Hello again friends,

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Here's what's in this week's issue...

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→ Equity step ups are the bees knees.

→ SMBs need healthy founders to succeed.

→ Stocks are flat, what's the strategy?

→ The leverage on leverage problem.

→ Scarce assets, the third generation curse & more.

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Explaining an equity step-up

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What is this thing?

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The short answer: A very sexy investor perk.

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Unless you’ve been in the Entrepreneurship-Through-Acquisition (search fund) space for a while then you’ve probably never heard of an equity step-up.

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I hadn’t.
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But discovering this changed how I invest.

Let me explain what it is:

Let’s imagine that someone is buying a business for $1 million dollars.

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You are an investor in the deal. You decide to invest $90,000.
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You'd expect to own 9% of the company, right?

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But not with an equity step up.

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If, for example, there was a 2.0x equity step up multiple, your $90k investment would actually end up owning 18% of the business.
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How is this possible?

Voodoo money magic?

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In the self-funded search fund space the acquirers usually have around 80% of the purchase price funded by debt (ie. SBA loan/seller-note).

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This means maybe only 10% of the price of the company being acquired is coming in the form of equity so the acquirers can (and should) offer extra ownership to the investors on a per-dollar basis.

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How it actually looks...

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For this example we will use a 2.0x step-up multiple.
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Acquisition Purchase Price: $1M

• SBA loan (debt): $800k
• Seller note (debt): $100k
• Sponsor capital (the acquirer): $10k
• Investor capital: $90k
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Total Capital: $1M

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Investors get preferred shares with an 8-12% preferred return. After returns are paid, your shares convert to common equity at the step-up rate—turning your 9% into 18%.

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Why is this great?

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For investors, it means potentially higher returns on investment. For acquirers, it means they put in 1% of the total deal price( just 10% of the total cash injection), and yet they end up owning 82% of a million dollar company.
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It’s a win-win.

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Hit reply and let me know your take!

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ENTREPRENEUR-INVESTOR READS

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🤑 Starting a business is tough and can take a toll, with half of entrepreneurs experiencing burnout. Maintaining personal well-being is crucial - the highs are high and the lows are low but it’s your responsibility to protect your own health and sanity. No amount of funding or marketing can save your business if the founder isn't in a good headspace. (ungated version)

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🤑 Major stock indexes have been pretty much flat so far this year with the only bright spots being utilities, energy, and consumer staples, tech not so much. Signs of an upswing are there though, and targeted trading strategies, ie options, could help take advantage.​

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🤑 Leverage on leverage - growing debt in the private credit market, similar to 2008. Private equity firms are taking on more loans to pay dividends and handle cash shortages, stacking new debt on top of existing debt. This increase in borrowing, mostly away from regulatory watch, could lead to some tough times again.

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🤑 People are starting to use tech stocks like Nvidia, Amazon, and Meta as bets against inflation, and alternatives to gold. They do have strong positions in the market and keep making steady money, so they are staying attractive to investors. Crazy how important some companies are on so many levels.

Say hello to this week's partner... Hire amazing remote talent from $5/hour In our last business, we doubled our profit margins by recruiting amazing talent from South Africa.​ ​ You can see how we did it in this case study. ​We’re now helping other businesses do the same.​ ​ If you haven’t looked into South Africa as an amazing talent market, I highly recommend downloading our DIY Playbook, where I share everything I know about recruiting from SA.​ ​ Or you can use our agency, Sauce, to do all the heavy lifting. ​ Get 50% off our headhunting fee by mentioning Investing.io. ​ We have boots on the ground in SA and deep knowledge of the SA job market. Learn More

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🤑 Balancing between productive assets like stocks and scarce assets like art can help you better manage risks. Mixing these types of assets, you can achieve steady returns with less risk.

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🤑 Blockchain is making business opportunities more accessible and fair by spreading ownership more widely and making investments easier and cheaper. It turns assets into digital shares that anyone can buy, cutting out middlemen, and speeds up transactions.

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🤑 70% of wealth transfers fail by the third generation. Most due to unprepared heirs, legal challenges, and evolving family dynamics. The younger ones have different values and goals, and prioritize different forms of investment. Plan carefully my friends.

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Quick Hits

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👋 Hey entrepreneurs!

​Come join our private community for entrepreneur-investors

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✅ Offers from other members.

& more.

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We have a fantastic group inside: Holdco owners, public company CEOs, crypto exchange VPs, more business owners than we can count, semi-retired value investors, people both early in their careers, and people later on.

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Want in? Come Join Us → Apply Now​

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Disclaimer: Not financial, investing or tax advice. This newsletter is strictly for information, entertainment and education purposes. Nothing in here is investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your professional advisors. Do your own research. There will also be affiliate links in here from time to time because we like free money.