When it comes to buying a business, people often think they have to complete the deal by using their own funds. While self-financing a business acquisition is undoubtedly a good option to those who can afford it, it’s by no means the only way to acquire the small business of your choice.
In fact, as we introduce below, you don’t need to put your hand in your own pocket to buy a business. If you’re savvy, you can utilize one of several attractive financing options that minimize (or completely restrict) cash out of pocket when you’re buying a business.
Don’t believe us? Here’s how to go about it.
Can You Really Buy a Business without Spending Your Own Money?
Yes, you can! Financing a business acquisition doesn’t necessitate the draining of your life savings. Successful entrepreneurs often look for ways to acquire businesses with ‘no money down,’ either because they don’t have the capital available or want to keep it for other reasons.
But it’s important to realize that not every business owner is likely to be enamored by the prospect of selling to someone who doesn’t have any money! Your chances will be heightened if you can identify and approach underperforming businesses you think you can improve, or by understanding the personal circumstances of an owner and knowing they want out.
If you find the right business at the right time, then it’s more than possible to negotiate an acquisition without spending your own cash. Here are seven ways to consider.
Seven Ways to Finance a Business Acquisition without Fronting Up the Cash Yourself
Just before we introduce seven alternative ways to finance your business acquisition, it’s important to note that many of the following approaches are used in conjunction with one another. When you don’t have cash up front, you need to be flexible and may need to utilize several strategies to get the deal over the line. With that in mind, let’s look at the potential options available to you:
1. Seller Financing
Seller (or owner) financing is an intriguing way of acquiring a business. Instead of approaching a third party, you strike a deal with the seller to lend you the capital required to purchase their business.
The broker (or indeed the owner) will strike up a purchase agreement which will include the following key aspects of the sale:
- The principal (the purchase price of the business)
- Interest rate
- Quantity and regularity of future payments
- Agreed rate of payments
- Consequences of missing payments
- Loan duration
It’s vital that you draw up and agree to a comprehensive purchase agreement, as you don’t want to be caught out by misunderstandings. And while you might end up paying more money for the business in the long run, you will be able to acquire the business upfront without spending a great deal of your own money.
An important caveat: you should be aware that 100% seller financing is extremely rare. That is to say that most seller financing arrangements require a 20% or 50% contribution. Therefore, your best chance of finding a 100% seller financing deal is to identify a buyer who wants to walk away from the business right away.
2. Leveraged Buyout
Another attractive proposition for potential cashless buyers is a process known as a leveraged buyout (LBO). According to the Harvard Business Review, an LBO is ideal for entrepreneurs looking to buy small, privately-held businesses and is suitable “whenever a buyer lacks the requisite cash and borrows part of the purchase price against the target company’s assets or cash flow.”
An LBO is ideal when you’re hoping to acquire an asset-rich business, but you must ensure that the business has sufficient cash flow to cover its ongoing expenses and debt service requirements.
In most instances, an LBO goes hand-in-hand with other business acquisition models, whether its seller financing or SBA loans, as we introduce below.
3. SBA Loans
An SBA Loan is partially guaranteed by the U.S. Small Business Administration and is issued to entrepreneurs by participating lenders. There are different types of SBA loans, including 7(a) loans, 504 loans, and Microloans, each of which is suitable for different business acquisitions.
One of the key features of an SBA loan is that if you default as the business owner, the government returns the stipulated amount to the lender on your behalf. But ultimately, your personal assets act as a guarantee if your business can’t make the required payments.
Here’s an overview of the different types of SBA loans that may fund your business acquisition:
Up to $5million
Working capital, expansion, and purchases
Up to $5.5million
For the purchase of long-term fixed assets
Up to $50,000
Working capital, inventory, and supplies
To find out more about how an SBA loan could help you fund a cashless business acquisition, find out more on the US Small Business Administration website.
4. Assumption of Debt
Debt assumption is precisely as it sounds; you take on the debts of the business that you’re looking to acquire. This is attractive to some business owners who are looking to free themselves from the burden of debt and are looking for a potential buyer to take on the financing of their business.
Depending on the level of debt that the business has, you might be able to negotiate a nominal or even non-existent up-front fee for the business. Needless to say, assuming the debts of a business is a risk, and you will need to be confident that you will generate sufficient amounts of capital as you proceed to service the monthly repayments while making it worth your while.
But if you take the time to do your sums and are confident that you can turn the business around, then assuming its debt is an effective way of saving yourself money in the short term.
5. Bank Loan
You might have expected to see bank loans a little further up on this list. The reason that we haven’t introduced them until now is that they’re often hard to come by when you’re looking to fund a business acquisition.
Ultimately, for a bank to approve an acquisition loan, they will want to see that the business has substantial assets and will only lend to buyers with an excellent credit score and a proven track record of running a business.
In most instances, individual entrepreneurs looking to buy a small business will struggle to have a bank loan application approved, but it’s worth considering all the same.
6. Angel Investing & Crowdfunding
Another option available to you when looking to acquire a business is to approach investors to stump up the necessary capital. This is a great option when the cost of the business is relatively low, and you can tap into your personal relationships or current professional network to secure the funding.
Naturally, investors will be looking for a return on their investments, so you will have to consider what you’re willing to give away in return for their capital (shares, for instance).
Alternatively, you could look at setting up a crowdfunding project to appeal to a wider audience of potential investors. Projects that are successfully crowdfunded are those that pique the public interest. So, if you’re looking to take over and redevelop an underperforming (but exceptionally popular) community business for example, you might be able to initiate a successful crowdfunding campaign to cover the costs of the business acquisition.
7. Sweat Equity
In some instances, you might be able to find a business owner who is willing to sell their business, at least in part, in exchange for sweat equity. This basically entails working for them for free. Your labor is making up for your lack of down payment and is an effective way to broker a deal that involves seller financing.
If you’re interested in acquiring a business with sweat equity, you will have to come to an arrangement with the business owner after working out the cost of your time. It’s also important to note that this is one of the more creative strategies on this list, and not every business owner will be willing to go for it.
It’s absolutely possible to minimize cash out of pocket when buying a business, but it’s a challenging process. The seven ways that we’ve introduced above aren’t guaranteed and will largely depend upon your personal networks, creativity, and ability to pitch a sale.
But what they do prove is that there are lots of options available to entrepreneurs who are looking to acquire businesses without footing up a huge capital outlay right at the start of their ventures.
Ultimately, this enables you to keep your cash on hand for future endeavors or for the day-to-day running of your new business.
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