Buying a Business With (Almost) No Money Down

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Can you buy a business with no money down? Yes. It takes some creative financing, but it is possible. Here's how it works: Take the example of Dan, who owned a couple of auto body shops for 20 years, and for at least the past three, had planned on selling the business and retiring to Costa Rica with his wife. He figured that the business was worth about $300,000 and that that would make a nice nest egg, along with his other investments.

But the changing economy shifted his plans too.

Dan put his business up for sale, but had little luck. So to entice buyers, he decided to offer to finance up to 1/3 of the purchase. Although he was not thrilled with taking $100,000 less up front, he also knew that it made the sale of his business much more likely.

Certainly this is not a new or radical idea. By some estimates, up to 75% of all small business sales include some degree of financing on the part of sellers. The reason is obvious: Most buyers do not have all of the money necessary to purchase outright. And of course most lenders do not offer anything close to the 100% financing on a business sale loan.

So in Dan's case, he figured that a good buyer should have been able to come up with $50,000 down. A bank could finance another $150,000, and he would take the remaining $100,000 using a five-year balloon note.

And it worked. Dan found a great buyer who was able to get in putting only 16% down, the bank did not have a lot of exposure, and Dan was able to sell his business and retire, while also receiving some steady income for the next five years and then a lump sum payment.

And the thing is, in the right circumstance, 100% seller financing is possible. That is how you buy a business with no money down. It's like buying a house for a bargain – you have to find the right situation, and a seller who really needs to sell.

It’s a win-win. Obviously, for the seller, it makes selling the business much easier. By helping to finance the sale, you can get a better price and a faster sale. Other benefits include:

• The seller should get an ongoing interest payment that is typically more than she could otherwise get from another investment

• If there are any problems with the business or property, the seller can negotiate an “as-is” provision, which would be hard to do with more conventional financing

Are there risks involved? Of course. The main one is that the buyer may default on the loan and you will be forced to repossess a business you no longer want. But a seller can diminish the likelihood of that happening by doing some due diligence. The seller must check out the buyer as much as the buyer must check out the seller and the business.

There is good news for the buyer too in this scenario. First of all, that an owner is willing to finance some or all of the sale should be proof that this really is a good business; otherwise the seller would not finance it. Financing a lemon is a sure way to get a deal breached.