The Zero Dollar Funding Method That Builds Freedom And Abundance
Acquisition Aces - Issue 3
Read Time - 3.5 minutes
The Zero Dollar Funding Method That Builds Freedom And Abundance
In the military, everyone has a role that requires a very specific skill set. People start in the same place but focus, experience, and continued training are some of the reasons for different career outcomes. What you think the job is all about in the beginning, becomes something very different after you have been in it for a while. Business is also like that.
Regardless of what type of business you are trying to build, there are only a few entry points to get started. You can read the books, watch the videos, and brainstorm business plans all you want but you won’t really understand what to do until you take action and get feedback.
Take this guy here:
Ok, that’s technically me. In reality, though, that guy in the picture is a totally different person. That version of Ben thought that you had to get a big pile of money yourself to be able to buy someone else’s business. Nope. If “Ben 1.0” had an acquisition coach, he would have learned that there are ways to acquire assets without spending a dollar of your own money. It is a tactic he could have deployed the day after leaving the military.
The “Seesaw” Method To Keep Control While Using Other People’s Money (OPM)
There are a lot of different ways to get people to give you money to help you buy a business. The one that gets the most attention is VC funding in the SaaS space. Start by solving a problem with an app that people pay a monthly subscription to use. Build up the user base to validate the model. Then, pitch it to the guys in the suits. Get funding. Scale. Exit. It doesn’t always work exactly like that but you get the basic idea.
The problem with this model is that you lose control of the business. The suits are constantly putting pressure on you for growth. For example, it took Uber 14 years before it turned a profit. Everyone points to the company’s unicorn status but that happens so infrequently in the VC world it is a very bad bet (That’s why its called a unicorn). I use this extreme example to illustrate that there is always a cost to getting funding. You will always have to sacrifice something but we want to do it in a way that accomplishes our twin goals of cash flow and maintaining control of the business.
One way to do this is, is to structure the deal by “Seesawing” the risk of the parties. It works like this. You find a deal that a traditional bank would finance. In this situation, the bank will typically require a 10% to 15% down payment. Instead of putting the cash down yourself, you find a preferred investor (or investors) to cover the down payment. This means that they have special rights and are paid back first.
In the current market, you are looking at giving a preferred investor around 8% to 12% on their money, plus a front-loaded repayment schedule on the principle (let’s call it four years for this example). For those first four years, the investor bears a large portion of the risk because if the business fails they are unlikely to recoup the principal.
Once the principal is repaid, however, the risk “seesaws” back to the buyer because they are responsible for keeping the business running. The investor still gets payments, but at a lower rate now that the initial money is no longer at risk. This allows the buyer to negotiate favorable terms for the period after repayment and, more importantly, keep control of the business by not having to give up large amounts of equity.
To make this work you must find deals where there is enough cash flow to make the required payments and pay a salary to you, the buyer. In order to do this you must be able to properly evaluate a deal. There is a standard set of business metrics you can examine to accomplish this. Watch this video to get a better handle on how that works.
