Buy a Business with No Money, Part 2 | How to Buy a Business - How to Sell a Business

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About ME: My name is David C. Barnett. I am a consultant and I work with entrepreneurs around the world to buy, sell, and organize their small to medium sized businesses. As a former business broker, I have seen many people do bad deals and lose their life savings as a result. So, I made it my mission to start this channel to help educate people on ways to invest smarter and to ask questions, so they don’t get trapped into doing bad deals.
I am also an author and written books such as Invest Local: A guide to superior investments returns in your own community. My most recent book is Smarter than a Startup: The Risk-Reduced way to get the business of your dreams up and running. Other titles include, How To Sell My Own Business and Franchise Warnings: What you really need to know before you buy. All titles are available here: www.investloca...
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[@catra195]

I thought the question was using the assets to borrow money for a down payment and then use vendor financing not as the total sum of purchase

[@DavidCBarnett]

Yes, you are correct. That is the question exactly. Borrow against assets then get the vendor to finance the rest. The problem is that you end up with an opening balance sheet with all debt and no equity. It doesn't matter if some of the debt is to a bank and some to the vendor. It's still all debt on the buyer's opening balance sheet. Lenders usually have minimum debt to equity ratio requirements. Learn how to buy a business at www.BusinessBuyerAdvantage.com

[@levarhaffoney6117]

Great information.

[@DavidCBarnett]

Thanks for the kind words Levar. If you are interested in buying a business, learn how to do it right at www.BusinessBuyerAdvantage.com

[@levarhaffoney6117]

I'll check it out. Thanks.

[@t.l.williams5752]

Im eager to join your course and learn more about buying businesses. I know, as of now, I don't have the funds for a down payment but if i have access to a hard money lender can that work?

[@DavidCBarnett]

I wouldn't recommend it. You'd end up over-leveraged and be in a weak position. Also, there likely won't be any collateral to offer the hard lender. What would work better would be to find the right deal then bring in equity partners. This kind of thing is discussed more in Business Buyer Adventure, the group coaching program that follows Business Buyer Advantage. dave

[@shauna1306]

Well can it be pulled off with a non traditional bank loan?

[@DavidCBarnett]

Hey, if the bank will give you a personal line of credit big enough, you could do anything. But you're not leveraging the assets of the business in that case.

[@shauna1306]

@@DavidCBarnett thank you for your reply. I'll be booking a call with you soon! 😁

[@tubewatcher38]

Interesting David. Does 100% financing work better in other situations & if so, what types? Is that covered in your business buying course btw? -Tx

[@DavidCBarnett]

100% leverage can work if you have outside assets or wealth to back up personal guarantees. It's also dangerous as it puts a lot of cash flow pressure on the business. In the course, a sample company is used to demonstrate normalization, valuation and financing. You can see how deals are put together all the time in the real world of Main St. businesses.

[@snorttroll4379]

What about buying a portion of a business, but having access to all the cash flow to pay debt. Then u can do a sellers not on the rest.

[@seanlee2278]

Is this Codie that Codie S.?

[@DavidCBarnett]

Doubt it. It was the male spelling.

[@UltimateBargains]

Hypothetical scenario: Fair market value $400,000 according to valuation of assets and cash flow. Seller wants $80,000 down payment and will carry a note for $320,000. Find an asset-based lender (ABL) who will lend $100,000 secured by the assets. Schedule a simultaneous closing. ABL deposits $100,000 into escrow and you sign the documents (as if you are the owner) to secure the loan with the assets. Then you go to other closing room where the escrow agent generates a check for $80,000 to the seller and the promissory note for $320,000 that is subordinate to the ABL loan. Now you are the legal owner of the business. Then, as the new owner, you go back to the first room and pick up your check for $20,000 for your working capital. You are paid to buy the company for a total price of $420,000 (105% of the agreed price) that you already calculated could be serviced by the cash flow with a safe Debt Coverage Ratio (DCR) of 2.0 or higher. DCR is the Net Operating Income (NOI) divided by the combined Annual Debt Service (ADS). Double closings and simultaneous closings happen all the time when buying businesses and real estate (income property). The key is finding that unicorn, the Motivated Seller, who will subordinate his large 2nd position lien to a small 1st position lien. NOI is very similar to EBITDA, because it includes operating expenses and excludes income tax, depreciation, principal and interest on debt.

