One of the most frustrating things about online investing is finding the perfect business, but not having the money to buy it.
When you’re trying to acquire $100k – $5 million dollar online software businesses, there just aren’t many lenders that work with individual investors purchasing companies with no hard assets to repossess.
Traditional banks are not incentivized to invest in this space and usually can’t even understand what you’re describing. Personally, I have zero interest in trying to ELI5 how an online business cashflows to a bureaucrat that has never owned a business.
SBA loans are too slow, require a personal guarantee, exclude any type of creative financing, etc.
Private Equity firms are dipping down into our market now, but they aren’t interested in financing operators, just scooping up the businesses themselves.
Groups of successful online investors pool their money together for equity buys, but then you’re stuck with partners. I appreciate partnering solutions, but my primary focus is on being an active investor in my own operations.
At this point in my career, I’m still enjoying the life of a solo operator. I’m not interested in any outside, passive investor asking me “how’s it going” every few weeks. I work when I want, I vacation when I want, and I don’t have to explain it to anyone else that’s not also working directly on the project with me.
With those personal parameters, getting capital to purchase a business isn’t easy…simply because I’m not interested in the terms or lifestyle associated with those traditional types of financing relationships.
Acquisition Financing Firms
In late 2021, I financed a portion of my Gigalixir online investment using funds from Boopos.
The money is expensive, let’s get that out of the way right away. This isn’t a 4% interest on a 30 year loan, but it is an option. It’s a slice of financing you can combine with other slices of cash to structure a deal.
But in the end, I owe Boopos credit for finding me the business, following through on every promise, and providing the cash exactly when required.
For anyone interested in the experience and process of working with a company like Boopos, I tried to recreate all the important aspects of the deal below.
Introduction to Boopos
I reached out to the founder, Juan, and we spoke briefly about what I was trying to acquire and established that first ‘loose connection‘ relationship.
Little did I know how important that quick introductory discussion would be just a few short months later while I was trying (unsuccessfully) to unplug and vacation.
Sourcing Deal – “Did You See This One?”
Roughly two days into my vacation, I got an email from Juan asking if I’d seen a business for sale from FE International. For someone who was on the front page of their website at that time, I was a bit embarrassed I didn’t see the listing already. Somehow it had slipped my radar.
Without Boopos, I would have completely missed this listed business because I was on vacation.
After a glance at the prospectus, I knew two things.
First, this was the perfect business for my team.
Second, I was going to become the owner of this business.
It was love at first sight.
Experience with Pre-LOI
One of the best features of a Boopos pre-approved business is they’ve already done a good amount of due diligence on the company.
Now…please don’t misunderstand me…you still need to do a ton more, but it’s nice that someone whose financial liability is potentially on the line gave it a review before you waste even a second on the prospect.
Typically, if Boopos already vetted a business, they will post a loan amount they are willing to put into the acquisition.
For example, Boopos may put $500,000 into a $1,000,000 business if the buyer puts in at least a certain percentage of their own money. (The rest can be financed in other ways, like seller loans, etc.)
At this point, Boopos will share with you their term sheet and pre-close checklist.
Working Out the Financing
The point I want to make very clear below is that Boopos loans are similar to a variable rate loan in an environment with raising interest rates. Except, at least in this case, we know the schedule of rate increases from the start.
I want to illustrate exactly how those increasing rates affect your ability to pay the loan back, so you can construct your acquisition financing to your advantage.
Let’s dig into the term sheet for an idea of what a typical loan might look like for a typical acquisition.
In my case, I was looking to borrow around $200-$300k for the acquisition. In the end, I borrowed less, but the numbers were all the same regardless of the amount borrowed.
Key Variables in Boopos Financing
* Facility is the amount borrowed.
Let’s do this example for $500,000.
* Revenue Redemption Amount is the percentage per month Boopos would be entitled to of the business monthly Revenue (not income).
– 28.0% / month
Boopos will hook into your payment processor(s) (Stripe, PayPal, etc.) and automatically withdraw that money from the business bank account starting on month two after the close of the acquisition.
So if your business made $100,000 in revenue in the first month, a few weeks into the second month, Boopos would withdraw $28,000. That $28,000 is applied to your loan balance.
Keep that in mind when you’re calculating the cash flow of the new business. For some businesses, that 28% revenue cut can be the entire monthly profit, so if you are also financing other debt, make sure you’re covered.
* Repayment Cap is the maximum amount to be repaid, based on a multiple of the Facility.
For example, the Repayment Cap might be 1.6x the size of the Facility. If you borrow $100,000, the maximum amount you would have to pay back is $160,000.
* Opening Fee is like an ‘origination‘ fee or ‘closing costs‘ from a mortgage lender.
Boopos will typically take a 2% opening fee, so if you borrow $100,000, they will send you $98,000 to close the business. Remember that small haircut when you look at the repayment plans below.
* Prepayment rules and corresponding differences in prepayment time frames.
This is where Boopos financing starts to get interesting. Typically, Boopos will reward earlier paybacks by keeping that interest rate lower in the earlier years vs. the later years.
It’s best to think of these numbers as the Interest Rate, not as a Prepayment Rate.
Prepayment – inclusive of Royalties collected to date – will typically look like the following table:
* Before the 1st anniversary: 1.15x
* Between the 1st and 2nd anniversary: 1.30x
* Between the 2nd and 3rd anniversary: 1.45x
* Thereafter: Repayment Cap
So what does this mean?
