The EASIEST way to do an acquisition with zero money…
When it comes to making acquisitions, all the gurus peddle this idea of zero money down. They talk about seller finance, or going to the banks and getting funding, or even raising from investors, as though it’s easy.
And the knee-jerk reaction from folks that haven’t done it before, is that it’s not possible.
The good and bad news for you is that your hunch is right - it’s not as simple as they make it out to be. Investors want to see a track record, sellers want their money upfront, and banks always want to see money down, or your own trading history, or collateral.
But there are a couple of solid deal structures that actually are both achievable for you as a buyer, and desirable to (some) sellers. I’m going to talk about one of those today - thats what I call the “property-financed deal” - where the property the business owns unlocks the ability to get bank funding, without putting down a cent.
Look, for a start, every single business transaction that I have experienced has been a “structured deal”, in some way or another. The idea that a seller gets a 100% cash cheque and leaves the next day is romantic, and incredibly rare. These only happen when the business is a standalone asset, and operating the asset is totally independent of ownership. Some examples are certain softwares, and infrastructure assets such as solar plants. In reality, 99% of deals are “structured”.
What does that mean? Well a structured deal is one where the 100% cash cheque is not the case. The seller might get some cash upfront, some paid over time (seller finance), and some contingent to performance (earn-out). None of these terms should come as surprises to you. If a seller expects their cash up front, move on - it’s almost certainly NOT a good deal.
So here lies the opportunity with the “property-financed deal”. We typically set seller expectations, during initial conversations, at about 50% cash upfront (which we get from banks, investors, etc), and the balance an earn-out or seller finance. Believe it or not, this is not far off from most sellers expectations, and most reasonable people we speak to literally tell us (before we tell them) that they don’t expect to get all the cash up front.
So when the business owns a property, that’s where things get juicy. If you’re buying a business where the property value is approximately equivalent to the value of the business (let’s use 50/50 in this example), you can employ the “property-financed deal”.
Here, I’m going to use the example of a $2m business + property acquisition. The property is priced at $1m, and the business is priced at $1m. You strike a deal with the seller to pay him 50% of the 2m cash down, and 50% seller financed.
Some of you may see where I’m going with this…
Remember how I mentioned in the beginning that banks will only be happy to fund when there’s collateral, to ensure the security of their capital?
Well now you can approach the banks for the $1m loan to pay the seller his down payment. This can go down one of two paths…
1. You work with the banks acquisition finance team. They give you the $1m loan without issue, because it’s 100% collateralised by the property in the business. In fact for them, this is more secure than a typical commercial property loan (which banks write day in day out), because they have the cashflows of the business that they can use as debt coverage (i.e. the business’ cash flows can pay off the debt secured by the property, giving the banks extra comfort).
2. You still have a hard time (extremely unlikely), so you simply approach a mom-and-pop commercial property investor (there are literally millions of these), and have them buy the property, which makes up the down-payment for the seller, and then you’ve effectively 100% seller financed the business acquisition.
Easy.
There are dozens and dozens of creative funding strategies like this. No money down deals are a reality - they’re just oversimplified by the gurus which, justifiably, makes them smell like BS.
But anyone can do this. We’re in the middle of one of these deals now - I’ll report back once it’s wrapped up, with the specific deal details, so be sure to follow/like/comment etc so you don’t miss out when that drops.
Dim Niko