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Buy a Business With No Money Down!?!?

February 2, 2012

There are ways to get into a business with “little” money down.  No money down?  We would NEVER say NEVER about anything.  But if you have seen our post about Absentee Ownership, you will note that there are some deals that carry the same sort of odds you get with buying a Powerball lottery ticket.  And according to Powerball’s own Web Site, the chances of hitting the grand prize are approximately 175,223,510 to 1.  Those are the kinds of odds you would deal with in getting a business with absolutely nothing down.

This particular post will deal predominately with purchasing an ongoing business.  There are SOME businesses you can get with “little” down and we will discuss that.  But there are dangers in doing that, and we will discuss those as well, below.

First and foremost, no SBA or conventional Loan will consider a Buyer that comes in with no money.  Ain’t gonna happen!

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at  Thank you for your interest.)

There are some circumstances that would permit you to convince the Seller to give you a loan for 10% to 20% of the purchase, which can then be used for the down payment on an SBA loan.  To do this, you need to meet three (3), very exacting requirements:  First, your Credit Score must be superlative; second, you need to have experience that will be judged by the SBA to be related to your purchase, which is to say you need to prove that you have the education and skills to make that particular business work, successfully.

The third is more difficult to readily understand without study.  When you do a deal like this, you would then have two (2) Loans:  One to the SBA and the other to the Seller.  The Seller will almost certainly ask for terms that are higher than market.  So you need to be certain that you have the Cash Flow in this business that will allow you to pay both Notes – one to the SBA and one to the Seller – and still provide you with an Income, as well as provisions for Cash Reserves.

The SBA will require that both Buyer and Seller sign agreements that state that the Seller’s Loan will not be paid any sooner than the SBA will be paid.  So, if your Loan with the SBA is ten (10) years, the Seller can only be paid over a minimum of a ten (10) year term.  This is a legal stipulation which means you cannot legally sign a deal that will allow for pre-payment of the Loan to the Seller.  Some Sellers will not want to wait that long, to get 10% to 20% of their money.

What are your alternatives?  There are a number, but they are all non-conventional and have tremendous potential for risk.

The best, depending upon the amount you need and how fond your friends and family might be, is to borrow or elicit investment from those close to you.  Frequently, that sours.  Expectations vary widely between borrower and lender, and because of the relationships, they are normally not put in an agreement, in any great detail.  It leaves huge opportunities for misunderstanding and irritation – to say the least.

A number of cultures resist borrowing from banks and other institutionally-oriented lenders.  They traditionally borrow between themselves and it works exceedingly well.  But the entire structure of those deals is culturally established, and that is something that those outside of that particular culture would find extremely difficult, of not impossible to replicate.

Some years ago, we dealt with a Credit Card Company that extended loans to some small business Buyers, if the Buyer would sign long term contracts with that Credit Card Company to process its charges.  We have no idea how that worked out, or whether it is even still going on.  The charges would probably be higher than you would normally receive from Card companies without a loan, and it could even be more financially problematic and costly than a conventional loan scenario.  But it may be worthwhile to pursue; HOWEVER, WE WOULD ONLY CONSIDER THAT WITH THE APPROVAL OF BOTH YOUR ACCOUNTANT AND ATTORNEY.

Private Money Lenders may be worth pursuing; however, their rates are frequently higher than would make sense.  These are more typically used on a short term basis.  You might use one of them if you felt that, after two (2) years of operation, you could convert to a more conventional loan.

None of these guarantee you can buy any business with nothing down.  They may offer opportunities to get some Investors or Lenders to provide you with the money to obtain the money for a down payment.  But there are other considerations, when doing this.

And one of the most difficult is that this kind of Debt is fraught will risk!  Part of the tremendous economic crash of 2007 and 2008 had to do with people leveraging too much debt, for the purchases they made.  (Leverage is – in extremely simplistic terms – using a small amount of money, in combination with credit, to make a large purchase.)  If you have an enormous amount of Debt, resulting in a huge monthly payment due each month, what happens when your business has a temporary drop in Revenue?  It does not take long, if you are highly leveraged, to get so far behind that you can never recover.

Keep in mind that Robert Allen wrote a book called “Nothing Down”, which was involved in Real Estate investing, in the 1970s.  It was very popular, although there were a number of people that followed his methods and who subsequently went broke.  Interestingly, Mr. Allen, himself declared bankruptcy, in 1996.  And some of his critics suggest that parts of his methodology were either unethical or even illegal.

We cannot pass judgment on Mr. Allen or his methods; however, what is obvious from the collection of information on and about him and his programs, is that there is an incredible amount of personal risk attached to them.  Not the least of which is that there is normally no such thing as a “non-recourse” loan, when dealing with highly leveraged business deals.  A non-recourse loan is one in which you have no personal liability.  Normally, you will be asked to personally guarantee such borrowing, and the less you put down, the more likely it is that you will be asked to sign such personal guarantees.  That means your home and other assets, even future earnings from jobs you may take if the business fails, are all subject to judgments, in order for the Lender to get some of the borrowed funds back.

Perhaps one of the biggest reasons NOT to do a deal with no money down, is that you need money to keep the business going, after you take over.  People who have never been in business frequently think, “I am buying a business that makes money, so there will be Cash Flow from the fist day.”  WRONG!!!

