In this article, we’ll touch on a range of financial options to buy a business when you only have a small amount to invest. At the end of the article, there is a guide to the types of businesses that can be purchased at different amounts of investment.
How Can I Buy a Business With a Small Amount of Cash or a Down Payment?
With limited funds, here are some options for buying a business:
- buy a low priced business
- utilize retirement funds in ways you may not be aware of
- partner with other investors
- leverage a small down payment with an SBA or third-party loan
- ask the seller to finance part of the purchase price
- ask the seller to take earnouts for part of the purchase price based on performance triggers after closing
Can I Buy A Business With No Money Down?
In general, buying a business with no money down is unlikely unless 1) you have a special relationship with the seller or 2) the business has serious problems. Also, no money down is one thing, but do you have any money at all for working capital or unplanned expenses?
Beware of seminar gurus who pitch the no money down pipe dream. Could it happen? Yes. But, while a guru may have done it, possibly even more than once, what would it realistically take for you to do it? Beware of the no money down expert that sells a “repeatable” process based on an edge case.
No-Money Down Email From “Buyer”
Here is an email I received from a buyer who probably attended one of those seminars about buying a business with no money down. The numbers have been altered for simplicity.
I am looking to work under the current seller until the debt is paid off. In my plan, The current owner and I would get together and go over what jobs need to completed and their details/requirements. Currently I am a machinist capable of running manual machines or CNC machines along with programming. In the shop I work in now I am the Lead CNC supervisor. In this condition, the owner would only spend two weeks or less getting me up to speed on the details of the job. I would then run the operation of the business while the owner could sit at home and relax. Under this circumstance, the following conditions would apply.
1. Every year, the owner will pocket $150,000 and I will pocket $50,000 (on the basis of $200,000 profit each year)
2. I will assume ownership of the company after the $400,000 has been paid in full, not a penny sooner.
3. Again, I will not own the company until after the debt has been paid in full. Looking to have more of a temporary partnership.
Thank you for your time, look forward to hearing from you soon.
Have a great day!
The seller’s typical reaction to such an offer is something like “That’s not the type of buyer I’m looking for.” And that would be one of the nicer responses I have received. Most sellers would react in a more animated fashion with unflattering characterizations of the buyer and creative suggestions for what they can do with their offer.
In all fairness to the no money down gurus, I’m certain they were responsible enough to tell their disciples that this is a numbers game, not a get rich quick scheme, requires hard work for those willing to succeed, and eventually there will be a seller who will agree. They could be right, but what kind of seller would agree? And when a buyer finds an agreeable seller, how likely would that business be a good one? See What are the Inescapable Truths About Buying or Selling a Business?
Are Low Priced Businesses Worth Buying?
Some low priced businesses are definitely worth exploring. Many digital businesses are small and cheaper than what you will find on traditional business for sale websites like BizBuySell. Check out our article that gives you a bigger picture of the best places to find businesses for sale.
Other low-priced businesses may be startups. You’ll find that the pros and cons of buying startups lie somewhere between starting a company from scratch and buying an established business. The startup option could be a good fit if the startup provides enough of a head start to be worth the asking price. While many startups will be challenging to take over, you may find some with reasonable potential and lower risk. The seller may have a legitimate reason for exiting early, such as health, taking a job, loss of interest, or pursuing a better opportunity. Use your discretion, but also consider the additional costs to get the business going, which should be low for most online startups.
With low-priced businesses that have assets, you may be paying for the assets rather than the cash flow. Low priced businesses tend to be unprofitable or barely profitable. While the assets may be underpriced and provide the jump start you need, it is likely you’ll need significantly more money to generate the momentum to get the business off the ground. Some sellers will sell an unprofitable business for a low amount so they can get out of their lease, which the buyer of the business would assume. On the extreme end, some businesses may be advertised as asset liquidation sales or stopped businesses.
Buyers with clear skills advantages or strategic synergies can carve out a niche buying low-priced, unprofitable, or distressed businesses. For example, if you have skills in content creation and monetizing blogs, there are many bloggers who will abandon their efforts because they cannot endure the lag time between content creation and enough traffic to make money on ads. See Can it Be Worthwhile to Buy a Business with Problems?
If you have skills in recruiting, you may be able to pick up businesses that are being sold due to a hiring challenge but otherwise has potential. If you have extra space, you may be able to pick up businesses handicapped by high lease and utility costs. If you’re a digital marketing wizard, you may be able to revive old school businesses that never joined the digital age. This is not an uncommon scenario given the “silver tsunami” of retiring baby boomer business owners.
