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WES S04E06 - Funding Structures

WES S04E06: Funding Structures

Justin Cooke December 11, 2018

Subscribe to our VIP LISTAs you continue to grow/expand your online business, you may want to consider the ways in which you can best bring in outside investors to grow the company.

Structuring these funds is a new and exciting opportunity in the industry and we’re seeing more and more funds popping up from various teams we’ve done business with.

The question is – would you be better off giving away debt, equity, or some mix between the two to your investors?

In this episode, we dig into the advantages and disadvantages to both investors and operators when it comes to how to split the pie.

If you’re curious about these types of funds and portfolios and want an inside look at what’s happening with these today, this is a great podcast episode for you.

Digging the show? Please do stop by iTunes and give us a review when you get a chance – we’d really appreciate it!

Alright, let’s dig in…

Listen To The Full Interview:

Direct Download – Right Click, Save As

What You’ll Learn From This Episode:

  • Debt/Loan
  • Equity only
  • Debt + Equity Hybrid

Featured On The Show:

 

Ace:                       As an investor, one way to lower your risk when you’re investing in these deals is to start to get some money on the dividends.

Announcer:        Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show, where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts, Justin Cooke and Ace Chapman, share their real life advice, examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin:                   Welcome to the Web Equity show, this is season four, episode six. I’m your host, Justin Cooke. I’m here with my co-host, Ace Chapman. What’s going on buddy?

Ace:                       What is up guys? I’m excited about today’s episode.

Justin:                   Yeah man. We’re talking funding structures. We’ve got three methods that operation investors use to set up funding structures between themselves. I’m really excited to talk about it too. We actually started doing this episode and it got extended, so we’re not going to say a part one, part two, but we’re going to talk about these  three funding structures this week and then next week we’re going to go into a bit more depth into how they’re actually used.

Ace:                       Yeah. Once we started getting into it and talking from our personal experiences and wanting to give examples and get into at least some detail, we realized this is a lot more than what we can get through in one episode. So we’re going to be talking, like I said, from our personal experiences and how we set these things up, as parts of deals that we’ve either seen in deals that we’ve acquired or been involved in, obviously from the brokering perspective or partnerships, investors and then some of the actual acquisitions.

Justin:                   Yeah, you’ve actually done some of these deals through deals purchased at Empire Flippers and we’ve seen some of these scenarios with some of the people that we work with. Obviously we’re happy to share the details behind some of these structures, how they work and what they look like. Not exactly willing to state who are running these specifically, unless we have their permission beforehand. And you have a couple of examples you want to share, but yeah, if you don’t know the names or if you didn’t get permission, then we’ll leave those ones out obviously.

Ace:                       Yeah. And this is the disclaimer park. , this is an emerging market, so there’s no right way to do these things. A lot of things are being tested. There’s a lot of opportunities for thinking about how you can match your own deal structure, investors to the deal. So a lot of what we discussed today, they still has to prove itself out over time to see which models make the most sense for these smaller deals that we’re doing and what’s most valuable. Keep in mind, we’re just sharing information from our own experience.

Justin:                   Yeah. And another thing, , we’re not lawyers or accountants just to stand this disclaimer. You really should speak to professionals that have your interests at heart. While we have your general interest in heart, we don’t know you specifically or what your situation is, so you need to talk to professionals before you get involved in anything and make sure you understand the risks and what’s going on there. But wanted to give you  an overall sense on the deals that we see.

                                Before we do that, man, let’s do some listener love. We’ve got a nice message over on Quora from Jacob Brown who said Web Equity Show podcast with Jessica Cook and Ace Chapman is a great deep dive into the process of finding and structuring acquisition deals. Really good for beginners and intermediates. Jacob, thanks for the shout, man. Really appreciate it.

Ace:                       Yeah, Jacob, my man. Thanks so much.

Justin:                   All right buddy. Let’s get into funding structures.

                                All right, Ace, so we have three methods we want to talk about. The first one is the debt or loan model and, just give a brief explanation of what we’re talking about here.

Ace:                       When it comes to getting a loan, as we all know, there are upsides and downsides to being on the line for a loan. With most of these deals, since we’re doing smaller deals, these are not businesses that are over 10 million. The biggest downside is that you’re going to have a personal guarantee, but in some cases, a bank may be willing to give you a loan, but the brief estimation, as you guys all know, is you’re borrowing the money. They don’t care what happens to the business. The business could work. It could not work. But you’re making those monthly payments every month. If you don’t make those payments, it’s going to go against your credit, they could come after you for other things, but that’s getting a loan to acquire the business. So that’s what we’re going to talk about first.

