how are you structuring these deals so operations continue as per usual without getting “stuck” within the business?For example, Dan recommends being a macro thinker and allocating time to big picture thinking …but are you structing deals where owner has to stay on as operating GM/COO? Or an earnout?

Yusufa Sey1st of all, great questions Brock LarameeI can tell you what I have done

I AM BASED IN COPENHAGEN, DENMARK AND HAVE COMPLETED THE FOLLOWING:

1 Acquisition (£3M Revenue, £800.000 EBITDA)2 X Acquisitions closing this month (combined £13M Revenue, £900.000 EBITDA)All 3 in same industry so soon combined £16M Revenue group, 200 employees combined)

I have also helped a friend find equity financing for 1 other acquisition and thus owned 2% of that company, which we later reverse merged onto a stock exchange in Copenhagen and I made about $40K net from that dealBeen active for 2 years

What I do is I have equity partners that finance the equity portionThis is usually 30% of Enterprise Value (enterprise value is equity value of the business + all debts in the business)

My equity investors keep 51% of the business / the groupI am the Chairman and will keep 20%The rest goes to active managers who run the day to dayI don’t work in any of the companies actively other than monthly financial review etc

 

 

We buy them cash free debt free, the sellers pay down the business existing debt, and keep the equity value of the businessThe banks bring up to 70% of Enterprise Value, thus the sellers either need to roll over some equity (we acquired 75% of the 1st company but now acquiring 100% of the next 2), or they need to defer some of the payments (typically 15% – 20% and for up to 5 years)

 

 

I charge the group £65K per year in management fees (about $80K)I charged the group £80K in arrangement fees at closing (roughly $100K), half of which went back as a sweetener to my equity partners

 

just normal private investors looking for good investments (ie HNWI)Regarding management, I won’t pursue a deal / target unless I have visibility over who will run the operation. Can either be someone already in the company or someone we hire as part of the processEach company has a Managing Director, but I have also hired a group ceo to supervise all the MD’s (ie 1 ceo & 3 MD’s under him)

You should attract investors into deals on a subsidiary based / deal by deal basisIn my case the same investor that backed the 1st acquisition also is backing the next 2, therefore there are no structural issuesWe will attract new investors into this specific group going forward and we would need to settle on a valuation of the combined group, and all existing shareholders including the 1st investors will be diluted “pro rata” (meaning equally on a % for % basis)

I also provide my investors with preferred equity (ie they get Cashflow out of the business ongoing operations. I am paying them 12.5% of their invested capital annually which represents their cash on cash returnsI pay this cashflow from the total management fees I extract out of the business, which I have agreed with the debt company is 20% of our injected equity capitalThus the math (in USD converted from Gbp) is as follows:EBITDA = 1.2M (roughly)Enterprise Valuation = 3.6MClosing Payment to Sellers = 3M + 0.6M payable over 4 years in equal annual installmentsThey have to hand us the business cash free debt free. The business has roughly 250K in existing (non operational) debtsSellers Cash = 2.75M at close (debt free)Of the 3M closing paymentEquity Investor = 1MCredit Institution = 2M (Important to note that this is NOT a bank. This is a credit institution that focuses on commercial mid market debt activity)Annual Management Fee = 0.2MROI to Investor = 0.12M (12.5% annual cash on cash return, in top of a 51% equity share in the business)My Fee = 0.8MCEO, MD, etc salary included in business P&L as a costThus EBITDA reduced by same amount as CEO salary (as MD’s where already in the business cost base)CEO’s job is to run the business more efficiently and earn his pay + improve the bottom line for shareholdersArrangement fee at close = 0.1MOf which I keep 50% and give my investor 50%

Legals fees in UK cost between 35K – 60KThis cost is fixed regardless of wether or not you close, so it helps to have some cash of your own, cash from your investor even if you don’t close, or already own a business that can take the “hit” if you fail to closeI have had 1 deal fail to close and I had to pay the legal bill. I just got them to invoice my 1st acquisition / other company

I have not been to QLA. Have only read the book.I don’t try to “follow” what Dan Pena has said

I just pick up the phone, have normal human conversations with business owners, make them offersI am not looking for any no money deals which are 100% seller financedI am looking to solve multiple stakeholder problems:Investor Problem = they want cashflow from their investment and ROI. I solve this

Business Owner Problem = They want an exit and don’t want to wait 10 years on an earn out with zero cash upfront. I solve this problem

Credit Institution Problem = they want stable earnings from a business and a high interest rate. I solve this problem and pay 8.25% interestI also attract credible managers to the business and make them shareholders and pay them market rate. I solve their “dream job” problemRinse & Repeat