5 Ways to Get Money to Buy a Business

I was broke, frustrated, and hungry. Not for food, we had enough to eat. I was hungry for... A new challenge. A new chance at success. Something to fill my mind and my soul. But I was also a devoted mother. Being a mom was my number one priority, so the “more” I was craving had to mean more for my munchkins too. Not something that sent Mommy MIA. If you’ve been following me over the last several months, you probably know at least parts of my story.

If you’re new around here, just know that I took a giant leap of faith, I went all in on myself and went from a 4 Star server at Cracker Barrel to an acquisition entrepreneur. Yes, I bought a business! You can learn about that ​here​, but do come back so I can show you how easy it is for YOU to do the same, even if it seems impossible at the moment.

These are 5 totally doable ways for almost anyone to buy a business, even if you’re broke. Five ways to buy a business with little to no money out of your own pocket.

1. Get an SBA loan. (Qualification is not based on your current income.)

2. Exchange your expertise for equity. (Yes, you have expertise.)

3. Use your 401K. (Without paying taxes.)

4. Seller financing. (Most deals involve at least a portion of seller financing.)

5. Private investor. (Lots of people have money to invest.)

Each one of these methods deserves a deep dive of its own, but we’re going for simplicity today. I know at least one of these methods will work for you and your current situation. Get creative. Think outside the box. Be open to new ideas. Hell, you can even combine more than one of these 5 methods into a strategy that creates a win/win for both you and your future seller.

Speaking of win/win, I think it’s an overused phrased, a bit on the cringey side, yet very powerful, nonetheless. That concept is actually key. Not a key but THE key. I had lunch at a high dollar place in town last week. I was meeting with a gal pal that heads up the WEOC, the Women’s Entrepreneurial Opportunity Center. We’re developing some ideas for next year’s workshop schedule. (Three cheers for business buying workshops!) I made a new friend at that luncheon; a financial advisor. She has a client that wants to sell his business. He has two options on the table, two very different buyers. Buyer A is a trusted employee. He’s been with the company a long time, knows his stuff, but he’s low on resources. Buyer B is a bigger company, a competitor with deep pockets, ready to lay down the cash. The choice is obvious, right? Sell to the one with the money. Not so fast…The owner actual prefers to sell to his employee, the buyer that he knows and trusts, the one that is likely to preserve the legacy that’s been built up over the life of the company.

That was a long-winded way to say sellers want more than cash. As a buyer, you have to figure out what that “more” is, and a way to provide it to the seller. In other words, don’t let the fact that you don’t have the key to Fort Knox stop you from buying a profitable business in the next several months. Use one or more of the financing sources that follow.

SBA Loan

Getting a loan backed by the Small Business Administration, which is part of the US government, is probably one of the easiest ways to buy a business. The government itself doesn’t loan you money. The government does promise to reimburse the bank if you don’t pay the loan back. Most banks can do SBA lending but you’re better off going with a preferred lender. A preferred lender does their own underwriting. This means the bank makes its own decisions on who to lend to. Non preferred SBA lenders have to get additional approval from the SBA itself.

Anytime you have government involvement, there are always plenty of hoops to jump through. There is lots of paperwork to file and it takes time, even several months to process, but once approved, you’re home free, meaning there are no growth metrics to meet, no requirement to provide current financial statements. As long as you make your scheduled payments, they’ll never bother you.

There are no prepayment penalties. The seller can even provide the down payment. And you can qualify with a credit score under 700!

There are downsides to the SBA loan, of course. The red tape and time involved have already been mentioned. The biggest downfall is the fact that you will be required to pledge any and probably all the property you already own. Even so, it’s a great program.

Exchange Your Expertise for Equity

You have skills business owners need. Under the right circumstances, you may be able to collect a few dollars for your services in addition to a percentage of equity, even 25-30%. The naysayers will tell you this is just another way to get a job, don’t let them rain on your parade. This can be a great way to get in the game! Especially if you can help bring their business to a point where it’s ready to sell and you get a piece of that pie. Rinse and repeat. Let me know if you want to hear more about this strategy. One of my biggest warnings here would be around taxes. Be careful not to get yourself into a situation where you have taxable profits, due to your ownership percentage, but no distributions to pay that tax bill.

Transfer Your 401K

As mentioned above, you can use your 401K, on a tax-free basis, to buy a business. You start a new company, with a new 401K, liquidate the investments in the old account, without putting any of the money in your pocket, and roll that cash into the new 401K at your new company. Then that new 401K invests in the stock of your company and presto, your new company has cash to buy a business. There are lots of regulations around this strategy. I wrote a three-part article you can find ​here​ and ​here​ and ​here​.

Bonus Idea-Fund your 401K, taking full advantage of all matching provided, with the explicit intent of using it to buy a business in the future.

Seller Financing

Seller financing happens in about 60-75% of all deals, including all of my own deals so far. There are lots of advantages, and risks, to both sides, but it can definitely create that win/win we’re looking for. There are two main types of seller financing I’ll explain briefly. The one is just like a normal loan you get from the bank. It’s for a specific amount of money, probably the purchase price, amortized over a set amount of time at a specific interest rate. Every payment is the exact same and the payoff happens on a predetermined date.

The second type is referred to as an earnout. This means that payments are based on some factor of business performance. The actual payout amount is unknown, but the formula and the time frame is set. I’ve done deals both ways, but the earnout is how I bought my first business. The monthly payments were calculated by taking the previous month’s revenue times 20%. We did this every month for five years. That sales price ended up being about one times annual revenue. We, as the buyers, were protected from the downside, while the seller got to enjoy the benefits of the upside. It was so fun to get Ralph’s reaction every month. “This is way more than I expected!”

Private Investors

This strategy sounds fancy, at least to me, and maybe the most out of reach, unless of course you don’t even have a 401K to start with. But in reality, there are plenty of people with cash they’re not sure how to put to work. This could be your parents or grandparents, the retired guy next door or maybe your accountant or attorney. As I’m doing a quick Google search on this topic, I’m discovering there may be regulations I’m not too familiar with. I’ll dig into this topic and get back to you with more details.

Maybe I dropped the ball a bit on the last one, but the fact that there are lots of ways for any Ordinary Evelyn to buy a business remains true! Hell, one time we even exchanged a business for a privacy fence. The most important part of getting a deal together is to build ​rapport​ and find out what the seller really wants. Their first reaction will always be a pot of gold, but it’s your job to dig deeper. Not like you’re burying a body, but in a relationship building manner where you get to know the seller beyond a transactional event.

Now go buy a business!