Justin:                   Yeah. Even if it’s … Sometimes it’s a bank that gives out the loans and sometimes it’s investors that give out the loan. So we want to talk about what some of the upsides and downsides are for the investors or the banks and then what some of the upsides or downsides are for the operators. No matter what side of this deal you’re on, whether you’re an investor or you’re an operator, you might get a little more sense into how this works.

                                Talking about the investor side of things, if the business fails, you’re more likely to get paid back in full plus interest. And that’s typically because you have a personal guarantee. It’s not a loan for the business, it’s a loan for the person that’s running the business. And that’s generally how these deals are structured.

Ace:                       Yeah, I do a lot of lending personally on deals that I feel like, okay, this is a pretty solid business. So from the investor perspective, you probably don’t want to do this if you are dealing with a borrower that’s 100% dependent on that business succeeding in order to pay you back. And secondly, you probably don’t want to do it if the person doesn’t have a good credit history and all that good stuff.

                                The great thing is that when you’re dealing with somebody who’s willing to take out a loan on the business, they’re probably pretty motivated to make that business work. If you’re going in and you’re just given equity and they don’t really have to pay you anything unless everything works out, that could maybe make them a little bit more or lackadaisical. But if they know every month they’re on the line for this interest and principle, they are probably pretty motivated to make that business work.

Justin:                   Yeah, that motivation is interesting, Ace. Just to touch on that, I think it’s going to depend on the personality. Some people are more motivated by paying debt back. That’s me. I’m motivated. It’s like, “Oh my God, I got to do this.” It makes me, puts me under the gun and makes me hustle. Whereas someone like my business partner, they really don’t like it. It makes them uncomfortable with it.

                                It’s motivating for some people. It’s somewhat crippling for others. They can’t operate with that kind of debt behind them. I think it depends on the person. Yeah, it motivates me for sure, but I know people that it doesn’t.

                                One other thing you need to be careful, from an investor’s perspective on debts or loans on these businesses is, you can cripple a business that’s operating on low profit margins. So, if they have low margins or are there’s a business that needs that cash for growth and you’re sucking up that growth through loan repayments with interest, then you could be hurting their ability to grow and get you paid back faster.

                                You need to be aware of what  margins they’re going to be operating on. But whether that’s done traditionally and what the plan is after the fact with the loan that you’re giving him and start thinking about what’s the debt to income? What’s the loan to value on this? Where will it put their cashflow and six months and 12 months in 18 months? Will they be able to pay me back, even with growth, which they’re obviously going to want to do.

Ace:                       Yeah. It’s good to think about this from the banking perspective. There is a reason that the bank says, “Oh yeah, we know 100% of your income is this, but we’re going to base your affordability for a mortgage on 30% of your income because if we let you go to 70% of it, you’re going to eventually run into trouble. You don’t have room for error and all this.”

                                You have to structure these things from the perspective of how can I put this business in the best situation possible financially. And a quick pro tip is, I like to structure these where, for the first 90 days it may be interest only. I’ll let the person pay me interest only for 90 days so that they’re not just jumping into the business and having these large payments eating into the margin. They can build up some working capital and then start the payments later.

Justin:                   And they may need that cash right up front because things pop up with a business, right? You may, “Oh, I forgot about this or this is needs to be paid, or I want to inject a little bit of growth, little extra growth,” and they’re not paying back the principle, they’re just paying the interest. That’s pretty smart, Ace, I get that.

                                All right, man. Let’s talk about some of the upsides and downsides for operators specifically.

Ace:                       Yeah. When it comes to the operator’s side, obviously you’re coming at it from a totally different perspective. You want to get the money, you want to get the money as cheap as possible. You want to make sure that the business is going to be successful, because you’re the person putting in the work. You can typically use the money from a business loan in any manner you see fit. In SBA type loans, which is going to be in the example we’ll talk about in a sec, they’ll give you specific things, where this goes towards the purchase, this goes towards working capital, this goes towards inventory, and really split it up.

                                When you’re dealing with the individual investor, a lot of times the agreements don’t go into specifics as much as doing a deal like a SBA type of loan. Keep in mind when you’re structuring this from the operator perspective, you need to know what you’re going to use that money for and if you need to negotiate that with the person you’re borrowing the money from, you need to do that early on so that they’re aware that, I need this amount of money for this, I want some working capital, I need some money for inventory. So, you don’t get that loan and they’re like, “Oh wait, you used all the money to buy inventory? I didn’t think you’re going to do that.”

