10 Creative Ways to Finance a Business Acquisition

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Interested in buying a business, but don’t have the cash on hand to swing the deal? That’s when savvy business buyers get creative. There are many ways to fund a business acquisition that don’t require plunking down 100 percent of the purchase price in cash on closing day.

Many people jump into entrepreneurship by buying an existing business. You may be surprised to learn that quite often, business buyers don’t use cash to acquire a business.  

If you’ve wondered, “How do I buy a business with no money?” we’ve got some ideas for you below. You can use creative financing to buy a business and realize your entrepreneurial ambitions.

To pull off a business purchase without cash, you’ll need to figure out how to fund your business acquisition. But rest assured, it can be done. If you’re short of cash, take heart–there are still plenty of ways to finance the deal and become a business owner.

What is Acquisition Financing? 

Let’s start with a basic definition of what we’re discussing here, which financial types refer to as “acquisition financing.” This fancy term simply means that you’re borrowing the money to buy a business rather than buying it with cash. Most often, it means you’re using other peoples’ money to make your business acquisition rather than your own–but there are also a couple of ways to use your own assets to generate the business acquisition funding you need.

How can you finance the business you want to buy? Here are ten ways, ranked from best options to riskiest:

1. Earn-Out Agreement in a Business Sale

The easiest way to finance a business purchase while limiting your risk is to structure your sale so the seller receives only part of their cash upon closing. The rest of the money due is paid out over time, usually over the course of the following year. 

The remaining sale proceeds are paid in quarterly installments, reliant on the business’s continued strong performance. Depending on the deal you negotiate, you might pay zero additional money if sales drop, or earn-out payments might drop by just a small percentage.

Most importantly, whatever you pay in the earn-out, you’re able to use the business’s profits to make the payments. Because now, you’re the owner. You’re out-of-pocket for less of the sale price–though it’ll be longer before you take home profits from the business, if you use them to pay the earn-out. 

This is a great structure especially if you have concerns that the owner’s departure will cause sales to tank.

2. SBA-Backed Bank Loan for Business Financing

One of the most popular types of business acquisition loan is a Small Business Administration (SBA) loan. What this really means is you get a business bank loan, which the SBA guarantees. The SBA’s involvement encourages banks to make more business loans.

If you have a good credit rating and an existing relationship with a business bank, an SBA loan is a great way to go. There’s a lot of paperwork to qualify, as the SBA has stringent business acquisition loan requirements. But it can be worth it, as SBA loans have lower interest rates.

One caveat: Most SBA loans are secured by collateral–often, the buyer’s home. If you don’t want to put your casa at risk, an SBA loan may not be for you.

3. Personal Loan to Fund a Business Acquisition

If you’ve got good credit and strong bank relationships but don’t want to jump through all the hoops of securing an SBA loan, you might just get your business acquisition funding through a personal loan from your bank. Note that as with an SBA loan, your personal loan will probably be secured by your personal assets, such as your home.

Rates will also often be a bit higher than they would if you got an SBA loan, but if you already have a good relationship with a bank, the business acquisition loan requirements may be less onerous. If you need to move fast, non-SBA business acquisition loans such as simply getting a personal loan may be a better option, since the SBA isn’t known for speed.

4. Borrowing Home Equity for a Small Business Acquisition

If you own valuable real estate you’ve built up equity in over the years, you could borrow some of that cash through a home-equity line of credit (HELOC). Essentially, your business acquisition financing comes from your own resources, in the form of borrowed home equity you’ll need to repay in monthly installments. 

You’re borrowing from yourself, instead of from a bank, since the equity built up in your home is essentially your money.

Using your HELOC can solve the problem of how to get a business loan with no money. One advantage is that HELOC terms are often fairly flexible, allowing you to make small monthly payments or put back in lump sums. It’s a revolving credit line, so if you pay some of your home-equity loan off and decide you need more funds to build your business, you could continue to tap that credit line.

But as with an SBA-backed business or a personal bank loan, you’re taking a risk. If the business doesn’t do well and you can’t make your installment payments, you could lose your house.

5. Seller Financing in a Business Acquisition

Sometimes, a business seller doesn’t need their whole cash payout all at once. Instead, they might be interested in creating a nice monthly retirement income from the sale. They do this by serving as your bank and financing your deal, collecting interest on top of the agreed-upon sale price. 

Also known as ‘taking back paper,’ a seller-financed business acquisition loan works like this: You sign a business purchase agreement, and become the new owner on closing day. You make an initial business acquisition loan down payment to the seller on closing, so you’ll need some cash for this approach. 

