How to Buy a Business worth Millions with $0 of Your Own Money
Seems like a gimmick, but it’s not. It’s a strategic move, however, for this to work you need three things:
1) Good credit
2) Relevant skills that lead bankers/investors to believe you’re capable of running the business you want to buy
3) A willingness to sign on the line for a huge loan with an unlimited personal guarantee
You’re going want to search for and find an established, profitable business that’s eligible for the Canada Small Business Financing (CSBF) program, and get 100% of the money by structuring a deal like this:
- 10% from an investor that likes you and wants to be your minority partner
- 67% via the CSBF program (up to $1m)
- 23% Seller Financing (vendor take back loan)
The search: you’re going want to look for a business that has as many of these attributes as possible- this is the “sweet spot” where the best deals are - check out this blog.
How you’ll find your business target, simple, search here. Also, make sure to join our Premium Buyer Program here for an optimized deal flow experience.
For this example, we’re going to say you found a nice business doing $500,000 in SDNE (Seller’s Discretionary Net Earnings) and you can buy it for 3X SDNE, or $1.5M total. $500,000 is the total available to pay yourself to operate the business, service debt, and for-profit distribution.
Your investor is someone who believes in you personally, has cash, and likes making money. You are going to offer them an AWESOME deal to put up all the cash you need. Offer them 15-18% equity, (worth $225-$270K) for $150K.
Investor will love the deal because:
- They get to buy in at a discount.
- Not very risky because it’s a long-established business and you’re a stud operator.
- Cash flow distributions will be awesome, immediate ROI.
- Downside limited to what they put in, and upside is unlimited.
Personal Guarantee via the CSBF program is usually negotiated between lender and borrower, a quick example: CSBF loan is for $1M and the corporation defaults, then there would be a responsibility for a personal guarantee of 25% ($250,000) of the original loan ($1M). Reminder, that the personal guarantee(s) is negotiated between lender and borrower and can differ.
Now let’s get the remaining 90% you need figured out. This will be debt in two notes.
- CSBF Program for 67% ($1M) let’s say 10 year amortized at 6% interest. Annual payment = $132,000
- Seller Financing for 23% ($350K) over say 5 years at 7.5% interest behind CSBF. Annual payment = $84,000
When the smoke clears you own 85% Investor owns 15%. The cash flow looks like:
$500,000
- $100,000 for your salary to run it full time
- $132,000 CSBF Note
- $84,000 Seller Note
= $184,000 in Annual Pre-Tax Profit.
Investor gets 15% of that = $27,600 (18% ROI on their cash).
You get $156,400 + $100,000 salary.
With Zero growth, just keeping it steady, you’re making $256K/year and investor is making 18% cash on cash return.
In 5 years, Seller note goes away and you’re making $328K/year and investor is making $40K/year (27% on original investment).
In 10 years with ZERO growth, CSBF loan is now paid off, and you’re making 85% of the $500,000 cash flow = $425K and investor is making $75K annually FOREVER from their original $150K investment. And your equity is worth $1.275M and investors’ equity is worth $225K.
But, if you grow at just 5% per year, the numbers are so much better at the 10-year debt free point: Business is now worth $2.45M or more. Your equity is $2.08M and investors’ stake is $368K. And you each enjoy $817K in annual cash flow, of which you get $694K and investor gets $123K.
Summary: look for deals between $1-$5M asking price (the micro market) and with earnings multiple of 2-4X and it will generally pencil out sexy like this. This was a small one. Bigger ones, even better. Line up your investor FIRST. Get an CSBF lender to pre-qualify you together second, then GO SHOPPING.
Further resources:
Source: Twitter.com | Inspired by Clint Fiore | BuyAndSellABusiness.com
Opinions expressed here by contributors are their own.
BuyAndSellABusiness.com launched a private Slack community designed to help people connect, share insight and ask questions about buying, selling and growing businesses or franchises. Apply to join here.
Remember, if you are interested in receiving the latest business news, insights and opportunities from BuyAndSellABusiness.com, you can subscribe to our newsletter here or join our text messaging list here. Also, if you are not a BuyAndSellABusiness.com user yet, what are you waiting for? Click here!
