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What if you could buy a Small Business with no debt or capital?
Here I'll detail the unusual buyout structure I used:
Here I'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'm attempting to distill industry nuances into principles that apply across SMB niches.
Highlights:
• $0 down
• "Looking forward" variable price
• Optimized for risk and incentives
DISCLAIMER:
I'm attempting to distill industry nuances into principles that apply across SMB niches.
If you're new to my "Entrepreneurship through Apprenticeship" idea, you might want to visit this thread first: https://twitter.com/joelrandyblake/status/1282364527913267200
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
• 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's 50% share.
The Jr. Partner (late 50s) and I would run the show together until his retirement.
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'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' combined book of business was too much for me alone.)
Now we had a challenge:
Where to find a *second* qualified buyer for such a specialized SMB?
(To those wondering: The Partners' 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' network.
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' network.
The four of us began researching best practices for buyouts in our niche.
Most commonly, the purchase price was based on previous years' earnings.
But in a relationship-driven business, that poses several risks:
Most commonly, the purchase price was based on previous years' 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'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.
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.
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's future performance
• Buyers assume operating ownership from day 1, with two-sided protections in buyout agreement
• Fixed % of gross earnings paid to sellers annually
• Fixed # of years
• Variable purchase price based on the company'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
• 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
• 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.
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'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!
Are you curious how the deal has played out?
Since taking over in 2018, my Partner and I have grown revenues by >70%.
We'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!
