Five Funding Options You Might Not Know About

We're back with another post about everyone's favorite F-word: Funding!

It can seem the most daunting of the hurdles when acquiring a business, but as we mentioned in a previous post, there is quite a long list of ways you can secure funding. We already gave our Top Four. Now we're going to explore some other creative, alternative approaches to keep in your toolkit.

The key word here is approaches, plural. None of these methods need to fly solo.

Think of it as you would when stacking a sub. (Or hoagie, for our Philly-area friends.) The more layers you give it, the more delicious it becomes. Bread and cheese and meats and pickles and peppers and, well - you get the idea. Each component brings something to the table to create mouthwatering goodness. In the same way, you can "stack" multiple approaches and angles to get the financing you need and the price point you want. 

The Equity Earn-In Approach

This method is relatively straightforward. You agree to contribute a specified amount of effort, time, or resources into the company in exchange for a certain percentage of equity. This can be measured in several different ways.

• Time-Based: You need to satisfy the agreement to work X number of months/quarters/years to receive equity in the business.
• Milestones: These could be personal milestones (you complete certain events or projects) or company-wide (milestones were met for the entire company).
• Revenue or Profit: You receive equity once you help the business attain a revenue goal or generate enough profit.
• Immediate Equity: Depending on the business and the deal, you can negotiate immediate equity in the company if what you're offering is valuable enough!

The Lease Approach

Much like leasing a car, you agree to make a number of payments over a certain amount of time. This is an excellent option for buyers who may not want to, or be able to, commit to the full purchase price out the gate while also allowing them to experience what it's like to run the business without taking ownership (yet). 

When the agreed-upon terms have been met, you can either opt to buy in at the prearranged price, negotiate to extend the lease, or relinquish control of the business to the owner. Not all sellers will go for the lease option, especially if they are anxious to sell the business and don't want to run the risk of you opting NOT to buy it in the end. Still, others may welcome the opportunity for regular monthly income on a business they still technically own but aren't responsible for running. This is another example of why it's crucial to know the seller and their goals so you can use it to negotiate a deal that's a win-win for both parties. 

The Asset Negotiation Approach

Does the business you're buying have a lot of assets you have no need for? Use that to your advantage! You can:

• Remove them from the equation to decrease the price you pay to the seller. (Just make sure you are valuing them at actual cost. Remember, the higher the value of the assets, the more you can deduct from the final amount.)
• Offer to sell the assets on behalf of the seller. You'll give them the proceeds while retaining a certain percentage of the sale, sort of like a "finders fee" for being the middle-man in the negotiation. This is appealing to sellers who don't want the hassle of trying to sell off the assets themselves.  

The Supply Approach

This approach needs a bit more legwork to pull off but can significantly impact the final purchase price if you play your cards right. It's all about bringing something to the table that only you can. This can show up in a few ways:

• Are you helping a business grow that's not yours? Are you sending referrals and customers their way without enjoying any of the revenue? If it's a significant amount, they may very well be open to a conversation about exchanging your contributions for equity in the company. (Especially if it's casually dropped in conversation that you could start sending those customers elsewhere.)
• Provide a product or service for the company's customers and offer to split the revenue. This is great for both buyer and seller. As the buyer, it allows you to test the demand for the product or service. For the seller, they're raking in 50% of the profits with none of the effort. (Who wouldn't love that?) If it turns out to be a massive success for both parties, use it to negotiate a buy-in with the company.
• If you don't have a product or service of your own to offer but have identified a 3rd-party vendor you think would be beneficial to the company, offer to negotiate an agreement between the two, with them splitting profits and you taking a finders fee. That finders fee can be arranged with both the company AND the 3rd-party. (No shame in double-dipping!) It's another win-win because they both see increased profits while doing none of the work. And you can use your share as a down payment to acquire the company. 

The People Approach

If you'll need to hire someone to operate the business or know of someone interested in becoming a business owner themselves, offer them immediate equity in exchange for their investment of capital. This works especially well for existing employees who know the business inside and out and may jump at the chance for a stake in the company. This will decrease the price you need to pay out-of-pocket, and you'll hopefully end up with a great operator or partner. 

Once again, you can stack these and the previously mentioned funding methods into any number of combinations to help you achieve your goals. It's all about analyzing your goals as the buyer, the goals of the seller, and what you can bring to the table to reach a deal that will leave both sides satisfied. 

Happy Stacking!