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E196: Mike Moyer's Slicing Pie: A Fair and Logical Approach to Equity Distribution - Watch Here

About the Guest(s):

Mike Moyer is an entrepreneur, author, and award-winning speaker. He is the author of "Slicing Pie" and "Will Work for Pie," among other books. With a background in startups and a wide range of business experiences, Mike has developed a deep understanding of equity splits and fair dealing with partners. He is passionate about helping entrepreneurs navigate the challenges of equity distribution and has become a leading expert in the field. You can find more information about Mike Moyer on his website.

Episode Summary:

In this episode, Ronald Skelton interviews Mike Moyer, the author of "Slicing Pie," a groundbreaking book that offers a fair and logical approach to equity splits in startups. Mike shares his origin story as an entrepreneur and explains how his personal experiences with unfair equity splits led him to develop the Slicing Pie model. He breaks down the concept of Slicing Pie and highlights its key differences from traditional equity distribution methods. Mike emphasizes the importance of basing equity splits on the bets made by each individual, whether in the form of time, money, or other contributions. He also discusses the challenges of implementing Slicing Pie after a company is already up and running and provides insights on how to navigate equity splits in mergers and acquisitions. Throughout the conversation, Mike emphasizes the universal logic and fairness of the Slicing Pie model and its potential to revolutionize the way startups approach equity distribution.

Key Takeaways:

• The Slicing Pie model offers a fair and logical approach to equity splits in startups, based on the bets made by each individual.

• Equity splits should reflect the proportionate contributions of each team member, whether in the form of time, money, or other resources.

• Slicing Pie provides a dynamic framework that adjusts as the company grows and changes, ensuring ongoing fairness in equity distribution.

• Implementing Slicing Pie after the fact is possible through a process called retrofitting, which involves recalculating equity splits based on past contributions.

• The Slicing Pie model can be used in mergers and acquisitions by combining the pies of the merging companies and ensuring a fair distribution of equity.

Notable Quotes:

• "Fairness is a universal concept. Just like splitting a cookie with your brother, equity splits should be based on the bets made by each individual." - Mike Moyer

• "Slicing Pie is a financing tool that ensures fairness in equity splits. It works because it is based on observable facts, not subjective opinions." - Mike Moyer

Article: 

Slicing Pie: A Fair and Equitable Model for Startup Equity Distribution

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E195: Boopos: Financing Subscription Businesses with Ignacio Villanueva - Watch Here

About the Guest(s):

Ignacio Villanueva is the VP of Origination of Boopos, a finance company that specializes in providing capital for subscription-based businesses. Originally from Spain, Ignacio has a background in professional rugby and has played for the Spanish national team. He studied business and law and went on to start a fintech company before joining Boopos. With his experience in the M&A space, Ignacio has been instrumental in building Boopos into a successful platform for financing online businesses.

Episode Summary:

In this episode, Ronald Skelton interviews Ignacio Villanueva, VP of Origination of Boopos. Ignacio shares his journey from being a professional rugby player to entering the world of finance and acquisitions. He discusses the origin story of Boopos and how the company provides financing for subscription-based businesses. Ignacio explains the different types of buyers Boopos works with, including roll-up strategies, sophisticated buyers, and first-time buyers. He also highlights the importance of understanding the cash flow and revenue trends of a business before acquiring it. Ignacio concludes by discussing the challenges and opportunities in the e-commerce and content site industries.

Key Takeaways:

• Boopos specializes in financing subscription-based businesses and works with different types of buyers, including roll-up strategies, sophisticated buyers, and first-time buyers.

• Understanding the cash flow and revenue trends of a business is crucial before acquiring it, as it helps determine the deal structure and financing options.

• E-commerce businesses can be risky due to their high competition and potential revenue fluctuations, making it important to have a solid understanding of the market and brand equity.

• Boopos offers a streamlined process for financing acquisitions, analyzing businesses within a few business days and providing personalized advice on deal structures.

• The future of acquisitions may involve new verticals such as TikTok shops and YouTube channels, and Boopos is open to exploring these opportunities.

Notable Quotes:

• "You have to be careful when you play around with [over-leveraging]. It could be very good, but it could also be dangerous. If your revenues decrease just a little and you're too over-leveraged, that could kill the whole structure." - Ignacio Villanueva

• "Growth by acquisition is our number one sport. We always encourage that. But make sure that the basic math adds up. Don't try to win the system. As long as the basic math makes sense, then go for it." - Ignacio Villanueva

Article:

How to Finance Your Online Business Acquisition: Insights from Boopos

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Disclaimer: This newsletter is provided for informational & educational purposes only, and should not be relied upon as legal, business, investment, or tax advice. We are not attorneys, tax, or financial advisors and not qualified to give any such advice.  

