How to Buy Business With No Money: A Step-By-Step Guide To Seller Finance

Introduction

Buying a business is an exciting and sometimes challenging process. It often entails a lot of money, which can be even difficult to tackle if you don’t have the cash upfront to purchase the existing business or are unable to take out a hefty business loan. Buyers with a lower credit score or poor credit may find seller financing more accessible than traditional options, as it typically involves fewer obstacles and more flexible terms. Fortunately, there are several options for buying a business with no money up front without having to sell your other assets.

This guide will provide business buyers with an overview of the steps involved in buying a business through various financing methods, including conventional mortgages as a traditional alternative to seller financing, so that you can make an informed buying decision. We will also discuss the pros and cons of buying a business through seller financing. In particular, we will highlight seller financing pros, such as the potential for sellers to attract more buyers and receive steady income from interest payments, as well as outline the potential risks to consider when buying a business with no money up front.

With this information in hand, you will be in a better position to decide if buying a business without your own money is the right choice for you. So, let’s get started!

Step-By-Step Guide

1.  Determine why you want to have your own business

As most business buyers will tell you, your commercial goals should be identified before searching for a suitable existing business that will help you meet these goals.

Are you buying a business to earn extra income? Do you want to stop being an employee? Do you want to increase your current profits by integrating an existing business with your own businesses? Do you have an online business but want to build a physical presence? Are you looking for a new challenge in life but don’t have the time or resources to start new businesses? Or do you just love making money? Maybe you have other reasons for buying a business?

You should also consider the impact on your personal life. Being the primary owner of a business requires a lot of time and effort, even for small businesses. You may have to accept a reduced salary initially, and so you need to be confident you can juggle the necessary commitment alongside other things in your life.

Clearly identifying at this early stage why you want to buy a business will help to keep your short and long terms goals targeted and focused, giving you the best chance of successfully achieving said goals.

2. Identify a suitable, existing business

Once you know why you want to buy a business, it is time to start looking for businesses that meet your needs and match your own skillset. You can research businesses online, attend business conferences and fairs, or use a business broker to help you narrow down your search.

Researching high growth businesses to buy in your local area, for example, would give you an immediate advantage as you may be better placed to know the local customer base & suppliers, which business models work, and the local market trends which will enable you to tailor your marketing strategy accordingly. You may even have your own ideas about attracting new customers with your local knowledge!

It is important to do in-depth research of the potential business and its business model before buying it. Conduct financial analysis to make sure that your target is an income generating business; one that will generate enough money to cover its operating costs and business expenses. Analysing the financial statements, customer base, and other important business aspects in detail before making a decision is essential.

And remember, always refer back to your initial goals we set at step 1 after conducting your research; does this business meet your current and longer term needs?

3. Understand who the current business owner is and their motivations

Once you have identified a suitable existing business, you may already have your heart set on your new business venture and decide that you want to take the plunge ASAP. But hold up, there are other important considerations with regards to its current owner.

Are your objectives realistic and in line with theirs? How flexible are they to alternative financing arrangements? Have you assessed the seller’s motivations for offering seller financing, such as their exit strategy or need for a quick sale? What are their long-term goals, maybe they’re approaching retirement age and want out? How much control are they willing to relinquish?

Opening a constructive dialogue with the current business owner is key to moving negotiations forward smoothly for potential buyers so that everybody’s interests can be addressed. Additionally, knowing this information ahead of time can help simplify the negotiation process and streamline the purchase.

4. Propose seller financing

What is seller financing?

In short, seller financing is when you don’t pay the seller all of the money on day 1 and, instead, defer part or all of the purchase price. The part that is deferred (payable later) would be seen as seller financed, because effectively the seller is lending you that money (as it’s owed to them).

Unlike a conventional loan, seller financing does not involve a traditional mortgage lender —there is no bank or financial institution acting as the intermediary. Instead, the seller acts as the lender in this financing arrangement. This makes seller financing an attractive alternative for buyers who may not qualify for a traditional mortgage or conventional mortgages, which often have strict approval requirements and are structured differently from seller financing deals.

Seller financing is commonly used in business acquisitions to facilitate the purchase process, making it easier for buyers to acquire businesses without the need for large upfront capital.

Small business owners, to those of a larger business, are often open to the idea of seller financing. You will be entering into an agreement for the seller to loan you the purchase price and you slowly paying them back over time, usually with profits you generate from the business.

Seller financing in the UK requires both parties to agree on the sale price, payment schedule, and interest rate (if any!). Negotiating these terms can be difficult, as it must take into account both your needs and the seller’s interests. The agreement offers mutual benefits for buyers and sellers alike, providing flexibility and smoother transactions. It is important to make sure that the agreement you sign protects your rights as a buyer while respecting the seller’s wishes.

From my experience as an M&A solicitor, the seller-financed (deferred) element can be simply incorporated into the Share Purchase Agreement (SPA), without the need to incur additional legal fees in documenting the seller financing as a separate loan agreement. Further, instead of creating overly complex interest arrangements, the buyer and seller can negotiate a revised purchase price if they intend to use seller financing. For example: the purchase price is £2m, but £2.1m if paid over two years.

