Episode Transcript
Hello, it's Andrew from XO capital. And this week I wanted to talk through a few common deal structures. So jumping right in the most straightforward go-to is an all cash offer. You do all cash. It's usually a hundred percent into an escrow account. Typically you'll come up with some kind of structure to say, maybe release 50% before the asset Transer and 50% after the asset transfer is complete.
Asset transfers are a little bit more difficult to do inside of escrow.com. Typically when you go into their UI. I haven't been in there in a while. I actually really don't like escrow.com. They make everything, a pain in the ass, like validating your LLC and all that stuff. Has almost always caused delays for us, but They're typically known for domain transfers.
So in a, an ideal escrow scenario, you are, you know, the seller is putting the assets like a domain into an escrow.com account, right? So you transfer the domain to escrow.com. And the buyers are putting the money into escrow. And so escrow.com has all of the assets. They have the the like dollar amount in there, and then they also have the actual asset that you're, that you're buying.
But that's really hard to do with software acquisitions because some of the stuff's in. Get hub. I don't really want to send all the, I don't even know how you would do this. Like a zip file of some kind into escrow.com. Maybe they have getup support now, but anyways, there's generally speaking, just too much crap to throw into escrow.com.
So generally speaking, somebody puts 50% of the. The assets into escrow.com or all of the assets and to escrow.com, you then just send the buyers directly, all this stuff. And And then yeah, once the once, once, like all of the assets have been transferred, then they can then release the cash.
And then there's usually like a day or two where everybody's just reviewing stuff, making sure you didn't forget anything. And then the other half of the. The other half of the Purchase price can be transferred. And that's really it. It's it's, you know, you pay escrow.com a fee, I think a quite a calm now waves the escrow fee. If it's above a certain dollar amount or maybe they always waive it, if you go through there, but acquired our contract charges a 4% fee themselves now. So. Anyways, if you're trying to save some cash, we oftentimes for smaller deals just don't do escrow.com. If we have some degree of trust in the buyer or the or the seller. We're going through a sale right now, which is why I'm kind of talking through it from the other, other side of the table.
But yeah, if there's a high amount of trust and typically if somebody's, you know, based in the us, it's, it would be unwise for them to kind of. Mess around with, with some of this stuff, it'd be too easy to Show fraud and all that kind of negative stuff anyways. So we have a comfort level of doing small deals without escrow.com to save on the fees, but for larger ones or when we're using investor money, we'd definitely always use something to protect them.
The second, most common type of deal structure is including some kind of seller financing. So. Despite all of the BS on Twitter. Nobody's going to say yes to, or, I mean, if they do. You know, Let's do this deal. Right. But if somebody says yes to like 80 or 90% seller financing over like two years or something ridiculous like that, that's just not the reality.
I mean, put yourself in, in the. In the seller's shoes, like, okay, I'm going to hand over this asset, but actually only get like the recurring revenue. That I would normally get less expenses. Of course. So maybe an extra couple of grand, a and, and then I still have to wait for a year or two to get all my money.
Like that's a bad, that's a bad deal for the seller, which is why most people say no to that. But a common deal is 80% cash. And then maybe 10 to 20% seller financing. So 80 to 90% cash, 10 to 20% seller financing. wiTh generally speaking, no interest rate over one to two years, we don't do anything over one year as a, as a seller.
And as a buyer, of course, we, we push for more time, right? Cause that's, that's favorable to us. You, as the buyer can push for 0% interest, right? You don't want to pay any interest if you're the buyer. And if you're the seller, of course you could push for some nominal interest rate, but we usually end up doing one year. Maybe 20% seller financing and 0% interest rate.
That's that's typically how that shakes out. Debt every time I post about debt and SBA loans, I get like 10 different messages from a bunch of different bankers saying, you know, you're an idiot. This is how this is done. We do this, you know, 10 ways to Sunday and most of the time. We've called them or tried to get a deal through those exact people and they can't get it done.
So we've tried three times to get an SBA loan on just a normal SAS acquisition. And one of them failed because the guy who was selling the business used it, it was like his own, it was just his own like LLC. So he had some add backs in that, right? Like he was running stuff, not necessarily strictly for the business, they were legitimate business expenses.
Right. But you have to add those back into the P and L. That can affect, like how much we could take a loan out against the business, because that would affect like how much actual cash we would get, like the SDE, the seller discretionary earnings. So if we took over the business and we removed his salary, we removed his car payment, all that stuff. Right.