When you take money in, in today’s marketplace, it will frequently come in via Charge Cards.  The Charge Cards will sometimes pay within 24 hours; but some take as long as 7 days to pay you, which is why a number of merchants refuse to take some Credit Cards.

You have payments to make, almost every day.  Inventory deliveries will frequently need to be paid on a Cash On Delivery basis, because many vendors will not offer credit terms to you, for at least six (6) months.  Coca Cola, if you have their products stocked, may never offer you credit.  It is nothing against you; it is simply their way of doing business.

You have Payroll to make, maybe on a weekly basis.  You may have a compressor break down on a cooler and need to make an immediate payment for the repair.  Equipment losses because of breakage or theft cannot always be postponed, and that kind of thing happens all the time.

Even before you take over, what about Deposits for Utilities, Phones, Leases, etc.?  In buying a business, you must deal with paying all of those items, unless you are buying the Seller’s Corporation.  Normally, you buy the Assets of his/her business, which includes all FF&E (Furniture, Fixtures and Equipment,) the business name and goodwill, among other items, both tangible and intangible.  But you set up your own Company, in order to do this.  The new Company has to establish its relationships with Utility companies and such, and therefore needs to pay deposits on service, in most cases.

So, even if you put no money down on buying the business, you still need money!!!

The vast majority of businesses that fail, do so because of a lack of Capital.  When you are undercapitalized, the slightest downturn in business can potentially put you out of business and on the street.  There are any number of protections that are legally available, if you miss your house payments for a time.  But those do not exist in the same way and with the same quality of protection, when you miss a Lease payment or Note payment on your business.

If you do not pay vendors for your Inventory, you cannot stock your selves and cannot obtain the Revenue you need, in order to get back in the black.  It is a viscous cycle, leading to a spiraling decline that occurs with extreme speed!

Think about the math.  If you have a Profit Margin of 10%, after all costs, and you run into the red and skip a $5,000 Note payment, how long does it take you to recover?  You need to pay for all of your other expenses, plus generate another $50,000 in Revenue, in order to make up that $5,000.  Let us make that very clear:  That’s not just $50,000; that is $50,000 OVER what you normally need to make, in order to break even on a monthly basis.  If you were already struggling enough to have to miss a $5,000 payment, how are you going to get back to breaking even, AND making an additional $50,000?

This is why, once you get behind, it makes it horrendously difficult to get back in the black!  That is why you do not want to start out undercapitalized.

This is also why we frequently tell people to wait until you are absolutely, financially ready to take a move like this.  We understand you are anxious to begin; but it is far better to wait and be patient, than to doom yourself to failure and a sentence of financial ruin, for years to come.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at Thank you for your interest.)

  1. i have a slightly differnt view, I have done over 30 deals with litterally no money down, and certainly without bank finance, companies rangingf in size from $750k – $5m. There are many ways to extract working capital from a badly structured balance sheet and finance the ongoing business, and there are many structured deals that work for both parties that enable you to take ownership without any cash or need for furture cash.


    • Jeremy, we do not disagree with you, and we congratulate you on your success. But we will also stick to our thesis, which is geared toward people who are not tremendously experienced or formally educated in business; our comments are geared toward people who are looking at starting up or purchasing their first or second businesses. Frankly, people like you do not need to read our posts. Everything we talk about here is below your understanding and experience level, and we believe the way our narratives are written, the majority of our audience understands that point. We try to use a bit of humor with some of our posts; we normally state that our positions are not engraved in stone – as we believe we suggested in the post you read; and we treat our Readers with respect, because our goal in writing is to help, not harm.

      To say that people can extract Capital from Balance Sheets is correct and fine; except that the people with whom we work on a daily basis don’t even know what a Balance Sheet is or how to read one, much less use it to extract Working Capital.

      The kind of work you do is something we respect and applaud. But it is also the kind of thing that would cause the vast, vast majority of novices to crash and burn within six months. Your methodology provides you with opportunity, but it also contains a tremendous amount of risk; there is no margin for error, if that novice goes into such a deal with both a lack of Capital and an equal amount of inexperience. Moreover, many of these novice-Buyers have no understanding of the risk they are undertaking; to hold out large scale optimism for such deals, does them an incredible disservice and sets a huge number of them up for almost certain failure. And there are a lot of people taking advantage of Buyers with a lack of experience and business knowledge, and they are routinely abused, particularly in advertising on the Internet.

      So, while we appreciate your position and success, please understand our position, as well. We are attempting to educate that novice, offer him/her advice they can absolutely use, potentially to succeed; if they were to attempt your strategies, the average person reading our posts would be doomed, from the start.


      • Jeremy Harbour permalink

        You are absolutly right it is a more advanced strategy, although I had no business eductaion, and learnt how to do this on the job.

        In fact they say necessity is the mother of invention and it was my lack of capital that made me find a way to get my fist deal done. Also by using no capital you massivly reduce risk, all you risk is your time, and you get that back in lost sleep 😉

        So not for the feint hearted, but certainly if someone has a business already it is by no means out of reach, the first business I picked up had a turnover just 160k but the experince was invaluable and completly changed my whole outlook on business and wealth.

        So it should certainly be an optional ambition for your readers entrepreneurial careers.

        Thank you for all your doing to help and encourage entrepreneurship !


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