Trying to purchase a business with no money down is usually a waste of time if you want a good business. But leveraging into a small business for sale with a relatively small cash down payment can often be accomplished using some of these suggested strategies.
1. Seller financing is the most popular and perhaps the most effective way to buy a business opportunity with borrowed funds. The typical method is for the buyer to sign a promissory note to the seller for the amount carried back, specifying the collateral to be used--usually capital assets of the business, the term of the note and the interest rate charged.
2. Bank or business lender assistance. While more difficult to borrow than funds from the seller, purchase money loans from lending institutions are becoming more available thanks to the Small Business Administration loan programs. The SBA guarantees a large portion of the amounts provided by the agency’s approved lenders to small business owners and buyers. The entrepreneur wishing to purchase a business with SBA loan financing needs to include a considerable amount of paperwork in the loan application. And there are strict rules about qualifying for money under an SBA loan program.
3. Vendor assistance: When seeking lending help from others, it often is a good idea to look in the company’s payables file and to call on the any listed vendors--those firms supplying products and services to the business being sold. With the incentive that they can continue selling to the company under its new ownership, the vendors are asked to permit the business buyer to assume those debts. With this kind of agreement in place, the seller won’t need as much cash at close of escrow to clear business debts, because those obligations will be assumed by the buyer. The net result, of course, is a decrease in the cash needed by the buyer at close of escrow.
4. Inventory on consignment. A business buyer can hold on to the cash often needed to purchase inventory from the seller at close of escrow if the seller agrees to retain ownership of inventory and provide it to the business buyer on consignment. This agreement usually specifies that the person agreeing to purchase a business inventory in this manner will pay the seller for the items as they are sold to customers by the new owner.
5. Earn out agreement. This kind of provision in a business sales contract is usually designed to bridge the gap between buyer and seller when they can’t agree on the value of the business. But it also is a good way for the buyer to obtain extra financing. The basics of the strategy is for the price established at close of escrow to be lower than the seller would like to collect, resulting in a smaller down payment from the buyer. Then, assuming that the business produces satisfactory revenue and profit results in the months after close of escrow, the price of the business actually will increase according to a price/performance formula agreed on by both parties beforehand. The added value is expressed as a hike in the value of the company, and an increase in payments is made by the buyer on the promissory note to the seller.
The entrepreneur who wants to purchase a business with limited cash can often achieve that objective using these strategies if he or she is willing to do the extra work and is able to get the cooperation from the parties involved.
About The Author: Peter Siegel, MBA is the Founder of BizBen.com and the Director of the BizBen Network. If you are searching to buy a California small business make sure you are a part of the BizBen Business Buyers Success Program. If you have questions about buying a business, getting SBA Loan pre-qualified or about the Business Buyers Success Program please feel free to phone Peter Siegel direct at: 866-270-6278.