The Art of the Deal: Disruptive Strategies for Business Growth

0:00Good deals start as meh deals and they become, they get honed down. I mean, it is that diamond in the rough, but like it looks like a freaking rock. How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table because this is Business Lunch with Roland Frazier and Ryan Dice.

0:29Welcome to another episode of Business Lunch. And today's a snackable episode with Roland where he's going to get into some more tactical strategies that you can start using to live a rich and happy life. If this is the first snackable episode you're hearing, I'd encourage you to go back and listen to some of the other episodes that Roland has put out. And if you want to get notified every time we release a new episode, go to the new businesslunchpodcast.com website and we'll send you detailed notes along with every episode. That's businesslunchpodcast.com, www.businesslunchpodcast.com, and you can sign up for the free email newsletter where you'll be able to get all the highlights and resources from the episodes.

1:04Hey, everybody. Welcome to the Business Lunch Podcast with your hosts, Ryan Dice and me, Roland Frazier. Ryan, what's happening? Nothing. I'm incredibly bored out of my mind. I've got nothing to do. That's not true. But compared to what you've been working on, it feels like nothing. You've got a pretty cool deal in the mix that I wanted that you were telling me about. And we were like, we could talk about this, just you and I, or we could flip on the recording and share this with all of our business launch pals. So tell me about this deal you got going. Yeah, this is the perfect example of why we do this program.

1:43because we would normally just chat about this as along with most of the things that we talk about on here. And so we're just kind of, you know, saying, Hey, fly on the wall. If you guys want to want to see the stuff that we're doing and talking about, here you go. Okay. Yeah. So I think it's important. Everybody needs to know I'm hearing about this in real time. Yes. We made sure because you were going to do it. It's like, ah, let's, let's, so I have no idea what you're about to say. Um, what you could hear is like, Ryan, we're doing this deal and you're freaking out, bringing in another investor.

2:14We're doing a hustle takeover. It'd be an awkward episode. The reason that I have you trapped on this show is as we are talking, your office is being door lock changed and all the codes, all the computers. Now, what we have is a deal that came up. And it was from somebody that we were looking at maybe creating a strategic relationship with. And interestingly enough, this has come up twice in the last week. So in this particular one, I like this one because it lends itself to the possibility of creative deal structuring, which as you guys who are watching and listening know is one of our favorite things to do.

3:00So here's the deal, Ryan. Basically, company, they're doing about$30 million in sales right now. The entrepreneur has built$100 million plus businesses before. Or this one is kind of relatively new and it needs capital to basically get ready for one of its big seasonal order. It's kind of a large bump in seasonal stuff around this time of year. We can't say the company name for privacy reasons, among others, but can you say the industry? Online retail, I guess e-commerce Okay, consumer? Yes, so there's some events that are coming up that are big times, big pushes for them And they get significant orders, kind of like Black Friday is for most other people And so they're looking for some capital And not a ton, but a couple million bucks And they're going to use it to get ready for to buy inventory basically to get ready for the event.

4:19And they are going to get some working capital and payables and all the normal things people do with that money. They have the ability to get the capital from a couple of different sources, but it's relatively expensive. They've got the private equity option where you're looking at around 15 % plus in terms of what the companies that are interested in potentially funding one. Is that 15 % for debt or interest rate, or that's what they take in equity? Both, basically. So an interest at a favorable valuation plus its preferred debt effectively that is going to return 15 % before anybody else gets anything.

5:08And then another option which was basically a reverse royalty where somebody would put in the money and then they would get an override on gross sales in perpetuity. Kind of like a Shark Tank deal, if you've ever heard those. Yeah, I was going to say, that sounds like a Kevin O 'Leary, Mr. Wonderful, I'm going to give you money and you're going to give me a royalty. So what's cool is that means there's funding that's available. And they approached us and said, you know, hey, we have lots of strategic stuff that we can do together. Would you be interested in, you know, would you be interested in and having the opportunity to invest at a relatively favorable valuation?

