200 $0 OOP Ways To Fund A Deal

Question 1

1. Asset Carveout (pre LOI)

Answer 1

Take things out from the asset list that we carve out of the deal, lowering the purchase price, lowering corresponding accordingly due to what assets get carved out.

Balance Sheet value lists assets at historical cost, this usually DIFFERS from current value/worth.

Question 2

2. Instant Earn-In (Pre LOI)

Answer 2

Equity for the seller unlocked immediately upon doing the deal.

Can be combined with some instant equity and some months/years later, or unlocked as an earn in when they fulfill their bargain and hit targets.

Question 3

3. Temporal Milestone Earn-In (Pre LOI)

Answer 3

Equity is unlocked based on time - maybe we get small portion equity now (at least 20% ideally) and vesting the rest over time.

Question 4

4. Event milestone Earn-In (pre LOI)

Answer 4

Equity is obtained for either party upon completion of certain events.

Question 5

5. Revenue Segment Milestone Earn-In

Answer 5

Unlock equity when certain milestones or profit goals IN YOUR SEGMENT of business, isolating your performance so you’re not impacted by the rest of the company.

Question 6

6. Profit Segment Milestone Earn-In

Answer 6

Equity unlocked when a profit goal is hit in my/a specific segment of business, isolating my performance from the rest of the company.

Question 7

7. Revenue Company Wide Milestone Earn-In

Answer 7

Equity is unlocked based on hitting company wide revenue targets. This strategy includes “risk” in that the company could tank despite us driving lots of traffic or fulfilling our role.

Question 8

8. Profit Company-Wide Milestone Earn-In

Answer 8

Equity is earned when company wide profit targets are hit.

Question 9

9. Sweat equity

Answer 9

Objective is achieved and then equity is unlocked.

Question 10

Co-investors

Answer 10

Bringing on other people with money for equity in the company.

Question 11

Pipe wrench

Answer 11

Bringing 10% or more of the value/revenue/profits of the company, gaining equity based on your extreme value to the company.

Question 12

12. Revenue share Pre-Sale Tests

Answer 12

Run a promotion of your product or service to the company’s list on a 50/50 revenue share basis to determine whether there’s a demand for your existing company’s products or services and apply your 50% share to the down payment to acquire the company (benefit is that this 50% share of ours is “pre tax” so all that value is going to buying the company and we’ve got pre tax dollars funding part of the purchase price.)

Question 13

13. Toll gate deal / 3rd party Revenue Pre-Sale Test

Answer 13

Run a promotion of a 3rd party’s product or service to the company’s list on a 50/50 revenue share basis to determine whether there is demand for a particular product or service you or your company doesn’t currently provide but would like to test, or like to add for growth to the target company’s offerings and take a “toll gate” fee for doing this (usually 25% from company and 25% from product/service owner/provider. Apply your share to down payment to provide funding plus shift taxes.

Question 14

14. Fair Market Value Based - FMV based 100% cosign non inventory

Answer 14

When you can’t get a carveout deal but won’t use some assets, any assets you plan to sell post closing, we are carving them out of the price BUT we are committed to selling them and giving the profits to the seller after we sell.

Question 15

15. FAIR market Value +fee Based Cosign Non Inventory, Non Essential Assets

Answer 15

Charge a fee like 10-20% fee for liquidating. Calling this a consignment it’s not technically a carveout.

Question 16

16. Fixed value based 100% consignment Non Inventory, Non Essential Assets

Answer 16

Another iteration of a consignment to sell assets of the company we won’t use or need, but without a carveout. In this case we’re agreeing on a fixed value of each asset we will sell and as we sell it, we pay the previous owner based on a predetermined fixed value we establish when making the deal - irregardless of our sell price we get when we sell that asset post close.

Question 17

17. Lease Option on Total Business

Answer 17

Pay a monthly or quarterly Or annual fee to take over and operate the business for 1-3 years. Anytime until the 3 years is up, ive got an option to purchase the business at an agreed upon price (price is set before/at the start)
This is great for when a seller has shiny objects syndrome on something else or really doesn’t want to be in the business anymore. Or they need to get out the business fast, or if they’re just going to close. Tell them “idk if I want it or not, but im willing to take a look at it and work it for up to 3 years. And we agree that I have an option to purchase it at X dollars (set the price before).

Question 18

18. Lease purchase on Total Business

Answer 18

Pay a monthly or quarterly Or annual fee to take over and operate the business and have a contractual obligation to purchase it for a pre agreed upon price at the end of or prior to the end of the option.
This is great for when a seller has shiny objects syndrome on something else or really doesn’t want to be in the business anymore. Or they need to get out the business fast, or if they’re just going to close. (You can still back out of this since you purchased through an SPV and can backout liability free.

