I made this video a few weeks ago to explain the different scenarios that someone might conceivably buy a business with no money and the dangers for the buyers and sellers in each. Watch: https://youtu.be/NVTgDT7Cc2g
Cody, one of my viewers, sent in this thoughtful question in reply to the video:
Hello David, thanks for all the videos. Have a question: I have heard of people buying businesses through 100% financing, but not technically no money down.
So they first go to a lender and borrow against the assets of the business to raise cash, which they then give some or all that cash to the seller, as a down payment.
Then they get the Vendor(Seller) to carry some kind of financing on the rest, the seller is in a junior position to the lender in case the business fails.
In theory this should work great, the seller will get about as much cash at closing as they would if the seller liquidated.
Have you heard of this?
Does it work?
If it does work, is it easy to put together?
If it does not work, why not?
Great questions Cody!
The problem with this scenario lies in two places… are we actually talking about buying a business or just a collection of assets? The reason I ask is that if a seller is happy receiving an amount which approximates a liquidation then we’re not receiving operating capital or paying for goodwill.
If there is no goodwill value, is the business a profitable money maker?
Also, if you’re buying this as your first business then what would your opening balance sheet look like? The banker will want to see.
I must admit though, this strategy would work for a different kind of buyer. See my video response to learn who could pull this off. Watch: https://youtu.be/xZqJTa_YZj4
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