What are the benefits of seller financing?

This type of financing brings a significant amount of benefit, as it can massively reduce the amount of money you need to buy a business up front. One key advantage is the possibility of lower initial payments, making it easier for buyers to get started. Many buyers choose seller financing for its flexibility and accessibility, especially when traditional lending is difficult to obtain.

Additionally, sellers can negotiate the asking price when offering seller financing, sometimes obtaining a premium for providing this option. Also, if a seller is open to this financial arrangement, it is a strong indication they are confident that the business is profitable, and that they believe you will make a success of it and be able to meet the repayments over the long term.

Additionally, not needing to go though a traditional finance provider will likely:

(a) speed up the deal, as finance providers often cause delays;

(b) lead to lower legal fees for both sides (as there is less documentation to deal with); and

(c) increase the chances of the deal successfully completing (as it’s not uncommon for finance offers to be withdrawn later down the deal, or to be reduced in such a way that jeopardise the deal).

The drawbacks of a seller financing: considering the down payment

The seller may want to retain a level of control (for example, remain as a director), or stipulate that you cannot sell the business on within a period of time. You must check that any seller conditions align with your own plans.

Further, sellers who accept for a large part of the purchase price to be deferred (hence seller-financed) will request that the buyer provide them with security, as often the buyer is an empty Special Purpose Vehicle (SPV). The security can come in the form of a personal guarantee by the owner of the SPV (you), or as a debenture over the target business. Both will restrict what you can do because, if you give the target business as security, you will be limited in what additional finance you can raise. This may delay your growth plans.

Navigating the seller financing contract process: What if the seller won’t loan me all the money?

It should be noted that most sellers will be reluctant to hand over 100% of the business price. You may feel this is at odds with the title of this article, but fear not, there are options available for borrowing money.

If you are unable to fund any initial down payment out of your own cash, you can always look to a business loan from a bank, loans from family or friends, or bringing in a silent partner, passive investor (or even venture capitalists!) to raise cash as alternative funding options to meet the entire purchase price. If the seller cannot finance the full amount, you may also need to seek a third party lender, such as a bank or other financial institution, to cover the remaining balance.

Common solutions that business buyers use to solve the shortfall between the seller-financed amount and the total purchase price is to:

(a) use the target’s cash in the bank to pay the seller. This is usually seen as a loan that the target business is giving to the buyer, which is then used to pay the seller. Effectively, the target company will be owed money by the buyer post-purchase (hence target company-finance instead of seller-finance?).

(b) raise finance via traditional institutions and secure such loans against assets of the target business. Effectively, the target business is the borrower and it takes out a loan that is secured against its valuable assets (like real estate or machinery). That money, like with option (a) above, is then loaned to the Buyer SPV, which it uses to pay the seller.

Always seek professional advice!

Due to the complexity of buying a business, buying an existing business can be a time consuming and tedious process. For this reason, it is always advisable to seek the help of professionals for assistance. Business brokers and advisors are well-versed in buying businesses and can guide you through each step of the process. They will also be able to provide invaluable advice and contacts that can help facilitate the buying process.

Financing Strategies and Negotiation Tips

Securing a successful seller financing deal often comes down to smart negotiation and a clear understanding of your financial position. Before entering discussions, know exactly how much you can afford for a down payment and what loan terms you’re comfortable with. Offering a larger down payment can sometimes persuade the seller to agree to lower interest rates or more favourable loan terms, making your monthly payments more manageable. On the other hand, you are also risking more capital.

Being prepared, flexible, and open to different financing methods will help you negotiate a seller financing deal that works for both parties and sets you up for long-term success in your new business.

Managing Cash Flow After Acquisition

Once you’ve completed your business acquisition, managing cash flow becomes a top priority. Business buyers must ensure they have enough income to cover monthly payments on the seller financing agreement, as well as ongoing operating expenses. Creating a detailed cash flow forecast will help you anticipate income and expenses, allowing you to plan for both expected and unexpected costs.

It’s also wise to build an emergency fund to cushion against any short-term cash flow issues. Working with a financial advisor can help you develop a cash flow management plan tailored to your business’s unique needs. By staying on top of your finances and planning ahead, you’ll reduce the risk of default and set your new business up for long-term success.

Conclusion

To conclude, purchasing an existing successful business can be a great way to benefit from a proven business idea. Once you’ve identified the type of business you want to buy and where to buy it, you’ll need to give consideration to how to finance your acquisition.

You’ll find that most business owners choose to conduct a business acquisition through owner financing, a leveraged buyout, small business loans, or similar means without having to spend money from their own bank account.

By researching your options, understanding the seller’s motivations, and seeking professional assistance if needed, buying an existing business with seller financing can be a viable option for those wishing to become business owners without having to raise large amounts of money up front or take out hefty additional loans.

However, it is important to understand the risks associated with buying a business with no money, and ensure any agreement you sign is in your best interests.

Now you have read this article, you should be better informed on how to buy an existing business with no money via seller financing and what steps to take.

If looking for professional legal advice, contact us now.