Buy Your First Business For $0: A Step-by-Step Guide

Author

MF BANKS
November 27, 2024

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Buy Your First Business for $0: A Step-by-Step Guide

Starting a business from scratch can seem daunting, especially when capital is limited. But with the right approach, you can own an existing business with solid cash flow and a proven track record—without spending a dime upfront. Here's how you can strategically acquire a business with zero out-of-pocket costs by leveraging financing and investor support.

Step 1: Pick a Recession-Proof Industry

Start by focusing on industries that are likely to thrive even during economic downturns. Some examples include:

HVAC (Heating, Ventilation, and Air Conditioning): People will always need temperature control in their homes and businesses.

Accounting: Every business needs to manage finances, file taxes, and handle payroll.

Laundromats: Laundry is a basic necessity, and laundromats have stable customer bases even in tough times.

Detail: When selecting an industry, research the competition, industry growth potential, and customer demand in your target area. This will help ensure you’re making an informed decision about which sector to enter.

Step 2: Use a Business Broker or BizBuySell to Find a Business

To find potential acquisition opportunities, leverage resources like business brokers or websites such as BizBuySell. Look for businesses with:

$10k+ in monthly cash flow: This ensures the business has a healthy revenue stream.

$500k to $1M in price: Businesses in this range are often established but still accessible to first-time buyers.

At least 5 years in operation: Longevity indicates the business is stable and less risky to take over.

Detail: Evaluate multiple listings and dig into the details of their financials and market position. Take note of industries where the business's financial health aligns with your interests and long-term goals.

Step 3: Apply for an SBA Loan

The Small Business Administration (SBA) offers loans that can cover up to 90% of the business acquisition cost. These loans are attractive because they offer low interest rates and favorable repayment terms. [Check out our easy guide to getting an SBA Loan!]

What You Need:

Tax returns & W2 pay stubs: You’ll need to provide your financial documentation to prove income and establish credibility.

A clear explanation of your target business: You must explain the business you want to buy, why it's a good investment, and how you plan to maintain or grow its operations.

Detail: Be prepared to present a strong business plan and demonstrate how you’ll continue or improve the business’s profitability. The SBA looks favorably on stable businesses with a track record of success.

Step 4: Hire an Accountant to Analyze the Financials

Before making any commitments, hire an accountant to review the financial health of the business. They’ll help you:

Verify cash flow and profitability: Ensure the business has consistent and increasing revenue streams.

Check for red flags: The accountant will spot any financial anomalies, underreported income, or debt issues that could affect your decision.

Detail: A professional financial audit will provide you with confidence in your investment, helping to identify whether the business can generate enough income to cover your loan payments and still provide you with a profit.

Step 5: Talk to the Sellers

Have conversations with the sellers to understand why they are putting their business on the market. Many business owners sell for personal reasons, such as retirement, and may have a long-standing relationship with the community. Retiring Boomers are particularly common sellers.

Detail: Use this time to gather insights about the business’s challenges and opportunities. Are there any areas where you can improve operations? Are there risks you didn’t consider? Understanding the seller’s motivations can give you a stronger position in negotiations.

Step 6: Make an Offer Based on 2.34x SDE (Seller’s Discretionary Earnings)

When making your offer, aim for 2.34x the Seller’s Discretionary Earnings (SDE). For example:

If the seller took home $400k in the past year, you should make an offer of approximately $936k.

Detail: The SDE represents the business’s cash flow after all expenses, including the owner's salary. Basing your offer on this metric ensures you're paying a fair price for the business’s ability to generate income.

Step 7: Finance 90% of the Purchase with an SBA Loan

Once your offer is accepted, the SBA loan will cover up to 90% of the acquisition price. This financing allows you to secure the majority of the funds required to buy the business.

Detail: Make sure your SBA loan application is robust and includes your business plan, financial projections, and evidence that the business has steady cash flow.

Step 8: Find an Investor for the Remaining 10%

To cover the remaining 10%, find an investor who’s willing to put in the funds in exchange for a 15% equity stake in the business. Offering a small percentage of ownership can attract an investor without burdening you with debt.

Detail: Present the investment opportunity clearly, showing the business’s profitability and growth potential. Investors will be more likely to contribute if they see solid returns in the future.

🎉Congratulations! You’ve Bought a Business with $0

By following these steps, you've successfully acquired a business without needing upfront capital. You've leveraged an SBA loan for 90% of the purchase and brought in an investor for the remaining 10%. Now, you’re the proud owner of a business with established cash flow and growth potential!

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