Is it fair to expect
‘no-money-down’
opportunities?
Many purchasers believe that they can buy a business without having to put up any money. This is a false impression created in the popular press. In fact an equity contribution is required in nearly all LBOs that are not entirely funded with vendor loans. In larger deals the private equity company, rather than the management team, provides the bulk of this equity but it is still required.
In theory, the purchaser may purchase a business with no money down but only if the seller provides 100% financing or the purchaser locates a private investor ready to buy a business and let the purchaser operate it. Both eventualities are rare if not totally improbable.
What are the advantages to the vendor of selling a company with 100% financing? Many sellers try to avoid any deferred consideration or providing vendor loans at all. Buyers should exercise extreme caution when looking at these types of deals since they may end up purchasing a failing company.