Many savvy entrepreneurs would rather buy an existing business than start a new business. Buying a business that is already operating provides many benefits, for example, well-established products and services, employees who have been trained and know the business well and are able to maintain business continuity for a long period of time. Buying a business can still be done even if you don't have a penny in your pocket.
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Part 1 of 3: Finding and Staying in a Business
Step 1. Find the ideal business for you
Before buying a business, consider what type of business you want to run. Even if you plan to remodel your business unit to make a profit, you will still have to run and grow the business unit over a period of time. Also, searching for the ideal business will help identify the business units to buy.
Step 2. Find the business unit whose owner is leaving
Investigate local business units and their owners in your city. Typically, a business unit is ready for sale if the owner is about to retire or move on to a new business opportunity. You may have a greater chance with a business whose owner is retiring because usually the owner tends to want to sell the business unit quickly. However, finding these business units is quite difficult. Try these tips for finding business units to sell:
- Talk to a lawyer or accountant who works with local businesses.
- Speak directly to the business owner. Even if the owner does not intend to sell his business, he may know the owner of another business unit who wants to sell his business.
- Read local publications and look for owners who are nearing retirement.
Step 3. Come at the right time
You need to bid at the right time to get a good price. However, the exact timing really depends on the business owner. For example, as mentioned earlier, a business owner is already looking to retire. In addition, business owners tend to want to sell their businesses during a recession or worsening economic conditions to maintain their financial health. In this situation, you as a buyer face quite a high risk, but you can gamble and try to grow your business quickly after avoiding a crisis.
Step 4. Find a lawyer
When doing an LBO (leveraged buyout) i.e. buying a business without using personal money, you need a good business attorney to make sure the agreement is drafted properly.
Use a lawyer who specializes in business sales, and not a general attorney. This is done to avoid mistakes that may occur in business transactions
Part 2 of 3: Buying Business Units
Step 1. Find a business offering financing by seller
Some business sellers offer to borrow money to finance the purchase of their business. When you find a business that is being sold with financing by a business owner, you are halfway to buying a business without using any personal money.
- Keep in mind, almost no business owner offers 100% of the sale price financing. You will still need to make a “down payment” as part of the transaction. This down payment can be obtained from other sources of financing so you can still buy a business without using personal money.
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Business owners are willing to finance the purchase of their business units usually for two reasons:
- The business owner believes in his business unit.
- The business owner trusts you to manage his business well.
- However, this also means the market for the business is quite limited which means few buyers. Consequently, the seller is required to liquidate his business at a discounted rate.
Step 2. Make a creative offer
If a business owner is hesitant to provide 100% financing, make an attractive offer with your business purchase. For example, offer a better payout or interest rate. For example, the buyer may offer to work without pay for several months while giving all the profits to the seller.
Step 3. Find a business owner who wants to be a passive investor
Several owners have worked hard to manage their businesses over the years. This owner wants to retire, but still needs income from his business. Such owners will sell their business to you if they receive some income from business unit profits.
In this case, you still need to make a down payment. However, you are required to deposit a portion of the profit to the former owner over the next few years. This method is similar to financing by a seller, the difference being that payments to former owners are based on the success of the business. In addition, you are also not in debt
Step 4. Find a second source of funding if needed
Owners willing to finance 100% of the purchase of a business unit are rare. Therefore, you need a second source of funding.
You can try borrowing from a bank, but usually the process of getting a loan for a small business is very long and complicated. Banks usually don't like to fund businesses up to 100%. Your best options are often with other investors
Step 5. Invite other investors
If you can't finance the purchase in other ways, you'll be forced to find an additional partner. These partners can provide needed funds in exchange for a portion of the business unit's future profits. You can even bring in a “passive partner” who doesn't have active responsibility for the business.
In addition, we recommend that you issue preferred stock to various investors (perhaps family and friends) or issue unsecured loans
Part 3 of 3: Covering Surcharges
Step 1. Decide whether you are buying the business itself or just the assets
The difference lies in the assumption of debt that the business has. If you buy only the assets, you are not owed by these loans. However, if you buy the business as a whole, the debts that the business previously had will be covered by you. This difference will certainly affect your decisions, for example regarding the purchase value of the company and the payment schedule to the business owner.
Step 2. Arrange your agreement so that you still have funds left over
Even if the purchase has been financed by the owner and second partner, you certainly don't want to leave your bank account empty. We recommend that you reserve funds for attorney fees, capital budgeting, and working capital.
You should always determine the loan amount from the owner and additional sources before making an offer. That way, you're sure you've made an offer that leaves some funds to keep
Step 3. Assess whether additional funding for working capital is needed
If you buy a business for IDR 100,000,000 which is entirely funded by a loan, you have successfully bought a business without using your personal money. However, you still need working capital to run a business. You still have to pay rent, employee salaries, water and electricity costs, and so on. Make sure the business still has some working capital. You can get it from your investors or use the income and assets of the business to generate the required capital.
Step 4. Use the cash inflows from your business
This will help you not to add to debt. However, you will need analysis and projections of the future cash flow of the business to ensure the business has sufficient capital to run. If you don't think you can do a business cash flow projection, seek professional advice or use a banker to do the projection.
Step 5. Use existing assets to generate profit
Look for opportunities to sell or recycle equipment or other assets owned by the business unit. This will provide the opportunity to earn additional income without investing. For example, you can sell equipment or rent a vehicle that will be used less frequently. These opportunities may vary by business so examine all available assets and assess their potential value.
You can only do this if the asset is pledged as collateral to the seller
Step 6. Fund your business with accounts receivable and inventory loans
Factoring is a fast way of financing by selling receivables (at a discount) to a third party. In contrast, accounts receivable loans finance the business by using receivables as collateral. Thus, the business must pay off its debts or lose rights to the receivables it has.
- In factoring funding, a third party provides 75-80 percent of the value of the receivable immediately so the business can cover the various costs it has. The rest, minus the discount to third parties, is given later when the payment from the customer has arrived. Ask the banker to be referred to a third party that offers factoring.
- Factoring is not cheap capital, and is usually more expensive than credit loans.
Step 7. Generate income from property
Look for business owners who also own properties associated with their business. Then, draw up an agreement that involves leasing the property with a purchase option at maturity. Or, you can refinance the original property with cash from other borrowers.
Step 8. Consider refinancing or making additional loans
If all else fails, you can borrow funds to cover working capital costs. One great way is to take out an inventory loan. Basically, these loans fund the business to purchase the product being sold on the condition that the inventory is held as collateral for the loan. However, because banks have difficulty selling inventory held as collateral, many are reluctant to provide this type of loan.
