Tips for Acquiring Equity in a Company

The other one would be like, like with value ladders. So you guys know all about value ladders. Had a company that has a real estate SaaS come to me and they said, we're doing $3 million a year and we're losing 280,000. And I was like, how are you doing that? You're in a SaaS. And they said, well, here's how we're doing it. So what they had was they had a $39 a month product and, or you could buy it annually for $230. And they had nothing else. They did have, because they're smart marketers, they did have good marketing on generating that stuff. They were selling about $600,000 a year of affiliate products. They had about $500,000 a year worth of sponsors. So like they had a lot of the stuff that you might look at to go make money, but they didn't have a value ladder. They didn't have a high end thing to sell. These people who were real estate people, who we all know, because several of you in here sell real estate stuff, right? Why don't you have coaching? Why don't you have a mastermind? Why don't you have higher end things that you can sell them? And we basically just went through and put that in. And before the end of the meeting they're like, can we give you equity? And I said, when you turn it around and start making profit, then I'll talk to you. And then last but not least, Steve Harward came to me because he, and he's a war room member, for those of you who don't know him, he has a corporate formation business. He said, I have somebody that wants to acquire me and would you help me with that? So I said, fantastic, happy to do it. So we sat down and we looked at it and, and we realized, as is often the case, that the single person who comes to you and offers to buy you out is very, very far from the best deal that you could get for your company. So for all of you that get really excited, that are in Amazon, that have the private equity firms falling all over you right now, don't take the first offer. There's a whole lot of leeway and a whole lot of structuring that can be done. So we sat down and basically agreed that there were huge opportunities because he's really good at what he does, but there were a lot of opportunities that he wasn't taking advantage of. So it was like, what if we do this? Because if we're going to do these things. This company is literally worth three times what they're offering you for it right now. And so he said, yes, absolutely, that's right. And we ended up doing a deal for 10% of the company. Right. So that kind of stuff you can do very regularly. So I love that Jim tells the story about acquiring for no money, out of pocket an $88 million deal. Because this stuff, like, if you don't believe it, you kind of have to have a little bit of faith for the minute to do it. But once you do it, it's like, how many of you have bought a house with no money down, no money out of pocket? Anybody? Just a couple. Okay. Okay. Well, that's something you should all do, too. But when you do, it's absolutely crazy that somebody just signed their whole equity in their house over to you and they're still on the loan and you now have title to the property. That's crazy. Why would anybody do that? Right. Because they see value in it, because they're motivated. The same thing is true with businesses. All you have to do is create the value that you already know how to give. And then if you give that to them, you will be able to create a portfolio of companies that effectively gives you a private equity fund of your own that you didn't have to raise any money for. You don't have any SEC compliance issues and you don't have any partners, unless you choose to take a couple on that are investors that are hounding you for returns. But you're able to do the deal the way that you want. So structure wise, there's a few ways to do these. Warrants are just options that are issued by a company. If it's issued by a company, it's called a warrant. If it's issued by somebody that owns the stock in the company or the equity, it's called an option. So warrants is one way to do it. Just have the company give you warrants. The importance of taking your ownership interest in the company in this way is that if you don't, if you, if you take stock or equity straight out, you pay taxes on it, you are going to have to pay taxes on it at its present value at the moment that you receive it. So if somebody gives you 10% of a $10 million company, congratulations, you're going to pay taxes on a million dollars of ordinary income. Right. That's not what we're wanting to do. And you didn't get the money to do it. Right. Because you have the value, but it's not sold yet. So a warrant or an option will do that for you. My favorite document for that is called a profits only interest. That effectively allows you. It's a term of art. It is a legal thing. It allows you to have the percentage that you have of income distributions and it allows you to receive your pro rata percentage on the sale of the company, but you don't pay taxes on it. Now the only downside to it at all, which I don't think is a downside to us, is that you don't have voting rights in the company. You could conceivably negotiate a proxy agreement to have voting rights, but I don't think you care because you're going to have a minority interest, right? And if they're not doing what you want, then you shouldn't have, you shouldn't have partnered with them in the first place. You can also do phantom equity. I prefer profits interest to phantom equity for legal reasons. If you want the details on that, I won't bore you with it, but I'm happy to talk about it. You can also do, and this is sometimes easier to negotiate, you can also do a rev share. Now, does a rev share give you an interest in the, in the company? It depends on how it's worded. Depends on how it's worded. So you won't pay taxes on it at the time that you receive it. So we got that part taken care of. But how do you get to participate in the equity of the company? Well, if you are getting a share of the revenue of the company, when somebody goes to acquire it, it's going to be very hard for them to acquire without getting you to. Particularly if you add things like drag along rights, registration rights. There's a bunch of things that you can build into a revenue share agreement that effectively means that an acquirer is going to say, hey, we need to get that agreement