In Day 7 of the “10-Days to Buying Your First Business” series, Carl Allen dives into the art of structuring sequential offers to get the best possible terms for a business deal. He emphasizes starting with a lower offer and gradually increasing it over a few weeks without breaking rapport with the seller. This approach helps keep negotiations flexible and allows the buyer to secure a better deal by making strategic moves. The key is to avoid submitting the highest offer first and to allow room for incremental improvements.

Carl provides a detailed breakdown of how to craft multiple offers, starting with the initial offer at 75% of the calculated closing payment. He explains that as offers are adjusted every few days, the seller will perceive the buyer as carefully reconsidering their financial models and consulting with partners. This strategy puts subtle pressure on the seller and keeps them engaged. The process becomes even more effective when dealing with motivated or distressed sellers, as the likelihood of reaching an agreement earlier increases.

Throughout the episode, Carl introduces different ways to sweeten subsequent offers without significantly increasing costs. These strategies include extending seller financing by an extra year, introducing an earn-out clause, or leaving the seller with a small equity stake. These options provide flexibility and demonstrate Carl’s focus on maintaining a solid deal structure without inflating the cost unnecessarily.

He also stresses the importance of maintaining a good debt service cover ratio, ensuring that no matter how high the offer rises, the buyer should never overextend themselves financially. The ideal ratio is a minimum of 1.5, which means for every $150,000 in cash flow the business generates, only $100,000 should go toward servicing the deal. This ensures the deal remains profitable and sustainable.

Finally, Carl wraps up the lesson by previewing what’s to come in Day 8, which will focus on deal execution. This will include insights on legal processes, due diligence, and financing protocols, setting the stage for getting the deal over the finish line.

Full Transcript:

Wanna start making sequential offers over a period of a few weeks so that we can lock in the deal at the best possible terms for us. So hey, guys. Karl Lauer, and welcome to day number seven. We’re almost there on ten days to doing your first deal.

So yesterday, day six, we got into the whole concept of valuation and structure. And today, in day seven, I’m gonna show you how you can structure your offers because what we don’t wanna do is we don’t want to go in on a deal with our highest offer. We wanna start a little bit lower, not too crazy low because we don’t wanna upset the business owner and break rapport, but we wanna start making sequential offers over a period of a few weeks so that we can lock in the deal at the best possible terms for us. So I’ve actually got a really awesome cool piece of content that I’ve snipped out from one of my online masterminds, and I’m gonna be showing you this now.

Enjoy that. It’s about ten minutes, and then I will see you at the end for a recap.

But say, for example, that you’ve got a business that you’re looking at where it’s a broker deal and the seller has got really inflated value expectations, then then offer one may very well get counted. So you put in offer two and so on. And As you incrementally make these offers every three to four days, we we keep the seller sweating. It makes the seller really think that you’re returning to your numbers and rerunning your models and you’re talking to your financial partners and and all those different things. So, eventually, you’ll see the movement from the seller even with the seller that has a really inflated value expectation.

But if you’ve been leveraging the deal making triad properly and you’ve got that highly motivated or distressed seller of a good business, you’ll see the movement happen a lot quicker. And it might be the offer one or two or three gets accepted rather than offers four, five, and six. But I’ll show you in a minute how by having much more inflated offers actually doesn’t cost you, a, any more money, and b, affect the cover ratio. That most important ratio, that greater than one point five ratio in the green box, that auto calculated in the valuation.

So just to summarize, these were the outputs from the modeling that we did in our example deal in module five. So here’s an output for the EV method using the multiple of EBITDA and also the balance sheet method where we’re taking the net asset value of the business plus that goodwill that we calculated.

So the valuation range for one hundred percent of the equity was kind of in the one point nine million to two point seven million dollar range. And stripping that back down to enterprise value, just to value the business, was one point six million dollars to one point nine million dollars. So for the offer sequence, we now go and prepare six offers. So the first one is based on the summary that you had before.