5:49But it's not really favorable, given what the company's doing. It's favorable based on if the company can get to where it needs to get, you know, where we think it's going to get, you know, but it's, it definitely wouldn't support that valuation now. So here we are on the opportunity level with it. We would love to do a deal because they have a customer database that we would love to get into. They have industry contacts in a vertical that we're not in that they would love or that we're in just a tow that we could get in up to our waist with them. And so we'd love to figure out how to help as always, whether we've had anything to get from it or not.

6:28And also, how do we make a deal happen? But to put a couple million bucks in and be a minority shareholder in a deal that's overvalued, that has no liquidation ability is interesting. I think it's worth pausing there just to acknowledge this is what most deals start out as. right? Most people are like looking for that great, amazing deal that like, it's just this diamond in the rough. And it's like, how has nobody ever found this? Cause Oh my gosh, like the valuation is so low and I can come in and I can, you know, put nothing in it and make all this like what you got to realize is the deals that start that way are probably not deals that you want to be in.

7:10Um, what this is where the good deals start. Good deals start as meh deals and they become. They get honed down. I mean, it is that diamond in the rough, but it looks like a freaking rock right now. And we've got to chip away the stuff and polish it to see if it'll gleam. So I just thought that was worth pointing out because this is how the good, this is how meh deals become potentially great deals. They look like this from the beginning, not overly exciting, but like, I love the word you used, interesting. And the truth is that the other deal is similarly, the second deal, which is in a SaaS, is similar in that the valuation is high.

7:55The opportunity to invest was presented. The strategic partnership would be valuable to our company that they're talking to about investing. Um, the entrepreneur has a proven track record and, um, and, uh, it is not particularly appealing. Right. So I'll go back to this one on the consumer, the consumer e-com deal. So one of the things that occurred to me was that, uh, we could obviously do a deal that was the reverse royalty deal. I like that you get paid in perpetuity. pretty much it's based on sales. So there's no risk of manipulation of numbers or anything like that. And you would have your money back in about 18 months and then forever more.

8:50They have a good model of what they're doing. They really need creative help in deal structure. One of the things that they said was, like I said, what's the biggest constraint that you've got? I always ask that question. I love the theory of constraints and I love because it really brings down what's the if we could find one bottleneck that's the big bottleneck right now for them. It's that they can't bring enough big companies because they're kind of aggregating other companies by offering them their platform. and some of the companies are paying to be brought in and some of the other companies are just coming in and then the cashflow happens on a split.

9:32So the ability to cut these deals is the biggest constraint. They have the software, they have the teams, they have the warehouse space to do all the stuff. It's truly just the deal. And I drilled down on that question with them. So one of the things that we could bring to them that would be valuable if they didn't need actual cash would be, we can accelerate cash flow through deal flow conversion, right? And so that's something that I think, because we haven't presented what we're going to do yet. And just so I'm clear what that would be is, so what it sounds like, they sell their own products through their own platform, but if they could bring in other...

10:13They sell other people's products through their platform as well. They're similar to Amazon in a particular niche, right? And from that perspective, they wouldn't have the inventory constraint as long as the partners they were bringing on had inventory, then they would create cashflow and profitability and all that stuff without needing the$2 million to go and put it into inventory because they're effectively utilizing other people's inventory. Lower margin, but totally free cashflow at that point. Exactly. So love the business, love the entrepreneur, brilliant model and everything, one of the ways that we could help would be, let's do, let's help with deal flow conversion.

10:57I have that particular set of skills, so I could definitely do that. And then while it doesn't help them with the short-term cash need, it definitely could help get us into the deal. So kind of looking at what are creative options to get yourself into deals that, you know, what are the skill sets that you have that you could bring that will help eliminate constraints that the people that you're talking to have, this is one where that definitely fits. The other option would be straight investment. I don't really generally like having to take our money and put into deals ever if we don't have to.

11:32Generally, we don't have to. So I don't like that one. Definitely like the idea of getting into business with these people. So the other thing that I suggested was, couldn't we just sell our way to solving this challenge? Because they only need about a quarter of the total that they were talking about to satisfy the short-term need. And you and I both know we've done a million dollars plus in a day. So if we have offers that we could either ourselves through a third party or through these people themselves deploy to the audience that they've got or that we've got that could benefit them, I think we could actually just earn the money that was needed for them to do their immediate thing, call it a half million, and they're taken care of.

