How to buy a business with equity investors: the 11 lessons from the video

This is the written version of the video above, in which I walk through how to buy a business with equity investors instead of relying on a bank alone. It is for a corporate professional or business owner who wants to own a company that already makes money, and who does not have the whole price in cash. By the end you will know what equity is, where to find it, how to split a deal, and what to agree before you take anyone's money.

I have advised buyers and sellers of small and mid-sized businesses since 2016, and I built and sold Rollups.com. The lessons below are the ones I give our own clients at Acquisitions.com.

Why buy, and why with investors

Starting from scratch means years before the business pays you. Buying means the customers, staff and cash flow exist on day one. As I say in the video, "instead of struggling to grow one client at a time, you can grow one business at a time."

Three things make this a good moment. Many baby-boomer owners are retiring and want someone to protect what they built. Investors want good private deals to put money into. And uncertain times, in my experience, create the best openings for people who know how to act.

Most new buyers think a bank loan or seller financing is the only way to pay. It is not. Equity is a third source, and it is the one that lets you do bigger deals and close them faster.

The four steps of every acquisition

The whole process is four steps. Equity investors matter most in step three, but they are easier to find if you have done steps one and two well.

1. Find deals. Build a flow of businesses for sale that fit what you want.
2. Analyze deals. Read the numbers and decide what the business is worth to you.
3. Fund deals. Put together the bank loan, the seller note, your cash and investor equity.
4. Transform deals. Everything after closing: run it, improve it, grow it.

If you want the full step-by-step on finding, reading and closing a deal, read how to buy a business first. This article is about the money, and about the people who bring it.

Lessons 1 to 3: mindset, time and a clear goal

Mindset matters more than you think. "This journey is about producing more than you consume. It's about taking massive imperfect action rather than perfect inaction." Do not believe every negative thought. Replace doubt with action and with learning from the right sources.

Time commitment. Give this at least one to two focused hours a day, and scale up as you get better. Not one or two hours with the phone in your hand. At the peak of my own acquisitions work I was doing eight to twelve calls or meetings a day, and hundreds of calls in a few months, to find deals and investors. If something you do is not talking to sellers, partners or investors, or making offers, find a way to cut it.

A few habits help me: plan tomorrow today, meditate, work out, eat well, keep alcohol to a minimum, and make the next quarter your main focus.

A clear vision. Ask what your ideal deal is, what your ideal exit is, and whether you want long-term cash flow or a sale. For me it is as little ego as possible, extreme ownership and service to others. Know yours.

Lessons 4 to 6: pick a sector, look the part, pick the size

Pick your sector as soon as possible. Do not overthink it. Commit to one sector for the next twelve weeks. If you are lost, start with just the size and the location, and start local. It is easier to build trust face to face with an owner.

Position yourself well. Have a real website and an email on your own domain, not a free address. "People will take you seriously when you take yourself seriously." Sellers, brokers and investors all check.

Pick the right deal size. In the video I suggest businesses with $1 million and above in revenue as a starting point. Smaller businesses are often a job, not a business. The best deals often come from owners who care about their legacy more than squeezing out the last dollar.

Lesson 7: what an equity investment is

An equity investment is simple. You sell a share of the company you are buying in exchange for cash. The investor has no right to be paid back on a schedule. They are a partner, and they earn when the business earns and when it is sold.

Why do this instead of borrowing more? Two reasons.

• It takes pressure off cash flow. Less debt means lower monthly payments, which improves the coverage ratio lenders look at.
• Lenders want to see equity next to their loan. A buyer who shows up with investor money and their own cash gets taken seriously by the bank and by the seller.

Here is how a deal can split. Say the price is $2,000,000. The numbers are an example, not a quote; an SBA 7(a) lender sets its own terms, and the SBA publishes the program rules on its 7(a) loans page.

Without the investor, the bottom two rows would both have to come from you. With the investor, you close a $2 million business with $100,000 of your own money and a lighter loan.

Acquisitions.com is an advisory firm, not a broker-dealer or a lender. We introduce clients to lenders and to investors who look at acquisitions, and the deal is theirs to make. Investors who want deal-by-deal access to what we work on can read the invest page.

Lesson 8: agree the terms with investors in advance

An investor makes you look credible to sellers and banks, because you have more cash to close. The right investor also brings experience. "It's a strategic investor, not just a capital investor."

The price is that your share goes down. "You want to see bringing on an investor almost like a marriage. You need to manage expectations and responsibilities from day one." Have the hard conversations before you sign anything. Cover at least these:

• Worst case. What happens if the business misses its numbers?
• Exit. When and how does the investor get out, and at what kind of price?
• Vision. Are you building to sell in five years or to hold for cash flow?
• Decisions. Who decides what? Is the investor passive, or active like an executive?
• Money out. Is it dividends, salary, only capital at exit, or a mix?

Without a partner you have all the control. With one, decisions can be split, so decide what you want: control, money only, or a partner who shows up. "Everything is possible. You need to make the decision."

One rule I will add to what is in the video: selling shares in a company to investors is usually a securities offering under US law. Get a securities lawyer before you talk terms, so your offering, your documents and your investor list follow the rules.

Lesson 9: where equity comes from

Equity can come from more places than people think.

• Your own cash. Lenders treat it as equity.
• A 401(k), yours or someone else's. Take advice on the rules before you touch one.
• Friends, family and people you already know.
• Private investors who want exposure to small businesses.

Whoever you ask, be transparent about the risks. Be as honest as you can. We ask our clients to build a short pitch deck for the opportunity, because investors need to see the business, the plan and the numbers in a few pages.

This is where I say the line I believe most: "I'd rather own 10% of a billion than 100% of zero." If you can get smart money, it is worth every penny, even if you own less than all of the business. The biggest founders in the world sold shares to grow, and so can you.

Lesson 10: how to split the deal with the investor

Here is the default, and it surprises people. In my opinion, the person who brings the money deserves the whole deal unless you can prove otherwise. Large private equity firms often let an operator keep a small slice, because the firm takes all the financial risk.

So how do you earn more than a slice? By taking risk yourself. "If you're signing a personal guarantee on the loan, if you're operating the business yourself day to day, all those things are extra points for you to negotiate larger shares." That is why, in the structures I aim for with our clients, the investor takes less than 20% and the buyer keeps the rest.

Sophisticated investors, what I call smart money, will ask what skin in the game you have. Are you putting in money? Time? A guarantee? And on small acquisitions they expect high returns, in my experience 20% a year and up, because a private deal is riskier than an index fund. Your job is to show them a path to that return.

A buyer who raises outside money and leads the deal is usually called a sponsor. If that role appeals to you, read how to become an acquisition sponsor.

Lesson 11: accredited and non-accredited investors

Many of the structures you will use to bring in investors are only open to accredited investors, so you need to know the difference. The SEC's accredited investor page sets the main tests for an individual: income over $200,000 in each of the last two years ($300,000 with a spouse or partner), or net worth over $1 million not counting your main home. The SEC also lists other ways to qualify, such as certain licences. Read the SEC's page before you decide who you can ask.

Which structure fits which investor is a legal question. We help clients understand the options; the documents are written by their securities lawyer. We are not a registered investment adviser and this article is not investment advice.

What to do next

Pick a sector and a size this week. Set up a real website and email. Then start the calls: owners, brokers, and the people around you who might be your first investor. Done properly, equity lets you do bigger deals, close faster and let everyone win. If you want help finding good deals and the lenders and investors to pair with them, book a call.