Let’s do a simple scenario: Assume you have a $100,000 Boopos loan and your new business earns $5,000 in revenue each month with 0% growth. The Boopos Revenue Redemption Amount is 30% of the Revenue per month.
It means that if you pay off the entire $100,000 loan in Year One, you’d have to pay $115,000. ($100,000 x 1.15).
If you wait until the second year to pay the loan off, you’d have to pay back $130,000 ($100,000 x 1.3x)
Remember, you are only required to pay the Revenue Redemption Amount each month, which is 30% of Revenue. Any amount over that required payment is up to you.
What would it look like to pay off the loan at the end of Year One vs. the end of Year Two?
Loan Balance Due Boopos: $115,000 ($100,000 x 1.15x)
Total Revenue Earned from the Business: $60,000 (12 mo. x $5,000/mo)
Auto-Pay Boopos: $18,000 (12 mo. x $1,500/mo)
Remaining Balance at EOY 1: $97,000 ($115,000 – $18,000)
To take advantage of the 15% interest rate, you would need to pay the remaining $97,000 before the end of year one.
Now, this is where it gets interesting, do NOT skip this part!!!
If you allow the loan to mature into the second year, your original balance owed – from day one – goes from $115,000 to $130,000.
Therefore, on the first day of that second year, your balance owed actually increases by $15,000.
On day one of year two, your new payback schedule looks like this:
Loan Balance Due Boopos: $130,000 ($100,000 x 1.3x)
Total Revenue Earned from the Business: $120,000 (24 mo. x $5,000/mo)
Revenue Auto-Pay to Boopos: $36,000 (24 mo. x $1,500/mo)
Remaining Balance at EOY 2: $94,000 ($130,000 – $36,000)
At the end of year one, your balance was $97,000. Now, after another year and $18,000 in additional payments, your balance is only down to $94,000.
See how this starts to snowball and you can’t get ahead of the increasing interest rates over time?
If you let the loan roll into the third year, you’re looking at:
Loan Balance Due Boopos: $145,000 ($100,000 x 1.45x)
Total Revenue Earned from the Business: $180,000 (36 x $5,000/mo)
Revenue Auto-Pay to Boopos: $54,000 (36 x $1,500/mo)
Remaining Balance at EOY 3: $91,000
Crap! We’re still above $90,000 after three years of payments on a $100,000 loan.
Let’s pull that out a bit to show the differences:
EOY 1 Balance : $97,000 (Paid Boopos $18,000)
EOY 2 Balance : $94,000 (Paid Boopos $36,000)
EOY 3 Balance : $91,000 (Paid Boopos $54,000)
If you wait until Year 4, you’re paying back the entire Repayment Cap of $160,000 ($100,000 x 1.6)
This right here is the key to a Boopos Loan. You must understand the increased cost if you don’t pay it all back in the first year.
Where Does Boopos Financing Help?
You’re probably thinking, “This isn’t for me, that’s a lot of money and a high interest rate” and that’s understandable. But, like any financial instrument, there’s a place for Boopos financing in your tool kit to build your portfolio.
Boopos loans are good for businesses where you need a tranche of money to bridge the gap between what you have and what you need.
It’s also good if you believe you can immediately increase the company’s profit and revenue. If you could 2x this business in one year, you’d have much more capital to pay Boopos off in that first year at the lowest rate of 15%.
15% is still a high interest rate, but remember, Boopos financing is a tool that enables you to purchase a business for the long term.
Paying 15% for a short-term loan that closes a substantial deal can be worth it.
In my case, Boopos made up around 8% of the total purchase price, but it helped get the deal done. I would have had to hunt somewhere else to find that cash or give up more equity to someone else. Neither of which I was interested in while trying to close this deal.
Only borrow from Boopos an amount you know you can pay back in one year.
That’s how I use them, I never, ever plan on letting that loan roll over into that second year.
Other Benefits – No Personal Guarantee
There are other benefits of using Boopos.
If you take money from the SBA via a bank, they’re going to make you sign a personal guarantee.
For me, that’s a non-starter. I have too many other assets to expose them all to the risk of one deal.
Even if it means a higher interest rate, the most that I can lose from a Boopos deal is the business itself. Nothing else.
Try that with your bank or the SBA.
Other Benefits – Humans – Not Banks
If you’ve ever tried to get money from a bank or the SBA, you know you’re talking to a wall most of the time. An urgent question from you is a suggestion written on a leaflet thrown over a cubicle wall to a full Inbox on the wrong person’s desk.
Compared to the service you would receive from a bank, you’ll love Boopos.
You can reach someone quickly via email and get an answer that day.
Their money arrived the day they said it would arrive.
Their terms were never fudged and they worked around the small challenges that always arise in closing an acquisition.
They do what they say they will do exactly when they say they will do it.
And you don’t find yourself wondering what new factor will scuttle the deal at the last minute and cause the bank or the SBA to hold up the close.
Conclusion and Recommendation
Personally, I will work with Boopos again for a loan to acquire a business that I can pay back in one year.
I thoroughly enjoyed working with their team and I’m excited to see their growth in the industry.
If you have any questions about my experience, feel free to sling me an email.