How to Buy Businesses with Zero Money Down

Hey, this is Hector Santiabo. I'm the producer of Business Lunch. And today's episode is another snackable episode with Roland. Something that is bite sized that you can get through while you are washing the dishes, cleaning up around the house, or on that quick drive to the grocery store. But we want to make sure that we give these to you because Roland has been on a mission over the last little bit to really help as many entrepreneurs take their life and their business to the next level. And so these snackable episodes are going to come out every week so that you can have bite size, actionable tactics and strategies that you can start to use right away. And if you know another entrepreneur that's looking to invest, acquire, or one day sell their business, we ask that you please share an episode with them as well. Thanks for tuning in today. We're going to get into the episode with Roland right after this quick break.

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Hey everybody, Roland Frazier here. A lot of people ask me, what is the ROI on no money down deals. Now, first off, I want to say that you need to make a distinction between a normal acquisition deal, a no money down acquisition acquisition deal, and a no money out of pocket acquisition deal. And they're very important distinctions to understand before you get into what kind of return on investment can I get. ROI is return on investment. By the way, so when you're thinking about this, you want to say, okay, well, there's a traditional way of doing acquisitions. And the traditional way is that either you go to a lender, a commercial lender, like a bank, or it might be an investment bank. It might even be a fund like a private equity fund, or a family office, or a spac, a special purpose acquisition company. Those are kind of hot right now as we record this, or a high net worth individual or somebody else to get a loan to acquire the business. And typically they'll provide 70, 80, maybe even 90% of the acquisition price. So if you're looking to buy a business that's $5 million, they would provide 4.5 of that at 90%, all the way down to 3.5 at 70%. So they're going to provide that, and that's going to be debt. Okay. And there's also venture debt is another category that you might, you might run across, or growth capital. Those are other types of funds in addition to the ones that I mentioned. So these, in the traditional deal, these lenders, these creditors are going to loan you somewhere in that 70 to 90% range to be able to acquire the business. They're then going to expect you to come up with a difference. So in that case, you would be coming up with, if it's a 70% loan, you'd be coming with 30%. If it's a 90% loan, you'd be coming up with 10%. They call that the down payment. And that's money you've got to bring to the table. They typically don't like or won't allow that to be borrowed. So just like when you buy a house, the bank says, you need to show us that you've actually got savings of this much money to put down. And then we're going to loan the balance. These people want to be sure that you've got skin in the game as well. And so when we're calculating our return, we're going to say, what is our return on investment based on the amount of skin in the game that we've got? You can also have a return on investment that's based on the total acquisition price. So here's kind of how that works out and why it's important to understand. So let's say that you are going to acquire a $5 million company and you hold on to that company, you do some cool stuff to it, you grow it, and at the end of the day, you sell it for $10 million, you bought it for five and you. Let's say that you did a, let's say you did a 90% down. Excuse me, 90% financed. So you bought it for 5 million, you got a loan for 4.5 million, and you had to put $500,000 down of your own money.

Okay?

