Myth #2 - “Creative financing” - purchasing a business with little or no money down.
There are some prospective purchasers who believe that they do not need to use their own money to purchase a Business. Typically, this type of buyer's purchase strategy involves trying to purchase a Business with little or no money down. We have concluded there must be a best seller out there called “How to buy a business with no money down” because some buyers we have met have the same unrealistic purchase financing strategy:
- The purchaser will quit their current job and work for the business owner at an above-normal industry salary.
- The future profits that the business generates (which the prospective purchaser expects to grow exponentially) will be used to pay the vendor over a period of 10 years.
- The purchaser expects that there will be a number of aging business owners with no succession strategy that will be very interested in this proposal (points 1 and 2).
- The purchaser always knows of someone who successfully followed this purchase strategy of buying a business with no money down, but of course can’t offer specifics.
- The purchaser argues that they are giving up the security of a great career and willing to use their considerable skills to build the target business – this is an opportunity for the seller – and a significant risk for the buyer.
- The purchaser argues that if a vendor is reluctant to assist the purchaser with financing this demonstrates his lack of confidence in the future of the business.
Our Reality
One business owner we were working with said he was approached by a prospective purchaser with an offer that included a significant amount of vendor financing and very one-sided terms. The offer proposed by the prospective purchaser was that he would purchase the shares in the company over time - through the profits of the Company - a Company which was currently very profitable. So in this deal, the vendor would receive very little money upfront but would receive the promise from a stranger that he would be paid back over time. In addition, the purchaser further explained that he would take over management (and control) of the Company which would allow the vendor to happily retire. The vendor said he wouldn’t give his son this deal so why would he give a stranger this deal.
This story probably sounds like complete fiction, but it did happen, and we have numerous other similar stories of prospective purchasers coming into our office interested in purchasing a business using some creative financing, no money down scheme.