Creative Financing To Buy A Business

Is there some way to get into another business without having a big bank account?

Getting into business with no money down certainly is possible and may be easier than you think. Doing so requires the same skills as buying a small piece of real estate without a lot of cash.

Lets say you found a nice duplex thats going for $100,000. Using an FHA 3% loan, it is possible to buy that $100,000 asset with as little as $3,000 down.

The bank will loan you 97% of the money you need to buy the property. Thats called leverage — the asset itself secures the loan required so that you need not come up with a lot of money out of pocket.

That sort of leverage is similarly possible in the business game. Would it surprise you to learn that in fact it is commonplace to get into business with no cash down at all?

The key is to buy an existing business.

While starting a business from scratch with little or no money is doable, its difficult because financing a new startup is just about the riskiest loan a bank can make; lenders are much more apt to lend you money to buy a business with a track record.

So if you want to get into business, but dont have a lot of money, the secret is to buy an ongoing business and apply the same sort of leverage financing techniques used in real estate transactions.

There are many ways to structure such a deal. The first step is to secure the largest part of the financing — usually 60% — 70% or so. This can be done in one of two ways.

First, there is bank financing. Again, because the business has a track record, and presumably some assets (accounts receivable, cars, machinery, etc.), getting a bank loan shouldnt be too difficult.

Second, consider seller financing. Sellers are surprisingly often willing to finance much of the deal. Seller financing is great because:

Sellers may finance as much as 80% of the deal, while banks usually top out at around 60%. 100% seller financing is not unheard of either.

Sellers usually offer better terms. Whereas a bank may charge you 10%, a seller may offer financing as low as 7%, and the payout may last much longer (10 years is not uncommon.)

The best thing is to combine bank and seller financing. Lets say you want to buy a restaurant worth $100,000. The bank may be willing to loan you 60%, and the seller may chip in another 25%.

All you need now is to find another 15% and you have bought the business with no money down. Where do you find that $15,000?

There are several options:

Liability financing: Sellers will usually include in the cash price the amount they need to pay off creditors. If you agree to assume those liabilities however, you can reduce your out-of-pocket down payment by that much. Assuming $15,000 in liabilities is not hard to do.

Cash flow financing: If the business earns $10,000 a month, offer to pay the $15,000 balance in three payments after closing of $5,000 each, spread out a month apart. For a business that makes $10,000 monthly, that should be easy.

Or, consider having the seller retain the accounts receivables and reducing the purchase price by that amount.

Inventory financing: The purchase price will take into account the value of the inventory. If you are short $15,000, ask the owner to liquidate $15,000 in inventory, and then reduce the purchase price by that amount.

Asset financing: Arrange, before the sale, to sell one of the business assets at closing to help finance your purchase: Equipment, patents, trademarks, trucks, office space, etc.

Broker financing: 70% of all business sales are done through a broker. To keep a deal, almost any broker would be willing to forgo part of his or her commission and put it in the pot for the seller.

My brother sells commercial real estate and it is not uncommon for him to (sadly) kick-back part of his commission to close a deal.

Supplier financing: Major suppliers who want to keep the business business may be willing to loan you some money for closing a deal if it means they will continue to have a major account.

As you can see, there are many ways to creatively finance a business purchase with no money down. The key is to find a willing seller and get creative.

Buy a Business With No Money Down

When most people think of starting a business, they think of beginning from scratch--developing your own ideas and building the company from the ground up.

But starting from scratch presents some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow...all without a track record or reputation to go on.

Buying an Existing Business

In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation thats already generating cash flow and profits.

You have an established customer base, reputation and employees who are familiar with all aspects of the business.

And you dont have to reinvent the wheel--setting up new procedures, systems and policies--since a successful formula for running the business has already been put in place.

On the downside, buying a business is often more costly than starting from scratch. However, its easier to get financing to buy an existing business than to start a new one.

Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable.

Of course, theres no such thing as a sure thing--and buying an existing business is no exception.

If youre not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods. To make sure you get the best deal when buying an existing business, be sure to follow these steps.

The Right Choice

Buying the perfect business starts with choosing the right type of business for you. The best place to start is by looking at an industry with which youre both familiar and which you understand.

Think long and hard about the types of businesses youre interested in and which best match your skills and experience. Also consider the size of business you are looking for, in terms of employees, number of locations and sales.

Next, pinpoint the geographical area where you want to own a business.

Assess labor pool and costs of doing business in that area, including wages and taxes, to make sure theyre acceptable to you.

Once youve chosen a region and an industry to focus on, investigate every business in the area that meets your requirements. Start by looking in the local newspapers classified section under Business Opportunities or Businesses for Sale.

You can also run your own Want to Buy ad describing what you are looking for.

Remember, just because a business isnt listed doesnt mean it isnt for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer.

Put your networking abilities and business contacts to use, and youre likely to hear of other businesses that might be good prospects.

Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals.

If you hire a broker, he or she will charge you a commission--typically 5 to 10 percent of the purchase price. The assistance brokers can offer, especially for first-time buyers, is often worth the cost.

However, if you are really trying to save money, consider hiring a broker only when you are near the final negotiating phase. Brokers can offer assistance in several ways.

Prescreening businesses for you. Good brokers turn down many of the businesses they are asked to sell, whether because the seller wont provide full financial disclosures or because the business is overpriced. Going through a broker helps you avoid these bad risks.

Helping you pinpoint your interest. A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you.

Negotiating

The negotiating process is really when brokers earn their keep. They help both parties stay focused on the ultimate goal and smooth over any problems that may arise.

Assisting with paperwork. Brokers know the latest laws and regulations affecting everything from licenses and permits to financing and escrow.

They also know the most efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker reduces the risk that youll neglect some crucial form, fee or step in the process.

Buying A Business With No Money

Leveraged Buyouts To Buy A Business With No Money

How to buy a business with no money of your own? Is this really possible?

It's actually simpler than you might think. And surprisingly few people know about the strategy - so I'm going to spill the beans on this arcane method right now.

The way you do it, is by leveraging the assets of the specific business you want to buy: at about exactly the same time you buy that business.

It's called a full leverage buyout: acquiring a company by using the assets and cashflow of that company to finance the purchase.

Although the strategy is generally unknown to most internet nerds and even general business owners: big corporations have been doing it for a long time. And the strategy has become an accepted and widely practiced financing strategy.

But nevermind the big corporations. For the small business owner or an individual starting with little or nothing: leveraged buyouts can effectively help you skip the 2 to 5 years it generally takes to build a strong company.

What this means is that instead of wasting years painfully trying to grow your business with your own money: you can take over an existing business and begin reaping the rewards within literally weeks or a few months.

For this reason - many people, particularly those of us who already own our own businesses - experience a paradigm shift after

learning about how to do a leveraged buyout. Because we suddenly see the potential for a totally new way to go about building a successful business.

We assumed the way to do it was by saving up the initial capital by scavenging every penny and pressuring friends and family to come up with some money.

Then by starting the business from scratch and working 15 hour days while putting your savings and everything you've got on the line.

As the business grows, any profits are immediately put back into the business with barley anything to show for it personally - and this is continued for however many years it takes for your business to finally start supporting you instead of you supporting it.

Then we learned that with leveraged buyouts, none of our own personal cash or credit gets put on the line. And your business can immediately start producing wealth for you. And that this strategy can be repeated to buy even more businesses and accumulate even more wealth.

Owning a business is the ultimate wealth generator but the difference between just getting buy and making a fortune in business is your knowledge of modern day business strategies such as the full leverage buyout.