Justin:                   Yeah, yeah, for sure. It’s good to have a plan for it anyway and then, be clear on the loan on what you’re using it for and what restrictions you may or may not have on it.

                                The other thing is, it depends on, again, personality style, but like for me, having to repay that loan is motivating for me. I’m gonna, you know, nose to the grindstone so to speak and really kick some ass to make sure I get that loan paid back. Whereas other people, they’re like, they don’t operate well with that fear looming over them. I need my debt overlord looking over my shoulder, beating me up. So, it just depends on the person. But if you’re the type of operator that it’s helpful for, then it’s potentially helpful.

                                The other thing you need to know as an operator is that if the business fails, if it doesn’t work out or you abandon it or it goes to zero or whatever, you’re still gonna have to pay back that loan in full plus interest. So, you’re not off the hook typically, because it is a personal guarantee and your investor or your bank or creditor can come after you personally for the money. And that’s in almost all the deals I’ve seen. I think on deals larger than we’ve done, that may not be the case, but for all the ones that you’ve done, it’s always personal guarantee.

Ace:                       Yeah. Once you get over 10 million, they’ll just do basically a corporate loan to that company, the LLC or entity. But before you get to that point you are going to be online and even still a majority of those deals over 10 and they want somebody to have a personal guarantee, so keep that in mind. That’s probably the biggest downside to doing the deal as a loan.

                                I have one example I’ll talk about a little bit. We had a deal actually earlier this year, we closed on FBA business one of my clients purchased and we did an SBA loan and probably the thing that we didn’t include here and why I wanted to include this example is, you want to think about the amount of time that it takes to do the loan through a bank or SBA as opposed to an investor? Most of the time if you’re dealing with an investor, they get the space, It’s pretty easy to close. I’ve seen those close in as little as two to three weeks and as much as maybe six months, I mean 60 days.

                                Now, when you get the SBA, we actually had this thing, we thought it was going to end up taking close the six months, it was right under five months to get everything done. So, this was a little bit larger than a million dollar deal. And the awesome thing with SBA is that they give you a majority of the money. So we had 80% of the money from them. We had 10% that was from the seller and then my [inaudible 00:11:53] was putting in 10%.

                                When you have a deal like that, the upside is wow, I’m getting this business and I’m only putting 10% down. That’s hard to get anywhere else outside of SBA. But the amount of work and documentation and sometimes just waiting on the bank to get back to you is the biggest downside there. I wanted to include that as just something to keep in mind because you need to negotiate with that seller.

                                We prep the seller and let them know, hey, the upside to this is that you’re getting more money up front than you would if we were doing this financially or structuring this another way. So in exchange for that, you’re going to have to be patient while we get this whole process complete.

Justin:                   Yeah. I mean you’re going to have to be patient, but putting 10% down to business, that’s pretty rare. It’s just in the last year or two that really SBA has become more and more popular in terms of, we’re getting more and more SBA type of deals done. So, putting 10% down, having to wait a while and find the right deal makes sense.

                                They are pretty restrictive on the types of deals that are out there. So if you don’t need SBA look to the deals that aren’t American run, aren’t American businesses, don’t have, I think three years tax returns. Those types of deals you may be able to get a discount on there harder because SBA won’t take them on. So yeah, they’re pretty restrictive in the deals they’ll do. But if you can use SBA, you can definitely put a lot less down than some of the other deals.

                                All right man, let’s talk the opposite into this. Let’s talk the equity only deals and, basically an equity only deal is in exchange for money they invest now. Investors are going to take a stake in the company moving forward. That stake in the company may or may not include dividends or distributions. It depends on the deal and it would likely include obviously a payout in a liquidity event or the sale of the business.

                                So, they are getting a piece of the company and they’re going to get generally upside in the profit as it goes along. And then the upside in the value in a liquidity event.

Ace:                       Yeah. So, there are a lot of upsides. I love doing these equity deals and one of the reasons is, the biggest upside for the investor is that there’s this uncapped upside. You could end up growing this business three times and when it sells, you get, three times your investment, plus you earned some income over the time that you’ve owned the business.

                                So, let’s talk real quickly about those dividends and distributions, because as an investor, one way to lower your risk when you’re investing in these deals is to start to get some money on the dividends. The most risky place to invest is venture capital, and it’s because they’re waiting on this liquidity event, so if anything bad happens between when they invest and that liquidity event, then they lose all of their money. By getting those dividends and distributions in the meantime, you’re basically decreasing your risk with every single payment.