Question 19

19. Private lender (hard money loans against hard assets)

Answer 19

You go to a private lender (lots of these folks) who do hard money loans against any asset ((not intellectual property)) in the company (kind of a last resort to fill the deal stack for a company you really want)

Question 20

20. Sell and stock back + Call

Answer 20

The seller sells the company to your SPV and we give seller back stock in the SPV. Plus, we have the right to buy them out.
Say we buy a company for $1,000,000, we buy the entire thing with our SPV, but give seller back $20% and reducing our price to $800,000. The “call option” means we have the option to buy out their 20% in the future, either for a fixed price, or based on an equation

Question 21

21. Sell and stock back +put/call

Answer 21

Exactly like 20 but a little worse, the person who sold the business has the option to force us to buy the company after the time has allotted.

Question 22

22. Sell and stock back + Put

Answer 22

Exactly like 21 and 20 except even worse because we don’t have the right to buy them out but they have the right to force us to buy them out for a predetermined price at some point in the future.

Question 23

23. Seller consulting to offset purchase price (fee based)

Answer 23

The seller will get consulting that’s based on a fixed fee. You want 1 million dollars, I want you to be with the company for 1 year to help with the transition, I’ll pay you $10k once a month to knock $120k off the purchase price. Tax benefit of paying $10k a month as an expense, as opposed to a non tax benefit of buying another $120k of the asset. Also ensures seller sticks around for a year.
Downside to seller is they don’t get to pay capital gains tax on that $120k they’ll be paying normal salary tax, but we negotiate from our perspective we need their help and consulting.

Question 24

24. Seller consulting to offset purchase price (performance based)

Answer 24

Just like 23 where the seller gets their consulting fee but only when the seller has achieved something pre agreed upon. Different from an earn out bc earnouts are typically company wide and this performance based consulting is specific to something the seller’s consulting achieves. Like starting a new project or overseeing some change or implementing something pre agreed upon.

Question 25

25. Seller consulting to offset purchase price (blended formula between fee based and performance based)

Answer 25

Seller consulting fees are paid half as an agreed upon amount (fees) and the other half based on seller consultant’s performance (a mix of 23 and 24)

Question 26

26. Non competing equity split #1 (3rd party provides 100% of funds + acquires at your purchase price)

Answer 26

3rd party who has a business who would like to access the customers that the business has that you’re going to acquire - but a different enough product or service that doesn’t compete with the customer base. The 3rd party comes in with the cash. Allow them to come in at the same value that im acquiring it at.

Question 27

27. Non competing equity split #2 (3rd party provides 100% of funds but acquires at FMV

Answer 27

Just like 26 but the 3rd party gets their acquity at fair Market value and is not acquiring at the same price as me if I’ve negotiated a lower price.
3rd party who has a business who would like to access the customers that the business has that you’re going to acquire - but a different enough product or service that doesn’t compete with the customer base. The 3rd party comes in with the cash

Question 28

28. Non competing equity split #3 (party provides other assets or resources)

Answer 28

3rd party who has a business who would like to access the customers that the business has that you’re going to acquire - but a different enough product or service that doesn’t compete with the customer base. The 3rd party comes in with the assets or resources that will be valuable to the acquired company and gets equity based on value of their assets or resources they’re bringing

Question 29

29. Non competing equity split #4 (3rd party provide funds + assets/resources)

Answer 29

A combination of 27 and 28 -
3rd party who has a business who would like to access the customers that the business has that you’re going to acquire - but a different enough product or service that doesn’t compete with the customer base. The 3rd party comes in with the cash and assets/resources.

Question 30

30. Seller loan + wrap

Answer 30

Wrap comes from real estate.
When the seller has a loan and there’s a “due on sale clause” or other loans the seller has taken out to fund the business - so we wrap the loans into the purchase price. Say the price is $1mm and the seller has $600k in loans, either credit card debt or home equity or sba loan. Clauses in there say the seller is only one liable - mayhe the clause states that in the event of change of control, the loan becomes immediately due - and we don’t want that.
So what we do is wrap those loans into one loan (consolidation), and our single spv assumes this loan to the seller, and it reduces the purchase price by that amount (600k)

He doesn’t answer how this avoids the loophole of the clause that state the debt is due right away when ownership changes.

Question 31

31. Outside integrate investor

Answer 31

Outside integrator investor invests cash or assets and comes in to operate the company
(Integrator just meaning someone to run the business bc we don’t want to)

Question 32

32. Internal integrator investor

Answer 32

Internal ntegrator investor invests cash or assets and comes in to operate the company - someone from inside the company steps up to operate the business and invest cash or assets - often the #2 #3 or #4 in the company now has a chance to get ownership equity in the company.
(Integrator just meaning someone to run the business bc we don’t want to)

Question 33

33. Short term note payable used as your down payment

Answer 33

Rather than just standard DDP (deferred down payment) to pay 30 60 90 days - this short term note says we will pay X amount on date of closing

Question 34

34. Asset collateral to be replaced in 30 60 90 days of closing

Answer 34

Giving collateral over to the seller let them hold the asset to be sure that we are going to pay back the seller.