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Deeper: Introduction to Raising Capital for Acquisitions

Raising capital for business acquisitions is an intricate and multifaceted endeavor that stands at the heart of strategic growth, expansion, and diversification for entrepreneurs and businesses alike. In the competitive landscape of business development, securing the necessary funds to facilitate an acquisition requires a nuanced understanding of the available financing options, each with its own set of advantages, challenges, and suitability criteria. This endeavor not only necessitates a deep dive into traditional funding avenues such as debt and equity financing but also calls for an exploration into more sophisticated strategies involving private equity and Private Placement Memorandums (PPMs).

The journey towards successfully raising capital for an acquisition is paved with meticulous planning, strategic networking, and a compelling presentation of the business case to potential investors. It demands a rigorous assessment of the target acquisition's value proposition, the alignment of investment interests, and the navigation through a complex legal and regulatory landscape. At the core of this process is the entrepreneur's ability to articulate a clear and compelling narrative that not only highlights the financial merits of the acquisition but also underscores the strategic vision for future growth and value creation.

Among the myriad financing mechanisms available, private equity stands out as a powerful source of capital for acquisitions, particularly for those seeking substantial investment with the potential for strategic partnerships. Within this context, Private Placement Memorandums offer a formal, legally compliant framework for engaging sophisticated investors, setting the stage for a detailed discussion on their pivotal role in acquisition financing. As we delve into the landscape of raising capital, our focus will intensify on the intricacies of private equity and PPMs, illuminating the pathway for entrepreneurs and businesses to navigate this complex yet rewarding arena.

Overview of Capital Raising Methods

The pursuit of capital for business acquisitions can be navigated through various financing avenues, each presenting its unique set of characteristics, benefits, and considerations. Understanding the spectrum of available options—from debt financing and equity financing to hybrid approaches—is crucial for tailoring a strategy that aligns with the acquisition's objectives, risk profile, and growth potential.

Debt Financing

Debt financing involves borrowing funds that must be repaid over time, typically with interest. This category encompasses traditional bank loans, lines of credit, and mezzanine financing, among others. Traditional bank loans and lines of credit are among the most straightforward forms of debt financing, offering fixed or revolving credit based on the borrower's creditworthiness and the business's financial health. These options are suitable for businesses with strong credit histories and stable cash flows, providing a predictable repayment schedule without diluting ownership stakes.

Mezzanine financing, a more complex form of debt, blends elements of debt and equity financing. It is typically subordinated to other debts but offers lenders the right to convert debt into equity in the event of default, after senior debts are paid. Mezzanine financing is particularly attractive for acquisitions due to its flexibility and the potential for lenders to participate in the business's equity upside. However, it often comes with higher interest rates and requires careful consideration of the implications for the company's capital structure and control.

Equity Financing

Equity financing involves raising capital by selling ownership stakes in the business. This method can include venture capital investments, angel investors, and crowdfunding platforms. Unlike debt financing, equity financing does not require repayment but does result in the dilution of existing ownership stakes and potentially some degree of control over the business.

Venture capital and angel investors not only provide capital but can also offer valuable expertise, mentorship, and networks, making them a powerful resource for growth-oriented acquisitions. However, they typically seek businesses with high growth potential and a clear exit strategy, and may impose significant oversight and performance expectations.

Crowdfunding platforms present an alternative route, allowing businesses to raise small amounts of capital from a large number of individuals. This method can be effective for garnering public support and validating the business concept, but it may not be suitable for all types of acquisitions, particularly those requiring substantial investments.

Hybrid Financing

Hybrid financing options, such as convertible bonds, offer a blend of debt and equity characteristics. Convertible bonds are debt securities that can be converted into a predetermined number of the company's shares, typically at the discretion of the bondholder, under specific conditions. This flexibility makes convertible bonds an attractive option for companies seeking to minimize initial interest payments while providing potential upside to investors through equity conversion.

Hybrid instruments allow businesses to tailor their financing strategies to the specific needs and conditions of the acquisition, balancing the cost of capital with the desire to maintain control and flexibility in the company's capital structure.

Each capital raising method comes with its own strategic implications, requiring a thorough assessment of the business's financial health, growth trajectory, and the strategic objectives behind the acquisition. By understanding the nuances of these financing options, entrepreneurs and businesses can navigate the complexities of raising capital with greater confidence and precision.

Introduction to Private Equity and PPMs

The acquisition landscape offers a myriad of financing options, but few are as influential and strategically beneficial as private equity. Distinguished from traditional forms of financing, private equity involves capital investment sourced from high-net-worth individuals and institutional investors, targeting equity stakes in companies with significant growth or turnaround potential. This section introduces the realm of private equity and Private Placement Memorandums (PPMs), elucidating their roles in the financing of acquisitions.

