The old saying, “If it’s too good to be true, it probably is” might apply here. Now, don’t get me wrong. You can buy a business with no money down. But the circumstances have to be just right. 

The right circumstances: 

A few years ago, one of the M&A groups that I work with had an opportunity to purchase a daycare center. The seller had multiple business ventures they were running and was motivated to sell the daycare center. This way they could focus on one of their other businesses. The buyer was able to negotiate the purchase with no money down. The seller agreed to take a 10-year note for the purchase price and requested a monthly salary for one-year as an advisor. This was a win-win for both parties. The buyer could make the monthly note payment and cover the seller’s salary out of cash flow. 

The guru’s pitch:

Today there are dozens of “gurus” posting on social media that, for a fee, they can teach you how to buy a business with no money down. The structure is as old as the hills. It’s called a leveraged buyout or LBO. Get a loan against the target company’s assets and bring the funds to closing for the down payment. Convince the seller to provide owner financing for the balance of the purchase price. Viola! You just bought a business with no money down and it only cost you $2,500 to take the course. 

I found the “perfect acquisition target”:

At least once a week I get a call from someone who just completed some guru’s course and had discovered the “perfect acquisition target”. I’m like, okay. What’s the purchase price? Has the seller agreed to take a note back for a portion of the selling price? What does the company have for assets? What is the value of those assets? Are there liens on any of the company’s assets? If it sounds remotely possible to structure a deal I’ll request current financials to run the numbers. 

The real value of operating assets:

The value of the machinery, equipment, vehicles, and other assets listed on the balance sheet are not the current value of these assets. Accountants take a depreciation expense on assets for a reason. The actual value depreciates over time with wear and tear. Most lenders will require a current, certified appraisal.

Appraisal values:

The appraisal will typically list three values. Fair Market Value (FMV), Orderly Liquidation Value (OLV), and forced liquidation value (FLV). Some lenders might use the OLV but most will use the FLV. Lenders will never entertain lending against the fair market value (FMV). To be safe, you can estimate the FLV to be about one-third of the balance sheet price. Lenders will never lend 100% of the FLV. On average you can figure the loan-to-value ratio (LTV), or amount of money the lender is willing to loan against the assets, to be about 70%. 

Other assets:

Inventory assets. Inventory is a challenge for most lenders.  You must determine what percentage of the inventory is in each stage of production. You will have raw materials, work in process (WIP), and finished goods. Each phase will have a different value. Some lenders may not even consider lending against raw materials or WIP. Inventory LTV can range from 10% to 50%. Managing the inventory assets is also difficult, requiring regular reporting and monitoring. If any of the inventory is sold off and not reported the lender may be upside-down. When evaluating an LBO I don’t even consider inventory in the equation due to these challenges. 

Real estate assets. Real estate assets, if part of the business sale, are the best asset when trying to buy a business with no money down. Real estate is considered an appreciating asset rather than a depreciating asset. As with other assets, a certified appraisal is usually required. LTV for real estate assets averages around 80%, less any mortgage balances that may need to be paid off to transfer ownership. 

Existing debt:

If the company has any term loans, revolving credit lines, or equipment loans chances are the company has liens on all of its assets. Even vendors who extend credit terms to the business may file a UCC-1 lien on some or all of the company’s assets.  These debts must be paid off in order to have the existing liens released and will need to be deducted from the FLV noted above before applying the LTV. Unless, you agree to assume some or all of the company’s debts as part of the acquisition. 

One last note. 

Most lenders will require some “skin in the game”. If you are looking for a lender to finance the LBO then no money down probably won’t be an option. You should plan on putting up at least 10% of the purchase price using your own cash.  This lets the lender know that you are committed to the business’ ongoing success and meeting the terms of the loan. Another reason lenders like to see an equity investment by the buyer is it shows them you are buying the business to run it and not just to gut the company of its assets to turn a quick profit like “Larry the Liquidator” from one of my favorite movies, “Other People’s Money”. 

Please reach out if you have found the perfect acquisition target and need an honest evaluation. You can fill out the form on the Homepage,  book some time on my calendar, or just give me a call at (843) 790-3661.