Artcile 3
You will find quite a lot of brokers out there that argue not only that you can, but they will also teach you how to do it. There is also the story of the Loch Ness Monster- some say it is real, some even have some really shady pictures of him, but if you go looking, chances are you are probably not going to find him.
Truth be told, if you do listen to the arguments they bring to the table, you do have to agree that they do make a compelling case and it is possible to buy a very good business for very little money, but to mention that you can buy it for no money at all whatsoever, is a bit of an overstatement- and that is putting it mildly.
The common misconfusion about the “no money acquisition” philosophy is that you would think the business is free, when in fact it is not, but you will find out that you can leverage even up to 100 % of the upfront payment if you have a good negotiator on your side and with the profits the company makes, the loan will pay for itself and allow you to enjoy increased profits, expansion and an overall great return on investment, not to mention the fact that you just bought a business without putting any of your money on the table – I mean everybody is leveraging- you know this to be true- .What a great deal?!! Can I get 2 of these please?
Well… back in the real world- the truth is that while it is possible to buy a business for very little money, if you do not have a minimum amount, I would advise against embarking on this journey.
If you are thinking that no money actually means 0, you are going to be in for a surprise. When taking into consideration the whole process of buying a business, you will find that there are many steps to go along the way, the bare minimum team you will need on your side is an accountant and legal adviser, and they are notorious for overcharging. (If you don’t know the average fees for such advisers, I strongly recommend that you start from there) And if you want to make the best of an acquisition, you should definitely have a broker on your side as well.
You can try to go at it yourself, but you should look to make the best of the opportunity and although you might think you are saving some money, these are the people that safeguard the transactions and make sure you get the most out of your deal. I do not want to overstress the importance of these advisers, but it is something like having sex with a stranger and not buying a condom or even worst – buying the ceap ones. Some things are just worth an extra penny.
In addition to this, it is very- very- very rare that someone can loan 100% of the acquisition price. Why? Because if you do not bring anything to the table, why would they? I mean.. you are asking for large amounts of money for a business you believe in… but as they do put their trust in someone else, they do want to make sure that person is committed, and what better way to have you committed than putting in some of your own money (now you also have something to lose).
Also, even if you can borrow 100%, this means you have pretty much leveraged everything that there is to leverage and there is a chance that on the day of completion the debtor book dropped by 5k because some client was nice enough to pay what he owed and you find yourself short. Trying to explain to a seller that a 500 k – 1 M deal or even larger is not going through because of 5 k is not a position you want to be in (and 5 k is the fortunate case). Don’t get me wrong, there are many lending options and some great lenders on the market. I strongly suggest getting familiar with them, as this will be in your best interest. (I will write a separate article about it for those who are interested).
The fact of the matter is that, while you can get most of the money you need for the first payment, there are many other costs associated with buying a business and if you do not have a suitable amount in your own piggy pank, chances are you will lose what you have to all sort of fees and end up frustrated, disappointed and without the business you were looking for as well.
Of course, this does depend a lot on what kind of a business you are looking to buy, but if you are looking for a stable, healthy business, with a good profit margin and team in place, that can get you where you want to go, I would advise to have a minimum of 150 to 200k of your own funds.
While each business is a particular case on it’s own, please keep in mind that mergers and acquisitions are a complex process and if this is your first rodeo, you definitely want to go in prepared. If you are looking for some advice, we are happy to help and although this article might not have given you the answers you wanted to hear, I hope it has given you the information you need.