How to Buy a Business with No Money Down

January 24, 2024

Adam Hoeksema

There are roughly 1,000 people searching for “how to buy a business with no money” every month.  You can see that search volume is steadily increasing as well:

This makes me cringe because I think the reality is that there is almost no way to buy a business without any money.  

The Myth of Buying a Business with No Money Down

The concept of buying a business without any upfront capital often stems from stories of savvy entrepreneurs who have managed to negotiate deals that seem too good to be true. The reality is that acquiring a business usually requires significant investment.  That could be financial investment or relational investment.  

How Can you Actually Buy a Business with No Money Down?

If we assume that it is actually possible to buy a business with no money down for a moment, let’s think through the most likely scenarios where this could be possible:

  1. The seller is desperate - I have seen a situation where a business owner died suddenly and the children of the business owner just wanted to sell the business to someone quickly.  They had just lost their father, they didn’t know how to run the business, and they weren’t in a state of mind to try to learn the business, so they sold it quickly to a capable buyer with 100% seller financing. 
  2. The business is in rough shape - I have seen situations where the business is in really rough shape and is losing money each month.  The buyer might technically buy the business with 100% seller financing, but I suspect the buyer had to put in cash to cover losses for the first few months at least while trying to turn the business around. 
  3. Selling to a family member - If you are selling a business to a family member or a very close friend, I have seen the friends and family deal where the seller is willing to finance 100% of the purchase price. 
  4. Selling to a long time employee - Similar to selling to friends and family, I have seen business owners provide 100% seller financing to a long time employee who wants to buy the business.  

All four of these situations are pretty unique and I suspect the people that are searching for how to buy a business with no money down aren’t in these situations.  Most of the time I think it is going to be quite difficult to buy a business without investing at least something personally.  Here are some of the key challenges:

Challenges of No Money Down Acquisitions

Seller Skepticism: Sellers are typically cautious of no money down offers. They often prefer buyers with skin in the game, as it indicates commitment and financial stability.  Why would a seller give up their baby to someone who isn’t risking anything?

Limited Options: Businesses available for no money down are often distressed or have hidden problems. So if you are getting a business for no money down you might be getting a business that you will need to invest in after you own it in order to keep it afloat. 

Complex Financing Arrangements: Arranging a no money down deal usually involves complex financing structures, such as leveraging future earnings, finding investors, or negotiating vendor finance terms, each with its own risks and challenges.

I think there might be a couple of unique scenarios where you could buy a business with no money down, but typically you are bringing something to the table.  Here are some examples:

Leveraging Unique Assets to Buy a Business with No Money Down

Buying a business with no money down is a challenging endeavor, but it's not entirely out of reach if you have certain non-monetary assets. Assets like a substantial social media following, strong personal financial position, industry experience, or a personal relationship with the seller can be leveraged to facilitate such a deal. Let's explore how these unique assets can play a crucial role in acquiring a business without upfront capital.

Social Media Following as a Valuable Asset

If you have a large audience that you can bring to the table that is relevant to the business you are looking to buy, you might be able to leverage that influence and distribution to negotiate seller financing because the seller would believe you can help grow the business with your audience.  

If Mr. Beast wanted to buy your business for no money down and give you a cut of the upside, I bet you would say yes! 

Capitalizing on Personal Financial Strength

Ironically, if you have a lot of money, you might be able to buy a business for no money down.  The seller wants to know that they will eventually get paid, so if you have a strong personal financial statement that you can demonstrate to the seller, they may be more likely to negotiate with you. 

Industry Experience as a Key Negotiator

Strong industry experience might also be a reason why a seller would offer 100% seller financing.  If the seller believes that you can actually run the business better than they can, they may feel confident enough to offer you seller financing. 

Personal Relationships Influencing Terms

As I already mentioned, the best way to lock in seller financing is to have a great, long term relationship with the seller so that the seller wants to help you and offer you the most flexible financing options.  

So yes it is possible to buy a business without a dollar down, BUT this is reserved for some pretty unique scenarios.  If these don’t seem like reasonable options for you, then I would suggest focusing on an SBA loan.  

Check out my article:  How to Buy a Business with an SBA Loan - Ultimate Guide

How to Sell a Business with a Seller Note: Weighing the Pros and Cons

Selling a business is a significant decision, and how you choose to finance the sale can greatly impact the outcome. One increasingly popular method is through a seller note, also known as owner financing. This approach can offer several advantages but also comes with potential drawbacks. In this article, we'll explore both the advantages and disadvantages of selling a business with a seller note.