The business looked great. And it was great and is great still. I w I wish we can about that business, but none of these guys, none of these SBA loan gurus could make this one happen. So and then we've tried two more times with two other deals and the reality of trying to get some of these things through. I mean, you know, if you can do it again, good luck, please let me know how you did it, but it's been pretty tricky.
And so far we've been waiting for an incredibly squeaky clean P and L for an off-market deal with an extremely patient seller. And it's just very hard to have all of those things come together in one deal where a seller is like, oh yeah, sure. Yeah, no problem waiting like 90 days just to see if, if maybe yes, you guys can buy this.
No problem at all. Right? Like that, that, that really doesn't happen very often. What else doesn't happen very often? Or what, what, what kind of other structures we don't typically do is any kind of earn-out for doing a small deal, like under a half, a million dollars, doing some ridiculous earn-out is like, Stupid. So small, maybe 250,000 to 500,000.
I'm not going to like get in, in some kind of, you know, not, they're not even golden handcuffs. They're like, Copper handcuffs. For two years to get an extra a hundred grand out of a deal. And I have to go work for you. Like that is all, all of the earnout structures tend to be like very strange now. What you can do is if you are, and what I like better is some kind of turnout.
So typically what really happens with these smaller deals is there's a lot of churn. They really don't have product market fit. Or they do, but maybe it's kind of only in one segment of the business. And so what we've structured before, and I'm still waiting for this term to catch on is a, what we call a turnout.
So if the, if the revenue maintains a certain price, right, then we will pay a differing amount based on the retention. So if the MRR goes from, let's just say, if it's above 10,000, we'll buy and we'll pay 250,000 for the business. If the MRR range as. Reported by Stripe or ChartMogul be very careful about how you choose that.
You might want to just do actual like bank cash collections. That might be like a way more unbiased way to do it. If the MRR range goes between nine and 10,000, maybe we're only willing to pay 200,000. If it dips below nine, 9,000 cash collections on a monthly basis, maybe we're only willing to pay 180,000.
So we did this with analytics because we were worried about platform risk with LinkedIn and it ended up helping to protect our downside a little bit and, and helped us sleep a little easier at night. So turnout is another. The way that you can do it, but earn-outs, we don't really see for really small deals.
It's like unrealistic to be like, oh, and then you'll get an extra $20,000 if you just work for us for the next two years. And. Blah, blah, blah. Equity Earnin is another piece that doesn't really come into play for us. But if you think you could grow the business and the seller also thinks you're the best person to grow the business, then some than the previous owner might want to keep some equity.
And that way you don't have to buy the whole thing. So it'd be cheaper for you to buy maybe less risk. You still have the previous founder, which is nice to like, have to ping because a lot of the experiments you're thinking about they've thought about, or have already run. And that can also be a nice way to Grow the business and have the previous sellers still involved.
But again, that's not really something that we do, especially as we're starting to take money from outside investors. Our mandate is like, we gotta buy the whole thing. And so it's a little weird to have like a significant equity partner. That's not. One of the original investors, but the previous owner. So we generally speaking, don't do that.
Another thing you can do is mix and match any of the above.
I would just caution that things can get complicated fast, and then a confused seller. You know, isn't is an unhappy seller. So the longer that these things take to, well, what if we, you know, if, if it's cloudy next Tuesday, we pay 4,000, but if it, if it's raining, then, then like, we'll get, you know, something like that, right.
It just gets very complicated, very fast, and the seller might get fatigued and you, as the buyer can also get buyer fatigue, trying to like negotiate all this shit. And, and this, this deal becomes a very difficult one to make happen. And then both sides or one side ends. Ends up walking away. So I would try to keep it as simple as humanly possible, but sometimes it's necessary to, to bring in like a turnout or I dunno, an equity Earnin.
If you. Really want that previous sellers help or something like that. Another fun concept from negotiation zone of possible agreement. So The buyer's range obviously tends to be lower than the sellers range. So the seller wants to sell for the highest amount. The. The buyer wants to buy it for the lowest amount and that overlap, right.
If there were kind of two circles, it was a little Venn diagram that overlap between those two circles would be the zone of possible agreement. And so. It's always kind of fun to keep this in mind while you're negotiating to try and feel out what the sellers. They, you know, oftentimes now and acquire, they have their listing price.
So you can say that that's maybe at the top end of their desired price, but trying to, through the course of the negotiation, figure out their worst case scenario or their, their, their edge of their. A range that they would be willing to sell for and see if you can find any overlap between your range and, and the sellers range.
That is, that is of course how all deals are done. So that's it. That's the basics on how we structure deals.
