Many people give up on their entrepreneurial dreams because they don’t know how to buy a business with no money. Read on for seven ways to help you buy a business with no money down.
In this article:
- Plan and Prepare
- Find a Business Owner Who Wants to Sell Badly
- Look for Businesses That Aren’t Performing Well
- Go for the Pay-On-Performance Arrangement
- Take out a Loan From the Owner
- Start a Crowdfunding Campaign
- How to Buy a Business With No Money: Get Venture Capitalists
How to Buy a Business With No Money Down: How to Buy an Existing Business With No Money in 7 Ways
1. Plan and Prepare
Even before getting in touch with the owner of an existing business, do your homework.
Successful negotiations are highly dependent on one’s level of preparation. It’ll be challenging, if not impossible, to successfully convince business owners to sell businesses if unprepared.
There are two important areas of preparations and planning when buying businesses without shelling out cash:
- Knowing as much as possible about business owners and their businesses
Here are some things to remember when it comes to self-preparation:
- Check your credit score, and if there are errors on credit reports, fix them.
- Maximize possible loan amount for buying a business by paying off as much bank loan or debt as possible. Doing this can help maximize credit score and your chances of getting a business loan.
- Highlight experiences on your resume that are relevant to an existing business you want to buy. It can be challenging to convince a business owner that it’s a good idea to sell to you if you have insufficient experience running that kind of business.
Here’s what you need to know about the business owner and the business itself:
- The owner’s motivation for selling the business
- The business’ market niche or target market
- Average annual revenues and net profit of the business
- The average amount of accounts receivable and annual credit sales. These can help give ideas on the business’ annual cash flow.
- Average net return on capital
2. Find a Business Owner Who Wants to Sell Badly
Preparation and planning can only go so far. If a business owner is not really looking to sell, the likelihood of successfully negotiating to buy the business without cash payments is very low.
How can you find business owners who really want to sell their businesses? Here are some ideas:
- Look for entrepreneurs whose businesses have been in the market for more than six months already. This means there are no takers for their businesses and they’re likely more open to selling on a buyer’s terms.
- Find entrepreneurs who want to retire soon and are open to receiving a fixed income stream as amortization payments for the business instead of a lump sum amount.
- If all else fails, engage the services of a business broker. Just like a real estate broker, a business broker has access to owners who want to sell their businesses.
3. Look for Businesses That Aren’t Performing Well
People get into business to make money. Why would someone consider buying a business that’s barely making money or worse, losing money?
Buying such a business can be a great idea for two reasons:
- It maximizes the likelihood that a business owner will sell on a buyer’s terms (e.g. at a huge discount and possibly no money down). For the owner, doing so can stop the negative cash flow and preserve their remaining capital in the business.
- If the poor performance is due to poor management, a change in ownership may turn things around.
However, the buyer needs to have the necessary experience and skills to run such a business. Otherwise, it might continue to performing poorly or even lose more money.
In case the business continues to perform poorly after buying it at a steep discount and for no money down, losses can be minimal.
4. Go for the Pay-On-Performance Arrangement
This is a type of business loan that’s financed by the seller.
Under a pay-on-performance arrangement, the buyer pays the seller a specific amount every time the purchased business accomplishes certain benchmarks. These agreed-upon benchmarks, which the business can reach in one to five years, typically include:
- Operating income
- Net income
Total payment amounts will top out at the agreed-upon selling price of the business. For example, if you bought a business for $100,000 under this arrangement, you’ll pay no more than $100,000 in total for accomplishing the agreed-upon benchmarks.
5. Take out a Loan From the Owner
If the business owner isn’t willing to take the risk of selling under a contingency payment basis, there’s an alternative. Ask the owner for a “loan” — negotiate to buy the business on installment instead.
Compared to a pay-on-performance arrangement, wherein paying the seller is contingent on milestones, paying the buyer becomes an obligation. As a lender, the seller has the right to fixed and regular installment payments on the business.
With fixed, regular payments, the seller can feel more secure knowing he/she will get paid for selling the business even without initial payment.
For the buyer, you can buy and start operating an already successful or potentially successful business with no money. You can use the income to pay for the amortizations.
And just like a home or car mortgage, you can use the business itself as collateral. The worst thing that can happen if you fail and default on the loan is that the business returns to the seller.
6. Start a Crowdfunding Campaign
A crowdfunding campaign refers to raising funds for businesses, projects, or other endeavors online. While entrepreneurs can crowdfund on any online platform, such as social media 0r email, the most successful ones do it on established crowdfunding platforms such as:
Starting a business or buying an existing one via crowdfunding platforms provides key benefits such as:
- Legitimacy — Funders know that they’re funding legitimate a business’ endeavors or causes.
- Security — Project backers/funders will only pay the amount they pledged once the campaigns they chose to fund get the minimum amount of pledges needed. If not, they don’t get charged.
- As the first two benefits make it easier for potential funders to trust and pledge to fund businesses, it may help crowdfunding managers raise the needed minimum amount of financing for businesses.
7. How to Buy a Business With No Money: Get Venture Capitalists
Venture capitalists are a group of investors who are willing to fund businesses that traditional financing institutions aren’t. VCs can fund most, if not all, of a business’ capital requirements.
Considering the relatively higher risks involved in the types of funding they engage in, VCs typically have more stringent requirements than traditional financial institutions. For example:
- They charge higher interest rates.
- Venture capitalists require having a specific ownership percentage of the business.
- They may require the right to manage or participate in certain areas of the business to protect their interests.
Admittedly, these conditions can be quite challenging for most entrepreneurs. However, many find these more acceptable than not being able to fund their businesses at all.
That’s why for many people who want to fund their planned businesses, startups or otherwise, VCs are often the last resort.
Yes, it’s possible to buy a business or start a new one with no money on hand as a way to invest for retirement. It just requires diligently doing one’s homework, putting in the effort, and calculated risk-taking.
If given the chance to buy a business with no money, what kind of business would you want? Let us know in the comments section below!