Question 35

35. Seller subordinates seller’s carry back financing to another lender who will have 1st position (seller has a 2nd)

Answer 35

Subordinate means: of 1st 2nd and 3rd positions of loans. Real estate: 20% down and 80% loan. That 80% loan is sold off to Fanny Mae who has a 1st position. They get their money first if the house sells. Home equity line of credit or 3rd party loaner has 2nd position. 3rd position would get paid 3rd.

Question 36

36. Employee or group of employees (non integrator level)

Answer 36

Use the employees as investment tool to finance company. Oftentimes will have a 401k that allows them to invest.

Question 37

37. 10o9 investor (contractors to the business can invest)

Answer 37

Rather than employees internally, you can seek out contractors that work with the company and know the business understand risks, also want to see the company succeed since it’s a provider or working with their company - so they might want to invest with us.

Question 38

38. 3rd party Hypothecation:

Answer 38

3rd party lends their collateral with a bank or lender in exchange to get the lender to make the loan

Question 39

39. Credit card used to buy something seller wants to reduce down payment

Answer 39

Alwyas ask seller “what will you do with the money?” We use our credit card to deliver the tickets they want upon closing in exchange for lowering the buying price.

Question 40

40. Advisor loan (company existing advisor makes loan)

Answer 40

Advisory on an advisory board to the company you want to buy, (ppl associated with the company is a great place to get investors)
- they loan the company to be repaid from business operations and we use this loan to help with the purchase price

Question 41

41. Advisory board +Loan

Answer 41

Advisory on an advisory board to the company you want to buy, (ppl associated with the company is a great place to get investors)
- they loan the company to be repaid from business operations and we use this loan to help with the purchase price. 41-45 cards are all similar to this, but can come from board members board of directions/ advisory boards. IF THE COMPANY DOESNT HAVE AN ADVISORY BOARD say hey let’s make one now you’re on it, and do you want to invest too and lower your risk by being on the advisory board.

Question 42

46. Staggered tranches PPM (private placement memorandum) aka Just in Time Funding (JIT financing)

Answer 42

Valuation of company changes based on this formula based on performance. Say we acquired at 200k, we raise money to pay $40k, we’ve given away 20% equity for that 40k, we increase valuation to 500k. Then payment is due to seller for seller financing - now company is 500k and we need 50k more for 10%, now we need 100k for 10% at a million dollar valuation. I’ve given away 40% of the company but received 100% of the capitol to acquire the business / money needed to pay off the company. Very brilliant model.

Question 43

47. Reverse wholesaling

Answer 43

Become a middle man where I find a company to buy and then reach out to my network and see if anyone is interested in acquiring the company. I get contract to buy for $500k and get a seller willing to pay $750k and I earn the spread of $250k.

Question 44

48. Deferred payment + liquidate (not particularly wholesome) happened alot in the 80s and is coming back

Answer 44

Corporate raid.
1. Negotiate a deferred payment
2. Acquire and liquidate all assets / fire everyone as fast as possible
Acquire quarry for 1 million that has assets In a field where I know lots of potential buyers
Find a buyer before the buy and say “I can get you a great deal and you can buy at liquidation price” so buy the company for 1 million and immediately liquidate all assets for 1.5 million

Question 45

49. Gross cash flow Assignment for down payment

Answer 45

Assign a portion of the existing target business’s gross cash receipts to seller to pay part or all of the down payment or seller financing.
Say we have 500k in inventory, we assign 75% of gross cash receipts for 90 days, we could sell 166k/month and give all that proceeds to the seller before we ran out of inventory - then move to JIT (JUST IN TIME) assignment.
So we are using the company’s assets to fund its operations and then assigning its gross receipts maybe 50-75% to the seller so they get paid their down payment very quickly.

Question 46

50. Net sales cashflow Assignment of Down Patment

Answer 46

Assign a portion of the existing target business’s net cash receipts to seller to pay part or all of the down payment or seller financing.
Say we have 500k in inventory, we assign 75% of net cash receipts for 90 days, we could sell 166k/month and give all that proceeds to the seller before we ran out of inventory - then move to JIT (JUST IN TIME) assignment.
So we are using the company’s assets to fund its operations and then assigning its net receipts maybe 50-75% to the seller so they get paid their down payment very quickly.

Question 47

51. Gross margin cashflow assignment of Downpayment

Answer 47

Instead of saying I’m going to assign you gross or net sales, we will say “based on financial statements, the business operates at a gross margin on 70%, so 70% of all sales that come in will get assigned to you. 100k in sales, 70k gross profit, and they get their share from that (say 50%, so 35k to them assigned to the downpayment)

Question 48

52. Credit card down payment

Answer 48

We purchase a product from the seller on their merchant account which we are taking over - and then THAT is providing me the financing to give the seller that cash. Seller receives cash while he still owns the business - a way to use their merchant account to get them cash. And as I take over that business, the obligation to pay goes to my SPV.

