Can you acquire a business with no money down? Yes, absolutely, but it will be extremely hard. But before even thinking about financing, you need to be confident that buying a business is right for you. If so, what type of business?
Buying an existing business can be a smart move in some cases; however, you should proceed with caution, do your homework, and understand the advantages and disadvantages if you want it to be a successful venture.
If you go ahead with the business acquisition and want to put no money down, you will most likely need 100% seller financing, but other options exist.
Keep in mind that business brokers are wary of buyers who want to acquire a firm with little to no money upfront. This is due to the fact that many of these buyers have excessively high expectations stemming from limited practical experience.
You must be ready if you want to be taken seriously. Set reasonable goals and be well-informed. Demonstrate to small business owners, brokers, and possible investors that you have done your research.
Why no money down?
First, let's examine a few common reasons why an individual does not or cannot put money down.
1. Bad Credit Score
Bad credit is the most common reason that potential buyers cannot put money down. The prospective buyer simply does not have enough cash or line of credit available.
2. Lack of Cash
Some potential purchasers don't have any money set aside. Their credit may be excellent; they just don't have the money available to buy the firm or make a down payment.
3. No Working Capital
Another typical scenario is that the buyer has money tied to assets. They don't want to jeopardize their investments by borrowing against them.
Many purchasers have illiquid assets that are difficult to leverage.
Other people have liquid investments that may be easily leveraged or turned into cash, such as equities, bonds, or mutual funds. However, converting the assets to cash might create a substantial taxable event.
4. Risk Averse
Finally, some investors have money but don't want to put it at risk. Instead, they prefer to borrow. Or, individually, it might just not make sense to pay a high-interest rate on a bank loan. It is, nevertheless, likely to raise doubts among business brokers and potential purchasers.
Consider it this way. Would you lend to an investor who doesn't want to put any of their own money down? Most sellers and lenders would most likely disregard a buyer like this.
What are your Financing options?
Getting a no-money-down transaction is tough. Typically, these kinds of deals are rare and challenging to complete. However, there are a few ways to finance without putting down any cash.
100% seller financing
The owner finances the transaction, as the name indicates. The seller issues a note due within a specific number of years.
For the most part, having a seller financing component is usually a good business idea for acquisitions. They keep the seller connected to the company via financial obligations because purchasers generally pay off their debts using the cash flow from the new business.
However, few, if any, sellers are ever prepared to offer total financing.
A small company leveraged buyout is one approach to borrow money and start a business without putting any of your own money down. A leveraged buyout involves borrowing cash by leveraging the company's assets for funds.
The transaction structure of a leveraged buyout can be modified to become a "no-money-down deal" if certain criteria are met. The company must be sold for less than the value of its assets.
These may be possibilities, but they're pretty tough to come by. Think about it critically. Why would someone sell their business for less than the value of its assets?
Friends and Family
We highly recommend avoiding this route at all costs. Requesting cash is the easiest way to destroy a friendship or family relationship.
If you choose this option, request for the lowest amount feasible. Use friends and family to cover only the down payment and add seller financing. We cannot stress this enough, repay them as soon as possible.
Is 100% Seller Financing a Good Idea?
Many buyers concentrate their efforts on obtaining 100 percent owner financing. At first glance, It makes sense.
This is not an ideal circumstance for sellers, and they will try to avoid this scenario. Once the owner sells and is no longer running the business, they want to be paid as soon as possible.
So, why would an owner offer 100% financing? Let's examine some potential reasons.
There are Problems with the Business
A business owner might offer 100% financing if they are having problems. Essentially, they want to sell the business as quickly as possible to anyone who will purchase it. Offering substantial financing is one way to entice buyers.
No Longer Interested
Another reason for a business owner to give 100% financing is that the company may not be worth it for them. Perhaps the firm has issues similar to those described in the previous point. It might be too demanding or not generate enough money. Maybe they want to spend more time with their kids.
The owner can't find the Right Buyer
In rare situations, the firm is in excellent condition, but the owner cannot find a buyer that can obtain financing. This provides an intriguing prospect for the acquirer.
If your heart is set on buying a business with no money down, complete thorough due diligence to ensure you are getting a good deal. Is the business plan sound? Does the business offer a nice plot of real estate? Is the purchase price fair? Will the business be cash flow positive? Consider everything and good luck!