What if you could buy a Small Business with no debt or capital?

Here I& #39;ll detail the unusual buyout structure I used:
I bought my company in 2018 from its previous owners of 40 and 33 years.

Highlights:

• $0 down
• "Looking forward" variable price
• Optimized for risk and incentives

DISCLAIMER:

I& #39;m attempting to distill industry nuances into principles that apply across SMB niches.
If you& #39;re new to my "Entrepreneurship through Apprenticeship" idea, you might want to visit this thread first: https://twitter.com/joelrandyblake/status/1282364527913267200">https://twitter.com/joelrandy...
Additional context:

• Industry: Manufacturing

• Niche: Contract sales agency brokering long-term partnerships between physical product companies and custom manufacturers

• Founded: 1980

• HQ: Boulder, CO

• Employees: 5 (Partners: 2)

• Market: Lower-end
2012: I joined as an employee.

2016: The Sr. Partner announced his plan to retire 1/1/2018. He would be 65 years old.

We began working on a deal for me to buy out the Sr. Partner& #39;s 50% share.

The Jr. Partner (late 50s) and I would run the show together until his retirement.
2017: The Jr. Partner surprised us all by saying he wanted to retire at the same time.

Now we had a challenge:

Where to find a *second* qualified buyer for such a specialized SMB?

(To those wondering: The Partners& #39; combined book of business was too much for me alone.)
Turns out the Partners had a longtime industry contact / friend in Colorado who was looking for an ownership opportunity.

After getting to know each other, he and I decided to partner up on a 50-50 buyout.

Serendipitous, but also a testament to the Partners& #39; network.
The four of us began researching best practices for buyouts in our niche.

Most commonly, the purchase price was based on previous years& #39; earnings.

But in a relationship-driven business, that poses several risks:
1. If any supplier contracts get cancelled post-transaction, it cripples revenues and we& #39;re on the hook for full price.

2. We need access to the departing Partners for customer transitions and tribal knowledge.

3. A lump sum buyout requires substantial capital and/or debt.
Because of the mutual trust at the table, we were able to voice these concerns openly.

Once the group agreed on the importance of aligning incentives, the idea of a forward-looking earnings share buyout came up.
The structure itself is simple:

• Fixed % of gross earnings paid to sellers annually

• Fixed # of years

• Variable purchase price based on the company& #39;s future performance

• Buyers assume operating ownership from day 1, with two-sided protections in buyout agreement
Seller advantages:

• Mini-pension plan (in effect) funded by company earnings

• Qualified successors, hungry to grow the business

• Partake in future upside

• No headaches around financing options / approvals

• Continuation of multi-decade legacy
Buyer advantages:

• No debt or capital required upfront

• Downside protection from negative business events

• Turn-key operations

• Collaborative transition to preserve customer and supplier base

• Existing income stream with opportunities to revitalize
The complexities of this purchase structure are mostly qualitative (i.e. emotional).

A shared earnings buyout was only possible because of our shared history and values.

But using the apprenticeship approach, a "looking forward" structure can work for many niche SMBs.
Final Thoughts:

Are you curious how the deal has played out?

Since taking over in 2018, my Partner and I have grown revenues by >70%.

We& #39;re on track to overpay for the asset, in which case the company (and we, personally) will be in a strong position.

Now, back to business!
You can follow @joelrandyblake.
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