Private Equity: A Primer

Private equity firms are investment management entities that pool capital from accredited investors or institutional entities to invest in various businesses, aiming for high returns over medium to long investment horizons. Unlike public equity, private equity investments are not listed on public stock exchanges, allowing for direct, strategic involvement in the management and operations of the target companies. This direct involvement often translates into comprehensive operational improvements, strategic pivots, and accelerated growth, leveraging the private equity firm's expertise, resources, and networks.

Private equity can be particularly appealing for businesses seeking capital for acquisitions due to the combination of financial investment and strategic partnership it offers. It provides a substantial influx of funds necessary for the acquisition while also bringing in strategic oversight, industry expertise, and operational enhancements. However, it's essential for businesses to understand that in exchange for capital and expertise, private equity firms typically require significant ownership stakes and may influence decision-making processes.

Private Placement Memorandums: The Gateway to Private Equity

When seeking investment from private equity, businesses often utilize a Private Placement Memorandum (PPM) as a formal method to offer and sell their securities without having to register with the Securities and Exchange Commission (SEC). A PPM is a legal document that provides potential investors with all necessary information to make an informed investment decision, including details about the investment offering, the company's business model, management team, financial statements, and the risks associated with the investment.

Components of a PPM

• Executive Summary: Offers a concise overview of the investment opportunity, highlighting the business's value proposition, growth potential, and the terms of the investment.

• Business Description: Provides a detailed look at the company's history, business model, products or services, market analysis, competitive landscape, and strategic direction.

• Management Team: Introduces the team behind the company, outlining their backgrounds, expertise, and roles within the organization.

• Financial Information: Includes historical financial data, future projections, and the use of proceeds from the investment, offering transparency into the company's financial health and plans.

• Investment Terms: Specifies the terms of the investment, such as the type of securities being offered, price, minimum investment, and information on the rights and restrictions attached to the securities.

• Risk Factors: Details the specific risks associated with the investment, providing a candid look at potential challenges and uncertainties.

Legal and Regulatory Framework

PPMs are governed by a regulatory framework designed to protect investors and ensure transparency in the investment process. Typically, PPMs rely on exemptions from registration requirements under Regulation D of the SEC, which allows companies to raise capital from accredited investors under specific conditions. Adherence to these regulations is critical to the legality and success of the private placement offering.

Understanding private equity and the strategic use of PPMs is crucial for businesses aiming to secure capital for acquisitions. This financing pathway offers not just monetary investment but a partnership that can propel a business to new heights through strategic insights, operational improvements, and industry connections. As such, preparing a comprehensive and compliant PPM is a pivotal step for businesses seeking to attract private equity investment, opening doors to significant growth and transformation opportunities.

Preparing to Raise a Fund through Private Equity for Business Acquisitions

Raising a fund through private equity to buy businesses is a sophisticated endeavor that requires meticulous preparation, strategic insight, and a compelling value proposition. This process involves not just the identification of potential investment targets but also the establishment of a fund that can attract and deploy capital effectively towards these acquisitions. Here’s how entrepreneurs and fund managers can prepare to raise a fund specifically designed for acquiring businesses through private equity.

1. Define the Fund’s Investment Thesis and Strategy

Developing a Clear Investment Thesis: The foundation of any successful private equity fund is a well-articulated investment thesis. This should detail the types of businesses the fund will target, including industry sectors, geographic focus, and company sizes. The thesis should also outline the value creation strategies, such as operational improvements, market expansion, or digital transformation, that the fund will employ to enhance the value of its portfolio companies.

Strategic Planning: Beyond the investment thesis, a comprehensive strategy is essential for how the fund will identify, evaluate, and execute acquisitions. This includes the criteria for investment, the due diligence process, and the post-acquisition integration plan. A clear strategy not only aids in fund management but also assures potential investors of the fund's preparedness and potential for success.

2. Conduct Market Research and Identify Potential Targets

Market Analysis: Conduct thorough market research to identify promising sectors and market trends that align with the fund's investment thesis. This analysis should consider economic, technological, and regulatory factors that could impact the fund's target markets and investment opportunities.

Target Identification: Based on the market analysis, begin identifying potential acquisition targets. This involves preliminary screening for companies that meet the fund’s investment criteria and possess the potential for value creation through the strategies identified in the investment thesis.

3. Assemble a Skilled Management Team

Building a Competent Team: A fund’s success significantly depends on the capabilities of its management team. Assemble a team with a diverse set of skills, including investment analysis, business operations, financial management, and industry expertise. The team should have a proven track record of successful investments and business transformations.

