A while back, I was having cocktails with an entrepreneur on a visit to North Carolina.
25 to 30 years ago, he made around $200 million in real estate development and is now involved in the steel industry, among other ventures. Needless to say, he’s created immense value in the private capital markets over the years through real estate and entrepreneurship.
During our conversation, there was a theme that kept coming up as we were sharing our respective years of experience, and it’s one I’ve seen time and time again in my 25 years as an entrepreneur. It’s this:
Too many people today are looking for something for nothing.
It sounds really simple and boomer of me, but it’s true.
I’ve never seen as much content published on how to acquire a business with no money down or how to buy a business, hire a manager, and walk away as I have today.
Source: Digital Creative Mind
This gentleman, who had built significant wealth throughout the years, also crystallized the one thing in business that is simultaneously the best teacher and the best assurance of success in business. He said:
“Walker, there’s no better teacher than personally guaranteed debt.”
I couldn’t have said it better myself. This lesson is really the essence of entrepreneurship in the private capital market, and in this week’s post, I want to share why.
Deals that require low effort or capital aren’t what they’re cracked up to be, and even though signing a personal guarantee is anxiety-inducing, it is also the thing that can necessitate the growth of your business – and I’ll explain how.
Don’t Expect to Put No Money, Time, or Effort Down
A no money down acquisition sounds too good to be true, and I hate to break it to you, but it is. There are a couple of reasons why.
First, it’s nearly impossible to get a seller to agree to those terms, where they are willing to delay their pay day over a period of 5, 7, or 10 years, simply to allow you to buy their business.
In fact, if a seller is amenable to this plan, I’d take a closer look at either the valuation or how the business is run, because generally only sellers who are in a bind or looking to sell a lemon would consider offering 100% seller financing.
Additionally, approaching any business with the expectation of minimal effort or no financial commitment is a flawed strategy from the get go. The phrase “no risk, no reward” is a frequently touted cliche in the business world for a reason.
In case you don’t know my story, I’m the Wall Street Journal bestselling author of Buy Then Build and creator of the acquisitions educational platform Acquisition Lab. Over the last decade, I’ve purchased over $16 million in revenue across seven companies, and I’ve consulted on more than 200 transactions in the private capital markets.
In my years of mentoring aspiring acquisition entrepreneurs, I tell people all the time: if you’re looking to quit your W-2 job and buy a business,
- Don’t try to do it with no money down, and
- Don’t plan to put a manager in place so you can walk away on day one.
What Sellers and Lenders Are Looking For
Whether you’re buying real estate or a business, you’re entering the private capital market. This arena demands risk, effort, and, most importantly, capital. Sellers and lenders work exclusively with buyers who are willing to put something on the line, whether that’s capital or a personal guarantee.
Why? This is how they feel confident they can work with you. If they know you have something at stake, they know you will do whatever it takes to succeed. If you have no skin in the game, you become a liability in the eyes of the lender, and they’re less willing to work with you.
Again, if you find a lender or seller who is willing to give you financing or the keys to their business without you putting anything forward should make you pause. Why are they willing to engage in a deal that seemingly doesn’t benefit them? Is there something you don’t know about the stipulations of the financing (e.g. higher interest rates or hidden fees) or the business itself? Likely, there is.
The Likelihood of No Money Down Deals
In the Lab, I often ask, “Raise your hand if you’d sell your house to a buyer on a 100% seller note, with no money down and nothing upfront.”
To no one’s surprise, not a single person raises their hand.
*crickets*
Why? The logic is pretty simple. If you’d be hard pressed to find a seller who wants to engage in those terms, why do you think you’ll find them as a buyer?
In order to find houses with willing sellers, you need to secure a bank loan and personally guarantee it. This is how deals get done, and this also applies to small business acquisitions.
I’ve spent a lot of time in the sub-$25 million market because it’s an area of the market that’s less sophisticated and more fragmented. This has made it ripe with opportunities to add value so that’s where I’ve focused much of my work.
In sub-$25 million transactions, you’re typically looking at a six-figure cash infusion combined with an 80-90% personally guaranteed loan. Although you might be able to reduce that a bit with a seller note, most seller notes are also personally guaranteed – just in second position to the lender (e.g. you’re obligated to pay off the bank loan before the seller note, but both have a personal guarantee attached to them).
There’s endless media coverage nowadays promoting how great it is to buy businesses – and it really is. Acquiring a business provides an excellent platform for entrepreneurship, creating value, growing through acquisition, and building equity.
That said, acquisition entrepreneurship doesn’t come for free. The chances you’ll take on personally guaranteed debt are more likely than not. Not to mention, there are significant pitfalls with taking on seller financing you want to be aware of.
How Having Skin in the Game Actually Grows Your Business
Now, signing a personal guarantee is certainly a commitment, but it’s not all bad. In fact, as I alluded to earlier in my conversation with the gentleman from North Carolina: it can be the greatest teacher and accelerator of your personal and business growth.
I don’t say that lightly.
Personally guaranteed debt is more than just a financial obligation – it’s a motivator. When you have that kind of risk on the line, you’re far more committed to ensuring the business succeeds.
A personal guarantee allows you to create the most value in your business because the high-stakes nature of a personal guarantee gets you to burn the boats and commit fully.
In the Lab, when members ask if they should buy a small business with the cash they have or use that cash as 10% down of a much larger business, I always recommend the latter. There are a number of reasons why I’ll always encourage this option, but one reason is because with a smaller business, a buyer simply has much less at stake.
If they lose the money, it might hurt, but the bank, the government, and their remaining assets aren’t involved in the process. The pain of giving up with a smaller business (with no personal guarantee) is far less excruciating than if you take on personally guaranteed debt for a larger business.
What a Personal Guarantee Can Teach You
When I look at entrepreneurs in startups, I often see people spending other people’s money and taking risks they wouldn’t take with their own money, all the while drawing a salary. In acquisition entrepreneurship, it’s different – you’re putting your own capital and reputation on the line. You’re taking real risks and making things happen.
And when times get tough, you may have to make difficult choices, like I did.
During the Great Recession, I had to lay off and furlough employees, and I reduced my salary to zero. It was one of the most challenging periods I’ve experienced in business. While my team felt the pain, I made sure I felt it even more because I believed it was my responsibility. Through it all, we were able to keep the balance sheet healthy, thanks to the cash flow we maintained.
That said, if I didn’t have a personal guarantee, who’s to say what decisions I would have made.
The same applies for you. Through the inevitable highs and lows, that personal guarantee will hold you accountable to showing up for your business (and your employees and customers) every day. It will teach you how to manage staff and how to innovate within your business. It will force you to do whatever it takes for your business to survive and grow.
And ultimately, just like the entrepreneur who made millions in his business endeavors, it will allow you to succeed in the long run.
Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.
