How to Buy/Sell a Business With $0 Down

The right front fender of the little red Pontiac Firebird was hanging down and grazing the curb. Obviously, it had seen better days. If I’d been thinking, I wouldn’t have parked it right in front of the bank. Was this guy getting a car loan or about to rob the bank?

The bank president’s office was all glass. I could look up and see my little car from where I was sitting. Maybe he wouldn’t notice that the car was mine. A 1979 model like that would be a collector’s item today, but in 1993, it was just an old well-used late model car.

I was trying to pull off a coup of sorts. I had an opportunity to buy a nice business. The owner was retiring and had it for sale — a tax and accounting enterprise that had been profitable for years. The only issue was that I didn’t have a red cent. Only a red car in the parking lot, grinning back at me, my only asset.

That’s why I was at the bank. You see, I had been searching for a business to start or buy for about a year. The problem was I didn’t have any money. And that’s the problem I was trying to solve on this day.

If things didn’t work out, then at least I gathered up some valuable intel, as they say in the business — experience to use and apply later.

I really didn’t know if I could pull it off. My mom was on a fixed income. She lived on social security and rent from the farm. She didn’t have cash to fund me. I had to do this all on my own. I’d have to put together a creative financial deal in order to buy the business.

Today, there are nearly 2.5 million baby boomer business owners that are transitioning into retirement. The problem is, according to Wilmington Trust, 60% have no succession plan.

Many will just close their doors, leaving money and viable businesses on the table.

I know this is true from experience. I meet these business owners every year at conferences. They own successful businesses with millions of dollars in sales and loyal clients. Manufacturing, sales, distribution, you name it… all kinds of businesses. But the owners are still working into their 70’s or even 80’s. “Why do you still work,” I’ll ask. The answer is usually the same.

“I have no one to sell to.”

But what comes next is even more interesting…

“I’d finance nearly the whole thing if I had someone to sell it to.”

Buying a Business With $0 Down is Not Impossible

Most people think buying a successful business without any money is impossible. But it’s not only possible, some people make a career out of it. Carl Allen has spent the last 27 years helping owners retire. He’s literally done hundreds of deals without any cash out of his pocket.

“There are 2.6 million small businesses for sale in the U.S. today. Only 1 out of 13 will sell in the next 12 months, if at all.”

This number will only grow over the next decade. And in 1993, I didn’t have a Carl Allen…

Be Direct and Ask Them What They Want

Investing has a concept called invert always invert. In other words, you always want to know why the person on the other side is doing a particular thing.

Why are they selling stock to me? Why do they want to sell their business? What is their motivation? What’s important to them?

If you don’t know, then directly ask them, “What do you want?” That’s what I did.

Turns out, she wanted $50,000 and someone who could take good care of her clients. She valued that. The rest she would finance — carry the loan over the next 10 years. This is called seller financing. It works in businesses, just like in real estate.

My trip to the bank that day was for the $50,000 part. Would I be able to come up with that?

The profits from the business were consistent and stable. 85% of the clients came back year after year. You know what they say about death and taxes…

I told the banker about my plan to add investment services to the existing business and how I could live like a pauper until it worked. After all, I was already living that way. (Just look at my car… or maybe don’t.)

I Did Not See That Coming!

I started to hand him my notebook. I had painstakingly run the numbers. It showed the business would have cash flow even if we had a bad year. I could pay my debt and live my pauper lifestyle. It was all there on the page.

But I knew what was coming next…

He would thumb through the numbers and shake his head, “Steven, that’s not how it works. We need some collateral.” That’s what the others had said.

But that’s not what would happen on this day.

I didn’t even see it coming. He just looked at me. In fact, he didn’t even touch my notebook. He said, “Okay, I’m sure your numbers are good. I’ll give you the money, because I know you’ll pay it back.”

The Rest is History

For those of you who’ve known me (Steve) a while, you may know bits of this story. Many of our investing clients came to us through that original business years ago.

Later, I used the same technique to buy real estate. In big business they call this leverage buyout or LBO. You use the cash flows from the business to make the purchase.

Buying a business with nothing down is a little bit of a misnomer. It’s really buying a business with no money out of your pocket. The buyer always needs something — some guarantee that you’re not going to just walk away. Where that cash comes from is the creative part.

Here are some things to remember:

  1. Currently, there are over 2 million businesses nationwide that will need buyers. It’s a buyer’s market in businesses.
  2. Understand what the seller wants. Meet those needs. (They may not be financial, either.)
  3. Know the numbers. Are the cash flows stable? What if we have a bad year? Show that. Be honest in your assessment.
  4. If you can get the seller to finance, how much do they need up front? You might have to bring on a partner for the rest. A second loan or some equity in the business. It’s better owning SOME of a good business rather than NONE.
  5. When asking for money, go to the top. Organizations have many layers of management — each with limitations. The higher up you can go, the more the person in front of you can do.
  6. How can you improve the business? Can you add new products or services? Instead of branching out, can you go deeper? Ask yourself, “How can I do more with these loyal clients?” Improve your skill set so you can help them.
  7. Commit.

How CSH Can Help Buyers and Sellers of Businesses

At CSH, Business Succession is one of our five areas of focus. Having been a buyer and seller of many businesses and real estate properties:

  • We understand the motivations behind both parties.
  • We know how to structure the deal.
  • We know if you need to be aware of any tax traps or pitfalls.
  • We will help you understand when and how to sell.
  • We will help you know whether or not financing should be an option, and
  • If you should keep the real estate or rent it separately.

As you can see there are a lot of questions that need to be answered.

We can help you create a plan that sets you and your company up for success and gives you the peace of mind you need.

Reach Out to Us!

Do you have questions or concerns about business succession, investments, retirement planning, inheritance, or wealth management? We love helping people make sound decisions when it comes to these things. Give us a call at 217-824-4211. We’re happy to talk with you!