Leverage External Expertise: In addition to the core team, establish relationships with external advisors, such as legal experts, industry consultants, and operational specialists, who can provide valuable insights and support throughout the acquisition process.

4. Develop Robust Financial Models and Projections

Financial Planning: Create detailed financial models for the fund, including projections of the fund’s performance, potential returns for investors, and scenarios for the acquisition and growth of portfolio companies. These models will play a critical role in demonstrating the fund’s financial viability and investment potential to prospective investors.

Capital Allocation Plan: Develop a clear plan for how the fund will allocate capital across different investments, including the size of stakes, the structure of deals, and the timeline for investments and exits. This plan should balance risk and reward to optimize returns for the fund’s investors.

5. Create Marketing and Investor Relations Materials

Private Placement Memorandum (PPM): Prepare a comprehensive PPM that outlines the fund’s strategy, management team, financial projections, and the terms of the investment. The PPM should also include detailed risk disclosures to ensure transparency and compliance with regulatory requirements.

Investor Presentations: Develop compelling presentations and marketing materials that succinctly convey the fund’s value proposition, investment strategy, and the expertise of the management team. These materials will be crucial for engaging potential investors and securing their commitment to the fund.

6. Engage with Potential Investors

Networking and Relationship Building: Leverage personal and professional networks to identify and engage with potential investors. This includes high-net-worth individuals, institutional investors, family offices, and others interested in private equity investments.

Investor Meetings and Presentations: Organize meetings and presentations to discuss the fund’s strategy, showcase the management team’s expertise, and present the financial projections and investment opportunities. These interactions are critical for building trust and securing investor commitments.

Raising a fund through private equity to buy businesses is a complex but rewarding process that offers the opportunity to create significant value for both the acquired companies and the fund’s investors. By meticulously preparing and strategically positioning the fund, entrepreneurs and fund managers can successfully navigate the private equity landscape and achieve their investment objectives.

Marketing the Investment Opportunity

Effectively marketing the investment opportunity to potential investors is critical in the success of raising a fund through private equity for business acquisitions. This requires a strategic approach to communicating the fund's value proposition, leveraging various channels to reach and persuade potential investors.

• Develop a Comprehensive Marketing Strategy: Utilize a mix of direct outreach, digital marketing, networking events, and financial intermediaries to reach a broad yet targeted audience of potential investors.

• Leverage Success Stories: Showcase past successes, including successful acquisitions and exits, to demonstrate the fund management team’s capability and experience.

• Engage Financial Intermediaries: Partner with investment banks, brokers, and fundraising platforms that can provide access to their networks of accredited investors and institutional clients.

• Host Investor Events: Organize informational sessions, webinars, and roundtable discussions to engage investors directly, allowing them to ask questions and gain a deeper understanding of the fund's strategy and potential.

Navigating Negotiations and Closing the Deal

Once potential investors have shown interest, the next step involves navigating the negotiations and closing the deal. This phase is crucial as it involves finalizing the terms of the investment, ensuring both parties' expectations and legal requirements are met.

• Clear Communication: Maintain open lines of communication with potential investors throughout the negotiation process to address any concerns or questions they may have.

• Flexible Approach: Be prepared to negotiate on various aspects of the investment terms, including valuation, investment size, and governance rights, while ensuring the fund's objectives remain achievable.

• Legal and Financial Due Diligence: Conduct thorough due diligence to ensure all representations made in the PPM and other marketing materials are accurate and that the fund complies with all relevant laws and regulations.

• Finalize the Investment Agreement: Work closely with legal counsel to draft and finalize the investment agreement, ensuring it accurately reflects the negotiated terms and protects the interests of both the fund and its investors.

• Conclusion

Raising a fund through private equity to buy businesses is a complex endeavor that demands a comprehensive understanding of the private equity landscape, a clear and compelling investment strategy, and the ability to effectively market and negotiate the fund to potential investors. From developing a clear investment thesis and assembling a skilled management team to engaging with investors and navigating the legal landscape, each step requires careful planning and execution.

By adhering to the outlined steps and maintaining a focus on transparency, compliance, and strategic value creation, fund managers can successfully raise and manage a private equity fund dedicated to business acquisitions. This not only provides a significant opportunity for wealth creation but also contributes to the growth and transformation of the acquired businesses, making it a rewarding venture for all parties involved.

In the end, the success of raising a fund through private equity hinges on the ability to forge strong partnerships, both with investors and the companies the fund seeks to acquire. By demonstrating a commitment to operational excellence, strategic growth, and long-term value creation, fund managers can establish a strong foundation for sustained success in the competitive world of private equity acquisitions.