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Testimonial

Brad Sterl
Brad Sterl
CEO of Rustic Crust


"They took the time to really get to know our business, and offered a loan that fit our unique needs … it made sense."

Learn more about why VFG invested in Rustic Crust.

Deal scenarios

Vested for Growth provides the flexible capital business owners need, in the form of royalty, or "mezzanine" financing, to set their companies up for success. By modifying the investment structure to match the natural cycles and rhythms of the business, repayment schedules match revenues and the company is allowed to grow at a strategic pace, not one dictated by the demands of a capital structure.

Here are a few examples of deals VFG would be appropriate for. The numerical values are for illustration purposes only. Typical rates on subordinated debt run from 10% to 12%, and the revenue-sharing (royalty) rate runs from 0.5% to 3%,  depending on the size of your business at the time of investment.

1. Large new customer

Your business has received great news: You've just landed an enormous new customer. This is a big leap in revenue for you and the company, and at great margins to boot. However, you now need capital to fulfill this order. Perhaps you need inventory, or new machinery, or an upfront investment in personnel.

You need approximately $750,000 and your bank is willing to provide $600,000, leaving you with a $150,000 gap. Thankfully, you have excess collateral available, such as real estate or equipment. This could occur because your banking partner is willing to lend 70% of the purchase price of the real estate or equipment, but it appraises at a much-higher value than the purchase price, leaving accessible value available in the asset.

If fully collateralized, VFG could provide a simple subordinated debt instrument to provide the capital you need to grow into the new revenue. A long amortization schedule can keep monthly payments affordable, to help support healthy cash flow. 

Scenario 1 - Subordinated debt

Business needs


$


750,000



Bank loan - 7 yrs @ 7%

$

600,000

--Maximum bank can lend

Gap

$

150,000


VFG loan - 10 yrs @ 11%

$

150,000

--Subordinate to bank (rates range from 10% to 12% depending on the risk)

New gap


$0

2. Business growth after rough year

Due to economic turbulence, your business had a rough time last year or the year before. You have adapted your business model and activity is picking up again. And you need capital to allow you to take advantage of current opportunities.

The bank is limited in how much it can loan to you because of the blemishes on your recent profit-and-loss statements.  Because you have exhausted your available collateral, the bank is also unable to provide more asset-based financing. However, your growth plan is solid, you have a great team in place, and recent performance has been strong. Even better, you can demonstrate which sales are likely to come from which customers over the next year.

You don't have enough personal equity to contribute. And you don't want to take on an outside equity investment that could force you to sell the business down the road. Or perhaps your existing equity holders don't want to dilute their ownership position.

VFG could invest using a subordinated debt plus royalty structure. This would provide a loan at a fixed rate between 10% and 12%, plus a revenue-based "kicker" (royalty) for a fixed number of years to compensate for the non-collateralized nature of the investment.

The royalty rate is defined up front, and is determined by both the size of your business and this size of the investment. The typical range is from 0.5% to 3%. For the sake of this example, 2% of your top line will be shared for three years with VFG, during which time the business grows and becomes fully bankable. When that happens, you refinance with a bank, VFG's investment is repaid, and you lower your cost of capital. In the meantime, you had access to the capital you needed to grow, resulting in improved business and increased profits.

Scenario 2 - Debt plus royalty

Business finance request

$

1,200,000


Bank loan - 7 yrs @ 7%

$

700,000

--Maximum bank can lend

Gap

$

500,000


VFG loan - 10 yrs @ 10%

$

500,000

--Rates range from 10% to 12%,  depending on the risk

New gap


$0

Plus: Royalty payment for five years (with pre-payment options after year three)

2% of revenue


% varies based on size of business at time of investment, typically between 0.5% and 3%

3. Acquisition

Your company is doing well, and has a fantastic opportunity to buy a competitor or complementary businesses. The acquisition will result in both cost synergies and cross-selling opportunities to propel sales from both customer bases. Margins are already strong, and will only be improved by the merger.

However, acquisitions require capital. Your bank's policies and regulations allow it only to do so much. The personal equity of you and your fellow owners isn't enough to close the deal.

VFG can provide the extra capital needed to complete the acquisition. While this could fall under the debt plus royalty structure above, it could also be completed with a pure royalty structure. Instead of (or perhaps in addition to) taking on an outside equity partner, VFG and the business can agree on a required "return multiple" on the investment, and your newly grown business pays only a percent of the top line, with no fixed debt service, until that multiple is reached.

This allows for the acquisition to close, and because the payment is dependent on business performance it allows room for the unexpected to occur. Perhaps the cost synergies don't materialize as quickly as hoped, or perhaps merging the two organizational cultures proves more difficult than anticipated. Perhaps a customer at the acquired business had unknown plans to take his or her business elsewhere, or the cross-selling programs are simply pushed out to the future due to customer business cycles.

In any case, a pure royalty structure adapts to the ever-changing conditions you face. The business would only pay a certain percentage of revenue, and do so until the multiple is met. It could take two years, it could take five years. VFG's patient capital allows room for the business to tackle the challenges, setting you up for long-term success.

Scenario 3 - Pure royalty

Acquisition costs


$


2,500,000



Bank loan - 7 yrs @ 7%

$

1,700,000

--Too risky for banks

Seller note - 10 yrs @ 6%

$

300,000


Personal equity

$

100,000


Gap


$

400,000



VFG pure royalty

$

400,000

--Pure royalty deal

New gap



$0



Investment multiple


2X


Total due to VFG


$800,000


Royalty payment to VFG until target reached

3% of revenue

% varies based on size of business at time of investment, typically between 0.5% and 3%

To discuss how VFG financing could work for your business, contact us. We're always happy to explore the possibilities. And if VFG isn't a fit, we'll do our best to refer you to someone who can help.



Tom Manero
Tom Manero, CFO, VXI

“To continue VXI's recent growth, we needed capital to strengthen VXI's balance sheet. VFG provided it in a way that worked for our bank and for us.”
Community Loan Fund