[@DavidCBarnett]

Hi, Did you watch the first video? kzbin.info/www/bejne/hIe3mHeKbKiWaMk ior the LBO video which followed this one? kzbin.info/www/bejne/i6OlfYKqh75jhas Scenarios like this one could possibly happen, but why would a seller do it unless for example there was some kind of personal relationship between the two. Also, the 'trickery' of a simultaneous closing with a lender would not pan out. The assumption here is also that the fixed assets are worth much more than $100,000 such that the lender would agree to make a loan with an 420000:0 debt to equity ratio. Typically when assets are used to back debt in small business there is some kind of government program in place to allow them to be collateralized at a fair market value. Lenders using these types of programs usually require a minimum debt:equity ratio. True asset-based lenders operating in a free market will only lend a fraction of orderly liquidation value. I have worked with all these types of lenders in my capacity as a Certified Machinery & Equipment Appraiser. For example, to get a $100,000 loan from a hard money equipment lender who doesn't care about the buyer's equity there may have to be $250,000 FMV of equipment. If the business seller is willing to accept $80,000 down on a $400,000 business, then they likely will want to have first position lien on all the assets. In all the 'large VTB' deals that I've seen, this is the case. The seller actually agreed to a large VTB because there would be no bank involved to interfere with their security. I know that there are people online who are promoting this kind of strategy but even they suggest that you need to sift through hundreds of suspects to find a few prospects to maybe find a deal or two.

[@UltimateBargains]

You lost me at "trickery". Double closings and simultaneous closings are perfectly legal, legitimate, and definitely not any kind of trickery. Unicorns are hard to find, but not impossible, that's why they're called unicorns.

[@DavidCBarnett]

'Trickery' is likely not the best word. The transaction doesn't need to be so complicated. I think you're looking at a template from the world of real estate investing. Representing yourself as the owner of a business and it's assets to a lender when you're not is actually called 'fraud.' Any lender worth their salt would search the corporate registry to find the names of the company officers and would find that you're not there. Any deal to buy a business that involved using debt would need to be done in a transparent fashion. So maybe the 'asset-based lender' in your example could be your rich uncle trying to help set you up in business. Also, he would likely have to be subordinated to the vendor note since the VTB ratio would be so high.

[@UltimateBargains]

David Barnett If anyone asked me about how to buy or sell a business, then I would not hesitate to recommend you. I gave your book, "21 stupid things", 4 stars on amazon. By the way, real estate (income property) *is* a business with income, expenses, debt, taxes, insurance, accounting, realty & personalty, management, marketing, customer support, investor relations, etc. EBITDA is very similar to NOI (Net Operating Income). Continue the great videos. ;)

[@DavidCBarnett]

+UltimateBargains thank you very much. Yes, real estate is a business with one really big difference. In real estate, there is one big asset and a title registry. This is why there are strategies with simultaneous closings, etc. Cheers.

[@DRUNKENSYLEMASTER619]

wouldn't your successful business work as a good failure buffer too.if the new business cause a loss your company should be able to recover it in tax savings.It called carrybacks and carrfowards.I no it not the goal to loose money but it seems like a good safety buffer unlike the guy who just buys the failing business alone and just looses it all.

[@DavidCBarnett]

Hi Jason, how tax losses work is a bit of a mystery to many people. If you are in a jurisdiction where the corporate tax rate is 20% then if you earn $100, you pay the government $20. If you lose $100, you save $20. So if you have losses, you don't get them back with tax savings, you only save the amount of the tax rate. The government doesn't bail out money losing companies.... unless you happen to be a bank and have lots of political friends.

[@mountainman6172]

David Barnett Eloquently put!