The seller lets you pay the balance due over time, usually across multiple years. They collect interest each month, just like any other type of installment loan such as a car loan. 

The dark side: The seller will usually charge more interest than you’d pay with an SBA or traditional bank loan. 

What could go wrong? If you default on the loan, the seller could end up owning the business again. You lose the money you’ve paid to date, and the business asset. The owners are free to sell the business again to another buyer, increasing their total payday.

6. Find Co-Investors to Fund a Business Acquisition

There’s no rule that says you have to acquire a business all on your own. Many investors team up to buy businesses together. Peek behind the scenes at that Subway sandwich shop on the corner, and you may find it’s owned by a syndicate of dentists, for instance. 

Look around your network and see if you can connect with other investors like yourself. If you go this route, be sure to define roles and responsibilities carefully among the various buyers, so everyone is clear on returns they get and what they must do to keep the business going. If you have good relationships with your co-investors, this can be a great way to get started in business ownership, with a partial stake you got without having to pay loan interest.

7. Friends and Family Funding for a Business Acquisition

Do you have moneyed relatives? If so, you might hit them up for money to buy a business. They might even forgo charging you interest! 

That may sound appealing, but I’ve listed this pretty far down my rankings because borrowing from friends and family is fraught with potential problems. If the business struggles and you can’t pay them back on your agreed-upon timeframe, it can mean hurt feelings, broken friendships, and awkward family Thanksgiving dinners. 

Ask yourself how much you treasure those relationships before asking friends and family for money to buy a business.

8. Peer Loans for Buying a Business

Been turned down by traditional banks for a business or personal loan? You might get the money you need by crowdsourcing it. In a crowdfunding campaign, people donate because they’re inspired by your story, and for the rewards or perks you offer to funders. 

The big plus: You get the money from many individuals, none of whom receive an ownership stake. You’re still the sole owner. Pretty sweet, if it works. But note that this is a fundraising avenue that many may try, but few will succeed.

You’ve probably heard of Kickstarter, and there are many other platforms like it. Some are particularly small-business friendly–here’s a list of top contenders. If you’re buying a consumer business, you could reward funders with discounted or free goods or services. 

How do you get total strangers to give you money to buy a business? Tell a great story. To learn how, study successful fund-my-business pitches on your chosen platform. Then, share your passion for business ownership, promote your page, and see if people will help you achieve your dream.

9. How to Cash Out Your 401(k) to Fund a Business Acquisition

Many people don’t know this, but there’s a way to borrow money from your retirement accounts tax-free to buy a business. It’s known as a ROBS transaction–for Rollover for Business Startups.

Here’s how it works: You transfer or “roll over” your retirement-account money to a new retirement account you set up under the umbrella of the business you’re buying. Next, you borrow the money you need out of that account to pay for the business acquisition–without penalty.

There are two big risks here. The first is that if the business fails, you have no retirement money to live on. The second is that the IRS takes a very dim view of ROBS transactions. The agency has warned repeatedly that it plans to review all such deals and may disallow them, demanding that account owners pay back every dime with penalties. Companies have proliferated that help entrepreneurs set up ROBS, but think hard before going this route.

10. The Last Resort: Using Hard Money to Buy a Business

What do business buyers do when they’re dying to make a business acquisition but don’t have the cash, or a good credit rating? They turn to profiteering private lenders. 

Interest rates are high in this scenario, but you might find an individual, syndicate, or private-lender group willing to loan you the money you want. They call it ‘hard money’ because it’s harder to obtain and harder to pay back than a traditional bank loan, due to sky-high interest rates.

Hard-money loans are usually secured by real estate. In the case of a business-purchase loan, they might be secured by the business itself. This means you’ve put either a personal asset like your home at risk, or the business you buy. It’s risky, but if you can’t get a bank loan, hard money can be a route to obtaining the cash you want to buy a business.

Because of their high degree of risk, hard-money loans are most often used for short-term or “bridge” loans rather than longer-term financing. You’ll want to get out from under the burdensome high interest rates you’re paying as fast as possible.

Find the Money for Your Business Acquisition

As you can see, there are many ways to solve the puzzle of funding a business acquisition. I hope this list sparks ideas you can use to secure the money you need to buy the business you want.

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Picture of Written by Roman Beylin

Written by Roman Beylin

Roman Beylin is the founder of DueDilio, a leading online marketplace to assemble an M&A deal team. Our large and growing network of highly vetted independent professionals and boutique firms specialize in M&A advisory, due diligence, and post-acquisition value creation.

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