Hey GirdleyWorld!
We ditched calling this “The Maximizer”. It just wasn’t working so we landed on “GirdleyWorld.” If you hate this name too, reply with a better suggestion!
This week we’re looking at how to afford your first business (the Cold Start Problem).
Plus: my top 6 rankings for couples getaways…
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From 0 to 1: Buying your first business
To buy a business, you need capital. And to have money, you need a business. If you don’t have either and are starting with little money, you’re facing the Cold Start Problem.
There’s lots of reasons you may have limited personal capital to start with.
Maybe you don’t make enough to save up for a business. Maybe you don’t want to put 100% of your net worth on the line. Maybe you have less risk tolerance because you have kids to look after.
Some lucky people don’t have to solve this problem. Maybe you’ve got family money, or you’ve inherited a company or two. But if you don’t have a leg up like that, buying your first business can be a big hurdle.
But that hurdle doesn’t have to stop you. There are a couple of great ways you can get your foot in the door, even if your capital is limited.
Let’s take a look.
SBA Loans
An SBA (Small Business Administration) loan, specifically SBA 7A, is a government program that lets you use debt for acquiring your first company.
Depending on how you structure it, you can leverage to take on debt of up to 90% or more on a business. Some recent structures are going even higher, though high leverage always scares me – and should scare you, too.
Because they’re backed by the federal government, you can get very competitive terms, even when you don’t have a credit history. It’s an ideal program for getting off the ground. Right now, the ceiling for the loan value is $5M, which is more than enough to get started.
The risk of an SBA loan is the “personal guarantee”. Basically, you have to pledge that the loan will get paid back, and you have to put your assets on the line.
(Definitely talk to Heather Endresen if you’re going down this path!)
Bank Loans
If you’re looking to start with a bigger biz than $5M will buy, you can go straight to the bank. Of course, you’ll be on the hook for that money as well, and the terms might be less competitive than an SBA loan.
In some cases, banks will loan without personal guarantees (called ‘no recourse loans’). Those are harder to get, especially if the deals are smaller.
There are also multiple types of banks out there. A big “money center” bank like Wells Fargo will be very different from your local community bank (e.g. the Bank of West Wichita). All banks like collateral, though, so are tougher to work with if you’re just starting out.
Private Equity / Investors
This is a pretty straightforward solution. That doesn’t mean it’s easy, though.
You start a company that will serve as your HoldCo. Then you sell ownership in that company to other people, in exchange for their investing capital. Then you use that capital to acquire your first business.
There are different ways to structure that deal, but they all end up with the investors having ownership in your business. You’ll need to find alignment between your interests and theirs. Bring something to the table that gives them a reason to invest. That could be industry expertise, exclusive access, or the skill and grit to buckle down as an operator for a time.
The downside is that these kinds of investors want returns on their investments, so will want to capture some of the value. You may look up and realize you own only 20% of the company when all is said and done. It’s all about the deal you can sell to other folks, so your mileage may vary here.
But if you can get the right investors, you’ll have their expertise and experience to guide you.
Also note that sometimes private investors will structure their investment as a loan. This can work but it also scares me. If a bank won’t loan me money for a deal, that always gives me pause that perhaps I’m pushing the envelope too far…
Venture Capital
Venture capital is a special type of private equity. They typically invest in extremely high growth and high risk/reward opportunities.
VC would never invest in a roll-up. Even though they’re low risk (they’re usually stable businesses, so easier to model out), they’re not going to explode in value. They would much rather invest in the next Uber.
It’s rare to find a venture capital firm investing in a HoldCo, but it all depends on your idea.
Sweat Equity
This is the work-your-way-to-ownership path.
Basically, you go find someone who wants to retire out of their current business, and you buy into it over time. Work out a structure where you take a pay cut in exchange for equity.
For example, say you’re a person normally worth $200,000 a year. That makes you a high value person in a business. You strike a deal where you’ll get paid $50,000 a year for five years, but each year you gain a percentage of the business. At the end of the five years, you’ll own 80%.
This can be win-win: you get a stable business, and the existing owner gets a transition plan out, help for five years, and they know their business is going to get taken care of.
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Stuff that caught my eye this week
Appetizer: Earlier this week I posted about asking beautiful questions, and someone shared another great article on Scott Ginsberg’s approach to Asking Better Questions. Worth a look!
Main: Had a great conversation about franchises with special guest The Wolf of Franchises on my podcast, Acquisitions Anonymous. This is officially the first time I’ve interviewed a talking french fry.
Dessert: If there’s one thing Twitter’s great at, it’s flooding me with terrible suggestions for naming this newsletter. (Except for yours, of course, dear reader, which I loved.)
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That’s it for today!
While the above certainly aren’t the only ways to raise money, they’re the ways I’ve seen work over and over again. (I can’t, for example, recommend crowdfunding your first acquisition. Or bake sales.)
Have you seen other models work? I’d love to hear from you.
Finally, before I go: Mrs. G and I escaped to New York for a mini-vacation, and this town is now topping my list.
Girdley’s Top 6 Couples Getaways for a 5-day Weekend
6. Santa Monica/LA
5. Colorado Mountains (Aspen, Vail)
4. Miami Beach / Chicago (tie)
3. Mexico City
2. San Diego
1. NYC/Manhattan
What's your ranking?
Reach out on Twitter @girdley or reply to this email — I read everything that comes in!
Michael
