These days it seems you can buy almost anything without having any money upfront. You can buy your fridge, computer, car, and even house with no money down (ok, the house is a bit trickier now then it was in 2006). However, did you know it can be done for businesses to? Depending on the size of the business that is very reasonable option. However, the larger the business the harder this is to accomplish. If nothing else, consulting fees to your lawyer and accountant (whom you should always consult) could prevent a No-Money-Down transaction on larger (i.e. greater than $100,000 transactions).
So how do you go about finding a business to buy when you don’t have deep pockets and investors lined up?
The most important part of that is finding the right seller. The only way you can reasonably buy a business with little to no money down is to find a seller willing to finance the deal for you. As funny as it may sound, people don’t always sell a business JUST to make money. There are actually a lot of other items that can factor into a sellers decision of whom they want to sell to and for how much. The biggest factor in getting a LOW PRICE and OWNER FINANCING is the seller’s time frame. What that means is if someone needs to sell quick, you can get a much better deal. The same is true of anything you purchase. If someone needs to sell a motorcycle because they’re joining the military and being shipped out in 2 weeks you’ll obviously get a better deal then if they have all the time in the world. When you buy a house, car, or anything from a small business the same can be true and the same is definitely true when buying a business. So what are some common “flags” that you can use for bargaining leverage?
- Divorce – This may be the best one. Let’s face it, when people are getting divorced they need to get rid of things quickly and sometimes for very little money if for nothing else but to not allow their spouse to get the business. I’ve heard of one instance where a business owner literally gave his business away for free just so his ex-wife wouldn’t get it. 🙂
- Illness – Sometimes people get sick (or someone in their family gets sick) and they can no longer adequately run their business. Often that requires them to get rid of it quickly or risk losing it completely. In one instance I looked at a business with this scenario. A month after visiting that business the owner called me back and said she’d go down on her price and finance the business for me because she just needed to stop working right away. I passed on that business even though the opportunity for a no money down purchase was there.
- Retirement – This is a very common reason for selling a business and one that can be a great tool for negotiating the price down or toward an owner finance package. You first need to find out if they’re an S-Corp, C-Corp or LLC. If an S-Corp that you’re willing to buy the shares of, they stand to have great tax benefits by receiving small payments over time versus one large payment. The seller may not know of those tax benefits so you can use that as leverage. Another important point with retiring sellers is that they may be tied emotionally to their business. So what does that mean for us? Well that means they are motivated by more than just cash. If the seller is also the founder they generally feel a tight connection to their customers, employees and business as a whole. They don’t just want some well heeled corporate raiders coming in to sell everything off and make a mess. They’re looking for someone who can continue their vision. And if it’s important enough to them, they may even consider the buyer who is perfect in every way, except they don’t have the ability to come up with cash. From their perspective if their business is taken care of and they are still getting as much or more per month than when they were working why not take the deal?
- Cashflow/Bankruptcy – What I mean by this is someone who’s going to lose their house because they can’t make payments may be willing to sell their business quickly and cheaply. Obviously the strength of a business whose owner is broke should be in question, however keep in mind that the best businesses to buy are the ones that have problems that you can quickly fix. The owner with cashflow issues may need money upfront or may just need X amount a month to cover some bills.
So when you’re evaluating businesses to buy, it’s always important to ask “Why are you selling?” A lot of websites, like Bizbuysell.com and Bizquest.com, even list the reason for selling right in the description so you can more easily cherry-pick the right ones.
Here are a few other important questions to start narrowing down your business choices:
- Why are you selling?
- Is the seller also the founder?
- Is he involved in the business day-to-day? If so, in what capacity?
- Is an individual or investment company selling?
- What’s your time frame for the transaction?
- What’s the annual cashflow or profit?
- Is the business a S-corp, C-corp, or LLC?
- How many full-time sales personnel?
- Marketing budget?
- Current marketing projects?
- Is real estate included? If not does the seller own it and plan to continue leasing? (This can tell you a bit more about the sellers total monthly income without a business)
It can take quite a while to find the right business so start searching now. I’ll continue to walk you through the lessons I learn as I continue to work on business acquisitions.
To your business buying success, Bryan