5 Creative Ways to Buy an Internet Business Without Giving Up Equity

Thanks to the internet, it’s never been easier to buy an online business.

I’ve even created a free guide on the process with everything you need to get started.

A major barrier most will encounter is financing the deal.

I often hear, “OK great, I’m in. I want to buy a business and operate it as CEO. But I have no money. What should I do?”

You could also raise equity from friends, family or even investors. Many people do this.

But you will likely take on major dilution. You also have the burden of keeping those investors updated. No one wants that.

Keep reading to learn 5 creative ways to finance your acquisition WITHOUT giving up equity:

1. Pipe.com

Founded in 2019, pipe.com is the leading source of non-dilutive, recurring revenue-based capital for SaaS businesses. Pipe lends against a businesses ARR – annual recurring revenue. Businesses can collect up to 12 months (or more) of cash up front (from Pipe), while their customers pay them monthly or quarterly. The concept assumes a good SaaS business will have predictably low churn rates.

Advantages:

• Non-dilutive debt financing (Buyer retains equity)
• No personal guarantee
• Efficient application process with funding available in as little as 3 days
• Flexible capital source you can continue to draw from even after the deal closes
• Affordable – you can often receive 90%+ of full year revenue upfront

Disadvantages:

• Only available for SaaS businesses
• Generally can only access capital for up to 12 months of revenue (may represent a small piece of the overall purchase price)

When should you use Pipe financing?

Pipe.com is traditionally used as a source of ongoing liquidity similar to a line of credit. Customers can sign up for Pipe and list all of their recurring revenue contracts through the platform, flexibly selling those contracts to investors whenever they need the capital.

For purposes of M&A, Pipe is an excellent way to raise debt financing quickly, without all the hassles of the more common SBA Loan. If the business you are looking to acquire qualifies, I would recommend including Pipe in your capital stack.

Here’s how it works:

1. Sign up through Pipe.com
2. Connect your banking, payment processing, and accounting software
3. Pipe instantly assigns your subscription revenue a rating
4. Once approved, you access the Pipe Trading Platform and can see how much investors are willing to pay for your subscription revenue. Investors, on average, are willing to pay $0.90 – $0.95 for every dollar of revenue they buy on Pipe
5. You choose the customer contracts you want to sell from an auto-populated list
6. Accept the payout and receive the money within a day

2. Boopos

Founded in 2020, Boopos is a revenue-based acquisition financing platform. Boopos can provide debt capital for the purchase of an online business without requiring a personal guarantee. This is a major selling point for most entrepreneurs who do not want to give up equity, but do not qualify for an SBA loan or want to avoid its personal guarantee.

Advantages:

• Non-dilutive debt financing (Buyer retains equity)
• No personal guarantee
• Efficient application process with funding available in as little as 7 days
• Funds up to 85% of the purchase price
• Flexible repayment terms that adjust based on the business’ revenue performance

Disadvantages:

• Business must generate at least $100,000 in LTM revenue
• Business must have 18 months of revenue track record
• Max loan repayment period of 6 years
• Relatively high interest rates

When should you use Boopos financing?

Acquisition entrepreneurs who are focused on long-term equity upside and are willing to sacrifice near-term cashflow should consider including Boopos as part of their capital stack. Boopos can also be a good source to help finance the working capital needs of an eCommerce target.

Here’s how it works:

You can apply directly through Boopos website after talking with their experts. You may find various listings through online marketplaces that are already pre-qualified with Boopos.

Based on your loan amount, you will repay Boopos a monthly percentage of your revenues. This is not a fixed dollar amount, so if your business has a strong month, you will pay down more of the loan, and in less profitable months you will owe a smaller payment.

Boopos works with you to structure payments that make sense and adjust to your business cycle.

3. Seller Financing

Seller financing is a form of non-dilutive debt financing where the Seller essentially loans the Buyer a fixed amount of the purchase price. The Buyer then repays the Seller principal and interest overtime. Seller Financing is a very common capital source for Buyers with less cash on hand. It can be structured creatively and often does not require extensive diligence nor a personal guarantee.

