Trying to purchase a business with no money down is usually a waste of time if you want to buy a good business. But leveraging into a small business for sale with a relatively small or no cash down payment can often be accomplished using some of these suggested strategies, along with utilizing financing strategies that also offer buyers creative options for generating financing utilized for a down payment or purchase, etc.
1. Seller financing: Is the most popular and perhaps the most effective way to buy a business or franchise 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. Notes can also be sold to interested buyers of business notes by the seller after the sale of the business (a great strategy for getting cash without waiting).
2. Bank or niche business lender financing: 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. A business buyer 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. Non SBA loans are also available through private investors, select credit unions, and niche financial institutions. These loans are usually based on a buyer's credit score, credit history, and current salary and work with advisors like myself who specialize in business purchase financing assistance.
3. Vendor assistance: When seeking lending help from others, it often is a good idea to look in the companies 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.
A potential business buyer who wants to purchase a small business with limited or no 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 and work with a business purchase financing specialist.
About The Author: Peter Siegel, MBA is the Founder & President of BizBen.com and (businesses for sale, businesses wanted to buy, resources, & articles), BizBuyFinancing. He advises and consults with business buyers, business sellers, brokers, agents, investors, & advisors on a daily basis. Reach him direct at 925-785-3118 to discuss business purchase financing strategies regarding buying (or financing a puchase of) small to mid-sized businesses, franchises, or opportunities.
Categories: BizBen Blog Contributor, Business Purchase Financing, Buying A Business, Deal And Escrow Issues, Franchises For Sale, How To Buy A Business, Small Business Financing
Comments Regarding This Blog Post
All great points, Peter. Sweat equity can also can a good opportunity for someone to obtain ownership if they have no or little cash. A person through their own effort and toil can negotiate a percentage of a partnership in the business. I had a previous client who owned a coffee house, but wanted to convert in to sushi, but he did not know anything about sushi, but one of his customers at the coffee house was a sushi chef at another restaurant. The customer with the sushi knowledge, but limited funds was able to spark a partnership with the coffeehouse owner, where he would make the financial contribution, and the other person would run the day to day operations of the business, but obtained ownership.