On So-called Creative Financing
There's two basic types of creative financing. The type that works and that type that doesn't. If you keep your eyes and ears open, you will continue to be astonished by new discoveries. I recently completed a 100 page lesson on creative financing that works in contrast to the kind that doesn't. The lesson consists of the proven financing techniques, I have seen used over 20 years.
Then last night I come across something quite audacious. There was a conversation about how earn-outs work. Several people tried to explain the tactic. Then one gentleman, Mark Makuta, stepped in and gave two personal examples of how he used earn-outs to buy two businesses.
Here is his account in full:
Ron: I structured a few "earn outs" in my prior business and all is subject to negotiation. All of my earn outs were 100%, meaning there was no cash down payment. I was taking over retiring peoples list of clients and business, which was just to risky to warrant any amount of cash upfront. Two examples:
Earn Out "A": Existing business was valued at $300,000.00. Earn out structured as 10% of GROSS paid monthly on a "Net 30", no caps and a 10 year term. So, if after 10 years, I only paid out $250,000.00 that was the end of the deal. Result: After 4 years, all of the persons clients whose business I took over ended up moving to other firms and were restricted as to who they can give business to. Therefore, all revenues dried up and I only ended up paying out I think around $75,000.00. Glad I did not put any cash up front.
Earn out "B" : Existing business was valued at $900,000.00 and I really wanted this business. I knew of the clients and their business I was going to possibly be assuming and I cut a deal with the seller where the base value was to be $1,000,000.00 ( So he was to receive another $100,000 as an incentive to do this deal with me ). Unlike "A", earn out was structured as 20% of NET Income paid monthly on a Net 30 basis with a yearly cap of $200,000.00. So if by October, we reached $200,000.00, no further payment was due until January of the following year. Bottom line: The gentleman received his million in a little over 7 years and I also thru in paying his health benefit premiums for the 1st five years of the deal which had a value of approximately $45,000.00 for him. This was a sweet heart deal. It worked very well for the retiree and it worked extremely well for me because my firm ended up continuing relationships with this guys clients list for quite a few years after the deal ended.
Again, everything is negotiable from monthly caps to yearly caps to final terms, etc.
Hope this helps,
Mark
~end
There's two basic types of creative financing. The type that works and that type that doesn't. If you keep your eyes and ears open, you will continue to be astonished by new discoveries. I recently completed a 100 page lesson on creative financing that works in contrast to the kind that doesn't. The lesson consists of the proven financing techniques, I have seen used over 20 years.
Then last night I come across something quite audacious. There was a conversation about how earn-outs work. Several people tried to explain the tactic. Then one gentleman, Mark Makuta, stepped in and gave two personal examples of how he used earn-outs to buy two businesses.
Here is his account in full:
Ron: I structured a few "earn outs" in my prior business and all is subject to negotiation. All of my earn outs were 100%, meaning there was no cash down payment. I was taking over retiring peoples list of clients and business, which was just to risky to warrant any amount of cash upfront. Two examples:
Earn Out "A": Existing business was valued at $300,000.00. Earn out structured as 10% of GROSS paid monthly on a "Net 30", no caps and a 10 year term. So, if after 10 years, I only paid out $250,000.00 that was the end of the deal. Result: After 4 years, all of the persons clients whose business I took over ended up moving to other firms and were restricted as to who they can give business to. Therefore, all revenues dried up and I only ended up paying out I think around $75,000.00. Glad I did not put any cash up front.
Earn out "B" : Existing business was valued at $900,000.00 and I really wanted this business. I knew of the clients and their business I was going to possibly be assuming and I cut a deal with the seller where the base value was to be $1,000,000.00 ( So he was to receive another $100,000 as an incentive to do this deal with me ). Unlike "A", earn out was structured as 20% of NET Income paid monthly on a Net 30 basis with a yearly cap of $200,000.00. So if by October, we reached $200,000.00, no further payment was due until January of the following year. Bottom line: The gentleman received his million in a little over 7 years and I also thru in paying his health benefit premiums for the 1st five years of the deal which had a value of approximately $45,000.00 for him. This was a sweet heart deal. It worked very well for the retiree and it worked extremely well for me because my firm ended up continuing relationships with this guys clients list for quite a few years after the deal ended.
Again, everything is negotiable from monthly caps to yearly caps to final terms, etc.
Hope this helps,
Mark
~end
Earn-outs are typically used to postpone, possibly forever, 5 to maybe 30% of the selling price. Seeing them used to pushback 100% is something new even to myself.
Hats off to Mr. Makuta.
Find out more ways to buy businesses using creative tactics.
Hey, that is an amazing example of creative financing in action. Do you know what kind of businesses he bought?
Posted by: MickB | September 18, 2009 at 12:18 PM