How To Buy A Business With No Money Down
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Last updated 04/16/2024 by
Benjamin LockeEdited by
Summary:
Buying a business with no money down is achievable through various strategies such as seller financing, SBA loans, equipment loans, and finding investors or partners. This article explores practical examples and models to illustrate how individuals can acquire businesses without upfront capital, highlighting the importance of creative financing solutions.
Buying a business with no money is possible through strategies like seller financing, which is part of nearly 80% of business purchases. Some of the ways to acquire a business with minimal or no upfront capital, include seller financing, Small Business Administration (SBA) loans, SBA + Equipment Loans, and/or finding investors or partners.
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Can I buy a business with no money down?
Yes, it’s definitely possible. Buying a business with no money is possible through strategies like seller financing, which is part of nearly 80% of business purchases. Some of the ways to acquire a business with minimal or no upfront capital, include seller financing, Small Business Administration (SBA) loans, SBA + Equipment Loans, and/or finding investors or partners.
Pro Tip
“Buying a business with little to no initial capital is quite the challenge, but it’s definitely doable with the right approach. One popular strategy is negotiating a deferred down payment, which allows you to pay the seller over time from the profits of the business. Another approach is an earn-out deal, where payment is tied to the business’s performance post-acquisition.
Leveraging zero-interest business credit cards for the down payment presents another savvy option. This method offers the advantage of spreading out the financial burden over time. With the grace period before interest accrues, it provides a cushion for the business to generate cash flow, easing the initial financial strain.” – Amanda Webster, VP at Fund&Grow
Leveraging zero-interest business credit cards for the down payment presents another savvy option. This method offers the advantage of spreading out the financial burden over time. With the grace period before interest accrues, it provides a cushion for the business to generate cash flow, easing the initial financial strain.” – Amanda Webster, VP at Fund&Grow
Ways to buy a business without money
Buying a business with no money down needs to be planned. Private equity funds buy businesses all the time with little money down or no money down at all. However, private equity funds have many more connections than your average Joe-Six Pack. For most people, buying a business with no money down can be done in the following ways:
Seller financing
Seller financing is a transaction where the seller of the business acts as the lender to the buyer. Instead of receiving the full purchase price upfront, the seller agrees to receive payments over time, often with interest. This method is particularly useful for buyers who may not qualify for traditional financing or who seek more flexible payment terms.
Example scenario
The owner of a cat cafe names Stuart wants to retire and is willing to sell the business to a passionate employee. However, the employee lacks the funds to pay the full price upfront. They agree on seller financing, where the employee pays a portion of the sale price as a down payment and then makes monthly payments over five years for the balance, allowing the transaction to proceed without immediate full payment.
SBA loans
The Small Business Administration (SBA) offers various loan programs to help entrepreneurs purchase businesses. SBA loans are known for their lower down payment requirements and longer repayment terms compared to conventional bank loans, making them accessible for buyers without substantial capital.
Example scenario
Jacob Miram identifies a promising tech startup for sale but lacks the capital for a traditional purchase. They apply for an SBA 7(a) loan, which provides enough funds to cover the purchase price and some operational costs. The SBA guarantees a portion of the loan, reducing the risk for the lender and enabling the entrepreneur to buy the business with a manageable down payment and favorable loan terms.
SBA loans + equipment loans
Combining Small Business Administration (SBA) loans with equipment financing can cover the purchase price of a business and the necessary equipment without the buyer needing to provide significant personal funds.
Example scenario
Mary Sefedis wants to buy a small printing company valued at $200,000, including $50,000 worth of printing equipment. She applies for an SBA 7(a) loan to cover the business purchase and secures an equipment loan for the printers. The SBA loan requires a 10% down payment, which she negotiates to pay partially with seller financing, thus minimizing her initial cash outlay.
Investors or partners
Bringing on investors or partners can provide the necessary funds to acquire a business. This method involves exchanging equity in the business for capital or forming partnerships where financial responsibilities and business profits are shared.
Example scenario:
A group of individuals sees potential in a struggling manufacturing company. They form a partnership where each contributes a portion of the needed capital to buy the business. Alternatively, they might seek an investor willing to provide the funds in exchange for a stake in the company. This collective approach allows them to acquire the business without any single partner providing the full purchase price upfront.
Expert Insight
“The first crucial step in locating a company you may purchase with no money down is to uncover companies whose owners genuinely need—or even genuinely want—to sell. Owners who are nearing retirement age, or companies that have been listed for sale but have not found a buyer are all indicators of a motivated seller. Seller financing is significantly more likely to be considered by an owner who is prepared to sell. It is a good idea to use a local business broker to assist you in your hunt for motivated business sellers.” – Wishine Ali, CEO and Founder – Best in Ottawa
Sometimes you can use multiple methods to buy a business with no money down
People don’t need to choose one off the list to buy a business with no money down. Instead, they could use multiple methods. Let’s give an example of Mary Sefedis. To purchase the business she bakery business she is going to use a combindation of SBA Loans + Equipment Loans , Seller Financing, and Investors and Partners.
