1) Become knowledgeable in the business you want to buy.
2) Develop a systematic approach to establishing relationships with business owners.
3) Understand fundamental business valuation principles
The Deal Structure
Most businesses aren’t sold as an all-cash transaction. The buyer typically pays a 10% to 30% down payment when buying a company. Lenders fund the balance of the purchase. Money gets loaned to people they believe are highly likely to repay it. Lenders can be family, friends, banks, business owners, etc. Gaining expertise in the business you want to buy will increase the comfort level of lenders.
Becoming an Expert in The Company You Want to Buy
Make it your job to become an expert in the business you want to buy. Do this by researching and talking to people in the industry. Talk to business owners, suppliers, end-users, and anyone with industry knowledge. Attend trade association meetings and meet as many industry insiders as you can. Let them know that you are looking to buy a business and would appreciate any input they have. They may even direct you to business owners interested in selling soon.
Systematically Meeting Business Owners
Create a routine with regular networking events where you meet business owners face to face. Be transparent and let everyone know you are researching the industry and intending to buy a business. Do this well, and you may get all the deal flow you need from this one activity. Compliment in-person networking with an online strategy where you meet business owners online using LinkedIn, Social Media, Forums, and any place business owners are online. Communicate by phone, email, text, or wherever they are, and keep a diary to keep track of all your contacts. Consider Contact Relationship Management (CRM) Software to manage your contacts. Some CRM systems are free if you stay under certain thresholds.
Understanding Business Valuation Fundamentals
Understanding business valuations is not complex if you learn this single valuation method called the “comparable sales method.” As the name suggests, it compares similar-sized companies in the same business. It analyzes it’s asking price, which is publically available and free on business-for-sale websites like bizbuysell.com, bizquest.com, bizbrokernet.net, and other websites. Compare 3-5 companies with similar gross sales and net profit. Find comparable sales data in the same geographic area or as close as possible. All the information I have mentioned is publicly available and accessible, but knowing what they sell for isn’t. However, there is a workaround to estimate the sales price. Studies have shown that over 80% of businesses sell for 70% to 85% of the asking price. If the average asking price of five laundromats of similar size was $200K, I set a value of $140K to $170K.
Due Diligence
Visit at least some of the businesses you used for comparable sales data. Do some due diligence to see how companies with identical gross revenue and net profit can differ. One company may have new equipment, and the other may have equipment that needs repair. One business may be in a great part of town while the other is in the wrong part of town. This work is required to become knowledgeable and expert to buy a company with little or no money, but the reward can be life-changing.
Trade Labor for Downpayment
Expect a down payment of 10% to 30%, which was previously mentioned but is worth re-stating. Now that we know the company’s value using the comparable sales method, we can calculate a reasonable down payment. The other benefit of contributing your labor or expertise is getting experience in the business you will own one day. This direct experience will show the business owners and lenders that you know the company and are qualified to run and service the debt. You can start today by establishing relationships with business owners in person and online. Be creative and look for a win-win deal that protects all parties.
Conclusion
Buy a business with no money down without risking your own money. Buying a thriving company without cash can be done if you do the work outlined in this article. Getting business knowledge, building relationships with business owners, and understanding fundamental business valuation are crucial but not the most important. This strategy will not work without honesty, integrity, and discipline. The other skill you must have is patience, which can take several months or longer. Because of size and complexity, some deals can take much longer to get done but give a lifetime reward. Join our community by clicking the button below and learn more about buying a business on my blog.
