Hi Reader

Ever dreamed of owning a business but thought you needed a massive savings account? Think again.

You’re successful, smart, and ready for a change. But the idea of buying a business seems out of reach. Too expensive, right? Wrong.

Today, we’re busting the myth that you need a fortune to buy a substantial business. Let’s dive into how you can acquire a $2 million business without breaking the bank.

Let’s talk about where the money comes from for the typical acquisition entrepreneur’s deal.

The Problem: Cash Constraints

You’ve got the skills, the drive, and the vision. But maybe not millions in liquid cash. It’s a common roadblock for aspiring business owners.

But here’s the kicker: it doesn’t have to be.

The Solution: a Smarter Funding Stack.

Ready for some good news? There are multiple ways to fund your business acquisition without emptying your life savings (and most deals will have a combination of sources) . Let’s break it down. Here are funding sources to help you buy this $2M business other than your bank account:

1. SBA 7(a) Loans: Your New Best Friend

Ever heard of the SBA 7(a) program? It’s a game-changer. Here’s why:

• You only need to put down 10% of the purchase price (plus a guarantee fee that varies by loan size).
• That’s right, just $200,000 for a $2 million business.
• The SBA guarantees up to 75% of the loan, making banks more willing to lend.

2. Seller Financing: A Win-Win

To be clear, I’m not talking about a “zero money down” or similarly unrealistic seller financing situation. Contrary to what you may hear from some gurus, most sellers won’t do that (at least not for most businesses that you’d actually want to buy). Here, we’re just talking about sellers agreeing to accept a promissory note for a relatively small portion of the purchase.

Sellers can be more flexible than you think. Here’s how it works:

• Typically, sellers might finance 10-15% of the purchase price, with the actual number dictated by factors like risks associated with the target business, and how readily salable it is.
• That’s $200,000 to $300,000 of the $2 million.
• It shows the seller’s confidence in the business’s future (and in you).
• If you need more breathing room after your acquisition, you may even be able to have the seller agree to a period of interest-only payments after your purchase (commonly I see 2-3 years).

3. Full Standby Seller Notes: A Hidden Gem

This one’s a bit technical, but stick with me:

• A full standby note is a special kind of note where no payments of principal or interest are accepted for the first 2 years. After payments start, there also can’t be a “balloon payment.”
• Another caveat is that many lenders want payments to be amortized over a longer period of time after the standby period has expired (some even insist on eight years so that the total loan term matches that of the SBA 7(a) loan term).
• Full standby notes can count for up to 5% of the purchase price towards your equity requirement. SBA rules technically say that it can count for up to 10% (ie all of your required equity) but I’ve never seen a lender be comfortable with that.
• That’s another $100,000 you don’t need to come up with upfront.
• It reduces your immediate cash needs even further.
• Note: sellers are often reluctant to agree to full standby notes. So if you plan to propose one, I suggest that you be willing to pay full listed price. Asking sellers to consider a reduction in price and take a full standby note as part of it, is usually a nonstarter.

4. Retained Equity: Keep the Seller as Minority Owner

Here’s another way to reduce your cash outlay. Reduce the purchase price altogether by keeping the seller on as a minority owner! Here are the details:

• Can be accomplished both as a partial acquisition (stock purchase) or equity rollover (asset purchase)
• Price is reduced by the percentage of equity seller ends up with.
• Make sure owner retains less than 20%. Otherwise SBA rules require them to personally guarantee your loan (definitely a no go).
• This can significantly reduce your upfront cash needs.
• Eg: seller retains 15% = price goes down to $1.7M and cash required goes down to $170K (even without a full standby seller note)

Putting It All Together

Let’s crunch some numbers for that $2 million business:

• Seller Equity: 15% (price now $1.7 million)
• SBA loan: $1,360,000 (80%)
• Seller financing: $170,000 (10%)
• Your cash: $170,000 (or as low as $85,000 if seller will take a full standby note and your bank approves it)

Note: there are SBA guarantee and closing fees that will increase your cash requirements, but the numbers above are generally accurate.

The Bottom Line

Buying a business doesn't require a huge bank balance. With smart financing and the right approach, you can become a business owner without draining your life savings.

Next issue, we’ll dive into how to find the right business to buy. Stay tuned!

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