Mary’s plan is to fund the entire business purchase with only $10,000. Let’s break down how she can do that.
| Item | Amount (USD) |
|---|---|
| Total Purchase Price | $200,000 |
| Of Which: Equipment Value | $10,000 |
| SBA 7(a) Loan Amount | $180,000 |
| Equipment Loan Amount | $10,000 |
| Total Financing Required | $230,000 |
| Down Payment Required (10%) | $20,000 |
| Seller Financing (for Down Payment) | $10,000 |
| Mary’s Initial Outlay | $10,000 |
Financing Breakdown:
- SBA 7(a) Loan: Mary applies for an SBA 7(a) loan to cover the majority of the business purchase price. The loan amount is $180,000, which is 90% of the total purchase price, excluding the equipment value that will be covered by a separate equipment loan.
- Equipment Loan: To finance the $50,000 worth of printing equipment included in the sale, Mary secures an equipment loan. This loan is separate from the SBA loan and specifically targets the equipment part of the acquisition.
- Down Payment: The SBA loan requires a 10% down payment on the total purchase price, amounting to $20,000. Mary negotiates with the seller to finance half of this down payment ($10,000) through seller financing.
- Mary’s Initial Outlay: After negotiating seller financing for half of the down payment, Mary’s immediate financial commitment to the purchase is reduced to $10,000, which she pays from her personal funds.
Mary still needs to raise this $10,000, she does that by raising $10,000 via equity investments from her friends and family.
To create a simple model that explains how a business worth $200,000 would translate into equity for $10,000 raised by Mary, to be split 4 ways, we’ll assume that the $10,000 is used as part of a larger financing strategy to acquire the business. This model will show how the $10,000 investment is converted into equity shares for Mary and her three partners.
Equity distribution model
For simplicity, let’s assume the $10,000 directly contributes to the business’s equity and does not involve any debt financing mechanisms like loans.
We’ll consider that the $10,000 investment is solely contributed by three partners to support the acquisition or operational needs of the business, without involving any debt financing mechanisms like loans. Mary, while instrumental in orchestrating the deal, does not provide financial investment but may negotiate for equity or compensation for her contributions in other forms.
Total Business Valuation: $200,000
Total Equity Raised (by partners excluding Mary): $10,000
Number of Financial Contributors: 3
Equity Contribution per Financial Contributor: $3,333.33
Total Equity Raised (by partners excluding Mary): $10,000
Number of Financial Contributors: 3
Equity Contribution per Financial Contributor: $3,333.33
Under these conditions, the equity percentage attributed to the $10,000 investment relative to the business’s total valuation is calculated as follows:
| Parameter | Value |
|---|---|
| Total Business Valuation | $200,000 |
| Total Equity Raised (Excluding Mary) | $10,000 |
| Equity Percentage for $10,000 | 5% |
| Number of Financial Contributors | 3 |
| Individual Financial Contributor Equity Stake | 1.67% |
FAQ
Can I really buy a business with no money down?
Yes, it’s entirely possible to buy a business with no money down through various financing strategies. Seller financing, SBA loans, equipment loans, and partnerships with investors are all viable methods to acquire a business without upfront capital. Each option has its own set of requirements and benefits, making it important to explore which method best suits your situation.
What is seller financing and how does it work?
Seller financing occurs when the seller of a business acts as the lender, allowing the buyer to pay for the business over time instead of upfront. This arrangement often includes interest and can be particularly beneficial for buyers who may not qualify for traditional bank loans. The terms are negotiated between the buyer and seller, including down payment, interest rate, and repayment schedule.
How do SBA loans assist in buying a business with no money down?
SBA loans, offered by the Small Business Administration, can help entrepreneurs purchase businesses with lower down payment requirements and longer repayment terms than conventional loans. These loans are government-guaranteed, reducing the risk for lenders and making them more accessible to buyers. SBA 7(a) loans are a popular option for buying existing businesses due to their flexible terms and the support provided by the SBA.
Is it beneficial to bring on investors or partners when buying a business?
Answer: Yes, bringing on investors or partners can provide the necessary funds to acquire a business without personal financial investment. This approach involves exchanging equity in the business for capital or forming partnerships where financial responsibilities and profits are shared. It’s a strategic way to pool resources, share risks, and leverage collective expertise for the success of the business.
Key takeaways
- Seller financing is a common method, allowing buyers to pay over time directly to the seller, making up nearly 80% of business purchases.
- SBA loans offer lower down payments and longer repayment terms, facilitating the purchase of businesses without substantial capital.
- Combining SBA loans with equipment loans can cover both the purchase price and necessary equipment, minimizing personal financial outlay.
- Investors or partners can provide necessary funds, exchanging capital for equity or shared profits, enabling acquisitions without direct personal investment.
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