And all I do is I make the first offer just with seventy five percent of the calculated closing payment. Offer two will be one hundred percent of the calculated closing payment. And then for subsequent offers, I can sweeten the deal in four different ways. So offer number three will be to just add one additional year to the seller financing.

It doesn’t change the cover ratio or the financing. It just means you’re paying for the business for one extra year. And if you’re scaling the business and you’re leveraging all those cross selling opportunities and all those deal synergies, you could be able to do that much faster.

Offer number four is where I introduce something called an earn out, which I’ll talk you through in a minute. Offer number five is you leave the seller with, say, ten percent of the equity. So you only buy ninety percent of their business and leave them with the other ten percent. And then offer number six is where you sell some equity to an investor to raise more capital, which means you can make a higher closing payment. But, again, you won’t own one hundred percent of the business. You’re going to have a minority investor in there. Whilst it’s a bad thing to get too diluted, if that investor that partners with you can add massive value to the continued growth of your business, then it’s not such a bad thing.

So let’s give you the example. So, again, our original valuation was, obviously, one point seven of one point nine million dollars with a closing payment of eight hundred and forty four thousand eight hundred dollars. So offer one will be to reduce that by twenty five percent to six hundred and thirty three thousand six hundred dollars. Now the eight hundred and thirty thousand dollars of seller financing, that stays the same.

The debt that we’re inheriting is the same. There’s no earn out, there’s no retained equity, and there’s no selling equity to anybody else like an investor. So we’re offering about one point eight five million dollars for that business, and our payment cover is one point eight. Now if that offer gets rejected or it gets countered, then you already have offer number two ready to roll.

But wait three to four days, then make offer two, which is offering the full closing payment, the seller financing, and the debt. So offer number two would be two point zero seven million, a little above the top of the range. That’s an increase of about eleven point four percent or two hundred and eleven thousand dollars on your opening offer.

Again, the cover ratio doesn’t change. Now that offer might get accepted or you might get another counter offer, in which case we’d go to offer number three if we need to. So, again, it’s the exact same closing payment, but this time, we’re gonna add an extra year of seller financing. So the seller financing for this deal goes from eight hundred and thirty thousand dollars up to just over one point one million by adding that extra year. The annual payment stays the same. The debt inherited stays the same. We’re just adding a fourth year.

Earn out, retained equity, selling equity, we haven’t done that yet. So now we’re offering two point three million dollars and change for this business, and the payment cover is still one point eight. And it’s a total payout increase of nearly four hundred and ninety thousand dollars. We’ve actually increased our original offer now by twenty six percent.

So it’s starting to get really, really interesting. It’s still a safe deal. We’ve still got a payment cover of one point eight, and we’re not raising any more money. So if necessary, if you really like the business and the seller’s really negotiating hard with you, then if you need to, you can move to offer four, which is the same closing payment, the same four years of seller financing, the same debt that you’re inheriting.

But what we do now is introduce something called an earn out. Now an earn out is where you’re giving the seller bonus payments for increased future performance of the business. So a seller might say, look. I want two point seven million dollars for this business because I’ve got all these contracts that I’ve just won, and they’re all gonna be paying off in the next couple of years.

It’s gonna be a lot more revenue, a lot more cash flow that you’re gonna see washing through this business. So, you know, I want a little piece of that. So you can isolate them, and then you can pay the earn out when that incremental profit is realized. I do a whole lesson on earn outs in a lot more detail in module number seven, financing.

But but think of an earn out as a kind of bonus payment to the seller above the current levels of profitability. So it’s only going to be a win win situation. So so let’s say we offer a four hundred thousand dollar earn out as part of this deal or a hundred thousand dollars per year on our four year payment structure. So that takes the total deal value to just over two point seven million.

That’s maybe what the seller wants. So now this is eight hundred and eighty eight thousand dollars above your opening offer. It’s a forty seven point nine percent increase. So you’re really going over the top to buy this business if you need to, but it’s not costing you any more money, and your payment cover remains the same.

