Broker's demand proof of funds- Zero Down Guru Strategy Explained

 

Let’s go to the mailbag… Question: I've used some of your teachings to buy a business and I'm targeting deals around $10 million but this broker is asking for proof of funds before he sets up a meeting with the seller.  Any advice? thanks in advance, R. Can you guess what my advice might be? I’ll tell you. First, sketch out what a reasonable offer for the business might be and how much you’d usually borrow from a bank and the seller. You’ll be able to estimate how much of a down payment you need to do the deal. Then, show the broker somehow. You don’t necessarily need to send documentation. I’ll give you an example, back in my broker days, someone who showed me a bank balance on their online banking portal would be fine. You might need $100K to do the deal and I can see there is $125K in that account, fine. The purpose of the broker’s request is that they’ve likely been burned by people who have taken a ‘no money down’ guru program and have wasted their time before. So, I told this to R. and you know what?  He got right back to me! His answer… What if I tell him I am using asset financing i.e. inventory, revenue, A/R, etc? What does this line mean? You’ll notice there is no mention of a bank. Why? Because a bank would require some degree of down payment or balance sheet strength to do an acquisition financing deal. So, instead of a bank, R. wants to pledge the inventory and A/R as collateral to a lender who doesn’t care too much about cash flow. What does using ‘revenue’ as an asset mean? It means R. intends to pledge the company’s receipts to get a merchant cash advance. All of these leverage techniques have a much higher cost than bank financing. R’s plan is to get control of the company, leverage it up in this high-cost way and then give that money to the seller as the ‘down payment.’ Any balance will likely be paid with a seller’s note. This is ‘zero down guru 101’ stuff. It’s the kind of stuff you’ll pay a guru $10,000 to learn in their online ‘community.’ It just might work, however. Here’s what is required… The business broker needs to be inexperienced and uninformed -AND- the seller’s advisors need to be a bit dimwitted. An experienced person would realize that if this deal did happen that the resulting business would be highly leveraged and have an extreme cash flow demand from these short-term loans. Risk would be magnified on this already risky asset class. The quality of the guarantee and collateral of the seller note would be diminished by these debts. Not only would R. be gambling on super-duper awesome instant performance and growth, the seller too would be taking such a bet but may not likely know it. So, if the broker doesn’t understand this, then time and effort may be spent trying to do this deal. If a deal were agreed upon, then the second line of defense would kick in, the seller’s lawyer and accountant might be asked to give their opinions. These two would need to completely miss the signs of trouble in order to not warn the seller. So, what kind of seller might agree to this? One who is totally desperate, maybe. One who has no time left to find a better buyer, maybe. One who doesn’t want to take the time to liquidate the business themselves if they do understand fully what this buyer intends to do. This is why so many of the gurus say that you have to have the patience and fortitude to contact 10,000 business owners to find just he right one. The goldilocks seller! But maybe it’s a different kind of seller like this… One who has a crappy business that is losing money and can’t find a buyer… hmmm… Would this, in fact, be a weird reversal of karma? What if the business is sinking and the seller knows it and just wants out and other buyers have passed because of their due diligence revealing problems? In my experience, the ‘zero down guru’ folks are very concerned about doing deals and much less concerned about the ‘day 2 problem’ that I often speak about… actually operating the business and generating a good cash flow from it. This kind of seller could agree to R.’s deal, make him buy the shares, take the money and run! Who knows?!? I asked for a deal update if/when it ever happens. If you’re not broke and want to buy a business, then I would love to teach you how.  Head over to https://www.BusinessBuyerAdvantage.com and sign up for my online training program. Cheers David C Barnett