Buying a business with little to no money may not be as hard as you may think. There are many business owners looking to exit their businesses for a variety of reasons. Some may be retiring, others may be overwhelmed, or perhaps looking for a professional move but therein lies the opportunity for ambitious entrepreneurs looking for opportunities that already turn a profit.
The hardest part of the entrepreneurial process is getting started. If your starting from scratch, you’ll be faced with all the normal challenges but also, you’ll have to battle the unknown and the statistics. Almost 50% of new startups fail within five years, which is why it makes sense to explore existing businesses because they have already made it past that early threshold. The learning curve through trial and error is perhaps the most challenging aspect of a new startup business. Most simply run out of time and or resources before they can figure it out.
In the advent of the IoT (internet of things), there are numerous business models that can be partially or completely home based while using strategic third-party relationships to fully support the business needs. And of course, there remains the bulk of opportunities in the old-fashioned brick and mortar model. In all there are countless opportunities of all sizes and makeups to explore. Let’s get started on this journey…
Finding A Good Opportunity
Finding the opportunity used to be the hardest part of buying an existing business. However, today almost everything you’ll need is at your fingertips via the internet. In the old days businesses for sale were listed through business brokers who maintained investor and buyer lists they develop usually through relationships and local advertising. This meant your chance of finding a business outside of your local geography was quite a challenge. Then dealing with business brokers who had another set of filters built-in to their screening process that usually kept you from ever getting close enough to the business owner to present your case or offer. This meant unless you fit a certain buyer profile with plenty of assets and cash you can’t even get in the game, until now.
Before you can begin your search, you need to figure out some basics. I like to call this a purchase profile. Some of those key items are;
- Business sector desired
- Business type; home or brick and mortar based
- Price range you are comfortable with
- Profitability and revenue model
Once you have the basics in place its time to grab your laptop and start searching. There are dozens of online business broker listing sites, but as with most things, a few large ones have most of the listings aggregated.
Since most business brokers now also use the internet to advertise their business listings, you’ll have plenty of inventory to sort through. Additionally, an increasing amount of business owners use these sites to sell direct to buyer. Here are three sites to start with:
During your research you’ll be asked to sign a non-disclosure agreement prior to release of any sensitive business information, which is standard practice. Upon receipt of the business prospectus you’ll be able to dive into the details to see if the opportunity meets your criterion. Keep in mind, buying a business is a lot like buying a house, everything is negotiable, and it’s only worth what someone is willing to pay.
Evaluating Your Opportunity
Refer to your purchase profile search results narrowing down your top choices.
Each opportunity will have pro’s and con’s, it’s up to you to prioritize to best suit your goal. Some may prioritize business type over profit or sector over price, etc.
Reflecting on the earlier list of items or factors involved in this search, it’s time to dig into the profit and revenue. Most businesses arrive at their value using a multiplier approach. If a business uses a simple multiplier approach, they would effectively take the gross profit and multiply out based on industry and sector. This tends to vary a bit based on industry and bushiness type, but a little research will provide a good barometer to start with. Let’s look at a look at an example;
Business scenario 1 – Internet business selling vitamin supplements with 6 years of history.
Asking Price- $780,000
Profit – $195,500
Research may suggest that this business type usually sells for 3 x’s it’s profit, so this listing is asking 4x. Do your homework so you can feel good about the value you arrive at. Since this business has been established for six years, you’ll have plenty of information to adequately understand the journey to appreciate the opportunity.
Once you’ve completed your due diligence and are ready to make an offer, you’ll be quickly pushed to the next question which is how to pay for it….
Paying for The Business
Now we must think outside of the box but not too far. The conventional approach would expect that someone buying a business would secure financing through a bank or other small business program types. This approach is also the most difficult because everything must fit neatly into preconceived boxes. For instance, you must have grade A credit, a net worth to speak of, proven track record in that line of business, and much more to check the multitude of boxes required for approval.
