Buy a Business with No Money? Can You Really Buy a Business if You're Broke? - David C. Barnett

so how exactly would one go about buying a business with no money hi there everyone it's david barnett from investlocalbook.com the blog site and youtube channel where i talk about buying and selling small businesses local investing personal finance and business management and anything else that people want to ask me questions about I have been watching for some time now videos on YouTube talking about buying businesses with no money and I've also gotten several questions over the course of the last year or two from people who want to know how they can put a business deal together to buy a company with no money or people who've been offered businesses for no money and they want some advice on those and I thought maybe now is the time to actually create a buy a business with no money video but mine's going to be a little bit different from well the all the other ones you can find online because I'm going to put a little bit of intelligence and common sense into this video so first of all what exactly do we mean by buying a business with no money does that mean you don't hand over any money on closing day or does that mean you get the business for free a lot of businesses are bought with a certain amount of vendor financing which means that you put part of the money down on closing day and then the vendor accepts payments over the course of time now it's conceivable for example that a vendor may agree to finance a hundred percent of the purchase of a business I've been involved in a couple of transactions myself where a vendor has actually sold business and carried a hundred percent financing but it was usually because there were some specific special circumstances for example I once helped a man buy a motel the vendors agreed to an arrangement which amounted to a hundred percent vendor financing because he was going to use his own cash to renovate the property and then get an appraisal for a higher value and then he would be able to get a bank loan to pay them out so it's not that he didn't have any money he just didn't give any to them on closing day okay he still had cash he used it to renovate the building another example might be someone who has no money in the same as account but they have other personal hence so I was involved in another deal where a guy did not take any of his own savings to buy a business what he did instead was he offered his home as collateral for a loan at the bank that was the money he used as the down payment so again he didn't take any money out of a savings account but we certainly can't agree that he bought a business with no money because money did cross the table in that transaction so I think what a lot of people are thinking of when they think of the question or the idea of buying a business with no money is a flat broke person with no money in the bank no personal assets that can be offered as collateral like really no money and how would this person go about actually purchasing a business that's a going concern okay so let's take a look at that particular scenario and there are two different ways that we can buy a business there we can buy the shares of a company we can also buy the assets of a company there's another video on this channel that talks about asset vs. share prices so if you're not familiar you might want to go and take a look at that I'll put a link in the show notes below so let's think for a minute first about an asset purchase so in a lot of asset purchases we have machinery and equipment in the business we may also have inventory and there's going to be some money in the bank and some money in the till and the cash register so I'm thinking of like a store so if I'm going to sell you a store and I'm not going to require you to give me any money on closing day that represents a risk to me because if I give you the business you now have all the capital assets the shelving the cash register etc and you also have that inventory so what you could do is you could sell off all the inventory pocket the money and run away right because you haven't given me any money I'm putting anything down I've basically given you control over these assets you could use them in such a way that I end up getting all right so if I was in a jam as a business seller and I wanted to sell a business and I was willing to do vendor financing for a hundred percent of what I sold what I would technically be doing is not really selling a business it would be more like liquidating the assets of a business and financing them a hundred percent before I were to do that kind of deal though what I would likely do is try to liquidate as much as I could for cash to my own benefit to fill my own pockets right so in a retail store what that would mean is selling inventory maybe having a big sale so now the the normal operating inventory level of the business will be reduced and in all likelihood the things that would sell out would be the most in-demand items so if you think of a grocery store you know maybe there's artichoke hearts and canned tomatoes in my mind anyway the canned tomatoes would sell out first right and you would be taking over a business that had some shelves and some artichoke hearts what are you going to sell the people you know people don't demand artichoke hearts in the same way they demand tomatoes so as the buyer of this business even though you got a great deal and you got to buy this business with 100% vendor financing without some money in your pocket to inject into operating capital to replenish the inventory you're basically going to be given part of a business not an entire business because you're going to lack that operating capital another example is if you are if the business for example were to sell you know goods to other businesses in all likelihood that business will have to sell and give people terms so maybe 30 days to pay a seller in that scenario is probably going to want to collect all of his receivables he may pay his payables if you get that business with no money down you're going to have to figure out a way for you to cover all the bills for the first 30 or 40 days until your new receivables start to flow back so again your if you can buy this business with no money down it doesn't necessarily mean that you don't need any money to buy the business you're going to have to put in operating capital let's look at a share purchase so when you buy when you get the shares of a company basically you have all this kind of stuff in the company that's on the balance sheet which may or may not include operating capital let me draw a quick balance sheet on the on the whiteboard here and I'll be back in just a second all right so now I've created here a very simple balance sheet for an example company in this company we have assets liabilities and equity over here I've got cash of a hundred dollars receivables of a hundred dollars