Can You Buy a Business with No Money Down?
Many of us have dreams of owning our own business. Franchise opportunities abound for people who have ready cash to spend, although it can take close to six figures ($100,000) to do a proper job of it – what with the initial franchise fee, start-up or build-out costs, inventory, supplies, and so on. But what about those entrepreneurs who have a self-employment wish but little or no money to sink into the venture? Breathe a bit easier, folks, because it CAN be done.
The Real Estate Model
In all kinds of financial times, but especially when things are a bit tight, there are plenty of stories about people who buy houses with “little or no money down.” Although this article is aimed at actual businesses – “flipping” houses by buying, fixing up and reselling them is clearly a business, but outside the scope of this discussion – many of the techniques used by budding real estate magnates are applicable here as well. And the secret to buying a business with no money down can be boiled down to a single word – financing.
Outside money to buy a business is generally available from three primary sources – banks, sellers, and outside investors. Each source has its own requirements. Some offer multiple ways to achieve the same result, which is to gain enough money to buy a business without dipping into your own wallet. The best way to accomplish this is by combining sources and methods, and the type of business you choose to buy is a key factor in how you proceed. There are essentially three business models for the entrepreneur. Each model requires a slightly different strategy in order to acquire it on a no-money-down basis.
A start-up business is one that you “start” from scratch. These are the most difficult deals to structure, mainly because they have no financial track record. A brand new business has no history of sales or credit. Banks find that these offer the greatest risk, and in these times of particularly tight credit, “risk” is a nasty word among bankers. However, under the stimulus package proposed by President Obama, a significant sum has been set aside for use by small business owners. The Small Business Administration (SBA), a federal agency, works with banks to provide loan guarantees. While the SBA will guarantee a large portion of the loan, it will not cover its full value. You may have to look elsewhere for enough money to get started, perhaps taking on a friend or relative as an outside investor.
The Existing Business
An existing business is one you acquire from its current owner. This is the best option for a no-money-down buyer, since one assumes there are customers, cash flow, and intrinsic business value such as “goodwill” and ongoing relationships with suppliers. Banks are more likely to lend money to buy a solvent business, but your best terms may actually come by way of the seller. A seller may finance as much as 80 percent of the purchase price, while a bank rarely lends more than 60 percent. Some sellers are even willing to float the entire value of the sale as a loan. Payback terms are also generally more lenient from seller-based financing. It’s not unusual to see a seller charge significantly less interest – perhaps as much as three to four percent lower – than a bank, as well as providing a longer payback period. In some cases, an owner may allow you to pay back the loan over ten years.
A turn-around is an existing business that is either already failing or else teetering on the edge. Banks will rarely provide financing for these kinds of deals. However, sellers under these conditions can be highly motivated, and buying a business like this is definitely worthwhile if the underlying premise is sound. Perhaps the business is failing because the owner has lost interest, is undergoing personal challenges, or simply does not have the marketing or financial management skills to turn a profit. If you believe you could do a better job, then the turn-around could be your perfect chance to buy a business at a rock-bottom price. An outside investor is also an excellent option under these circumstances. Some people have money to invest but have no interest in running a business on a day-to-day basis. If you can convince an investor that you have the skills to turn around a nearly defunct enterprise and make it profitable, you both will be winners.
Seller-Based Financing Options
If the seller is willing to provide most or all of the financial incentive for you to take over, there are several clever ways to structure the loan. One is through asset financing. Prior to closing, you arrange to sell off part of the business elsewhere and use that money for partial financing. This could be tangible items (vehicles, equipment, etc.) or intellectual property, such as a patent or trademark. Another is known as inventory financing, where you identify a buyer for part of the company’s inventory – perhaps a competitor or professional liquidator. A third option is supplier financing. Few suppliers these days are happy to see a customer disappear. They may be willing to help you acquire the business so that their sales will continue uninterrupted.