In much of my content I talk about “bootstrapping” a deal. This is a better way of saying you have no money, no resources and you want to buy a company. So let me talk about the ten key ingredients of a bootstrapped deal. Rather than a definition, these are factors that you hope and need to be present to complete your deal. Some should be present, maybe not all, but you want as many of these babies in your corner as possible.
1. A willing seller. If you don’t have a willing seller you have an unwilling seller. You need to find out which one you have and if it’s the latter, drop them like a hot potato.
2. A willing buyer. In case you aren’t sure, you are the buyer. You need to be mentally ready to pull the trigger. Pulling the trigger means doing whatever it takes to get the deal done. This could mean taking outsized financial risks or begging for money. Pulling the trigger means risk and you need to be sure you are ready for it.
3. A willing broker. Some brokers will do anything to kill a deal. A good broker is one that at least pretends that he is working for you and he will actually help and coach both sides of the transaction. He will get you the information you need and not try to talk you into how a great a deal you are getting. Sometimes the best brokers are independent and don’t answer to a bigger M&A firm. This means they can make their own decisions and aren’t stuck trying to run the deal according to someone else’s rules.
4. Understand your point of no return. When you are doing deals the point of no return is the last chance you have to bail out before you undertake major financial risk. This could be when you engage a lawyer to draw the contract or much later in the process, such as when you sign on with a lender.
5. A Strong Balance Sheet. If your deal has a weak balance sheet you have no safety net. While most deals have very little safety in the hard assets anyway this is the key to getting your deal done fast. In most bootstrapped deals I have done the businesses were overloaded with assets. You have to wait for these deals but they are generally the best. Overloaded with assets. Look for it, these deals do exist. Sometimes you need to find them outside of the mainstream broker network.
6. Stable Earnings. This is not only for you but for the lenders or investors you deal with. The appearance of stability and profitability is critical so that others will help you finance the deal.
7. Your Team. You not only need a team, you need a bootstrap team. This could be a trio of people who can get your deal done. An accountant, a lawyer and a lender ready to work for you at the drop of a hat and for peanuts. I bring lenders into this category because this is a wish list and you wish you had a lender at your fingertips. The fact is you will have many potential lenders and only one will be involved.
8. Capital Sources. You will need capital sources even if you don’t use them. You need money even if you have it. You need backup sources as well. You could be Donald Trump and most of the time you still won’t want to use your own money. LBO lenders ask for somewhere between 0% and 30% investment by the buyer to show the “skin” in the game. This money can come from you or it can come from a friend, or family or outside investor. Or it could just vanish because you found a lender that will do 100% financing. Your choice.
9. Time. You need time to do your deal. The less time it takes the better the chances of closing. Here is a counter intuitive statement: The best chance of closing a deal is when the seller points a gun to your head. If it is just the financing that is missing from the deal, and it usually is, then a deadline is just what you need. Get ready to scramble for scratch, dial for dollars, beg for bucks. That will get it done.
10. Luck. You need lots of luck to complete your deal. But never make the mistake of leaving your luck up to chance. You have total control over your luck. Everything in bootstrapping is playing the odds and your odds increase as you make the numbers work for you. See lots of deals, talk to lots of lenders, talk to investors, talk to brokers. The more numbers you rack up the better your chances of success.