How Can I Use Retirement Funds to Buy a Business?
I will discuss two ways to utilize retirement funds for business ownership.
Firstly, if you have a significant amount of retirement savings, preferably over $50,000, you can set up a ROBS account (Rollover for Business Startups). In a nutshell, your retirement invests in your business. Let’s say you have $250,000 you can deploy toward the purchase of a $200,000 business acquisition and have money left over for working capital. Your retirement is the owner of the business, so any profits must go back to your retirement. However, profits come after you pay yourself a salary allowing you to benefit today and in the future.
Your retirement account is an investor, not a lender, so there is no monthly loan payment back to your retirement. It can be expensive to set up these counts, typically close to $5000 plus monthly fees. That’s why most advisors recommend considering ROBS only if you have a large enough amount in your retirement account. They often suggest $50,000 as a minimum threshold. While many people do not know about ROBS, it came about with ERISA way back in 1974. Congress passed tax legislation that would be known as The Employee Retirement Income Security Act (ERISA) allowing for exemptions to encourage investments in small businesses.
That said, there is risk in buying or starting a business and the IRS cautions the use of ROBS. When I consulted my CPA, I thought he would shut it down and scold me for thinking about “playing” with my retirement funds. When I asked if he had ever heard of ROBS, to my surprise, he said he liked them. After my jaw dropped, I told him I thought for sure he would not approve. His rationale was simple. If you’re going to start or buy a business, you’re going to invest funds either from your bank account or your retirement and you’ll either succeed or you won’t. If you have the skills and confidence to succeed, there can be advantages using ROBS to fund your business. Do what I did and read this IRS warning and consult your CPA.
Secondly, you can borrow up to $50,000 from your retirement and you pay yourself back. There is an interest rate and a five-year term, which means the payment is relatively high compared to a 30 year loan like most mortgages. The good news is all the interest you pay goes right back to your retirement account, so you are funding your retirement.
One strategy is to borrow $50,000, set aside $25,000 to make your payments for almost half the term, or a little over two years, and utilize the other $25,000 to buy a small business or use as working capital for that business. Your uses are not limited to funding a business. This can be a great source of bridge funding to get you past a certain hurdle before reaching profitability. Your CPA can recommend a service that will set this up for you.
Side Note: You can use retirement funds to purchase real estate through a self-directed IRA.
How Can I Preserve Capital and Reduce Risk When Buying a Business?
One way to reduce risk of investment capital is through leverage. While leverage can be viewed as more risky than purchasing all cash because of the debt burden and the personal guarantee, one can argue that it reduces risk because the buyer is risking less cash to acquire the business. If investing with a down payment lets the buyer preserve cash, the buyer now has funds to grow the business or protect it against unforeseen expenses or downturns. Furthermore, seller financing or earnouts align the seller with the buyer’s success. Even with an SBA loan, there may be seller financing. The prevalence of financing or earnouts is high since most business acquisitions are not all cash. Earnouts have an added benefit – no personal guarantee.
How Do I Buy a Business With a Loan?
The SBA loan program enables lenders to provide loans guaranteed by the SBA up to $5 million. There are various loans for acquisition of businesses and associated real estate, equipment, inventory and other hard assets to grow an existing business, and working capital. While the length of the loan for the business is 10 years, it is 25 years for the real estate. SBA lenders qualify both the business and the borrower, and require personal guarantees from the borrower.
You will read and hear about 10% down with an SBA loan. Buying with 10% down is easier said than done. For various reasons, you may not be able to finance 90% of the price. More realistically, prepare to invest 25% to 100% of the purchase price. Focus your search on businesses within your means, setting aside working capital and contingency funds for life’s inevitable downturns.
Can I Buy a Business if I’m Unemployed?
Many people buy businesses because they are unemployed or “underemployed.” If you need an SBA loan, the lender will look at your financial picture, skill sets, and the profits generated by the business you are buying. If the business generates sufficient profits to pay you a salary with sufficient room to spare, the loan looks good to the lender. Also, the lender is more comfortable when you take an active role in the business, which is easier to do when you are unemployed or underemployed versus working full time at a job.
Can I Buy a Business and Keep Working at my Job?
Depending on the type of business and your business plan, as well as the type of job you have, you may be able to buy and run a business while you are employed. (See this article on absentee businesses for more in depth coverage of the spectrum of passive to active owner involvement in a business.). If you need an SBA loan, the lender will factor in the costs you will incur to hire a manager or key employee who will oversee operations for you since you are working full time.
