraged buyout, you leverage the assets of the business (plus other funds) to finance the purchase.
A leveraged buyout can be structured as a “no-money-down transaction” if one condition is met. The business must be sold for a price lower than the value of its assets. These can be opportunities, but they are very hard to find. Think about it. Why would a person sell their business for a value lower than its assets?
Is 100% seller financing realistic?
A lot of buyers focus their efforts on trying to get 100% owner financing. It makes sense. At face value, it seems like an attractive option for buyers.
However, offering 100% financing to a buyer is not attractive to the seller. Far from it. They don’t want to be a bank. The seller wants to get paid as quickly as possible – ideally in “cash” (actually, a bank wire).
So, why would an owner offer 100% financing? Let’s examine some potential reasons.
1. Business has problems
One reason an owner may want to offer 100% financing is if the business has problems. Basically, they want to unload it as quickly as possible to whoever wants to buy it. Offering aggressive financing is one (or the only) way to attract buyers.
2. Business is not worth it
Another reason an owner may offer 100% financing is that the business may not be worth it for the owner. Maybe the business has problems as mentioned in the previous point. Perhaps it takes too much work or does not make enough profits. Or maybe the business doesn’t have a future.
Again, offering aggressive seller financing is one way to unload the business.
3. Owner cannot find a buyer with a deposit
In some cases, the business is good, but the owner cannot find a buyer who can get financing. This happens from time to time. This presents an interesting opportunity for the buyer.
Is SBA financing an option?
Small Business Administration financing is an option that every small business buyer should look into. The SBA backs institutions that offer financing to individuals small companies.
SBA programs are designed to help individuals and small business owners. Programs range from Microloans (under $50,000) to conventional loans of up to $5,000,000. Learn more about how to get a loan to buy a business.
Financing operations
Keep in mind that buying the company is only part of the challenge. You still need to run it. Running a business usually requires money – or financing. Here are three options that help finance operations.
a) Factoring invoices
One of the biggest challenges of working with commercial clients is that they pay invoices in 30 to 60 days. It’s unlikely that your newly acquired company can wait that long for payment.
Your company needs funds to pay employees, suppliers, and other expenses. It can’t afford to have its funds tied to slow-paying invoices.
The solution is to use accounts receivable factoring. This solution allows you to finance your accounts receivable (invoices). It provides immediate funds you can use to cover business expenses and grow.
b) Microloan
If you did not use SBA-backed financing to buy the business, you may still use it to operate the business. This is a great option for small companies.
If you need less than $50,000 in financing, consider an SBA Microloan. They are easier to get than conventional SBA-backed loans and can be used to improve your cash flow.
c) Equipment leasing
If you need equipment but cannot afford to buy it, consider leasing it. A lease allows you to get tools and equipment without the requirements of getting a loan. Leases can also be structured so that you purchase the equipment at the end of the lease for a token amount.
Disclaimer: This article is provided for information purposes only and does not provide any advice. If you need advice, consult a professional.
