How to Buy a Business With No Money

Co-authored by Gina D'Amore

Last Updated: August 25, 2022 References Approved

Many smart entrepreneurs prefer to buy an existing business instead of beginning a new one. Buying a business that is already operational will bring many benefits, including an already established product or service, well trained staff who know the business and enough success to have kept the company afloat for a period of time. Not having enough cash on hand to purchase the business will not necessarily keep you from buying it. Banks have been tightening their commercial lending standards in the last few years, but you can still find the funding necessary to purchase a business without using your own money.

Part 1

Part 1 of 3:

Locating and Settling on a Business

1
Figure out your ideal business. Before you look for a business to buy, consider what type of business you'd like to run. Even if you plan to "flip" the business for a profit, you'll have to run and grow the business for a good length of time. So make sure that you actually want to be involved with this type of business. Also, figuring out what you want can help you find and identify a business to buy.
2
Look for a business owner ready to get out. Investigate local businesses, and their owners, to find out which ones are ripe to be bought. Generally, this means finding an owner who is prepared to retire or move on to a new business opportunity. The retiring owner will likely be the better opportunity, as they have more of an incentive to sell the business quickly. Locating these businesses, however, is easier said than done. Try the following avenues to locate them:
- Talk to lawyers or accountants that work with local businesses.
- Talk with the business owners themselves. Even if they aren't willing to sell, they may know another business owner who is.
- Read local publications and seek out owners who are nearing retirement age.^{[1]
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3
Come in at the right time. Getting a good deal on a business requires making an offer at the right time. However, this doesn't mean the right time for you, just for the business owner. As previously mentioned, this can simply be as the owner is planning to retire. Alternately, this could be during a recession or economic downturn, when the owner is looking for a quick exit to establish his financial security. While this is a risk for you as the buyer, you may be able to secure betting financing from the owner and then see the business grow faster as you exit the downturn.
4
Find an attorney. When you're performing your own leveraged buyout (buying a business without using your own money), you're going to need a good business attorney to ensure that the deal is structured properly.
- Ensure that you get an attorney who specializes in business sales, not a general purpose attorney. Too much can go wrong with a deal handled by an attorney that's not specialized in business transactions.^{[2]
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Part 2

Part 2 of 3:

Buying the Business

1
Find a business that's offered with seller financing. Some owners who are selling their businesses are willing to loan buyers the money to purchase the business.^{[3]
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Research source} When you can find a business that's on the market with seller financing, you're on your way to buying a business with no money.
- Keep in mind, though, that almost no business owner is willing to lend 100% of the purchase price. You'll still need a "down payment." However, the down payment can be borrowed from another source, meaning that you still get the business without putting any of your own money into it.
- When a business owner is willing to lend you money to buy his or her business, that usually means two things:
  - The business owner believes in the business
  - The business owner believes that you can manage the business well. That's good news and points to likely success in your entrepreneurial efforts.
- However, it can also mean that there is a limited market for the business, thus few buyers. As a consequence, the seller is faced with liquidating the business at a substantial discount.
2
Make a creative offer. If the owner is reluctant to offer 100% financing, you may want to make them an attractive offer to go along with your purchase of the business. This offer could be one that offers them higher payments for a period of time or a better repayment interest rate. For example, a buyer could offer to work for free for a number of months (building sweat equity) while giving all profits to the seller.
3
Find an owner who wants to be a passive investor. Some owners have been working with their own businesses for decades. They'd like to retire and just enjoy life for a while, but they still need income. You can approach that type of owner with an opportunity to let you buy and run the business while he or she earns a percentage of the income.
- In this case, you may still need to put some money down. However, you'll owe the owner a percentage of the intake for several years into the future. This is similar to owner financing, except that the payments to the owner are based on the ongoing success of the business. You also aren't in debt.
4
Find a secondary source of financing, if necessary. It's not likely that any business owner will give you 100% financing for the business. If that's the case, you'll need to get a second source of financing.
- You can try to go to a bank, but usually the process of getting a bank loan for a small business is long and complicated. Bank lenders typically don't like to be part of a deal that's 100% financed. Your best option in many cases is to try and find an unsecured personal loan.
5
Bring on other investors. If you can't finance the purchase through other means, you may be forced to bring on an additional partner. This partner can contribute the needed money in exchange for a share of the business's future profits. You can even bring them on as a "silent partner," where they have no responsibilities or active duties in the business, but instead simply contribute money. Your equity partner will likely have to subordinate his position to the original business owner.
- Additionally, you could consider issuing preferred stock to various investors (perhaps family and friends) or issuing unsecured debt.