Justin:                   Yeah, I think that’s important. Make sure you’re getting a little bit of cash as go along because those distributions can add up to quite a bit, especially if it takes a while for the exit. If you’re three to five years out and the profit and the cash flow is good, make sure you’re getting a piece of that in relation to the equity in the business that you have.

                                Ace, I think a quick question for you. My buddies, Dan and Ian over at a company called, or a site called, tropicalmba.com. I’ve talked to them quite a bit about, their deal flow and they run a community for online entrepreneurs that are abroad, that are generally expats or traveling, and they have this huge community of people that they could potentially invest in and do equity deals with them. They’ve always held out and their answer, they’re concern is that they’re scared to put money into a business where the founders resent them three years, four years down the road, where they take an equity piece, they put in, I don’t know, $50,000 for 10% of the business or whatever and it ends up being worth, let’s say, $50 million and they just resent the shit out of them for that early equity stake.

                                I tried to tell them that I don’t think that’s going to be the promise, not really how it works. The business gets there, they’re not going to hate you for that. Right? They’re going to be happy that you were along the journey for them. What would your answer to them be to that kind of issue?

Ace:                       I’ve seen that exactly the opposite. I mean, when a deal … I would be more concerned about dealing with people when the deal goes bad, because working through those things are a lot more emotional when you’re trying to say, “Okay, we’ve got to fix this,” or, “We got to work this out,” and they may disappear on you and they have animosity towards you when the deal goes bad. That’s when you’ve got to manage through and it’s tough and you’re dealing with negative emotions.

                                I’ve never had a person react poorly when we’re winning together, we’re really making money together. It’s like, “Hey, I love you. I love you!” It’s all love.

Justin:                   And it depends on how much of the deal you took, right? So, just talking about how this looks from an investor’s perspective, the fact that you have uncapped upside is fantastic. The business hundred x’s, you a hundred x your return on that investment, fantastic. Everyone’s happy, They’re happy, you’re happy, the business is done extremely well.

                                Another thing is, you may get some level of control over the business. You may only take 10% equity or 30% equity, but you may get a board seat, you may take 51% of equity and you actually have a controlling interest in the business. So, you’re going to have, generally, some say in the business, especially, the larger the percentage you get, the more say you’re typically going to have. And again, that needs to be negotiated. The deal.

Ace:                       Yeah. I think most investors, they’re doing these smaller deals at least cause they want to be involved. If it was a thing of just, “Hey, I want to just sit back and collect money,” there are a lot of other ways to invest that way. What’s you’ll find is that people do want to be involved and it’s a cool opportunity for investors that may not have the time or ability to go out and start a business from scratch and they can come in as a mentor and help shape the direction of the businesses that they invest in.

                                I think that’s a whole another return for a lot of investors that you don’t want to take for granted as an operator. Those people want to be involved, so don’t just think you’re going to get the money and never talk to them until it’s time to pay.

Justin:                   Yeah, that’s totally true. My buddy has particular skillsets including SEO. And so deals that come along where he thinks they could really take advantage of his skillset, than he loves to invest in those deals because he sees an immediate … I can two to three x this thing really quickly. And so the operator wins on that deal by taking him on. He has some upside in their improvement. He wants to help them grow. Having a track record of doing that, it’s just a good sign for them to take him on and have him help them get the business up to speed.

                                This reminds me of a … I can’t tell this story. Never mind. I’ll have to skip that one. All right, man. Let’s talk about some of the upsides and downsides for the operator in the equity only piece.

Ace:                       Yeah, so the one thing to consider from the operator that is a little bit better than the loan, considering … You have to consider your perspective, but you don’t have to pay the investors back if the business fails, absence of fraud and that kind of thing, of course. But that’s a pro and a con for me. I think a lot of people are like, “Oh, great. I don’t have to pay this money back.” For me, I’d almost rather just have a loan and just pay you back. I’ll go out and do another deal and make my money back, but when the equity goes down, you have that animosity from the investors and that kind of thing is … For some people it’s actually worse that you don’t have to pay the people back. For other folks, they’re like, “Oh great, this one failed. I’m okay. It’s time to move on to the next one.” They knew the risk, there was the possibility it didn’t work out and they can move on.