Case Study: Owner Transitions from Job to Owner of Two Businesses
I sold a dry cleaning business to a District Manager of an equipment supply company. He had already purchased his first business prior to meeting me, a laundromat. Due to his job flexibility and the flexible hours at the laundromat, he was able to do both simultaneously. He felt the dry cleaning business I had for sale was synergistic with the laundromat, so he purchased it with the goal to quite once he had the two businesses up and running. He utilized an SBA loan for both purchases. On the second purchase of the dry cleaning business the SBA lender looked at his earnings from the laundromat to qualify him on a loan for the dry cleaning business.
How Does Seller Financing Work?
Seller financing means the seller becomes the bank and gives the buyer a loan. Seller financing can occur whether or not there is an SBA loan. Just like the SBA, the seller wants to have confidence in the buyer’s skills and may require a financial check, background check and a personal guarantee. However, unlike a back, a seller is not bound to impose any of these requirements. Seller financing is typically for a smaller amount of the purchase price (10-50%) than an SBA loan (up to 90%) and for a shorter term (1-5 years). In selecting the interest rate, the sell may benchmark current SBA rates and go a little higher. The interest rate impact is relatively small on these short term loans.
How Are Earnouts Used to Buy a Business?
Earnouts are a portion of the sales price paid to the seller in the future upon certain conditions being met. Those conditions could be financial targets or key customer, supplier, or employee retention goals. The most common earnouts are based on revenue targets. For example, a buyer may peg a certain portion of the offer to payments at each anniversary for a few years as long as annual revenue exceeds a percentage of the past 3 years average revenue.
Why Would A Business Seller Agree to Earnouts?
Why would a seller agree to earnouts when they no longer control revenue? The seller may not have a choice if this is the best offer or if the business has challenges like high customer concentration. In that case, the seller needs to agree to earnouts to mitigate risk for the buyer.
NOTE
Pegging an earnout to profit is less common since sellers do not want the additional risk of relying on all the things the buyer controls between revenue and the bottom line profit.
Are There Benefits to the Seller in Agreeing to Seller Financing or Earnouts?
Seller’s generally prefer all cash to seller financing. However, seller financing and earnouts can expand the pool of buyers, defer taxes on the sale of the business, and potentially net the seller more than an all cash sale. Additionally, the seller may be able to take back the business in the event of a default. This is not typically a benefit for the seller, as their goal is to exit and not return to the business, but it can provides some consolation.
In addition to financing, sophisticated buyers may offer the buyer an equity stake in the new company after the sale. The pitch to the seller is that they will own a piece of something larger, and when the buyer grows the company profits, the value of the company grows even faster (more profitable companies sell for higher multiples of profit). When the new company makes an eventual exit, the seller reaps the benefits of his shares in the bigger company. M&A folks are masters of alluring presentations and pitch business owners on the so-called “second bite of the apple.”
What Is a Personal Guarantee?
When a lender or a seller provides a loan to the new business owner, they want to know that the buyer is incentivized to make their payments as agreed. A personal guarantee provides some assurance as it enables the lender or seller to go after the personal assets of the buyer in the event of a buyer default on the loan.
Is a Personal Guarantee Required to Buy a Business?
When utilizing an SBA loan, a personal guarantee is required. If the seller is financing part of your purchase or accepts an earnout, the seller may or may not require a personal guarantee. However, most savvy sellers will require a personal guarantee from the buyer.
Should I Buy a Business With a Partner?
Partnerships have their pros and cons. A key advantage is to spread the risk and the investment cost. Another advantage is to combine complementary skill sets. This could be one way to buy a business with little money of your own, especially if you have one or more financial partners who may or may not be involved with running the business.
How Much Does it Cost to Buy a Business?
The average sales price for a business sold in the US through BizBuySell was $300,000 in 2020. However, some businesses sell for less than $10,000. Furthermore, BizBuySell does not keep data on the deal structures used to acquire businesses. In many acquisitions, the down payment is significantly smaller than the purchase price. Here is a table for buying businesses at various price levels. Here is a comprehensive article about the places to find business for sale.
