ONFO Shareholders Should Love Our SPV

Last week somebody sent me the following message, and I realized if he wrote it, others were no doubt thinking it too.

“What's going on? You keep offering deals outside what was the initial Onfolio Offer. Shouldn’t ONFOLIO be your first and only focus here?

All this talk about SPV’s and buying agency business feels like distractions with ONFOLIO slipping into the background.

And if it’s so good, leverage the hell out of it within ONFOLIO to build profits and drive up the share value for which I'm invested in. Have you seen the share price, let's focus on getting that back up…...”

Fortunately, it’s an easy email to address (even if it was painful to read).

The reason it was painful is because we are leveraging the SPV for Onfolio,

So the fact somebody didn’t realize that means I’ve done a woeful job at explaining it.

Here’s my rough reply to him (name redacted):

“[Name] That’s exactly what the SPV is for…The SPV is raising the cash needed to invest the cash portion of the acquisitions and Onfolio is using debt and preferred shares to pay for it’s share of the businesses we’re acquiring.

At each closing, the SPV would own 14% to 30% of each acquired business and Onfolio would own the rest!

SPV investors can get a very good return on their investment (20%+), and Onfolio gets very good cash flow without having to deploy much of its limited cash." I am 100% focused on Onfolio and nothing else!

This SPV is exactly what we expect will help get Onfolio profitable and I am indeed attempting to leverage the hell out of it.”

His reply:

“Great! If you put it in those terms, it makes sense.”

Phew.

But like I said, if he’s saying it, more people are thinking it.

So let me back up a bit because I am proud of what we’ve structured here with the SPV, and I’d like to explain what it means for Onfolio common shareholders, and why investors in general should be excited about it.

Sidenote: If you aren’t sure what the SPV is, you can read more here.

With the SPV, we are borrowing a core strategy from the “search fund” playbook, where you find co-investors to cover the cash portion of your acquisition.

Here’s our current situation:

1.) We have multiple businesses we want to buy, with enough free-cash flow that it should make Onfolio profitable.

2.) We’ve negotiated with the business owners who have agreed on roughly the following terms (each deal is slightly different, but directionally the same terms):

Acquisition price: 3x net income

Cash up front: 33%

Onfolio preferred shares (not common shares!): 33%

Onfolio note (explained below): 33%

So lets break that down some more for a business making $1,000,000 per year in net income.

Total price: $3M

Net income: $1M

To buy the business Onfolio gives the seller:

a) $1M worth of preferred shares, which pay the holder 12% per year in interest.

b) a $1M note, where we pay them approximately 6% in interest. We pay interest for 2-3 years, and pay the principal at various points in the future.

c) $1M cash.

Since Onfolio doesn’t have enough cash to buy all the great businesses who have agreed to these terms, we’re using a combination of acquisition financing (lenders will give us some money towards the cash payment) and raising the rest of the money to buy these businesses via the SPV - from investors like you.

In the hypothetical scenario above, Onfolio would contribute about $500k cash and the SPV would put in another $500k cash.

The deal moves forward.

The SPV investors own 16.6% of the business ($500k / $3,000,000) and would earn $166k per year assuming the business continues to make $1M net income per year.

This means that investors make a passive investment and would earn 33% annualized returns ($166,000 earnings from $500,000 investment).

Since we are buying 4-5 businesses, investors would also have some diversification.

For Onfolio, it is a great deal too.

In the same example noted above, we only put a small amount of cash into the deal.

But we get to acquire and own up to 83.4% of the business - representing $834,000 in annual profits, from one transaction, which is more than enough to cover the interest payments on the capital we’re borrowing and the preferred shares.

So yes, the SPV is potentially a huge win for Onfolio shareholders, but also provides a lucrative return for the investors who participate in the SPV. It’s genuinely a great win win.

What Happened To Preferred Shares?

Some people asked us why we were promoting preferred shares a few months ago, but now switched to the SPV.

We actually tested both offers to our audience, and preferred shares we promoted more aggressively at the end of 2023, as they were a cheaper source of capital for us.

However, after some initial traction, some people were put off by the fact Onfolio wasn’t profitable and they were worried about being exposed to the overheads of the business.

Raising more preferred shares would’ve gotten us profitable much sooner and made that concern moot, but people didn’t grasp that or believe it, so fair enough….

So we decided to push on with the SPV idea, since people get higher cash returns, more upside, and aren’t exposed to the current operating losses of the parent company.

And here we are.

Once we’ve finished the SPV raise and are profitable, we’ll probably raise more preferred shares since it’s the cheapest source of capital and people won’t have profitability concerns anymore, but for now, the SPV is what gets us there.

We’re ok giving up more of the upside to attract enough investors to fund the next phase of acquisitions since we believe it will also help ONFO become profitable.

So in conclusion:

1.) The SPV is not a “new thing” or side gig, it’s the priority and main way we are growing Onfolio.

2.) We structured the acquisitions and the SPV in a way that gives investors a great return, doesn’t expose them to our parent company’s losses, diversifies them across multiple acquisitions, leverages Onfolio’s expertise and deal flow, gives them upside and capital gains, gives them liquidity via the annual exit option, and gives them cashflow via the quarterly payouts.

What isn’t to like?

Ah, maybe you’re worried we don’t know how to run agencies profitably. Especially if our parent company isn’t profitable yet?

The parent company isn’t profitable because there are some high-fixed costs that are needed to be NASDAQ listed, with independent directors, corporate and securities lawyers, audited financial statements, etc. but the portfolio itself is profitable.

We believe the next phase of acquisitions will contribute enough free cash flow to more than cover all relatively those fixed-expenses.

Since you’re “only as good as your last acquisition”, I wanted to share a little bit about RevenueZen, our most recent acquisition.

Since the acquisition on 12/31/23:

Revenue is up 30%

Net income is up 100%

This business alone is likely worth almost the entire ONFO market value of $3 million.

I hope this clears everything up and it’s more clear why we’re doing the SPV, and why it’s good for everyone whether you’re an ONFO common shareholder or an SPV investor.

And I hope you’re as excited about it as we are!

Although we’ve raised almost $1 million thus far, there’s still room for you to invest in the SPV.

You can do so here.

We signed 2 Letters of Intent last week, meaning two agency owners agreed to our terms and we’re going through the final due diligence and paperwork stages now.

Plenty more where that came from.

Dom