How We Bought A $1M Business For $0 Out Of Pocket

For those of you who are unaware, on 12/31 we closed on the acquisition of Revenuezen.com, an agency we are very proud to welcome to the Onfolio family.

It comes with an excellent team, who retain 12% ownership of the business, healthy profits, strong revenue, and is a business we understand well.

Crucially though given our current cash position, we managed to acquire the business for $0 out of pocket.

Now like with all “No money out of pocket” deals, the headline is always more impressive than the reality, and I apologise for the bait.

In reality, we paid $240k up front for the business, but we used debt to fund that amount, hence the ‘no money out of pocket’.

The total deal structure was as follows:

• $240,000 cash at closing

• $440,000 two-year seller note at 11% interest, due 12/31/2025

• $425,000 of our preferred shares (12% dividend)

And we sweetened the deal with some stock options.

That means that for $1.1M we acquired a business which we are expecting to bring around $325k worth of profit to Onfolio in 2024 (or about $200k after interest payments on the debt, pref share dividends, and seller note)

A decent price to pay, and achieved without reducing our cash position.

The structure we used above is somewhat innovative, in that it’s unusual for the space we are in. The lower than usual up front amount, the inclusion of preferred shares, and the multiple of profits are all an attractive structure.

Our goal for 2024 is to reach profitability as a holding company, without reducing the cash we have in the bank through acquisitions. We have limited amounts of dry powder, which we’d rather keep on hand for working capital and pursuing organic growth.

One of the problems we’ve faced is that our revenues are small, and we operate in an industry where banks do not typically fund acquisitions.

Many people looking from the outside in say “Just get some bank debt”, but it’s not like we haven’t tried.

It’s actually ironic, because once we reach $10-15m in revenue and profitability, lenders will be much more willing to help us fund acquisitions.

The irony is that we have enough deals in the pipeline to achieve both that revenue level and profitability without deploying a ton of capital, but many lenders look at trailing twelve months before accepting pro forma projections.

So that meant we were forced to innovate and get creative with deal structures.

Since we were raising money from Preferred Shares in late 2023, and aimed to use that money for acquisitions, we decided it would make sense to just offer the shares to a business owner instead.

Most online business owners are not familiar with a preferred share, so there’s a large education piece needed.

Our pref shares are fairly simple though.

Each share is valued at $25, is not convertible to common stock, and pays $3 per year in dividends (a 12% yield). We are going to list those shares on an exchange in the coming weeks, allowing shareholders the opportunity to exit their pref shares after the 6month holding period the SEC mandates.

Any potential shareholder has to ask themselves what the risks and benefits are of taking pref shares over cash.

The benefit is obvious, you get a 12% yield from a publicly traded company that has been paying 100% of its dividends since January 2021.

The risk is that we stop paying the dividends, or once traded, the shares drop in price. Given that each share has a fixed $3 dividend attached to it, they aren’t likely to drop very far, if at all.

But let’s imagine the shares dropped to $20 per share because someone dumps some on the market. Now the $3 represents a 15% yield for new buyers. Many people will try to buy the stock at that point. Not many people who bought them for $25 are going to sell for $20 though, and buyers bid the price back up to $25.

Sure, our common stock hasn’t performed that way, but the common doesn’t have a dividend. It’s a huge difference.

As for finding a seller willing to take a seller note or less cash up front than usual…that is actually more common than you’d think in the current market.

A lot of sellers have more down to earth expectations than they might have had in 2020 or 2021. They see fewer buyers knocking, they understand capital is more expensive now, and a lot of them had a rough 2023 from a sales perspective.

We had to kiss a lot of frogs, but not as many as you’d think.

With Revenuezen, we found our Princes. (The first of many).

The RZ team understood the structure and why it was good for us and them. Plus, because we only bought 88% of the business and the whole team is staying on, they were aligned with us and wanted to get a deal done.

The fact we acquired an excellent agency and the team are staying is just as important as the way we structured the deal, and perhaps that’s a topic for another time.

Moving forward, we will likely use similar structures to the above where it makes sense and is possible to do so. I believe more teams will see the value in joining our portfolio and will feel more confident in taking a similar structure once they see others doing the same.

Nobody wants to be the first person to accept a structure different from the normal “all cash” or “mostly cash” deals. Well, almost nobody.

We’re excited about three things right now:

• Acquiring more agencies

• Using creative structures to get the deals done

• Using the above to reach profitability.

Now, a key thing to mention is you can’t buy a business just because the terms are good. In fact, that’s usually a red flag!

It’s also important to mention the use of debt.

We don’t want to rack up a ton of debt, especially after paying off the $2.4m seller note for ProofreadAnywhere a couple of months ago.

Too much debt when it has a short maturity becomes a time bomb and you end up constantly kicking the can down the road until one day you stub your toe. Ouch.

This is why we have got creative again, and are launching our SPV next week.

For those not in the know, our SPV (Special Purpose Vehicle) is designed to do two things:

• Replace debt as the cash portion of a debt

• Allow our audience and investors to “co-invest” in our dealflow.

For example, if we took the Revenuezen deal and instead of used debt to fund the $240k portion, we allowed you investors to fund that in exchange for a proportionate equity ownership, we’d still achieve our no-cash out of pocket structure and would avoid taking on debt.

For investors, there’d be roughly a 25-30% ROI on that investment, making it a win all around. (You could also buy our common shares to get an even bigger ROI, as the success of the SPV will drive value to all common shareholders too)

The SPV we are about to launch and raise money for is aimed to achieve just that. You can learn more about it here FYI, or indicate your interest here. 

We believe we’ll be able to get good returns for investors, continue to acquire solid agencies, and reach our own holding company profitability within several months using this structure, which is very exciting.

For those of you looking to complete your own acquisitions, this is also an encouraging tale. It shows that with some creativity, you can find ways to get a deal done.

Yes, you probably won’t have access to the same amount of debt as us (although with an SBA loan you could get more), and you probably won’t be able to offer preferred shares, but the point is that you can make something happen if you know it is possible, and you roll up your sleeves.

We’ve got many more deals lined up for 2024 and as they become public, I hope to share more details with you, as I believe it’ll make compelling content.

Until next time,

Dom