And, normally, when I get to offer four, if that’s declined, I just move on to a different deal. But in some cases, if this business is gonna generate so much economic value add for your net worth and the value of your existing business, then there are two other steps. But just be mindful of deal hating and make sure you’ve got lots of deals in your funnel. But if you really wanna go to town on a deal, the next step is you can let the seller retain ten percent of the equity.

So, again, if offered number four, our total deal value was about two point seven four million. If you would turn to offer five and said, okay, mister seller. I’m only gonna buy ninety percent. I’m only gonna leave you with ten percent of the business.

Then, technically, you’re adding another two hundred and seventy four thousand dollars to the valuation because you’re letting the seller keep that little piece of equity. So now that takes your offer over a three million dollar valuation, but your payment cover it’s still one point eight as you know, and we’ve increased our offer now by over one point one million dollars or sixty two point six percent for an offer number one. And then if you absolutely really, really need to, offer number six will be offer five plus you can then go and sell a ten percent equity stake to an outside investor.

Again, two hundred and seventy four thousand dollars. And if this business is absolutely mission critical to you, you’ve got no other deals on the table, and this deal is gonna drive massive amounts of EBA and wealth creation for you, then you might well consider diluting your equities. Better to own eighty percent or ninety percent of something than a hundred percent of nothing. So Office six is now three point three million dollars almost.

The cover ratio, the payment cover is the same. It’s one point eight. That’s not changing. But now we’re offering more than one point four million dollars or seventy seven point four percent more than in offer number one, and it’s not costing us any more money.

We’ve extended seller financing by a year. We’ve added an earn out bonus. We’ve let the seller keep ten percent of the business, and we’ve sold another ten percent of the business to someone else, which means that we can buy it because we get that extra capital we can pay at closing. So that’s it for lesson number one.

I’ll see you next on lesson number two, where we’ll go through how to submit your offers, and I will see you then. Until then, bye bye for now.

So I hope you enjoyed that and you understood the sequencing part by starting at a lower valuation and then building up. And what we’re doing inside of that sequencing is we’re not affecting the debt service cover ratio at all on the deal, which you know has to be a minimum of one point five. So for every hundred and fifty thousand dollars of cash flow that the business generates from its trading, we only wanna be spending a maximum of a hundred thousand dollars a year in servicing the deal, in paying for the deal no matter who’s financing, whether it’s seller financing, whether it’s bank financing, SBA, it doesn’t matter.

And by starting lower at that point where we’re not gonna break rapport, but we can then start to build up from that and then put those offers in, every few days after that. We’ll always be three or four steps ahead of the seller. They won’t know what’s hit them. It’s gonna be amazing.

You’ve got all this kind of figured out, and you saw how crazy we can be in sweetening the offer without impacting that debt service cover ratio. We can extend seller financing.

We can leave retained equity in the business for the seller. We can sell equity to somebody else and have a partner, preferably a partner that can add a lot of value to the business. So really, really cool. That was day seven.

Tomorrow, day eight, we’re gonna get into the deal execution phase. So I’ll teach you all about the legal process. I’ll teach you about due diligence. We’ll talk about LOIs.

We’ll talk about financing protocols, all those different things because by now, you should have shook hands on the deal, and it’s now all about getting that deal to closing, which we’ll cover in day nine. And then day ten, I’m gonna tell you about how to grow the business, which as you know, is where you make the most money as being a deal maker. So hope you enjoy day seven. I will see you tomorrow for day eight.

Until then, bye for now. Hey, guys. I’m Carl Allen.

I’m the founder of DealMaker World Society.

I’ve done tens of billions of dollars of deals over the last thirty plus years. If you’re new to my channel, definitely hit amazing deal maker content in real time. You’re not gonna miss any of the outstanding information that I’m gonna share with you.

And if there’s a question that you’ve got, if there’s something that you want to know the answer for, you want me to speak to it, definitely hit me up in the comment section, and I will record those videos for you, and I will get them on this channel as soon as possible.

So love having you part of this YouTube community, and I can’t wait to serve you. Until then, bye bye for now.