You might’ve heard you can buy a million-dollar business with a seller note and a bank loan — all without using your own money. Sounds great, right? Here’s the catch. Matt dives into what actually happens when you try that in the real world — and why having some of your own cash (and a backup plan) is non-negotiable.
There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!
Video Transcript:
Business Advice Video:
If you want to buy a business and you don’t have the money to buy it, there’s a mechanism called a seller’s note. And if you combine a seller’s note with a loan from a bank, you’re able to buy a business with very little, or in some rare cases, no equity whatsoever.A seller’s note is basically an agreement where you tell the business owner that you’re going to pay him that $250,000, $100,000 a year for the next two and a half years. So you can go to the bank for $750,000 as a loan, that is for 75% of the business, and they will be able to give you that loan. Not all of them.
Matt’s Review:
So here’s the problem. It is very, very difficult to get a bank to give you a loan, even for 75% of the business, if they know that you have no money of your own to put into the deal. They want you to be invested so that it’s not easy for you to just decide, oh, this isn’t working, guess I’m just going to declare a bankruptcy, walk away basically unharmed, and leave everyone else holding their unpaid bank loans or seller notes. So yes, it is definitely possible to get a business with a bank loan and a seller note, but it’s not typically 75% from the bank and 25% from the seller. It is more typically 75% from the bank, 10% from the seller, and 10 to 15% from the buyer, that’s you, right? So if you’re buying a million-dollar business, you can sometimes get in as little as 10%, but then there’s the bank fees, there’s the working capital needs, there’s the due diligence and investigation, and setup costs. So it’s going to be very hard for you get into a million-dollar business without spending anywhere from $150,000 to $250,000 of your own cash, and that can’t be your last dollar. You’ve got to have some more in reserve for things that happen out of the blue unexpectedly, right after you take over or within the first six months. You also don’t want to be, you know, completely broke when that happens, just because you’re going to have your own bills to pay. You might not be able to take money out of the business immediately. And if you agree to a seller note where for $250,000 borrowed, you’re going to pay back 100,000 a year between that payment and the bank’s payment, you might not be able to take any money out of the business for the first year or two if it stays at the same level that you bought it at. If it goes down, you’re going to be in real trouble. And even if it goes up a bit, there’s not going to be much left for you. So the problem with buying a business with no money down one is that it’s almost impossible, not impossible, but almost impossible to find a deal where that makes sense or is possible at all. But two, even if you do the debt service, the payment on those loans that you’re going to be able to get the business without putting any cash out is going to be so onerous And take so much of the cash flow from the business that you’re not going to be able to fund it anyway. So this is a very challenging kind of situation to put yourself in. It’s rare that it happens or can make sense, and I certainly wouldn’t count on it. You can absolutely buy a business to get yourself into entrepreneurship, business ownership. You can buy it instead of building it from scratch, but I would not plan on doing it with $0.