How To Buy a Business With No Money

Owning Your Own Doesn’t Need to be a Dream

One of the key parts of the American Dream centers on careers and for many people, true fulfillment in a career is the direct result of owning their own business.  Unfortunately, the idea of saving for years or even decades, leveraging everything you own, and then hoping for success means that many would-be entrepreneurs fail to ever achieve that dream.
…And when they do, the statistics are scary – 80% of new ventures fail in the first five years!

At the same time, saving money is one of the hardest things that we, as Americans, can ever do.  Too many of us own “too much” car, or “too much” house, or “too much” stuff and the debt service on all of these things can make it difficult to simply save a three month reserve of cash, or for a family vacation, or for our retirements.

How can you ever save enough to buy a business?

Stop right there.  Before you ever let the entrepreneurial bug bite you, you need to have an honest discussion with yourself.  Many small business owners make the mistake of believing since they understand the technical side of a business, accounting, for example, that they understand the business side of the business.  
You might be a great accountant, or a great car repairman, or a fantastic cook, but be realistic – do you understand how to run the business itself?

Other things to consider:

  •  What are your strengths and weaknesses? (Be brutally honest)
  •  Are you a great manager, or a great technical worker, or a visionary entrepreneur?
  •  Do you understand business engagements from a legal and practical standpoint?
  •  Can you build an effective business model and then forecast the budgetary requirements for such a business?
  •  Do you understand the accounting and bookkeeping procedures your business will demand?.
  •  Do you understand how to acquire clients, fulfill their needs, and then scale up the marketing and sales programs that will grow your business?
  • Who else is going to assist you in this business, because you cannot possibly do it all yourself?
  • How much are you prepared to spend – or can you spend – to launch and grow your business? 

That last one – about your budget – is a critical, but the number that you might have in your head can often be much smaller than you might think.

As in, buying your business might not cost you a dime.

The thing about becoming a business owner when no capital is available is that you have to do a little of everything well AND understand how the company makes money, creates profit, and how to keep your costs down.
So how do you buy a business with zero cash?  There are three keys things to bear in mind:

  • You’ll need to locate businesses that can be purchased (but may not be listed “for sale” locally) that are in an industry or niche that you are familiar with.
  • You need to understand why the owner has an interest in selling the company.  This is not only critical, but bear in mind that they may not share “all” of the truth about their reasons for selling to you right away.  Do your due diligence on the company, the market, and the clientele long before you make a decision.
  • Look at every business that is for sale, no matter what the company does.  There are thousands of reasons that businesses are put up for sale and an owner that is in dire straits may agree to very favorable terms with you if they view those terms as favorable to their situation.

Look for clues from the owner, like, “I’m honestly just not up to the challenges of owning this anymore.” 
“My partner left me, (or had a medical issue, died, couldn’t handle it, etc…” 
“We have gone way over our comfort level and we just need out.”

Making the Deal

So how can you negotiate the sale of a business without any money changing hands?
For starters, you have to understand why you will be successful when the other owners aren’t.  Remember that brutal honesty we discussed earlier?  You also have to know when the deal is not a good one and you cannot be afraid to walk away.  Becoming the owner of a restaurant that has poor egress and ingress to the building, or is far from busy traffic flow in your city is a terrible business idea, no matter how little it costs you to own it.
As you complete your due diligence, both personal and professional, you can begin to craft a plan to present to the owners.  Remember, they’ve told you they want out, they are extremely motivated, and you might very well be the only prospect they’ve seen.
There are things to keep in mind: 

  • The current owners are losing money and need expert assistance.
  • People do business with people they know, like and trust and if they understand how passionate you are about making the business work, they may be willing to accept some compromises.
  • The current ownership realizes that you have a particular skill set that will be beneficial to the success of the business.

With all that in mind, as you complete the due diligence phase, you need to share your goals and expectations with them.  You are, in effect, selling yourself and people buy from people they like.

Negotiation Time

The first part of any successful negotiation is ensuring that the owner is open to any alternate agreement on financing.  This, of course, is where your ability to forecast numbers, accounting, and bookkeeping all will come into play to allow you to estimate future profitability.

The beauty of owner financing, which is really what we’re talking about, is that the owner, due to the poor performance of the business, may place a very low value on the business to begin with.  Even if they are spot-on in their valuations of the company, many times, the asking price is of little consequence if they will accept the terms you put forth.
And what can those terms be?  You can offer to make the owner a silent partner in the business, retaining them as a manager or key employee for a period of several years while you pay the debt down.  In the event the owner simply wants out, you can agree on terms where the owner will be paid what amounts to an annuity on the asset monthly – which offers owners who are retiring a great tax incentive – more money in their pocket year after year versus the capital gains taxes they would incur with an outright sale. 

You also may be able to find an investor who is looking for a solid return on their money and is willing to fund the purchase in exchange for equity in the company.  Where do you find them?  Chances are, you know some already!  Speak to your banker, your accountant, or your bookkeeper to see who they know that is actively investing money in local businesses.
No matter how you agree on terms, those terms form a legally binding contract that you and the owner will use for all further negotiation.  About those numbers?  Make sure they are kind to you as a new business owner, because you still are in business to make a profit.

Last Thoughts

The key thing to remember is that business ownership is one of the hallmarks of our country and, despite the fact that many businesses take hundreds of thousands of dollars to start, opportunities exist in your town right now to become a business owner without using any of your own money.

There’s one more thing to consider – you’re buying a business that in all likelihood is not doing well financially.  That means that you will have to play a lot of roles in that business to turn it around.  You may not have the budget for marketing, so you’ll become the marketing department.  Ditto with sales, or procurement, or production.  Each step of the way, document the steps you take to achieve the results that your customers demand, so that when you need to hire and train your staff, you’ll have a clearly defined path for them to be able to do the job. 
It won’t be easy, but it can be done!