Buying a business when you have little financial capital and insufficient credit for an unsecured loan can seem like an impossible prospect. Most small businesspeople would abandon the idea of owning the business of their dreams under such circumstances. However, there are strategies that have been used for decades by big corporations to buy businesses without using a cent of their own cash resources. The best of these strategies is called the leveraged buy-out.
How to Buy a Business Using a Leveraged Buyout
Find the business you want to buy. For those looking to buy a small business, this can involve looking through the classified “business for sale” ads, online sources like Craigslist, or making direct inquiries to businesses in your area. When you locate the business that is both a good fit for your business passions and is interested in selling, you can then proceed with outlining a deal with the owner.
Interview the business owner to identify what terms he is seeking in order to sell. Don’t feel rushed toward or away from a deal based on the owner’s initial offer. Remember that the process of buying a business should be a deliberate one; take your time and understand that there should be a period of negotiation so both parties reach a fair deal. Ask if the owner will reduce the purchase price, if they would carry a note or you might even increase the purchase price in exchange for the owner carrying a note with a lower down payment.
Research the business. The best resource will be the owner; once you demonstrate you are serious about buying the business, the owner should be willing to provide you with the company’s financial history, operational costs, profit and loss statements, and a valuation of the assets and equipment. Once you have established that the business' long-term profits are greater than the monthly notes due to the owner, and the value of the assets and business equipment exceed the amount of the down payment of the owner’s note by at least 20 percent, you have the information you need to structure financing for the deal.
Locate a lender that structures asset-secured loans. Most national banks have lending divisions dedicated to this loan type. There are also regional and local banks that will be able to lend against the value of secured assets. Be sure to shop rates as they can vary between institutions. Once you find a bank you want to deal with, present the information regarding your lending needs and the liquidation value of the business assets to get a pre-approval.
Locate a bank willing to make a “swing loan.” A swing loan is an extremely short term loan (usually 24 to 72 hours) where interest is compounded daily, or there is a flat fee due at repayment. In order to get a bank to make a swing loan (remember you don’t have any cash or credit), you will need to find a way to guarantee the loan repayment.
Schedule a simultaneous closing of the business sale, the swing loan and the asset-based loan. On the date of the closing have the business seller and a bank representative of the institution that will make the asset-based loan meet you at the bank making the swing loan. Sign the legal papers transferring ownership of the business from the seller to you. Once the papers are signed, the banker making the swing loan hands the business seller a check in the amount of the down payment; this completes the transaction that makes you the business owner.
Make the asset loan and repay the swing loan. Now that you own the business’ assets, you go into a second room to meet the bank representative that pre-approved the asset based loan. Once you have signed for the asset-based loan, take the check in the amount of the liquid asset value of the equipment and deposit it into an escrow account at the bank that made the swing loan. Use the funds in the escrow account to pay off the swing loan.