equipment of a hundred dollars on the other side I've got payables of a hundred debts of a hundred and retained earnings of a hundred dollars now if I owned this company and I were to say to you look I'll sell you the shares of my company and I'll finance a hundred percent of it what could happen is you could take over control this company you could take the cash collect the receivables not pay the payables not pay the bank pay yourself a bonus of this two hundred dollars and then walk away and in all likelihood I will have been a personal guarantor on the long term debts and the bank will find out a way to come after me so would it make sense for me to sell a company like this to someone for no money for a hundred percent vendor financing probably not because I could do my own liquidation i I could take the cash to pay off the payables collect the receivables to pay off the debts and walk away and you know liquidate the equipment right so it's very unlikely that somebody who owns a company in this kind of state is going to be willing to sell it to anyone and finance 100 percent of the transaction let me make a quick change I'll be right back alright I made a quick change to my balance sheet here in this case what I've done is I've said we've smelled the same assets cash receivables and and the equipment of a hundred dollars each but on this side of the balance sheet on the payables side I've got $100 in payables and I've got debts to the bank of $300 well if we $400 worth of liabilities and $300 worth of assets then what do we have we actually have owner's equity which is negative so technically this corporation is insolvent okay there is insufficient equity on the balance sheet for for this company to exist companies can become insolvent for a short period of time but as long as they come out of it relatively quickly they can live you know to fight another day but a company that remains insolvent for a long period of time what what eventually is going to happen is that the debts will crush the company there's obviously not enough profit there there would be losses on the income statement in order for a company to end up in this kind of situation so this in fact though is the type of company that I could imagine somebody giving away and be willing to finance 100 percent of the shares because the shares wouldn't probably actually really be worth anything so it you know wouldn't be that big of a deal to finance their sale as long as you as the buyer we're willing to assume all personal guarantees on the debts you see debt assumption is the same as cash if I owe the bank a hundred dollars and you agree to take over that debt it's like you just gave me a hundred dollars because now I don't have to pay back the bank and scenarios where there's debt assumption is probably the only kind of situation I can possibly think of where someone would actually be willing to hand someone a company for no money or no money down the question is do you want to acquire such a business because a business that ends up in an insolvent state is probably a money-losing business so unless you have a way that's fairly foolproof that you can turn the business around or or make money with it it's probably not something that you want to buy in a recent email that I had from a potential client it was a woman who was basically offered a business by her boss who said I'm leaving I'm going to move away if you would like to buy this business I will finance 100% of it for you when she asked why he wanted to do it he said I want to move to a different place and this business in this market isn't generating the lifestyle that I require big red flag saying that the business doesn't make enough money of course he's willing to give it away for free because in his mind he's already reached the point where he really realizes that the business isn't an asset to him it's a liability to him it's costing him money to sit and fester not earning his potential in that particular market so I hope that that makes sense to people if you want to buy a business you should not be trying to figure out how you can take your broke self and Kani your way into a transaction where you can buy a great successful profitability with no money down you're not going to get those kinds of opportunities unless you're talking about someone in your family basically gifting you a business that that they want you to basically inherit if you want to go out and buy a successful business you have to develop the skills and mindset in your own household that leads to a disciplined budget that leads to an accumulation of savings equity in a purchase situation always starts with having money saved up in a bank somewhere I even work sometimes with people at a local government economic development agency and they do very small loans to people trying to start businesses up to $20,000 and their key measurement metric internally within their organization is how much other money they're able to leverage so to give you an example an entrepreneur comes in with $10,000 they lend the person $20,000 and now that person can start a company and put that $30,000 on the balance sheet as equity which then allows them to go to a bank and borrow maybe another $50,000 right so that economic development agency is able to then say to to their Board of Directors look we lent some 120 and and they were able to use that to create a company that started off with $80,000 of assets does that make sense anyway thanks for the questions I love getting your questions remember that if you enjoyed the content of this video please give it a thumbs up like it share it it's the only way that the systems that manage the Internet have of knowing that the content is actually valuable and if you want to get videos like this one before anyone else go to David C Barnett comm and sign up for my email list I send out an email every Friday with a new video or story talking about business deals buying and selling businesses local investing etc and if you're interested in getting your money working for you without actually getting into business then you'll want to check out my local investing Academy the next semester starts at the end of September and you can learn more about that at local investing course com as always if you are serious about buying a business one day and you want to prepare yourself and learn what it is that you need to do you should be going over to business buyer advantage com thanks and we'll see you next time have a great day

Channel: David C Barnett Small Business and Deal Making SME

Views: 123,737

Keywords: how to buy a business, how to buy a small business, how to buy a smallbiz, smallbiz, small business, business, business for sale, buy a business, buy a small business, no money down, no down payment, easy payments, business broker, buying a business, businesses for sale, business brokers

Id: NVTgDT7Cc2g

Length: 14min 22sec (862 seconds)

Published: Sun Aug 28 2016