Over the past few decades, entrepreneurship and business ownership has been romanticized. So many people want to own their own business in hopes to gain wealth. But as you can read in Laurent Truc’s free ebook “Buy Don’t Build”, starting a business is high risk as 50% of businesses end up fail. That’s a lot of lost investment in money and time.
So, what’s the alternative? Buy an existing profitable business. From Private Equity firms like MadX Capital down to individuals, buying a business allows you to find successful and profitable companies that have already stood the test of time and just acquire them for immediate profit. No need for trial and error, creating demand, finding the right employees, fine tuning your processes, and perfecting your product. It’s all been done for you.
But what do you do if you are not sitting on wads of money to make the purchase? The article below will review some strategies you can use to purchase a business (or parts of a business) with no money at all!
Why Would Someone Sell a Business for No Money?
First of all, when we say buying a business for no money, it does not mean that the seller does not received any compensation in exchange for their business. I want to be clear that this is about structuring deals that make it as interesting and beneficial to the seller and for you as the buyer.
This is especially important when dealing with business acquisition. Typically, when you buy a business, there is a transfer period of the assets (the assets being the money-making parts of the business like the product, the team, the website and social media, the infrastructure, the business processes and knowledge, etc).
And having the seller engaged to help with a smooth transition and help you in the first few months, is critical to the ongoing success of the business. So, it’s important that the seller be exciting about the deal they are entering with you so you get the right level of support.
A buyer is typically motivated to sell their business because of one or more of the following:
Seller are ready to leave and want to be compensated financially for the work they’ve done. Money or some other kind of financial compensation such as equity in another company or an exchange of something of value.
Getting Rid of a Head Ache
Some companies are hard to run or no longer interesting for the seller anymore. Many sellers become frustrated and decide they want out of their business. Often they don’t want to see their hard work go to waste and are looking for someone to take it over.
Many baby boomers are hitting their golden years and want to just hang up their gloves and call it a day. After working for years in a business, any owner is entitled to a retirement. Unfortunately, many business owners done have a succession place. Either they don’t have kids or next of kin interested in taking over the business or don’t have employees they feel can take on the operations of the business successful. These are prime candidates for selling a business.
Illness or Life Change
Unfortunately, these are the facts of life. Owners will go through medical issues themselves or potentially have family issues they need to focus on (like divorce, sick parents, or the multitude of things life throws at us). And sometimes managing a business is impossible under those circumstances
Business Plateau or Decline
I some cases, business owners have grown their business as much as they know how and getting to the next stage takes skills they just don’t have. A smart business owner will realize that a business can progress in the hands of a new operator and would be willing to sell off the business (or part of the business) to see it continue to progress
Reap what they can from a failing business
And in some cases, the business is a rapid downward decline and the seller doesn’t see a way out to save his business. They are then willing to sell it for no money with hopes of someone can turn it around
There can be a myriad of other reasons why someone would want to sell their business and would be open to doing it with no money down. It all depends on the creativity of the buyer and willingness (or in some cases, the desperation) of the seller.
Benefits of Buying a Business with No Money
We define buying a business with “no money” as buying a business without the seller shelling out any money of their own. Often times there is still a transfer of money that is done to the seller of the business but can be other people’s money (bank loan, investors) or with other vehicles that can provide more incomes to the seller in other ways (equity in another company, seller distributions over time, lease income over time).
The largest benefit to you as a buyer is that you can own a business that produces cashflow without spending any of your money. This is an example of infinite return on investment (the holy grail of investing). Now most likely there will be a lot of sweat equity involved which is not part of a standard ROI but the financial benefits are huge.
For the seller, there can be benefits as well. Often times getting a lump sum payment for selling a business will trigger taxes. I am not an accountant so I will highly suggest that you review any tax considerations with a qualified individual. However, there are some opportunities where payment for a business can be done over long period of time to reduce tax liabilities.
The seller also can benefit from diversification. They can sell their business for equity in other companies which can help them reduce the risk of having all their money in only one company. Many buyouts take place where a company will buy another company and the seller now gets shares in both entities.
And finally, if the business has plateaued or is on a decline, new management might be what is needed to change that trajectory. Selling part of the business to a qualified operator could make the portion of the business that the seller continues to own a lot more valuable over time.
What Types of Business Should I Look For?
