Seller Beware! Understanding ''No Money Down'' Business Acquisitions

As a seller, you should be prepared for buyers attempting to acquire your business with no money down, structuring the deal so that the business essentially finances its own acquisition. Instead of receiving a cheque derived from the buyer's personal savings, you may be presented with a combination of creative financing methods used to cover the cost.

Here are the specific strategies sellers need to be aware of when dealing with buyers who do not want to put their personal cash at risk:

Deferred Consideration (Vendor Finance): Buyers may propose paying you over time rather than a lump sum on day one. They will utilize your business's future cash flow to make these payments, perhaps quarterly or annually over a few years. This is the cornerstone strategy for asset-light service businesses.

Use of Your Company's Cash: A buyer might attempt to fund their initial payment to you using your own company's surplus cash. They may justify this by pointing out that taking this cash as part of the business sale results in significantly less tax for you (e.g., 10% via Entrepreneur's Relief) compared to withdrawing it beforehand as a highly-taxed dividend. On completion day, they would simply instruct you to move the agreed amount to a solicitor's account to be released back to you.

Invoice Finance (Leveraging Debtors): If your business has reliable unpaid invoices from clients (a "debtor book"), a buyer can finance up to 80% of those outstanding debts and use that cash for your initial consideration or working capital. Alternatively, they may propose that you collect these debts and pass 90% of the funds to you as upfront cash, while they charge a 10% administration fee.

Asset Finance and Property Refinancing: A buyer can refinance your company's physical assets or commercial property. They may take out a commercial mortgage or bridging loan against these assets to pay you.

Leveraging Customer Prepayments: Buyers may attempt to offset cash you have taken from customers for services not yet delivered against the upfront purchase price. In some cases, deducting these prepayments can reduce the cash they owe you on completion day to practically nothing.

The $1 Distressed Deal: If your business is distressed, with accumulated debt and stressful personal guarantees, a buyer may offer to acquire the company for a nominal fee of $1. In this scenario, you would not receive cash, but you would be released from personal guarantees as the buyer takes over the company's liabilities.

Understanding the Buyer's Stance

Be aware that buyers attempting this type of acquisition are strictly advised to "never put any personal cash into the deal". If they face a funding shortfall prior to completion, do not expect them to dip into their savings; instead, they will likely either walk away or attempt to renegotiate, perhaps by adding 12 months to the deferred consideration schedule.