1 No-Money-Down Strategy for Buying a Business

(Exchanging Your Expertise for Equity)

This requires no money, BUT, it does take a skill.

What skills do you have that business owners need?

Marketing skills perhaps?

Are you good at establishing standard operating procedures?

Accounting, bookkeeping, raising capital?

This is consulting work in exchange for equity.

Under the right circumstances, you may be able to not only bill for your services, but also earn a percentage of equity, anywhere from 5, up to 25 or 30%, maybe more, for meeting certain milestones that you determine.

I'm in discussion now with three business buyers where I may be doing financial due diligence work and deal support in exchange for a small piece of equity.

You would definitely be working here and the naysayers will tell you this is just another way to get a job, but don’t let them rain on your parade. This can be a great way to get in the game! And owning a small piece of a business could make you the prime buyer for the entire company down the road. Or the two of you can sell the business together.

One of my biggest warnings here would be around taxes. Be careful not to get yourself into a situation where you have taxable profits, due to your ownership percentage, but no distributions to pay that tax bill. For example, if you own 25% of the business, you will have to pay taxes on 25% of the profit, regardless of whether that company keeps the money in the business account, or pays it out to the shareholders.

Distributions, the shareholder payouts, do not happen automatically just because there is profit made by the business. A simple clause in the operating agreement can remedy this. Operating agreements are going to be imperative and you may want an attorney to help draft that document.

As you consider exchanging your expertise for equity, give a lot of thought to exactly what type of business, and more importantly, what type of owner you want to work with.

I would also work in a “get to know you” or dating period before the equity kicks in. This will give you a chance to see if this is really a good fit or just another bull headed owner that won’t listen to a new idea.

Beyond the finances of a business, the most important part of getting a deal together is building rapport. This includes getting the seller to know and trust you, but also figuring out what the seller really wants. There are probably as many ways to approach this as there are businesses.

One way would be to find companies that want to sell in the next couple of years and use your skills to help create more value for that current owner, as the company moves from just a going concern, to a transferable asset.

Another way could be to find a business that's currently for sale where the seller is leaning more towards the tired stage, than the retired stage, and would be rejuvenated by having a partner with your skills to help grow the business.

A third way would be to find companies that are stalled in their growth and need your help to get to the next level, even though selling may not be on their radar.

This is how the math and that conversation should go with a potential deal of this nature:

YOU: Hey Seller:-) You own a biz worth $100 right now. Give me 25% and I will do x, y, and z for the business over the next 18-24 months.

SELLER: Why would I give you 25% of my company?

YOU: Great question. The reason you want to give me 25% of your company is that as I do x, y, and z, the company will become more and more valuable. At the end of those two years, the biz as a whole will be worth $150. Your 75% (of the $150 company) will be worth $112.50. Your 75% of this improved company will be worth more than owning 100% of your previous "crappy" company.

Okay, you probably want to rephrase that a bit…

Other benefits of exchanging your expertise for equity can include:

• The opportunity to do your due diligence from the inside.

• This partnership aligns incentives between you as the consultant, and the owner.

• You and the original owner can then sell the company together.

• The original owner may buy your equity back, because the new version of their business is so much better than it was.

Tips to keep in mind:

• Do a dating phase before equity kicks in. Maybe 90 days.

• Make sure your new equity position can’t be diluted. Another operating agreement clause.

• You still need a solid “buy box” of the type of companies you’re willing to work with.

• Vetting the seller, who is becoming your business partner, is much more important than in traditional deals.

What questions do you have?

Hit reply and ask me anything!

Love ya!