There are a few aspects to that questions but at a minimum consider the following 3: 1) the seller and their motivation and 2) you and your skills and 3) the potential of the business and industry
The seller and their motivation
To find an opportunity to buy a no money down business, you need to find the right seller. A seller motivated to sell their business due to one of the issues we listed above (or other issues that would drive them to take an offer of anything other than cash). This will maximize your chance of being able to find a deal structure that will get you a no money purchase
You and your skills
If you are planning on being the operator of the business then it is highly suggested that you have some interest in the industry and topic that the business deal with. Business is hard. There will be ups and down and frustrating times and the more engaged and knowledgeable about the space that you are, the more likely you can push through the tough issues.
Also finding a business where you see opportunities that map will to your skills and knowledge will make it much easier for you to grow the business and ensure it’s on the right pack. You probably should not buy an ecommerce company if you’ve sold anything online and don’t have internet access. Don’t buy a dog grooming business if you’re allergic to pets.
Although these are silly examples, many people feel they can learn on the job. If you purchase a business that has a number of employees but you’ve never managed people before and have never hired and fired, it may be a steeper learning curve that you expect
So try to find a business that you understand, feels like it’s in your sweet spot of skill and knowledge and something you’ll get excited about working on every day
Potential of the business an industry
Running a business is typically all consuming. Even you outsource much of the workload to employees and contractors, the first year or so there is so much learning and mastering of the operations that it will be a lot of work. So it’s important to make sure that the effort is worth the return.
Research the business and the industry in depth before jumping in. Look for a business that has a large upside potential. For example, if the business if just a brick and mortar, is there an opportunity to bring it online (and vice versus). Is the business only selling retail and therefore has an opportunity to sell wholesale? Are there affiliate opportunities available to help drive more sales? Are there business assets that are under-utilized and can generate more revenue?
Identifying growth opportunities is critical to make a strong purchase and create longevity for your business. Look for these opportunities early in the process.
How do I purchase with no money?
There are a number of strategies that will allow you purchase with “no money down”. Some are a bit complex and while others are pretty simple to wrap your head around.
Use Bank Financing (Business Loans or HELOC)
Many businesses have assets that banks are willing to loan on, especially brick and mortar companies. Does the business have a physical location or equipment that can be used as collateral? Does the business have a lot of Account Receivables that can be sold for cash or leveraged? Does the business have other assets (like a patent) that can be leveraged? Can you make a personal guarantee to help secure the loan?
Rarely will you be able to purchase an entire business on bank financing. Typically, a bank will limit the amount of the loan to 60-80% of the business value. If the loan is insured by the government (SBA in the US or BDC in Canada) then in some cases 90% can be loaned.
You can then bridge that gap with seller financing
Often sellers will take back a loan to help you close the business, called seller financing. This can be structure in an unlimited amount of ways such as a loan at a certain percentage (typically 0-10%), payback over time, earnouts (small payments each month), balloon payments, etc
Exchange Something Else of Value
This can be anything. A piece of real estate, work that you can do for them, or a wine collection, a fine car, etc. Some seller are not looking for money , they just want someone else to run their business and would happily take something else in consideration.
Do you have assets that you can trade for a portion of equity or to earn equity over time?
There are a lot of people that are looking to diversify their retirement portfolios and are willing to find alternative investment opportunities outside of the standard stock options and mutual funds. Reaching out and finding investors, whether it be friends and family or people inside your network, can be a great way to raise the money you need to make a purchase. Obviously those investors will want a return so be prepared to offer a benefit for the risk they are taking
There are limitless opportunities to strike creative deals that will allow to purchase of all or part of a business. It is all about your creativity and the seller motivation.
It is important to also remember that there is a real cost of borrowing money. When some of these strategies are used, make sure the business’ cashflow can handle the cost of debt that is required. For example, if you are getting a bank loan or leveraging your HELOC, understand the cost of borrowing as this could be a substantial additional cost.
Make sure during due diligence that you review the money the company generates to ensure you don’t get in trouble. Again, using an accountant to help you understand this can be critical.
Many people believe that buying a business with no money is impossible. But there are millions of businesses in North America and each owner has their own circumstance. Understanding a seller motivation is the starting point to be able to create a win/win structure and has no money upfront from you
There is no better way of creating infinite returns on your capital.