How Two Buyers Bought an Online Business with Funding in Just 12 Days
Getting the funding to acquire an online business has always been a pain. Funding providers, like traditional financial institutions, just aren’t as established in this industry yet.
Up to now, your only viable options have been a personal guarantee, a home equity line of credit (HELOC) loan, or raising capital from local investors or your own friends or family.
However, these financing options come with limitations:
- HELOCs use your property as collateral, so you would need to own real estate and be willing to risk it on the business acquisition.
- Raising capital requires a ton of legwork to find investors willing to trust you with their capital and legally set the terms of the loan. As for raising money from your friends or family, you can only imagine the kind of relationship turbulence that could cause.
Another funding option that is the most common is seller financing.
You will make an agreement with the business owner to pay a portion of the purchase price upfront as down payment and the rest over a period of several months or years.
However, not all business sellers are open to this type of deal, especially in the sub-$800K range, meaning you’ll likely be beaten out by a buyer offering a full-cash buyout.
While the funding landscape may seem a bit muddy, we’re going to share a story about two buyers with a budget of around $50K who acquired a $355K business in just 12 days. The buyers managed to finance their business acquisition without using any of these funding sources.
Securing Funding to 7X an Acquisition Budget
The buyers had high-paying jobs, but both were also experienced with Amazon FBA, having run their own business together.
They had come to a point where they wanted to further leverage their capital by acquiring an existing business instead of starting a new business from scratch.
These two buyers, with their breadth of experience, had a great deal of potential to succeed with an FBA acquisition. However, their budget wasn’t on the same level as their skills and experience. This meant they were limited in how much they could scale their wealth.
They had an offer accepted for a potential acquisition within their $50K budget, but the deal fell through. That’s when we decided to help them increase their budget so they could reach their wealth-scaling potential.
Introducing the Buyers to a New Type of Financing
At the time, we had recently connected with a private third-party lender. The lender was happy to send a support letter informing us that they were open to providing funding for the buyers.
We usually only allow buyers to unlock listings no more than 50% above their verified liquidity to protect sellers from tire-kickers and competition stalkers, but now the buyers were able to unlock listings seven times their verified liquidity.
Once the buyers had found a business, they confirmed the mutual interest between themselves and the seller over a call. After outlining the specific terms of the deal, we introduced them to our funding connection.
About the Business
The business was almost three years old, so pretty well aged. What was really great about this business was that it had earned consistently over its lifetime with no big spikes or drops in profits.
The business also sells several stock keeping units (SKUs) that are variations of one core product, with thousands of positive reviews—a particularly desirable trait for investors as the fewer the number and range of products, the easier the business is to run and scale. The products were also trademarked, making the business more defensible against competition.
The business operations were streamlined with a simple supply chain, meaning it only took the seller two hours per week to run. The seller wanted to exit their business to focus on their studies.
Overall, this was a great business to acquire, and thanks to our lending connection, the buyers were able to make an offer for this $355K business with a budget of around $50K.
About the Deal
The buyers put down a price that was around their initial budget, with the rest of the funds coming from the lender.
The third-party lender we work with is made up of a team of entrepreneurs and business owners with tech and ecommerce expertise. Backed by venture capital firms and angel investors, they have 200 qualified business buyers on a waiting list to receive funding.
As part of the repayment terms, the lender is to receive a set percentage of the business’ revenues until a payment cap is reached. Before the first anniversary (a year), a low payment cap is set, and this increases each year until a maximum payment cap is reached.
As part of the terms of the deal, the business cannot consistently drop more than a set percentage in revenue for a set number of months.
A requirement for the funding of this deal was that an asset purchase agreement (APA) be filled out by the buyers.
Another requirement was for the buyers to set up an LLC for the business, which was used as collateral for the deal. Should the business consistently perform poorly after the purchase, the funder has the right to seize the business. The buyers also filed a seven-day letter of intent (LOI) so that the LLC formation could take place and any paperwork with the lender could be signed.
Because our lender has such an efficient operating system, the buyers were able to close the deal within just 12 days. With such accessible funding for online business acquisitions, both buyers and sellers can reap the benefits.
New Opportunities for Buyers and Sellers
Sellers don’t even need to know their business is being acquired using this type of funding, as the acquisition on their side is no different than if all of the capital was coming from the buyer. The biggest benefit for sellers is that there are more potential buyers for their businesses.
The buyers in this case study were able to acquire a larger business and gain more cash flow from the asset—49.9% more than they would have with the original deal.
What’s more, the $50K business had a low multiple, so the business was actually earning considerably more than what is typical in that price range.
If you were to carry out this same transaction with a more industry-standard $50K business, the difference in earnings would be considerably greater. The potential earning difference would typically be around the 400% range!
The Lender’s General Terms
As a rule of thumb, they’re looking for buyers to invest $1 for every $4 they invest with the aim of recouping the amount from the monthly revenue of the business.
The percentage the lender recoups is based on the risk profile of the business and the business model. This percentage averages between 10-50%; however, SaaS businesses typically have a higher revenue redemption rate compared to other business models.
Early repayment is rewarded with the lender as a discount on the loan, and the interest rate caps increase as the years pass. As a rule of thumb, the repayment caps are roughly 15% in year one, 25–30% in year two, and 40–45% in year three.
If minimum repayments are made and the repayment of the loan is pushed to the maximum term, then a maximum interest rate of 60% or 1.6X on the principal can be reached. However, a benefit of using our third-party lender is that they’re supportive of buyers using them as a bridge to secure further financing through a bank loan.
In other words, a buyer could acquire a business with funding provided by our lender and subsequently use the business to secure a banking loan.
Wondering if You Can Secure Funding for Your Next Acquisition?
With our new lending partner, you’re now able to secure funding quickly and easily to scale your wealth. In the case of these two buyers, they were able to unlock listings for businesses much larger than they were previously able to.
Create an account and add funds to your Wallet to start searching for businesses you could get funding for. When you search our marketplace, you’ll see listings labeled with a Lender Approved badge that are available for funding. If you’d like funding to acquire a business with this badge, schedule calls with the seller and map out a deal with specific terms that you can share with the lender.