as part of this deal and then you end up participating. It's not as strong, but it's a fallback position. There is also depending on how you take your ownership interest in whatever you're going to do. There is a section 1202 of the Internal Revenue Code for people in the United States that can allow you, if you do certain things right, like you acquire it as an individual, which I don't like because I like using a spv. I like to isolate liability in separate companies. But if you basically acquire the interest as an individual and you hold onto it for five years and it was an original issuance of the company stock Then you can exclude $10 million or 10 times your adjusted basis from income, which is pretty cool. So a significant amount of gain, 10% of a hundred million dollar sale, that, that's pretty significant. And then the other thing is that sometimes people will say, well, I'm not comfortable giving you a piece of the company, but I'll give you the ability to buy in. And that's great. As a first step, here's how I would suggest you structure your buy in. So what I'll do is let's say that I'm acquiring 10% of a $10 million company. So that means I've got a million dollar buy in. So I don't want to give a million dollars cash. I also don't want to give a million dollars cash after I went and earned it and paid taxes on it and then give it because effectively it's going to cost me a million five. Right. So I'd rather not have to come out of the cash. And also do it with pre tax. One way that you can consider doing that is through a percentage tiered buy in or a percentage tiered earn in. The way you do that is, is you say okay. So in that deal you'd say okay, so let's do this. I'm going to have 10%. So let's do a profits only interest that gives me a 1% interest until the profits of the company equal $10 million. So for the next $10 million of profits in the company, I get a 1% interest. I'll pay taxes on my 1% distribution. I'll be getting something for that. But what you're effectively doing is letting the company pay for your buy in. I hope that makes sense. So let's say then that the company has during the first year $5 million of profit. Then during that period of time you would get 1% of the $5 million and you would get credit towards your million dollar buy in of 9% of the 5 million, which I think is 450,000. Right. So you're effectively letting the company buy you in. It's not a bad thing for the person who is giving you the interest because they're still getting the income. You're not being taxed on it, you're just waiting to earn in by adding value. It's really, really a creative and good way to do this to save yourself a whole bunch of money. So don't forget that if you, if you think about doing this kind of stuff, as far as increasing deal flow, there's a lot of ways to do that, the easiest would be strategic partnerships. So Terry Williamson here said we had been kind of chatting for the past four years about how can we do something together. Terry's really, really amazing in the E commerce space and has about $100 million company in that he's, he's put together using a bunch of different strategies that we've, we've worked on. And so he has really plugged into the Amazon FBA market. And so he said, how about we work together to help these guys exit their companies because it's a very, very hot sector right now. And I said, that sounds great. And so he said, well, just let me make a couple of phone calls and I'll get 25 people in a room to pay to talk about how can we grow and exit their companies in the right way. And then we'll take a piece of the deals for helping them negotiate the exits. Well, what's cool about that is that if you get 5% of. Let's say that you get. It's usually pretty high at that level, but let's say that you get five of them to convert. Well, that's like having 25% of a company for free. 25% of one company, but it's diversified. So here's what's cool, though. They pay $5,000 up front. So he just sent me a check for $60,000 and said, I'll send you a check for $60,000 every month to come and talk for a half a day to come and talk at my thing. Because with what he does, brings them in, and then Together we share 50, 50 in the proceeds from the exit consulting. Now we can just refer them to buyers because we got buyers that are lined up all day long who will pay us a fee. Or we can take a piece of the company to help them do that. So. So we win either way. Like, even if somebody said, I don't want to give you anything, we say, okay, that's cool. Would you like us to help you find a buyer? Well, yeah, Sweet. Buyer pays us 5%. 10%? Yeah, 5 to 10%. So that's kind of cool, right? So I'm leveraging Terry's strategic relationships with all of these people, and you guys can too. And we get to go and form a company together and participate in a whole bunch of exits for companies we didn't have to build. That, to me, is really cool.

Ever wondered how some people build real wealth through acquisitions, while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals and the right guidance. And that's exactly what we give you in the EPIC Deal Fast Track. If you've been thinking about buying a business, but you keep getting stuck, whether it's finding the right deal, structuring the financing or negotiating with sellers, you are not alone. Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal Fast Track is not another course. It's it's actually an implementation program and it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're going to plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the Deal Flow engine so you always have high quality off market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers that get accepted and fund them creatively many times with no money out of your own pocket. And number three are closing and integration systems so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an EPIC Deal Advisor every.

Step of the way.

And that's people that have actually come up through the system and done these deals themselves. That's the only way to become an EPIC Deal Advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines. Just text I'm in to 334-458-9034 and we'll get you in. So text I'm in to 334-458-9034. We'll get you in. No fluff, no wasted time, just real deal making from people that are actually out there doing deals right now. I'll see you there.