How to buy a business with no money down: five ways to fund the deal without your own cash

How do you buy a business with no money down, and how do you get the seller to agree to it? Based on what is working for my buyer clients, the answer is to stack five sources of funding in a particular order: the target company's own cash, debt secured on its assets, equity from investors in your purchasing vehicle, seller finance, and earnouts. Used together, they can cover the whole price without any of your own money, even when the seller wants as much as possible paid up front.

5 ways to finance a business purchase

This is how I would structure the deal if I were buying a business myself, and it assumes the hardest case: a seller who wants the highest possible price and as much of it as possible on day one. That is unfortunately not uncommon. The five strategies, in the order I would use them, are:

• Target finance: the company's own cash.
• Debt finance secured on the target's assets.
• Equity finance raised through an SPV.
• Seller finance, by deferring part of the price.
• Earnouts, to close any remaining valuation gap.

Each one reduces the amount you need to find yourself, and each one is easier to agree once the one before it is in place.

Target finance: using the company's cash

First, as far as possible, I would use the target company's cash in the bank to fund the completion payment. The completion payment is the sum you must pay on completion, the day you become the owner of the business. Most trading companies will have some cash sitting in the account, and that cash belongs to the company you are about to own, not to the seller personally.

The seller's instinct may be to take that cash out before completion. But if they extract it pre-completion, they would likely end up paying income tax or dividend tax on it. Instead, I would encourage the seller to leave the money in the bank and let the deal use it to fund the completion payment. Because the cash then forms part of what they receive for their shares, it will likely be treated as a capital gain, and the seller could end up paying tax at a rate as low as 14% rather than dividend or income tax rates. In my experience this is often the argument that gets a difficult seller interested, because it is their money that goes further, not yours.

Debt finance secured on the target's assets

Second, I would use the target company's assets to raise finance. The company's assets are offered as security to a traditional lender, such as a bank, which lends against them. The facility completes on the day of completion: at the same moment I become the owner of the business, the lender takes security over the assets and advances the money.

I would do this to bridge any shortfall in the completion payment that the target's cash cannot cover. The lender is looking at the company's assets, not at your personal balance sheet, which is what makes it possible for a buyer with limited funds of their own. There is a bonus, too. If the debt finance produces a surplus beyond what is needed for the seller, that surplus may be used to pay professional advisers, the solicitors and accountants, so even the deal costs are not coming out of your pocket.

Equity finance through an SPV

If the target's cash and the asset-backed debt still do not cover the completion payment, or if I want to raise more because I have expensive or ambitious plans for the business, the third source is equity finance from family, friends and angel investors.

Equity finance means giving shares in return for money. Ideally I would give those investors shares in my SPV, the special purpose vehicle. That is the newly formed limited company that acts as the buyer in the acquisition. Raising into the SPV means I have the money immediately, before completion takes place.

After completion the SPV owns the target company, so the investors indirectly own a share of the target. They are backing the acquisition rather than lending to it, and their return comes from the value of the business you have bought. The trade-off is that you are giving away part of the ownership, so I would use equity to fill a gap or to fund growth plans rather than as the first port of call.

Seller finance (deferred consideration)

Having done everything I can to reduce the completion payment, the fourth step is to defer as much of the purchase price as possible. This is typically referred to as seller finance, because I will owe the seller the deferred amount. The seller is effectively giving me a loan, repaid out of the business over time. It is the single biggest lever in a no-money-down structure, because every pound deferred is a pound that does not have to be found on completion.

Seller finance sits after the first three sources deliberately. Once the seller can see that the completion payment is funded, and funded partly with their own company's cash, agreeing to wait for the balance becomes a much smaller ask.

Earnouts to bridge a valuation gap

Finally, earnouts. If I am dealing with a seller who wants a lot more for the business than I am prepared to pay, I would bridge that valuation gap with an earnout.

An earnout is a contractual provision, typically in the share purchase agreement, under which part of the purchase price only becomes payable if the target company achieves specific financial targets. For example, part of the price might be paid only if the company makes profit above an agreed threshold.

The logic for the seller is simple: if the business really is worth what they say, they will be paid for it. The logic for the buyer is that you only pay the higher price if the performance justifies it, and you pay it out of the profits the business has actually generated. An earnout turns an argument about valuation into a question the business answers for itself over the following years.

Putting the five together

Taken in order, the structure looks like this. The completion payment is funded first from the target's cash, then from debt secured on its assets, then from equity investors in the SPV. Whatever is left of the agreed price is deferred as seller finance, and any difference between your valuation and the seller's is dealt with by an earnout. At no point has the buyer put in money of their own. That is how my clients are buying businesses with no money down, even from a seller who started out wanting everything up front.

Next steps

If you are preparing an offer, work out how much of the completion payment the target's own cash and assets could realistically cover before you approach lenders or investors, because that number shapes everything else. Then have a corporate solicitor structure the SPV, the seller finance and any earnout in the share purchase agreement so that each element is properly documented.