Trying to purchase a small 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 business purchase financing strategies that also offer buyers creative options for generating financing utilized for a down payment or purchase, etc.
In this blog post I will share with you some of the more non-traditional business purchase financing strategies I advise my seller, broker, agent, buyer consulting clients in the BizBen ProBuy & Prosell Programs.
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).
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.
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.
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.
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.
Contributor:
I am an experienced entrepreneur, attorney, & business professor. I & my EvergreenGold® team offer business owners sound advice & expertise to build business value & achieve profitable sales. Call me today for a business evaluation & SWOT analysis for your business anywhere in the USA.
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I am the Founder Of BizBen.com. I consult daily with intermediaries, business buyers, owner/sellers & advisors daily about buying and selling California small to mid-sized businesses. Contact me today about joining & utilizing BizBen, consultations, & advisory services.
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McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.
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The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups.
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For over 25 years Peter Siegel, MBA has been providing niche business purchase financial advisory and loan placement services with SBA Loans, Non SBA Financing, Retirement Plan Conversions, Note Restructures, etc. Call me regarding business purchase financing and to get pre-qualified: 925-785-3118.
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