Justin:                   Yeah.  another thing is because the investors have equity in the business. You have kind of a, leadership council. You have strategic mentors that you can go to that are interested in having the business succeed. They have upside when the business succeeds. Having ideas you can bounce off someone can be helpful, particularly if you’re a solo founder. It can be a lonely road as a solo founder, as a solo entrepreneur. Having these kinds of investors gives you someone you can go to and bounce ideas off of when you don’t have that maybe in your business.

Ace:                       Yeah. And then the last thing to keep in mind is that you’re going to have to share a larger portion of your profits with those equity investors. Things work out, it’s going to be a lot more expensive than borrowing the money. Those monthly payments on a loan, you’re talking about splitting it up over three to five years, and it’s a small amount of money each month. So, it could end up, if things work out, you’re going to pay that investor a lot more than the cost of just borrowing the money.

Justin:                   Yeah, and I can see that’s greed kicking in. But I can’t see to some degree going, “Aw man, I should have taken a loan back in the day.” And I guess if you have middling success, that might be even of more concern. Obviously, if it’s a runaway success, everyone’s happy, “Aw, I could’ve just taken out, I could have paid back $1.2 million, but instead I had to pay back $10 million because the business made so much, but it’s worth a hundred who cares?” I mean, who Cares? It’s doing just fine.

Ace:                       Exactly. You’re exactly right. It’s when it’s in the middle. If it fails, then you’re dealing with a set of issues. If it’s extremely successful everybody’s happy. But it’s in the middle where it’s like, “Ah, I’d rather keep this money than have to send it to this investor.”

Justin:                   Yeah, for sure.

Ace:                       So let’s talk about an example here. We recently did a deal with you guys called Blue Dot. It’s a content website. It’s a really neat business. But when we were buying that one, that’s nothing that a bank is going to lend on. They prefer either software, SAS types of businesses and e-commerce. So, we knew we’d have to raise the capital from investors.

                                One thing that’s interesting about this deal, it was a $1.4 million deal and I had an operator that I knew, wow, this guy could really kill this business, but he doesn’t have a million four to buy the business. What we ended up doing on that deal is raising the capital to get to the seller and then the person that’s the operator, they have a small percentage of the business where they invested and put a little bit of capital up, but then we gave them a larger portion of the revenue and a little bonus of equity since they’re going to be running the business.

                                That’s how we ended up structuring that deal where it’s just 100% investors, we didn’t do any loans and we’ve got an operator who we’ve invested in to run that business

Justin:                   Who was not interested in doing the loan? Was that the investor’s decision or the operator’s decision? Or kind of both?

Ace:                       Yeah, it was definitely both. One of the things that’s nice if you’re doing a loan is, very consistent revenue and then maybe even some assets like inventory and that kind of thing. When you dealing with a content deal, you just don’t have any of that. So, with a SAS business, you’ve got this software that you can say, “Okay, on the balance sheet, this is what it looks like. We’ve got this invested in this software. Maybe if things don’t work out, we could sell that for something.”

                                So, not having any assets at all is one of those cases where it’s a little bit tougher to convince the investors to do the loan.

Justin:                   Gotcha. All right man, let’s talk about our third model which is basically just a hybrid of the two. It’s the debt equity hybrid. Effectively, this is where an operator borrows money from investors knowing that the loan will be paid back in time and with interest over time. Normally these deals are, there’s no normal here. Sometimes the deal can include a small equity piece or that loan can convert to equity at a certain point, just depending on the conditions that are set and the terms. Mostly, I’ve seen where they are doing the loan and they had to pay the loan back over time, but they take a small equity stake and they get to keep that equity stake over time. If the loan isn’t paid back or it’s not paid back in certain guidelines, then they took a larger equity piece. What are the types of deals you’ve seen for this space?

Ace:                       Yeah. So when you’re seeing a deal, and it does, and we’ll talk about this in my example after we go through the upsides and downsides, but there are cases where there is a little bit of inventory, there’s some assets where you can do a loan against those assets and then, but there’s some additional money that you want to put in as far as equity. From an investor perspective, that’s a great place to be in the deal, and I think from the operator perspective, you both are basically getting the best of both worlds and the worst of both worlds.

                                It can balance out for both the investor and the operator. And I think that’s one of the pros here is that, you’re balancing the best and worst of both worlds.

Justin:                   Yeah. I think it’s going to be a more secure deal than a straight equity play from an investor’s perspective. And it’s going to have some upside, but the upside is limited, right? Because you’re going to get a much smaller piece of the equity than you would if you did a straight equity deal. And then, again, you have to understand that these businesses can fail. If the business fails, your equity piece goes away. You may still have the loan, but whatever it is you’ve got in equity is going to be completely gone.

