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In this informative post, we will delve into creative strategies for structuring low or no money down equity injection deals when acquiring a business. The video transcript provides valuable insights from a seasoned expert, addressing common challenges faced by aspiring entrepreneurs like Ben. If you're looking to acquire a business but lack the necessary equity injection, read on to discover innovative solutions.
Understanding the Collateral Shortfall
Ben's situation is a familiar one in the world of business acquisitions. He's eyeing a painting contracting company worth $700,000 but doesn't have the $70,000 required for the equity injection. The first step in solving this challenge is recognizing the collateral shortfall. Typically, when a business lacks substantial hard assets, lenders seek additional collateral to secure the loan.
Leveraging Existing Assets
One option for addressing this collateral gap is to leverage existing assets. If you have a primary residence, banks may consider using the equity in your home as collateral, often placing a secondary lien. Similarly, if you own rental properties, these can be used as collateral as well. However, it's important to note that not all banks are willing to accept these types of collateral, as some prefer fully collateralized deals.
Creative Equity Injection Strategies
Now, let's explore creative strategies to secure the equity injection required for the business acquisition.
1. Seller's Equity Standby
One viable approach is negotiating with the seller to leave five percent of their equity in the deal on standby. This means that they won't receive payments during the loan term, which may extend up to 10 years. However, this portion of equity can accrue interest, helping to bridge the financial gap.
2. Family Gift
Another option involves receiving a five percent equity injection as a gift from a family member. Importantly, this gift must not be borrowed funds; it should be a genuine, non-repayable gift. This approach allows you to tap into your family's resources to secure the necessary equity.
3. Strategic Investor
Consider bringing in an investor who wants to own a portion of the business. While this investor cannot provide a loan, they can contribute the required cash in exchange for ownership. Typically, the investor's ownership stake should be less than 20 percent, ensuring that you retain control of the business.
Meeting Lender Requirements
While these creative strategies offer solutions for low or no money down equity injections, it's essential to meet specific lender requirements. Ensure that your business has a robust cash flow and that your personal credit score is in good standing. Meeting these criteria will increase your chances of securing the necessary financing.
Explore SBA Financing
If you're still unsure about how to proceed, consider exploring Small Business Administration (SBA) financing options. SBA offers various programs, such as the 7A and 504 loans, designed to assist entrepreneurs in various business scenarios. Whether you're starting a new business, acquiring an existing one, buying a franchise, or expanding your current operations, SBA loans may provide the financial support you need. Beau Eckstein, the expert in the video, can guide you through the SBA loan process and help you find the best financing solution for your situation.
Conclusion
Acquiring a business with a low or no money down equity injection is indeed achievable through creative strategies and careful planning. By leveraging existing assets, negotiating with the seller, receiving family gifts, or bringing in strategic investors, you can secure the necessary funds to make your business acquisition dream a reality. Remember to meet lender requirements, explore SBA financing options, and seek expert guidance when needed. With the right approach, you can overcome financial barriers and embark on your entrepreneurial journey.