Advantages of Selling with a Seller Note

Expanded Buyer Pool: One of the primary benefits of offering a seller note is that it broadens the pool of potential buyers. By providing financing, sellers open the door to buyers who might not have immediate access to traditional bank loans or sufficient upfront capital.

Higher Sale Price: Often, businesses sold with owner financing command a higher sale price. Buyers are typically willing to pay a premium for the convenience and accessibility of seller financing.

Faster Sale Process: Traditional business sales can be prolonged due to the time it takes for buyers to secure financing. With a seller note, this process is expedited, allowing for a quicker sale and transition.

Ongoing Income Stream: Seller notes create an ongoing income stream for the seller through the interest on the loan. This can be particularly advantageous for sellers looking for a steady post-sale income.

Tax Benefits: Spreading the receipt of the business sale proceeds over several years can offer tax advantages. It can potentially keep the seller in a lower tax bracket compared to receiving a lump sum.

Looking at no money down business purchases? Check out a QofE Report to understand the financial viability of your target business.

Disadvantages for the Seller

Risk of Buyer Default: The most significant disadvantage is the risk of the buyer defaulting on their loan payments. This risk can be mitigated through a thorough vetting process but never completely eliminated.

Deferred Full Payment: Unlike an outright sale, the seller doesn’t receive the entire payment upfront. This can be a drawback for sellers who need or prefer the full sale amount immediately for other investments or expenses.

Administrative Burden: Managing a seller note means dealing with ongoing loan administration, which can include monitoring payments and managing any late or missed payments.

Complex Legal and Financial Agreements: Drafting a seller note requires careful legal and financial planning. This process can be complex and may require professional assistance, adding to the cost of the sale.

Selling a business with a seller note can be a smart strategy, offering advantages like a broader pool of buyers, potentially higher sale prices, and benefits in terms of tax and income. However, it's important for sellers to carefully consider the potential risks, particularly the financial implications of not receiving full payment immediately and the risk of buyer default. As with any major financial decision, it's advisable to consult with legal and financial professionals to ensure that the terms of the seller note are fair and that you are adequately protected against potential risks. With the right preparation and understanding, a seller note can be a valuable tool in the successful sale of a business.

Understanding Seller Note Refinancing

Refinancing a seller note a year or two after the acquisition of a business is a strategic financial move that can benefit both the buyer and the seller. Let's explore how this process works and why it can be advantageous.

Refinancing a seller note means that the buyer secures a new loan from a traditional lending source (like a bank) to pay off the existing seller-financed loan. This typically happens once the buyer has successfully run the business for a period and can demonstrate its viability to traditional lenders.

Why Refinancing is Feasible Post-Acquisition

Proven Track Record: After running the business for a year or two, the buyer has had the opportunity to establish a track record of success. This history can include financial stability, profitability, and effective management, making the buyer a more appealing candidate to traditional lenders.

Improved Financial Statements: Over time, the buyer may have improved the business's financial health, providing more robust financial statements to present to banks, which increases the likelihood of loan approval.

Established Business Credit: If the buyer has been diligent in managing the business’s finances, they may have built a solid business credit score, further easing the process of securing traditional financing.

Advantages of Refinancing for the Buyer

Lower Interest Rates: Traditional bank loans often have lower interest rates compared to seller notes, potentially saving the buyer significant amounts of money over time.

Improved Cash Flow: Refinancing might offer better repayment terms, which can improve the business's cash flow.

Increased Business Equity: Paying off the seller note increases the buyer’s equity in the business, which can be beneficial for future financial moves, like expanding the business.

Advantages for the Seller

Lump Sum Payment: Once the seller note is refinanced, the seller receives the remaining balance in a lump sum, freeing up their capital for other investments or personal use.

Reduced Risk: The seller no longer carries the risk of the buyer defaulting on the loan, as the responsibility for repayment is transferred to a traditional lending institution.

Process of Refinancing a Seller Note

Buyer Secures a New Loan: The buyer applies for a loan with a bank or another lender. This process will include a thorough review of the business's performance and the buyer’s financial management since acquisition.

Paying Off the Seller Note: Upon approval and receipt of the new loan, the buyer uses these funds to pay off the remaining balance of the seller note.

New Loan Repayment: The buyer then begins repayment of the new loan under the terms agreed upon with the new lender.

Refinancing a seller note after a year or two of business operation can be a smart financial strategy. It allows the buyer to capitalize on improved business performance and potentially secure more favorable loan terms. For the seller, it means receiving the balance of the sale price and mitigating the risk of carrying the note. Both parties benefit from this arrangement, making it a win-win scenario in the successful transition of business ownership. However, as with any financial decision, it's important for both parties to consult with financial advisors to ensure this move aligns with their respective financial goals and situations.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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