12:26And then we've helped them solve a problem. We could either do that and say, and when we do that, we get equity, or we could just basically do it to be good people and say that plus the deal flow should open up, should solve the challenge you've got, plus open up the ability to invest in the company or to have ownership in the company because we've proved value. And so I'm just kind of kicking all that stuff around in my head right now and wanted to hear what your thoughts and questions are. oh i think it's interesting you know everybody when they go to raise money they always need either 2 million 10 million or 20 million dollars you know and then it goes up but it's funny it's always like i need two million dollars and so the first place where i would want to dig in more and it sounds like you did this is what is the use of funds like what's that use of proceeds if you get the two million because very often the things that people think they need two million for it's like well we can solve for that in other ways so now you don't need to to do that you need you don't need to go and you know take on unnecessary debt you don't need to dilute yourself anymore we definitely don't need to stockpile cash yeah yeah yeah and that's you don't want to put money in a business where it's like yeah we just want to have dry powder it's like oh that makes me nervous um if there's not a clear kind of deal and you know you said that there's some operational stuff and things like that so we'd want to unpack that they need about a quarter of it that that's That's what I drilled down to.

13:55But how do you make sure that once that is solved, that this cash flow constraint doesn't just keep, because that's one of the challenges with e-commerce businesses, right, is you don't always get great economies of scale. Sometimes they get worse as you scale and your providers can't fulfill. You've got to go to other ones and the quality declines or prices go up. So how does this not become an issue in six months where the first problem is solved for, but then it's it just rears its ugly head again. And now we're back around saying like, well, we still need two million bucks. Who are we going to get it from?

14:26Yeah. And the answer there here would be they will always every season need to bulk up on inventory as long as they're growing. It's one of the one of the evil cycles of e-commerce businesses is, hey, yeah, we're super successful downside. side. Yeah, we need more money for more inventory. So I don't see that that need would go away. I think a warehouse credit line would be something that we would work towards that would be helpful so that we could tap that for seasonal demand. The other stuff is just general growing pains. I think that they've recently honed the model down. I believe the model will cause cash flow.

15:06I think there's a way to turn the model they've got into cash flow that self-liquidates, which would be one of the things that I think we could bring to the table there. So I don't believe other than general growth challenges that you're basically solving for something that only pushes the problem off until your cash is gone. So I think that's a positive there. So I think that's good information for you to have. And does it reach a point where you can go? Because I know right now interest rates are high. Banks are holding on to lines of credit and stuff like that pretty tight. But is there a path?

15:47Or do they have existing banking relationships where they could get that line of credit? If not, and I believe I know the answer to this, but could we help them to secure that as a part of the deal? Absolutely. Yeah. And that becomes the thing. It's like right now, the reason they can't go and get a bank line of credit or something at even by 2020, 2021 standards, high interest rates, but still very doable interest rates is probably because of some of these growing pain challenges, some of these things that make it not look as compelling. So if we can solve for that, then they can go and get the less expensive debt that is more revolving.

16:25It is that line that they just need as a function of business. And we could probably help them do that. And I looked at one of the options would be a bridge, right? We could do a bridge loan. That would mean cash out of pocket for us potentially, although there are other ways we could potentially get that money. We could even broker a third-party bridge loan that would take care of them and get somebody that we know a good interest rate but not take cash that we might not want to deploy or risk that we don't want to take that somebody else is comfortable with. I think that could be good. I like a short term inventory loan.

17:00I've done that many times where I would loan somebody, you know, whatever it was that they needed. Usually it's less than a million, but for 30 days and get 20 percent on my money because they're going to take it and make double. Right. And and I know it and they're proven and I feel comfortable with that. And it's just, you know, as long as they manage money that way, you know, it works for both of us. So that would be a potential thing that we could do. The other thing would be that there are assets that the founding team has that could secure that are outside the business that could secure the loan.