                                A lot of times equity is just kind of a sweetener. It’s to get a deal done or to get a lower interest rate, so that they’re not paying back at a ridiculous high rate. But if it goes away then all the upside crashes down, even though the loan still there.

Ace:                       Yeah. So, let’s talk about it from the operator perspective. From the operator perspective, you’re dealing with an investor. Sometimes that same investor can do the debt and equity, which is nice, but you can structure this so that you can get the maximum amount of cash. You can get as much cash as you need on the loan side and get the minimal amount on the equity side. If you think this thing is going to really have a lot of growth in the future and what you’re able to structures is a deal where you get the maximum amount of cash for the minimum amount of dilution, which basically means that you’re decreasing the amount of equity that you’ve got in that business. So, that’s a great thing about putting these two together.

Justin:                   Yeah, it also is a good thing to use as kind of a bridge between a full equity raise, where you’re able to take on a loan. Maybe you go small equity piece, but you’re able to basically get the cash without doing a full-on raise and kind of gets you through until you hit the next milestone. That would put you in a position to raise another round.

Ace:                       Yeah. So, down side here is, at the end of the day, you’re still on the line for a loan. If the business doesn’t work out, you’re going to have to pay that back. And in some cases, and here’s where you want to read the fine, print. In some cases, it’s great if you’re an investor to structure the deal where you are investing equity and you have a loan, but if the business doesn’t work, that equity portion can turn into a loan. So, as an operator you want to make sure that you read the fine print here.

Justin:                   It’s interesting. It depends on how important this deal is to the operator. In some cases, they may just be able to pay it off and it’s not an issue. If it’s kind of their everything, I mean you’re probably going to get cents on the dollar in terms of trying to collect on that loan. It kind of depends on the deal and the person you’re dealing with, which is a good reason to understand their financial situation and, is this everything to them or is this a side gig? It also lets you know their involvement. Where are they coming from? How badly did they want to make this deal happen?

Ace:                       Yeah. So let’s talk examples here. One of the deals that we did a while back, there was a business that was in the teeth whitening business. It’s been around since 2004 and this was an opportunity, number one, investors are going to look at how long has the business been around? If you’ve got a business that’s been around for 10, 15 years, especially as an internet business, it’s like, okay, this thing is a staller. It’s going to be around for a while. That’s another case where somebody is going to be willing to do a little bit more of a loan note as opposed to being in just 100% equity.

                                That business had been around for awhile. It had also had a lot of inventory. And so that is something that’s interesting from the lending perspective. But the buyer also wanted to take on some equity investing in the business because it was too large a deal for them to do just with the inventory note. So, that was a deal where we combine those two and it met the qualifications for getting a loan on the business and it also had some growth and upside that could get some people excited on the equity side.

                                So, if you have a deal where it may have some assets or it’s been around for a really long time, but you’ve got some ideas for growing that business, you can get both types of investors excited about investing in that deal.

Justin:                   Yeah, it’s interesting.  The hybrid model can be used to mitigate risk for the investor where they don’t want to do straight equity, they want to do a little bit of a loan and is often meant as some kind of compromise between the two parties in terms of risk management and also not giving away the farm in terms of equity.

                                All right man. Let’s do a wrap up on this.  We talked about the three different models, the first being debts or loans and we mentioned these are usually based on personal credit. They must be paid back and there’s limited upside for investors. It’s more secure, but they’re also, let’s say the business was extremely well, they don’t get to dine on the upside so to speak.

                                Second piece is equity, straight equity deal. It’s paid out, generally there’s cash paid off via distributions and the profit and obviously any liquidity events or sale of the business. It’s more risky for investors, but there’s definitely more upside. More risk, more reward. It can cost much, much more for operators if it’s tremendously successful. So, if the business does really, really well, it’s going to be much more costly in the long run.

                                And then the hybrid model, the blend of debt and equity. This limits upside and downside for investors. That’s typically used as a compromise between the operators and the investors trying to get the deal done.

                                All right. That’s it for this episode. If you dig it, please head over to webequityshow.com and leave us a comment and tell us what you think. You can also drop us a review on iTunes and we’ll really appreciate it.

                                Next week we’ll be looking at the different types of groups you can form to buy larger deals and portfolios. See you next week.

Ace:                       Go out to make some deal.

Announcer:        Thanks for listening to the web equity show. Now is your chance to be a part of the action. Go to www.webequityshow.com/gift and send us your business acquisition or exit question and have it answered on the show.

 

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