What Business Can I Buy With $10,000, $50,000, $100,000, $250,000, $500,000 and $1,000,000?
| What Business Can I Buy with $10,000? With a $10,000 down payment, you are unlikely to get an SBA loan because lenders have minimum loan amounts. On top of that, sellers are unlikely to finance a large portion of the price. Low-priced listings on BizBuySell might be asset liquidations or mistakes such as a $490,000 business listed in error at $490. | Digital Business This is the most likely type of business you can buy at this level of investment and it’s likely to be a startup. The expenses of a digital business are minimal so you may have time to turn a profit without significant working capital after you acquire a digital startup business. Check Flippa and Micro Acquire. | Physical Business You’re very unlikely to buy a brick and mortar business for $10,000. Business brokers don’t carry listings this low, since their minimum fees are typically greater than $10,000. You might find a seller that just wants to get out of their lease, but if business is that bad, you’ll need a plan to do something much different than what the owner has been doing. | Franchise As far as new franchises, you’ll find only a few low priced listings at sites like franchisedirect.com. As far as franchise resales, the previous section on physical businesses applies. You’ll see very few franchise resales under $10,000 on Franchise Flippers.com and Franchise Resales.com. |
| What Business Can I Buy with $50,000? You could tap into your retirement account for a loan for up to $50,000 as previously mentioned in this article, and you can look into an SBA loan. | Digital Business Many digital businesses sell in this range. Plus, there are no geographic restrictions on where you operate a digital business so your choices are greater. You will have plenty of options at this level of investment with or without an SBA loan or seller financing. | Physical Business Sellers might finance 0-40% so you might secure a $80K deal with $50K down and the rest seller financing. A $50,000 down payment might land you an SBA loan up to $400K – $500K. There will be plenty of brick and mortar businesses for sale in this price range. | Franchise Geography is important to most franchisors. They will not be in markets too small to support their model or are saturated with existing franchise operations. While there are plenty of listings at this level of investment, your options depend on where you want to live. |
| What Business Can I Buy with $100,000? To access $100,000, you could tap into savings, a retirement account loan up to $50,000, or open a ROBS account. Plus you can combine with an SBA loan and some seller financing might be available in this range. | Digital Business Plenty of viable digital businesses are listed for under $100,000. You could buy one all cash as long as you have a little extra cash for working capital. Utilizing a loan, you could purchase a significant digital enterprise. | Physical Business Not many physical businesses with decent cash flows will sell for under $100,000, but if you’re open to an SBA loan, you can increase your search criteria all the way up to $1M list price. | Franchise While most new franchises will cost more than $100,000, there are plenty of options under $100,000. New franchises require significant startup capital beyond the initial investment. Plus, they have no cash flow so they require even more cash for a runway to profitability. |
| What Kind of Business Can I Buy with $250,000? At the $250,000 investment level, you may be able to acquire a business up to over $2,000,000 in price. This would have to be a healthy profitable business to support your larger loan payments at this level. | Digital Business You can find some very exciting digital business opportunities at this level of investment. | Physical Business You now have options to pay all cash and with that, negotiate a lower price, or finance your purchase and buy a bigger business up to about $2M. | Franchise While this amount of investment might be a little low to start thinking about multiple units, you’ll definitely want to explore it. Two locations to start and provides a great opportunity to run and compare two related operations, providing a ton of useful information early. |
| What Business Can I Buy with $500,000? At the $500,000 investment level, you could go all the way to the $5M price tag since the SBA loan limit is $5M. | Digital Business The number of digital businesses listed at higher prices drops quickly. It is critical to have in person meetings and consult advisors on these larger digital businesses. | Physical Business I would add Axial.net to BizBuySell as my top recommendations for finding businesses at this level of investment. | Franchise At this point, you can certainly consider multi-unit opportunities including highly successful existing franchise opportunities that are being sold due to retirement or other reasons. |
| What Business Can I Buy with $1,000,000? At the $1,000,000 investment level, you could go all the way to the $5M price tag with an SBA loan and utilize only $500K for a down payment. This leaves plenty of cushion for business needs after the purchase. | Digital Business Million dollar digital enterprises are the realm of experienced digital entrepreneurs and specialized business brokers and M&A intermediaries. | Physical Business You will be complete with financial buyers including search funders, family funds, and small private equity groups. You may also compete with strategic buyers in the industry. Your advantage as an individual buyer is to bring empathy, finesse, and emotional intelligence that may be lacking from your competitors. | Franchise Million dollar franchise investors are more likely to make greater returns due to economies of scale than their smaller counterparts who have simply bought a job. Multi-unit operators favor franchise branding and processes over riskier and potentially more lucrative independent entrepreneurial pursuits. |