17:38and then you would be comfortable that you would have a collateralized loan and the ability to get it back, they could potentially use those assets to fund as well and just might not know the sources for that. For the little bit of money that they need, the several hundred thousand that they need, I think that that would be really easy to put together. And it would be way better for them because one of the things I was telling them was, I mean, don't do something with a PE firm or a royalty deal that you're stuck with forever to solve a problem that's a short-term problem. Let us earn our way.

18:18I always say us when I'm talking to people. I say, let's earn our way out of this. Let's take the challenge. We got to figure out how to put a million dollars in sales in the coffer in the next three weeks to make this happen. And then let's go do that, because from that, our profit would be enough to fund what needs to be funded. And so it's just kind of kicking all those things around. Yeah, the perpetual royalty sounds like that could be potentially very appealing to a lender. There's a reason that they do these on Shark Tank. But boy, in the event of a sale, that thing lingering around is going to hurt your valuation.

18:54And they are and they do plan to exit. I assumed that or you wouldn't be talking to him. But yeah, so yeah, so that so I think that that's that's a challenge there. And I wouldn't I wouldn't want to be the person who brought that kind of, you know, anchor, you know, slung that anchor around their neck. I would always rather be creative. And I think that that's an important point to make, because when you're thinking about these deals, a lot of times people say, oh, you just don't want to come out of pocket the two million. You're trying to come up with clever ways to not give them all the, you know, you know what what they're asking for.

19:24It's like, yeah, for a couple of reasons. Number one, that's the business we're in. But number two, the oftentimes it's way better for them. Yes. And it's and it's keeping them from making a long term mistake that you can't unwind. at least try this first. Yeah. Right. At least try this first. You can always go and, and, you know, give away way too much equity or pay way too high an interest rate. There's always somebody who will take that deal. And it's always somebody who you don't want to be in business with long term. So let's try to figure out a way that we can do this where it makes sense.

19:57And we're feeling really good and we're not nervous about it. So we're not saying, how do we get all of our money back, you know, immediately? Cause we didn't put a ton of it in while at the same time, we just make the business better. We make it more scalable. We make it more efficient. And so that is the goal in going through these discussions of how do we get them what they need without just writing a check. It's not purely in the avoidance of putting money into a deal because we will put money into a deal. It's in the goal of like let's build a better business than what is there today. Right.

20:30Because if it needs money and it's not self-sustaining and it's not purely a short-term deal, then that probably means there's some points of optimization. So going back to the deal, what was the original term? So if it's$2 million, what were they going to say? What were they happy to give from an equity perspective for that$2 million? At basically 10%,$20 million valuation. Okay. Yeah. So a 20 million valuation, um, companies doing 30 million, but for e-commerce, they could be doing 30 million and losing money. We've had those businesses in the past. I haven't seen, cause it was just a preliminary, um, conversation.

21:07Um, I believe that they're, you know, in the million dollar profitability now, but, but, um, but that's because there's been heavy reinvestment in, uh, in things that are not going to be recurring. So they, they look at, you know, about a 20, 25 % margin, I'd say when all said and done. Yeah. So there's, there's basically 10 % at play. If the problem can be solved long-term, it feels like if it can be solved through a combination of let's just do the voodoo that we do to get you a combination of like, let's just go and make the money. Let's, let's go to the list. Let's just go and just create it.

21:46Let's just use good old fashioned alchemy. Um, which that's the nice thing. If you know sales and you know, marketing and you know, offer creation, that's very, very doable. And so, and a lot of these people in these businesses, they're good at it too. They're just so freaking close to it. They don't see it. Like, and so there's value in just having somebody else come in and yeah, do the alchemy for you. Yeah. I think that, that e-commerce people much, much less so people who do high ticket and digital get the possibility more than, okay, because e-com people are like, you know, we run our ads and we have our markets and we send our stuff out and people buy our stuff and yeah, we can promote a sale and we'll do, you know, but we already are doing all that.