So in that case, then you've got two different potential returns. If you sold it for $10 million and you bought it for 5 million, that's a 100% return on your total investment, right? But it's a much higher return on your actual investment, on your actual out of pocket investment. Because in this scenario, you got 90% financing. So on a $5 million investment in the company that you bought, you got 4.5 million in financing, you only had to put $500,000 down, right? So you sold it for $10 million. So, so you effectively, assuming you didn't put any other money into it, you got that $500,000 turned into $10 million. That's a 20 times return on your money. So I think that's 2,000%, right? So the question is, are you looking for a return? Are you going to define your return based on your total investment or on your investment of actual out of pocket? So that's when we start thinking about these more creative deals. In these more creative deals, we're not coming out of pocket at all. And that is going to mean that our rate of, excuse me, our return on investment, our ROI is really going to be infinite, okay? Because we have zero. We have zero investment. So when you think about these more creatively financed deals, then you want to think about the fact that you're actually working on an infinite return on the money because there's no money that is coming into the deal. So let's look at the two kinds of deals then that you might have where you're going to have an infinite return. The first is no money down. Now, these are very, very rare, particularly as you get into larger deals, and they're very, very rare because no money down means literally there's no money that is coming into the seller's pocket at closing. There's no money that is being put down from any source at all. So you've got to find a seller that's totally cool with 100% financing effectively, right? Because if it's going to be no money down, they're really literally getting nothing at the closing. Now, those deals do happen and they're very common in small companies, but they are definitely less common as you get up and above a million dollars. And honestly, if you think about it, why is the seller really that excited to do a deal like that? You're probably buying a company that's not that great. You're buying company from a motivated seller that can't get cash from somebody else. Okay? So by definition, if they've got the choice, if they got a great company that everybody wants, there's gonna be a whole bunch of people that are ready to hand them cash. And so you'll be competing with your I'm not gonna give you anything offer against people that are like, I'll just give you 100% of what you're asking for. Okay? So the quality of deals and the size of deals and the number of available deals when you're doing a no money down deal is pretty low. Now, in between the no money down deal and the traditional deal is the deal that I like to do and that is called no money out of pocket. So no money out of pocket is significantly different from a no money down deal because no money out of pocket deals do have the seller very, very frequently receiving a whole lot of cash at closing. And the only difference is between that and the traditional deal is that the money that the seller is receiving at closing is not coming out of your pocket. Meaning that not only do you not have to have savings of the amount that you are giving to the seller at closing, but you also do not have to borrow or tap your personal credit, borrow against or tap your personal credit or assets, or put those assets at risk when you're doing the deal. And the way that we do that is we have 219 different ways that we can finance a company without having to go and get a commercial loan. That's how many we've identified so far. And we're coming up with new ones all the time. The thing to remember here is that we're simply saying we're going to look at a lot of other places that the funds to do this deal can come from, other than savings that are in my pocket. Me, the buyer. So you, if you're acquiring the company, you're the buyer, you're not going to have to go and tap your savings. You're not going to have to go and get a home equity line of credit. You're not going to have to put your personal guarantee on the line. And the way that we do that is something we teach in an eight week course and even then can kind of only scratch the surface because obviously there's a whole lot to it. But what it ultimately comes down to is we're using the assets that exist in the company and some other creative financing techniques to provide the seller whatever down payment the seller wants at closing. And what that does is it still allows us to have an infinite return because we don't have any skin in the game. But the seller gets what the seller wants, which is some amount of cash at closing and then the rest is covered. Other financing tools, right, but not commercial lending. We don't ever use commercial lending on those deals. Now you can do hybrid deals where you use some of these strategies and some commercial. But it's really fun to play the game of how can I do this with no money out of pocket? One of the ways that we do this from the standpoint of credit is that we use a thing called an spv. And an SPV is a special purpose vehicle. A special purpose vehicle is just a company that's set up for the special purpose of acquiring whatever company you're acquiring. And this is very common in the investment banking world. It's something that we do all the time. You just set up a company that, that's going to do the deal that you're going to do. And that way if that company is getting seller financing or other credit from other people, it's not gonna be on your dime, right? It's not gonna be on your credit, on your personal liability, your personal guarantee. So that's the three types of these kinds of deals that you're looking at doing. And so when we're thinking about our ROI on those deals, we, we've had to come out of pocket $0. We've gotten the seller cash at closing. So there's a whole lot more deals that are available to us. Because now we can deal with sellers that actually want to get some money when they sell the thing. And then we've got all our creative ways to fund this thing outside of our personal credit or money. So in those situations, our return is truly infinite. And it's so much more fun because you're not limited in these deals to the amount of cash that you have available to invest in all those traditional deals. When you run out of money to put down as the down payment, you literally can't afford to do any more deals. When you do a no money out of pocket deal, you get the best of all worlds. You get sellers who want money at closing. So you get a higher number of companies you can acquire. You can acquire much higher quality companies and you can acquire much larger companies. But by doing the no money out of pocket versus the commercial way, you are able to buy an infinite number of companies because you have an unlimited checkbook since you don't have a capital constraint of the down payment like you have in the traditional deal. So your return is infinite. Now, that's your actual rate of return. Your return on the company acquisition can still be measured the same way that we talked about at the beginning of this episode. Right? You say, well, I acquired it for no money out of pocket. For how much money? 5 million. Great. I sold it for how much money? 10 million, acquired 5, sold for 10. That's 100% return. But instead of the return of only 20 times where I had to come up with 500,000 in the traditional deal, I've got an infinite return because I didn't have to come up with anything. And that is how you calculate rates of return in no money out of pocket deals. I hope that helps and I hope that you have a fantastic day.

You've been listening to Business Lunch with Roland Fraser. If you're enjoying the show, let us know by subscribing and leaving a review. And for more information, go to businesslunchpodcast.com thank you for listening.

Hey business Lunch listeners, we're going to get right back to the show, but Roland wanted me to invite you to a brand new training that he's doing on acquiring businesses with no money out of pocket. It's something that he's talked quite a bit about on the show, but he's doing a free training where he's going to walk through the entire process. So if you want to get access to that, go to businesslunchpodcast.com epic that's businesslunchpodcast.com epic and you can get signed up.

Ever wondered how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck.

It's.

It's about having the right system, the right deals and the right guidance. And that's exactly what we give you in the EPIC Deal Fast Track. If you've been thinking about buying a business, but you keep getting stuck, whether it's finding the right deal, structuring the financing, or negotiating with sellers, you are not alone. Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal Fast Track is not another course. It's actually an implementation program and it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're going to plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the Deal flow engine so you always have high quality off market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers that get accepted and fund them creatively many times with no money out of your own pocket. And number three, our closing and integration system so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an EPIC Deal Advisor every step of the way. And that's people that have actually come up through this system and done these deals themselves. That's the only way to become a an EPIC Deal advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines. Just text I'm in to 334-458-9034 and.

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So text I'm in to 334-458-9034 will get you in. No fluff, no wasted time, just real deal making from people that are actually out there doing deals right now. I'll see you there.