Part 3

Part 3 of 3:

Covering Additional Expenses

1
Determine whether you purchased the assets of the business or the business itself. The difference lies in the assumption of debts held by the business. If you only buy the assets of the business, you are not liable for these loans. However, if you buy the whole business, you will also have to factor in the repayment of existing loans in your repayment schedule. This distinction can inform your decisions, like the purchase value of the company and your repayment schedule to the business owner.
2
Structure the deal so you still have some money left over. Even with owner and secondary financing, you don't want to be left with an empty bank account. It's still a good idea to have some money left in the bank for attorney fees, capital budgeting purposes and working capital.
- You should always determine how much you can borrow from the owner and additional sources before making an offer on a business. That way, you can be sure that you'll make an offer that leaves you with some money left over.
3
Assess whether or not you need additional financing for working capital. If you buy a business for $100,000 that was completely borrowed, you've done a good job at buying a business with no money. However, you also need working capital to keep the business going.^{[4]
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Research source} You'll need to pay rent, employees, utilities, etc. Make sure that you have some working capital. You can either get that from some of the same sources you used to obtain the money to buy the business or use the business's income and assets to produce the needed capital.
4
Use existing cash inflows. You can use the business's cash flows to supply your working capital. This will save you from having to borrow more money. However, you'll need to analyze and project the business's future cash flows to be sure that you will have enough working capital. If you don't feel comfortable with projecting cash flows, seek out professional advice or hire a banker to do the projections for you.
5
Use existing assets to generate income. Look for opportunities to sell or repurpose existing equipment or other assets owned by the business. This can give you an opportunity to make additional income without any investment of your own. For example, you could sell off unused equipment or loan out vehicles that are not used frequently. These opportunities can vary widely between businesses, so examine all of the assets available to you and assess their potential value.
- You can only do this if the assets aren't pledged as security to the seller.
6
Finance your business with receivables and inventory loans. Factoring allows the business to sell its accounts receivable (at a discount) to a third party in order to receive capital more quickly. In contrast, accounts receivable financing allows the business to take out a loan against the value of their account. This means that the business must pay back regular payments to the lender or risk losing the rights to their accounts receivable.
- In factoring deals, the third party buyer gives the business 75 to 80 percent of the accounts receivable value immediately so that the business can cover costs. The remainder, minus the discount taken by the third party, is given at a later date when the customer payments actually come in. Talk to your banker to be referred to a third party that offers factoring.^{[5]
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- Factoring is not cheap capital, and is generally more expensive than a short-term financing arrangement secured by receivables.
7
Generate income from the property. Look for business owners who also own the real estate associated with their business. Then, you might be able to structure a deal that includes leasing the property with an option to buy it later. Alternately, you may be able to refinance the real property with another lender for cash.
8
Consider refinancing or taking on additional loans. If all else fails, you can take out additional loans to cover working capital costs. One good way of doing this is by taking out an inventory loan. Essentially, an inventory loan gives the business money to purchase products for sale, with the inventory being held as collateral for the loan. However, because of the difficulty banks may experience in selling inventory seized as collateral, many lenders are reluctant to offer this type of financing.^{[6]
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- Alternately, if you buy a business that takes in a lot of revenue from credit card sales, you might be eligible of a merchant cash advance.^{[7]
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  Research source} That's a "loan" where you get an upfront amount of cash but the company that provided you with the money takes a percentage of your credit card sales for a period of time.