This article was last updated 0 months ago and may not represent current law.
Can you buy a business with no money? Occasionally, yes, but it’s like finding a golden needle in a giant haystack. Sometimes, just sometimes, you can be in the right place at the right time and buy a business without using much or any of your own money, but it’s rare.
The “no money down” business purchase is a really popular notion these days, and I can see why, as the upfront cost of buying an existing company puts it out of reach for a lot of people who would like to own one.
In this article I’ll go through where these deals tend to come from, how to approach the seller and the ways of funding buying a business without a large amount of your own cash. I’ve written it from the buyer’s side, although I act for sellers as well, and I say at the end what I’d tell them.
Identifying opportunities for no-money-down deals
If you have limited funds, you need a seller who is open to being paid over time (often called seller financing or vendor finance) or to staying on as a passive partner. These tend to be owners who are looking to retire or to move on to something new. Timing matters as well, as if the business is doing well and has plenty of interested buyers, it will be hard to make a compelling offer without money behind you.There are several places to look. A distressed business which is struggling and needs turning around may be more open to an unusual deal, and so may an owner who wants to retire and is flexible about how they get paid. You might also find a partner who will put in the capital in return for a share of the ownership.
Asset-heavy businesses are another route. Where the company has valuable equipment or other assets, many purchasers look at carrying out a leveraged buy-out, which is where money is borrowed against the company’s own assets in order to create the cash for completion. Most of the time on a leveraged buy-out there is significant deferred consideration, and so any seller who is properly advised will look for security.
The last one is to offer your services or expertise in exchange for part ownership of the business. This is a great way of getting involved in a business, but it can take time. You basically operate as a “turnaround” specialist, and say you will help the seller get their house in order in return for an equity share.
Negotiating with sellers: finding a mutually beneficial arrangement
Take the time to understand why the seller is selling and what their priorities are, as that will tell you which terms they care about most and where there is room to negotiate. If they're open to being paid over time, be flexible in return, and consider offering a higher price in exchange for better payment terms. Be clear about what you can offer, and listen to the seller's concerns.If the seller isn’t willing to sell the whole business at once, consider a phased acquisition, where you buy it in stages over time. And get advice from a solicitor and an accountant (and a business broker, if there is one involved) before you agree anything, so that you know the terms are ones you can live with.
Creative financing options for buying a business
Owner financing or seller financing
This is the most typical way of buying a business without money upfront. The seller agrees to finance part of the purchase price for the buyer, which in this country is more often called deferred consideration.Essentially, a purchase price is agreed, often with cash being taken out of the company’s account to fund part of it “upfront”, and the balance is deferred over a period of time. Effectively, the seller is now a lender and the buyer a borrower, particularly if the seller requires some kind of security. Some buyers are reluctant to give security, such as personal guarantees, to make sure the seller gets paid. Many, however, will appreciate that they are getting the business (and its profit) on completion and can pay the seller back over a period of time. I’ve written separately about how deferred payments work for buyers and sellers.
Equity partnerships
An equity partner puts capital into the business and receives a share of the ownership in return. Unlike a loan, the risk and the rewards are both shared, which can suit a buyer with limited funds as it allows you to pool resources and share the cost of buying and running the business. If you are buying through a company together, the terms should go into a shareholders agreement, which sets out the rights and responsibilities of each of you and how the business will be run.Crowdfunding
Crowdfunding is a method of raising capital by asking for small contributions of money from a large number of people, typically via the internet.There are several types. In donation-based crowdfunding, contributors give money to support a cause or project without receiving anything in return. In reward-based crowdfunding, they receive a non-financial reward, such as a product or service from the business. In equity crowdfunding, they receive a stake in the business in exchange for their investment. Crowdfunding can be useful if you can’t offer security or don’t have a strong credit history, but a campaign is time-consuming and takes a significant amount of effort to promote and manage.
Grants and government programmes
Grants and government-backed loans are sometimes available to encourage business growth in particular regions or industries, and you can research whether any would apply to the business you want to buy. Bear in mind that applying can be a lengthy and competitive process, and you may need to submit a detailed business plan and financial projections to qualify.Leveraging existing assets and resources
If you already have assets, you may be able to use them to secure financing.For example, you could offer personal savings or other investments as security for a loan to buy the business, or assets such as property, equipment or stock. A pension doesn’t work in the same way, as if you assign your rights under a UK registered pension scheme, the scheme is treated as making an unauthorised payment to you and tax charges follow, so it can’t in practice be handed to a lender in the way that savings can. If you’re thinking of using pension money to fund a purchase, take regulated pension advice before you do anything.
You could also look into asset-based financing, such as factoring or invoice financing, which allows you to borrow against the money owed to the business by its customers. Whichever you use, you’re putting those assets at risk if the business doesn’t perform, so weigh that up and have a solid plan for repaying whatever you borrow.
Can you buy a business with no money?
So, after reading this, you'll understand that it is possible to buy a business with no money, but equally it is quite rare. If I'm acting for a seller, I would try to avoid such deals, as I want my seller clients to get as much cash on completion as possible. If there is any deferred consideration, then my sellers will want security. If I'm acting for a buyer, then of course I will trade on the seller's generosity as much as possible.This route to buying a business takes a lot of research, planning and negotiation to find the right opportunity and make a persuasive offer. Even with no money, you can still have valuable skills and resources to bring to the table, so don’t be afraid to pitch yourself as an asset to the seller.
When you’re considering buying any business, it’s super important that your solicitor knows what they are doing and is experienced enough to handle the transaction. I act for buyers on business purchases, so if you need any help or support, get in touch.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