Advantages:

• Non-dilutive debt financing (Buyer retains equity)
• Business’ existing cashflow can be used to repay the principal and interest
• May not require a personal guarantee; loan can be collaterized by business assets
• Interest rate and repayment periods can be very flexible
• Little to no required diligence since the Seller is comfortable with the asset being financed
• Can be a good way for the Seller to earn passive income after the sale

Disadvantages:

• Seller may require collateral via the Buyer’s personal assets
• During the repayment period, interest payments will lower the business’ cashflow

When should you use Seller Financing?

Seller Financing is an excellent way to finance the purchase of a small business using other people’s money. If a Seller is open to this type of financing, it is usually always in the Buyer’s best interest to include as part of the capital stack. The Buyer will benefit from non-dilutive financing that can often be funded using the business’ existing cashflows.

4. Earnout

An earnout is a contractual agreement stating that the Seller of a business will earn additional compensation in the future if the business achieves certain financial or performance-based milestones. An earnout is meant to align incentives after a deal closes. Buyers may find an earnout to be an effective way to create downside protection, in the event the business fails to perform in-line with expectations.

Advantages:

• Non-dilutive debt financing (Buyer retains equity)
• Purchase the business with less cash upfront
• Motivate the Seller to help transition the business smoothly
• Motivate the Seller to help grow the business, post-closing
• Provide downside protection in the event the business does not meet expectations

Disadvantages:

• Buyer shares upside performance with the Seller
• An unrealistic earnout can be demotivating to the Seller

Common types of earnouts:

1. Revenue: Seller receives a portion of all revenue generated over an agreed upon threshold.
2. Profit (or SDE): Seller receives a portion of all SDE generated over an agreed upon threshold.
3. Milestone-based: Seller receives additional consideration if certain milestones are achieved. These milestones may include an important product launch, new customer additions, traffic to the website, etc.
4. Time-based: Seller receives additional consideration based on their ongoing participation in the business, post-closing. This may be defined separately in the Transition Services Agreement.

When should you use an Earnout?

As a Buyer, it is almost always smart to include an earnout as part of your purchase consideration. An earnout is a great way to form a partnership with the Seller to ensure both parties are working collaboratively to grow the business. The only time an earnout may not be effective is in a competitive bidding situation. If you are competing with other all cash offers, an earnout will make your offer less attractive.

5. SBA Loan

SBA loans are small business loans partially guaranteed by the U.S. Small Business Administration and issued by banks. These loans are commonly used to help finance the acquisition of profitable small businesses.

Advantages:

• Available to almost all business types
• Ability to finance up to 90% of the purchase price using an SBA loan
• Long repayment periods (up to 10 years on an acquisition loan)
• Low interest rates and fees
• Flexible repayment terms

Disadvantages:

• Long closing process; can take months to secure funding
• Requires a personal guarantee of the debt
• May be challenging to qualify

How to Apply for an SBA Loan:

1. Make sure the business is eligible
   • At least two years of tax returns. New businesses are not eligible.
   • Buyer has good credit score (> 690).
2. Find a bank to work with
   • You can start with the SBA’s Lender Match tool.
   • Look for a bank with experience working with the SBA.
   • Engage 2-3 banks in parallel; each bank will have their own qualification process.
3. Complete the application process
   • The application will require lots of sensitive information – personal and business.
   • The time for approval will vary based on the lender.
   • Once approved, funding by the SBA can take another 1-3 months.

When should you use an SBA Loan?

SBA Loans can be a very effective way to buy a small business. Many Sellers and nearly all Brokers will be familiar with them. However, there are strict eligibility requirements and the entire process to secure funding can take months to complete. SBA Loans also require a personal guarantee, which means if the business can’t repay the loan, the SBA can go after the Buyer’s personal assets. I would first look into the other sources of non-dilutive financing that do not require a personal guarantee, before considering an SBA Loan.