22:29So doing more of that won't help us because our alchemy is it's black Friday or it's, you know, tie your shoes day and we sell shoes or whatever, you know? And so we already know that. Um, but what they don't know is all of the other ways that you can have a million dollar day. Yeah. they know promotions. They don't necessarily know offer creation and they're two different things. A promotion is not necessarily an offer, but it may be a function of the new offer. So yeah. So if, if we can help create, you know, money out of thin air, so to speak, which sounds super hypey, it sounds like late night infomercial stuff, but that's offer creation.

23:07And it's not from thin air, there's assets that are in place. It's just a matter of, of redeploying the assets in, in creative ways. And perhaps a short term, you know, piece, go in there and optimize some other areas to get them where they need to be. So that, okay, with the goal of saying, let's get you a revolving, you know, kind of this line of credit that will make sure this isn't an issue. Moving forward, build up these banking relationships, because you really can't be in e commerce, and not have some kind of banking relationship, unless you have generated so much wealth and cash flow that you are your own bank, and that typically takes decades, if not outside funding, then that seems like a great goal.

23:51And then you wind up with 10 % of a company that if they can do some margin improvement and grow to, I mean, where do you, I don't know what the total addressable market is on this, but what do you think the scale is in the next three to five years? I'd say it's in the$2 billion range. $2 billion in sales? Yeah. And it's currently doing$30 million? Yeah. And the company that they built before did, I think, five something. There's the trajectory to get there, and I see the path, but it's rapidly accelerated because of a very creative business model. Gotcha. Yeah, it's not a couple billion in sales selling whatever widgets they got today exclusively.

24:32then I mean, that that seems like a great deal. I mean, 10 % of a billion dollar company is it'll spend more than it'd be today. So it is. Yeah, I think it's just, it's coming up with the creative thing. But I think what I think probably it's a, it's a phased. It's a phased thing that we basically say, let's sell our way through the immediate problem with an offer. Let's solve the midterm problem with a banking relationship. Maybe revenue-based financing would be a really good opportunity here. Maybe merchant financing as well. It's gotten tight of late, but it's still there if you got good numbers.

25:15Also the constraint elimination. I think it's probably a CFE offer at 10 to 15, maybe even 20 points with some sort of cash minimum that happens 90 days from now, that starts 90 days from now because of the cash. You don't want to contribute to the cash constraint, then the ability to help them really accelerate through the structuring and stuff. I think that's probably what it's... And the nice thing about these kind of deals is there would be, like you said, it would be earned in over time. It would be contracted. I mean, so everybody would understand what the deal was, but as, as long as performance is happening, then the deal works.

25:58And that's what separates a CFE, a consulting for equity offer over just a, I wrote a check, give me my equity offer. And that's why when we do these kinds of deals, you know, our success rate in them is pretty close to a hundred percent because they either work and we stay in it or they don't work really quickly and we're able to bow out with limited time spent, we didn't really lose much. And the way that we approach these is always, hey, if nothing else, we left them better than we found them. And we learned from the process. So even if that means that it didn't work out and so we walk and maybe we don't take anything, that's the worst case scenario.

26:38The worst case scenario is we invested some time and we got nothing for that time. But what we are going to get from that is some learnings. We're going to build a relationship. Those people are going to say, hey, you tried and it didn't work out for a variety of reasons. So we've got a solid advocate out there. Some of our best advocates are the deals that didn't work out. But even that is in the gross minority. As long as you figure out how to, as long as you do the due diligence on the front end, you ensure check all the boxes you already mentioned. But when they do work out, you wind up with such a greater outsized return than if you just said, here's a couple million, give me 10%.

27:17Right. You know, you say, here's considerably less or no money, and maybe it's winding up at 20%. And the reason that that happens is because it's solving for greater problems, and it's us taking on more of the execution risk. Exactly. Cool. Well, I appreciate you talking that through with me. I think that that's a deal that I think I'll obviously give you the specifics offline. But does that sound like something that we might work together on? Yeah, I think that could be really great. And if the deal winds up going through and we can speak about it, I think it'd be fun to come back and do a follow-up episode about, you know, maybe we can't go into the details of the deals because there's sometimes NDAs.