How to buy a Company with $0
I've done quite a few startup acquisitions with Startups.com and have consulted on countless more. I get asked "How do I buy a company with $0" about a billion times. So here is the super simple version:
Target Company - Company is doing $10k per month in Net Income. It has 2 people working on it. It doesn't matter what the top line is.
Valuation - $300k.
Structure -
-
Propose paying $10k per month over 30 months. This is called seller financing. Seller says "Hey you're just paying me with my own money!" to which you say "But you don't have to work here, you can get another job, and get paid twice." Most sellers find this very appealing, and so do their spouses ;)
-
If they balk at $10k per month over 30 months make the time period longer.
-
If they say $10k per month isn't enough, propose escalating the amount every quarter, giving you enough time to generate additional revenue to cover the payment. It also pays off the principal faster.
-
Reduce the $10k per month by offering a small amount of residual equity. Most deals fall apart because the seller has FOMO. They increase the price super high not because it's worth it, but because they fear it might be. Leaving 10% (give or take) behind solves for this because they can still get a big check later if this somehow becomes Facebook (it won't). If you hate that idea, have the remainder (10%) burn off a little bit each year.
-
The key to the acquisition his the plan for generating additional cash on top of the existing revenue. That is the heart of the deal.
FAQ
Ask me literally any question about how this works, I've done it a million times, it works beautifully, and hopefully it's immensely helpful for you too.
Hey @wilschroter, thanks for sharing, super helpful! For 2 and 3, do you build in some sort of "interest rate" and amortization on their money to help define the payback period? Also, is the collateral the business? i.e. what happens if you default on the payments you owe the seller?
Cool idea..when you say you’ve done this a million times, are you running like 10 different businesses?
We have 6 active companies that we've acquired but we looked into over 100 startups to buy and did diligence on 40, not to mention the activity with my last 9 startups over the past 30 years.
How many people are full time on the 6 companies? I love the idea but I'd be worried about learning the business + growing revenue unless you had someone pretty dedicated to it. Do you have a ramp-up period where you focus most of your energy on the new business?
How successful in these situations have you been at flipping the businesses after a few years? Or have you always bought and hold?
This isn't going to be super helpful as an answer bc we have 200 people. I don't suggest you go and buy a whole stable of companies. I'm suggesting this is a great way to structure a deal to buy ONE and grow it as a kickstart to having something of value.
I don't believe in the buy and flip or build and flip. This isn't a commodities market, so the idea that we can easily sell it is fairly unrealistic and I've never seen the sell side to be liquid enough to make that bet.