We’ll focus on an alternative approach which will include a small percentage of borrowed money and seller financing. Seller financing will likely represent the bulk of the purchase price, and you’ll use borrowed money for your good faith down payment. Assuming you have at least marginal credit, obtaining a personal loan, or similar peer to peer loan is readily accessible these days. Finance companies small and large are aggressively chasing borrowers for small personal loans for any reason up to $50,000. A few examples are:
The seller financing piece should be understood for what it represents. Not all sellers will be willing to go down this road, however, there are a lot who will. If an existing business has a genuine track record of revenue and profit, then the next question may be, is it sustainable in its current state. If the answer is yes, then a seller will not be as hesitant to hold a seller note for a few years while you take over. This also acts as insurance to validate the claims being represented by the seller in the first place.
You may ask why a seller would consider holding a note rather than just hold out for a conventional buyer. Two reasons that are most likely are, you will offer him interest and terms on the loan note that he cannot get from his bank’s savings account. Most banks are offering less than 2% in most cases on deposits, but you could offer him two to three times that without having a major impact on your deal’s profitability. The other reason is you are more likely to offer him a better purchase deal rather than a buyer coming in with cash who will undoubtedly seek to low ball him as much as possible.
Let’s look at some real-life examples below.
- Example #1 – A 10-Year-Old Online Nutritional Supplements Business
This newly rebranded online business enjoyed many years of revenues of $900k+ which had fallen to less than $300k. The rules of internet marketing were changing and the owner, a retiring chiropractor simply wanted to play golf.
Since the internet commerce space was being dominated by Amazon, the impact of this reality made competition very cut-throat and began to destabilize many Brand’s product values by selling far below MSRP. This reality caused manufacturers to begin implementing very restrictive advertising rules, thus making it far more difficult to sell online.
This challenge was a breaking point for an aging doctor but presented an amazing opportunity for an energetic entrepreneur with some internet marketing skills.
The owner decided to list the business for sale at $499,000. However, after several weeks and two failed offers the listing was lowered to $399,000 in hopes for just getting it sold.
Finally, after several more weeks and lowered expectations, the seller found himself open to considering almost anything. Along came a buyer who had limited resources but plenty of ambition and ideas.
The deal came into shape like this:
List price- $399,000
Gross Profit- $125,000
Purchase price- $199,000
Down payment- $25,000
Seller financed- $174,000
Ultimately this ambitious new business owner purchased an active profitable business generating $250k in revenue annually with a $25,000 personal loan. The seller financed note was provided on a 3-year term at 5.5% interest.
- Example #2 – A 7-year-old Travel Blog business
This tastefully nurtured travel blog began as a hobby by an aspiring writer. The owner simply began writing about her travel experiences providing useful insight from start to finish.
Two years in she started learning how to monetize the blog by inserting advertising snippets and ads within the pages of her blog. This proved to be quite fruitful and became incredibly profitable by year three. The next few years would be spent optimizing the process and ultimately generating a steady annual income of $38,000. Not bad for a few hours a week writing about vacation.
Ultimately the aspiring writer’s pursuit of bigger career fish became a reality and she decided to sell the business to focus completely on her lifelong pursuit.
This business opportunity didn’t present any major challenges, per se, but did provide a start for someone interested in the travel and tourism business. There is plenty of growth opportunity through expanded marketing as well as an ecommerce angle if interested. A nice play could be made by offering some tasteful products like t-shirts or select travel items.
This business was listed for $120,000 and since it’s a clean model was projected to sell quickly and easily.
The deal came into shape like this:
List price- $120,000
Gross Profit- $38,000
Purchase price- $75,000
Down payment- $25,000
Seller financed- $50,000
The seller wanted a quick sale and since the revenue was established didn’t have a problem holding the $50,000 note for 2 years @ 6.5% interest which is much better than she would have gotten from depositing it into her savings account. The buyer who was seeking a passive part-time business used a personal loan to put up the $25,000 down payment. In the end, the buyer can pay all loan obligations and still pocket profit while continuing to build and expand an already profitable business.
Buying a business with no money is a little bit easier than you might have thought. And, it happens more often than you think. In business, a key perspective to maintain is that often there are many ways to create a win-win scenario, and if you are genuine in this attempt, success can be found.