Seven Key Deal Points
Hear how you could acquire (or give) an ownership interest when non-cash assets like knowledge or time are being brought to the table.
Hold on to your seats, swig that coffee and get your pen out (or just check out the show notes below) because Roland doesn’t skimp on the content today! Imagine what you could do with your business if you had the dream team or you could join forces with a strategic partner?
Knowing how to structure a deal can make all the difference, and that’s what Roland is helping us with today. He breaks down for us how to structure an agreement to let someone else into your existing business as an equity owner, when they have something that’s valuable to your company, such as time or knowledge!
These key deal points also apply if you want to ‘earn-in’ to partnership in a company, with no cash to bring to the table.
Here Are Roland’s Seven Key Deal Points To Remember:
- What are the roles of each party complete with full job titles, descriptions and employment agreements?
- Detailed compensation package deal points.
- Consider a Buy-In for immediate equity plus performance-based increases of up to 10% additional vesting, at 2.5% a year for up to 4 years. This is a time-based component, PLUS performance-based milestones based on revenue.
- Provide for what happens if things don’t work out: Build a backup clause into the agreement, like if they leave the business or they’re terminated. This way you have a right to buy them out on pre-agreed valuation formula with pre-agreed terms (so that it doesn’t have to be paid all at once).
- You need to agree on the Valuation for the Buy-In. Usually, this is done based on an industry multiple times EBITDA. (Earnings Before Interest, Taxes, Depreciation, and Amortization). For example, if a business is earning 1 million dollars in profits and you agree on a multiple of 5, then the valuation would be 5 million and a 20% buy-in would be 1 million dollars.
- If the buy-in is not for money, then you need to place a value on the non-cash value that they’re bringing. For example, if you operate at a 30% profit margin and let’s say they are bringing a book of business worth a million a year, then the first-year value would be $300,000. Then you consider the lifetime customer value, let’s say 3 years: Then you’d expect that book of business is worth about $900,000. Now! If your company valuation is 1.8 million and what they’re bringing is $900,000, then you’re up to 2.7million. So the 900,000 that they’re bringing to the table is worth 33% of the equity.
- You need to have language that adjusts their equity based on what you thought it would be, to what they actually bring in. So a good and fair agreement would include that the equity adjusts to fit the actual performance of what they bring.
Lastly, Roland encourages you to acquire an awesome attorney and business advisor to help you navigate the tax issues and more, but just understanding these options puts you ahead of the game.
To dig in further with Roland on how to achieve massive business growth, head over to the home page and sign up for exclusive content from Roland to your inbox. We’ll be dropping another sit-down interview this week, so take a moment to subscribe on Apple Podcasts.
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