How to Grow Your Business and Keep Your Equity

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Grow Your Business Without Giving the Farm Away.

Suppose you have built a technology driven service company that has been in business for 5 years and is billing $12 million per year.

Your business plan proves that you can triple the revenue in 5 years with $1 million dollars of growth capital. Growth can be organic, and or acquisition.

But, you don’t want or can’t qualify for a bank loan or Venture Capital.  Additionally, you want to retain your equity along with your control of the company, and you don’t want to take on cumbersome debt.


 

What Are Your Financing Options?money-hand-transparent-1280x1280

VENTURE CAPITAL:

After a rigorous process, investors take an equity position.

VC BAD GUY SCREENSHOT

Valuation:
You and the equity investor need to agree upon a valuation. Your EBITDA is $1.2 million, the VC decides to value your company at 6x EBITDA – $6,120,000. A $1 million growth capital investment will give the VC about 17% ownership of your company and leave you with 83%.

Conditions:

Additionally, the VC demands a board seat, monthly performance milestones, a personal guarantee and other conditions. Exit strategy – the company will be sold in 5 years.

Risk:

If you are having trouble hitting the monthly milestones you may lose control, equity and possibly personal wealth.

Reward:

If you hit your plan, at the end of 5 years your company will have:

  • $36 million annual revenue:
  • 20% EBITDA = $7.2 million
  • Valuation of 8x EBITDA = $57.6 million
  • VC Equity = 17% = $9.7 million cost of capital. Nearly 10x return to VC
  • Your Equity = 83% = $47.8 million

 

ROYALTY BASED FINANCING:

Investor Takes Small % of the Monthly Revenue Until the Debt Is Paid:

 

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Valuation:
Not necessary. In this case, you and the investor mutually agree that you will pay the investor 1.5% of your monthly revenues until the investor receives $2 million (2x return).

Conditions:
No equity, board seat, control issues, monthly performance milestones, personal guarantee or other conditions. No exit strategy. Revenue growth equals mutual success.

Risk:

In this example, only requirement is to pay 1.5% of the monthly revenue until the debt is paid. If revenue increases the payment increases, if revenue decreases the payment decreases. No threat of losing equity, control, personal wealth.

Reward:
If you hit your plan, at the end of 5 years your company will have:

  • $36 million annual revenue
  • 20% EBITDA = $7.2 million
  • Valuation of 8x EBITDA = $57.6 million
  • Royalty Based Financing cost of capital = $2 million. 2x return to investor
  • Your Equity = 100% = $57.6 million

Difference:

Nearly $10 million more to you, $7.7 million less to the investor. In this example, the VC cost of capital is nearly 10x, the RBF cost is 2x. It cost 5x more to take VC money. Additionally, you keep 100% of the equity and control.


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Summary:

youzigngrowth-croppedThe Royalty Based Finance (RBF) option eliminates the complex, time consuming rigorous process to find VC financing. With RBF financing, you fill out an application, and the investor evaluates your financials, track record and business plan to verify that you can meet the monthly revenue % payment. You and the investor mutually agree upon a fixed payback amount (royalty cap).

 

 

 

You keep your equity and grow the business without giving away the farm.