There are a lot of people out there who would like to be business owners, but there is one small problem that is keeping them from pursuing their dream: lack of available capital. The assumption is that without a large bank account, it is impossible to purchase an existing business.
Although it is not as easy, is possible to buy a business with little to no capital. How can you buy a business with no money down? The answer in short, is creativity.
You will likely need to find a seller who is willing to finance at least a portion of your purchase (more on this later), and you will need to find other alternative forms of financing. You also need to demonstrate the ability to operate the business successfully, which brings us to our next point: should you try to purchase a business with no money down?
Going into business is very risky, and most new businesses fail within their first five years. Therefore, purchasing an established business that has already stood the test of time is usually a better strategy.
But even existing businesses are risky, especially if you are leveraged to the hilt, and you are not 100% confident that you can run it. If you do have extensive experience in the industry the business is in and the proper skill set, this will go a long way toward making up for your lack of available capital.
Table of Contents
- Tips for Buying a Business with No Money Down
- Look for an Owner Who is Ready to Get Out
- Look for an Underperforming Business
- Offer a Higher Interest Rate/Larger Payment in Exchange for Your Labor
- Bring on a Silent Partner
- Find a Secondary Source of Financing
- Raise the Capital Through Crowdfunding
Tips for Buying a Business with No Money Down
Assuming you have determined that you have the necessary skills and experience to be a successful entrepreneur, here are some ways you can purchase an existing business without any money out of your own pocket:
Look for an Owner Who is Ready to Get Out
The first key step to finding a business that you can buy with no money down is to identify businesses whose owners really want (or better yet need) to sell. Signs of a motivated seller may be owners who are close to retirement age, owners who are dealing with health challenges or health issues of a close family member, or businesses that have been for sale for several months with no buyers. An owner who is ready to get out is far more likely to entertain the idea of seller financing.
In your search for motivated business sellers, it is wise to enlist the help of a local business broker. Also known as “business intermediaries”, business brokers have relationships with a lot of potential sellers in your area, and they can work closely with you to identify businesses for sale in which the owner is likely to be more flexible.
Look for an Underperforming Business
In a good number of cases, a business owner is motivated to sell because the business is not performing as well as it could. Maybe the owner is just burned out and ready to move on and they have not thought much about technology upgrades that could maximize efficiencies, marketing strategies that could produce a better ROI, and similar issues.
If you can find a business that is barely turning a profit or maybe losing money but could be turned around with better management and the right solutions, there is a much better chance that the owner would sell to you with little to no money down. Just be certain that you can turn the business around, because if you are not confident of this, then you could be getting yourself into a very difficult situation.
Offer a Higher Interest Rate/Larger Payment in Exchange for Your Labor
If you are dealing with an owner who does not want to do 100% seller financing, one way to change their mind could be to offer them a higher interest rate than what the going rate is at the time. Along with a higher rate, you can structure the deal so that they receive a higher payment from you, which means that in the long run, they are able to cash out for more than the expected sale price.
This strategy is best utilized with an underperforming business as we talked about in the previous point. With this arrangement, you might initially be working for “free”, but as you implement the solutions necessary to turn the business around, you should start to see profits before too long.
Bring on a Silent Partner
If you cannot get the owner to finance 100% of the purchase price, you may want to consider finding an investor who you can bring in as a silent partner. For example, maybe the owner is only willing to go up to 50% financing. In this case, your investor would put up the additional 50% and in turn, receive 50% of the profits.
You could also get a little more creative with this strategy and ask the seller if they want to retain an ownership stake and become a silent partner. This might be an appealing option for some owners who do not want to work anymore but still want to enjoy some of the fruits of the business that they have worked so hard to build.
Find a Secondary Source of Financing
You can always try to combine owner financing with another financing source to get to 100% of the purchase price. This might be difficult if you try to get a loan from traditional sources such as your local bank as they do not usually like to be part of a 100%-financed deal.
Some alternative commercial lenders might give you a loan like this, however. Or you might be able to do it through a home equity loan or by borrowing the funds from a relative who has the available capital.
Raise the Capital Through Crowdfunding
If all else fails, you can always try to raise the capital you need to purchase the business through crowdfunding. With crowdfunding, you can bypass financial institutions and raise money directly from the public. This could be done through equity crowdfunding, where public investors receive equity in your business in exchange for their funds, or through debt crowdfunding, where investors put up the capital for a business loan that you repay to them with interest.
Speak with a reputable CPA and accounting practice broker in your area.Business brokershelp potential business buyers prepare for purchase, and they work closely with owners throughout each phase of the sales process to help ensure a smooth and successful transaction.
