From 0 to 1: How to finance your first business

Different ways to solve the Cold Start problem and get your foot in the door.
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Howdy readers!

Today we’re talking about how to get past the first hurdle of buying a business:

  • How to finance your first business

There’s more options than you might think! Let’s get into it.

Before we get started!

Big announcement in my world — I’m hosting HoldCoConf 2025!

I’ve never been a big events guy, but HoldCoConf was super valuable to me. So when Kelcey and John asked me to partner with them to take it to the next level, I jumped.

It’s all things holdco — managing multiple businesses, incubating new ones, connecting with others, and then hitting the slopes at Sundance Resort in Utah.

Sound like your thing? Lock in early bird pricing now.

Now back to business…

From 0 to 1: Buying your first business

To buy a business, you need money. And you need a business to make money. If you don’t have money or a business, you’re facing the Cold Start Problem.

Lots of people don’t have enough personal capital to start with. 

Maybe you don’t make enough to save up for a business. Maybe you don’t want to put 100% of your net worth on the line. Maybe you have less risk tolerance because you have kids to look after.

Some lucky people don’t have to solve this problem. Maybe you’ve got family money, or you’ve inherited a company or two. But if you don’t have a leg up like that, buying your first business can be a big hurdle. 

But that hurdle doesn’t have to stop you. There are a couple of great ways you can get your foot in the door, even if your capital is limited. 

Let’s take a look. 

SBA Loans

An SBA (Small Business Administration) loan, specifically SBA 7A, is a government program that lets you use debt for acquiring your first company.

Depending on how you structure it, you can leverage to take on debt of up to 90% or more on a business. Some recent structures are going even higher, though high leverage always scares me – and should scare you, too.

Because they’re backed by the federal government, you can get very competitive terms, even when you don’t have a credit history. It’s an ideal program for getting off the ground. Right now, the ceiling for the loan value is $5M, which is more than enough to get started.

The risk of an SBA loan is the “personal guarantee”. Basically, you have to pledge that the loan will get paid back, and you have to put your assets on the line.

Bank Loans

If you’re looking to start with a bigger biz than $5M will buy, you can go straight to the bank. Of course, you’ll be on the hook for that money as well, and the terms might be less competitive than an SBA loan.

In some cases, banks will loan without personal guarantees (called ‘no recourse loans’). Those are harder to get, especially if the deals are smaller.

There are also multiple types of banks out there. A big “money center” bank like Wells Fargo will be very different from your local community bank (e.g. the Bank of West Wichita). All banks like collateral, though, so are tougher to work with if you’re just starting out.

(By the way! If you’re looking at SBA or bank loans, you should talk to my friend Heather Endresen — she’s great at helping you find the best fit for your deal.)

Private Equity / Investors

This is a pretty straightforward solution. That doesn’t mean it’s easy, though. 

You start a company that will serve as your HoldCo. Then you sell ownership in that company to other people, in exchange for their investing capital. Then you use that capital to acquire your first business.

There are different ways to structure that deal, but they all end up with the investors having ownership in your business. You’ll need to find alignment between your interests and theirs. Bring something to the table that gives them a reason to invest. That could be industry expertise, exclusive access, or the skill and grit to buckle down as an operator for a time.

The downside is that these kinds of investors want returns on their investments, so will want to capture some of the value. You may look up and realize you own only 20% of the company when all is said and done. It’s all about the deal you can sell to other folks, so your mileage may vary here.

But if you can get the right investors, you’ll have their expertise and experience to guide you.

Also note that sometimes private investors will structure their investment as a loan. This can work but it also scares me. If a bank won’t loan me money for a deal, that always gives me pause that perhaps I’m pushing the envelope too far…

Venture Capital

Venture capital is a special type of private equity. They typically invest in extremely high growth and high risk/reward opportunities. 

VC would never invest in a roll-up, for example. Even though they’re low risk (they’re usually stable businesses, so easier to model out), they’re not going to explode in value. They would much rather invest in the next Uber.

It’s rare to find a venture capital firm investing in a HoldCo, but it all depends on your idea.

Sweat Equity

This is the work-your-way-to-ownership path. 

Basically, you go find someone who wants to retire out of their current business, and you buy into it over time. Work out a structure where you take a pay cut in exchange for equity.

For example, say you’re a person normally worth $200,000 a year. That makes you a high value person in a business. You strike a deal where you’ll get paid $50,000 a year for five years, but each year you gain a percentage of the business. At the end of the five years, you’ll own 80%.

This can be win-win: you get a stable business, and the existing owner gets a transition plan out, help for five years, and they know their business is going to get taken care of.

A final note

Last year, I put together a course on how to find a great business to buy. It’s aimed at beginners — easy to understand, packed with information, and will help you get from zero to a fully-fledged deal-hunting machine.

You can check it out here — and for the next 7 days, take 20% off with coupon code NEWSLETTER. 

That’s it for today! Have a great week!