Question 49

53. Take ownership of the business at closing while taking on seller’s debt on a subject to basis

Answer 49

Not a formal assumption of the seller’s debt, but I’m taking it “subject-To Basis”
Legal distinction between formal assumption
Subject-To is “I’m taking it over, I know it needs to be paid, but im not going to assume it”

Question 50

54. Take seller’s debt with a debt wrap

Answer 50

Company debt wraps rather than just personal.

Question 51

55. Assume part of the target acquisition’s debt

Question 52

56. Assume all of the target acquisitions debt

Question 53

57. Assume some or all of the seller’s personal debt

Answer 53

With formal agreement- go to sellers personal creditors and taking it over and to let the seller off the hook.

Question 54

58. Seller inventory consignment

Answer 54

Deduct cost of FMV of target company’s inventory from purchase price and pay seller as it sells - seller still owns it (why it’s subtracted from the purchase price make sure all inventory we acquire is useful, don’t pay for obsolete inventory

Question 55

59. Tax assumption: assume tax liabilities of target acquisition

Answer 55

assume tax liabilities of target acquisition -
Another debt the seller would otherwise have to pay off when it closes. Just be sure they’re not overdue and be sure we can afford to pay them from the proceeds of the company’s operations.

Question 56

60. Double escrow

Answer 56

Close the sale on the acquisition and then immediately resell at a profit to another buyer directly after the first escrow closes. -
Kind of like reverse wholesale but truly a double close
Not doing an option - so find the buyer first.

Question 57

61. Defer close 4DCM (4 day cash machine)

Answer 57

Take over running the business but defer the actual closing for a short period of time. Then, run a four day cash machine to provide purchase price or down payment funding for the closing -
Need to Google a four day cash machine

Question 58

62. Defer close + sale

Answer 58

Take over running the business but defer the actual closing for a short period of time. (30 60 90 dayas)Then, run a sale at the business to provide purchase price or down payment funding for the closing

Question 59

63. W/C Adjustment (Working Capital)

Answer 59

Cal with grant goes in depth.
This discussion is “how much gas left in the car when you sell it” the multiple the business gets sold out is already including (its implied and accounted for in the valuation) that there will be sufficient operating cash to continue running the business.
Don’t let the seller take all the cash out! It’s a negotiation and there’s opportunity to fund / use some of the money that’s already in the business to pay for the business.

Question 60

64. Opportunity zone

Answer 60

Looking for favorable geographically advantageous spots to open businesses (Ohio is good for spvs)

Question 61

65. 2nd TD NP as DP -
    2nd trust deed note payable as a down payment

.

Answer 61

Purchase 2nd trust deeds for deep discounts in real estate - use this asset as a down payment for the seller. We win in the arbitration. We ask the seller what they’re going to do with the money, maybe they’re investing somewhere with a 1-4% gain, and instead we trade them this trust deed at 17%. (I don’t understand all of this yet)

Question 62

66- 74. SBA loans

Answer 62

Acquire a company, get its PPP loan while it funds from within. Just give the $ that would’ve otherwise had to pay what we are now paying using PPP money instead, give that money to the seller.

Question 63

75. CAPLINE SBA

Answer 63

Line of credit loan.

Either us or the seller personally guarantees and gets this kind of loan for the company.

Question 64

76. Short term note payable for down payment

Question 65

77. Barter

Answer 65

Trade something of value in exchange for the down payment.

Question 66

78. 3P Barter

Answer 66

Bring a 3rd party in that has the desirable tradeable and have them trade it in exchange for my down payment while I give the 3rd party what they want whether an asset or $

Question 67

79. Refillable seller holdback applied to Down Payment

Answer 67

In most or all transactions 10%, there’s a hold back of 10% of the purchase price that will get released over maybe even a few years. So we help finance our deal by taking the 100k 10% we’d like to have an option to pay it in 6 months rather than putting the 100k in right now. So, we will give you a note against the hold back and we will basically refill that hold back at the end of 6 months. The seller wouldn’t get that anyway bc its going into a hold back (typically for 3 years btw) But to help make the deal happen I just want to pay the hold back amount not now but 9 months down the road.

Question 68

80 seller holdback applied to down payment with countering note payable

Answer 68

The 10% standard holdback with a countering note payable

Question 69

81. Seller holdback applied to down payment

Answer 69

Can be applied directly to the downpayment instead of the standard way / or even instead of paying for it in 9 months.

Seller should be interested in holdback financing bc its helping the seller get the money faster. (9 months or direct downpayment rather than getting paid in 3 years)