Contrary to what you might think, you don’t have to use your own money or collateral to buy a company.
Likewise, you don’t have to rely on a loan from the Bank of Ageing Parents, or an investment from crowd-funders or Angels to seal the deal.
Instead, you can use what’s known as vendor-finance or ‘leverage’ to acquire the business. Of course, for this kind of deal to go through smoothly, you need to find a highly motivated seller, someone who has a burning desire to get out of the business.
And he or she must own a business with plenty of current assets (cash or anything that can be turned into cash or accounts receivable within 12 to 18 months). That’s because you’re going to be financing some or all your deal with the money and value that’s already in the business.
You need to examine the business to determine what assets it has—cash in the bank, its debtor book, its contracts as well as fixed assets such as property, equipment, vehicles, furniture, phone systems, etc. Look in particular for undervalued assets. You might be able to borrow against these assets to fund the entire deal or your initial payment.
You have to work out how you can extract the value of those assets to finance your purchase and then negotiate with the seller to accept your deal. If the deal is successful, the seller will receive the cash they want from the sale in a tax efficient way, and you will acquire the business without using your money.
Some sellers might baulk at the prospect of being paid off with money that’s come from their company. It’s worth pointing out they will pay a much lower tax rate than normal (10%) on shares worth up to £10 million. Besides, regardless of where the money is coming from, they will still be getting exactly what they want. And, if they’re still not convinced, ask them if they really want to go through the entire process again with someone else.
There are many ways you can fund your purchase.
For example, you can use the company’s projected cash flow to fund a down payment. Simply determine the net cash flow (cash receipts minus expenses) that the business will generate in the first few weeks after the sale of the business. Then negotiate a deal that enables the seller to receive the down payment directly out of the cash flow once you’ve taken over the business. The cost-savings and profit improvements you make when you become owner should then help to fund the monthly instalments to the seller. The important thing in this situation is not to overestimate the likely income or underestimate the likely expenses in those early weeks because if you do, you’ll end up in dire straits.
Another way to fund your down payment is to approach the business’ existing suppliers and ask them to loan you the money in return for continued orders (when you’re the new owner). In return, you agree to repay the loan with interest and to pay the balance immediately if you switch to other suppliers. They’re usually highly motivated to help you because they want to continue getting orders and they’re likely to charge less interest than High Street banks. That makes them ideal financiers.
Yet another way is to sell the company’s equipment or machinery to a third party and then lease it back. You can use the money from the sale of the equipment to fund your down payment.
These are just some of the many options available to you to buy a business without using your own money.