There are three ways to buy a business—a normal acquisition, a no-money-down acquisition, and a no-money-out-of-pocket acquisition.
Of those three kinds of deals, Roland Frasier has a favorite. Roland has bought and sold a lot of businesses over the course of his career, so he knows what he’s talking about. In this bite-sized snackable episode, he shares which acquisition deal is his favorite and why—and how you can make it happen for yourself.
3 Types of Deals and the Distinctions Between Them
A lot of people ask Roland what the ROI is on no-money-down deals, but first you need to make a distinction between the three main types of deals.
- Traditional acquisition deals
- No-money-down acquisition deals
- No-money-out-of-pocket acquisition deals.
With a traditional acquisition deal, you need a lender, whether that’s a bank or a fund or an individual or an SPAC (special purpose acquisition company) or whatever. Typically, they’ll provide 70%-90% of the funding. That’s going to be debt. These creditors will loan you this money, then expect you to come up with the difference, the down payment. They typically don’t want that to be borrowed. It has to be your money so you have skin in the game.
Let’s say you’re going to acquire a $5M company. You get a loan for $4.5M and put $500k of your own money down. You do some cool things with it, grow it, and sell it for $10M. That’s a 100% return on your investment, but it’s a 2000% return on your $500k down payment.
That’s when we start thinking of more creatively financed deals, where we’re not coming out of pocket at all. That means our ROI is really going to be infinite, because we have zero investment.
The first kind of deal where you’ll get infinite return is no money down. These are rare as you get into larger deals. There is literally no money going into the seller’s pocket at closing. You’ve got to find a seller that’s totally cool with 100% financing. These deals are very common in small companies, but less common as you get above $1M. You’re probably buying a company from a motivated seller that’s not that great.
The quality of deals, size of deals, and number of available deals with a “no money down” deal is pretty low.
The “No Money Out Of Pocket” Deal
In between the “no money down” deal and the traditional deal is a deal Roland likes to do, and that’s called “no money out of pocket.” No money out of pocket is significantly different because the sellers often receive a whole lot of cash at closing. The only difference is that it’s not coming out of your pocket. And you don’t have to tap your personal credit or assets.
Roland and his team have come up with 219 different ways you can finance your company without getting a commercial loan, and adding to that list all the time. They teach this in an 8-week course, and even then they don’t scratch the surface. What it boils down to is that you’re using the assets that exist in the company and some other creative financing techniques to provide the seller with whatever down payment they want at closing.
You can do hybrid deals where you use some of these strategies and some commercial loans, but it’s really fun to play the game of “how can I do this without any commercial lending?” One thing you can do from the standpoint of credit is use an SPV (special purpose vehicle), a company that’s set up for a special purpose of acquiring the business.
Those are the three types of deals you’re looking at doing. When we think of ROI, we’ve had to come out of pocket zero dollars, we’ve gotten the seller money at closing, so it increases how many deals are available, and we’ve come up with creative ways of financing. And we’re not limited to how much money we have.
When you do a no money out of pocket deal, it’s a win win win. You can buy an infinite number of companies, you don’t have a capital constraint of a down payment, and your return is infinite.
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