Here is a great example of how to be self-employed by using "Sweat Capital" or "Sweat Equity" to quickly propel yourself into ownership of your own successful business with no cash.
Several years ago I was visiting a friend when his 34 year old wanna be self-employed son also stopped by to visit. Let’s call the son Dave (name changed to protect the innocent).
While Dave was off in another room at the house, his father mentioned to me that Dave was a superior salesman. Out of nearly a dozen salespeople that worked for the same company, his son actually produced more than 40% of the sales. I asked my friend if his son had any ambition beyond sales. He said yes, that he was very entrepreneurial and really wanted to be self-employed. In fact, Dave wanted to own a similar type company. However, even with his six figure income, Dave couldn’t pull together the cash it would take to start or buy a business of his own.
I stayed for dinner, and during the course of the evening Dave and I got to talking. I asked Dave what field he was in. When he answered, I said, “that’s interesting, I have a friend who just bought a company in a similar field without using a dime of his own money.”
I knew that would get his attention and he asked me “How did he do that?” I then told him the story of Phil Harris (another name changed to protect the innocent).
Phil was the star of his company’s five-member sales staff personally producing about half the firm's total sales. He too wanted to own his own business. Due to several generations of family ownership active in the business, there was no chance of buying out his employer. But Phil was highly motivated.
So one day Phil went to see the owner of his firm's major competitor. "Look", he reasoned, "because of the intense competition between our two firms, nobody's making a strong profit. I'll sign on with you, bringing all the customers I can. I'll even guarantee a minimum percentage increase in your sales. In return, I want to own a percentage of your company. The more sales I generate, the more of the business I'll own."
The offer looked good to the competitor because Phil was a good salesman with loyal clients. And… a surplus of business would mean healthy profits, instead of more years of little more than break- even operations. The competitor also reasoned that the deal had no downside. The competitor had no risk since, if Phil did not achieve the sales milestones, no shares of stock would be issued to Phil and it cost him nothing.
An agreement was put in writing that identified specific sales volume milestones. As Phil achieved each of the milestones, he would get increasing shares of ownership until by hitting the final milestone, he would own 30% of the company. The equity value of the percentage of shares of stock in the company that Phil would receive for achieving each milestone was worth significantly less than the equity value added to the company by virtue of the profits generated by those additional sales. Thus when Phil had earned his 30% interest, the equity value of the original owner’s remaining 70% was worth substantially more than the equity value of his original 100%.
Phil made the move and earned a 30% interest in the business based upon the sales volume from the customers that came with him. So Phil earned his 30% interest without putting up dime of his own cash.
About a year and half after Phil became the 30% owner, he bought out the original owner’s 70% interest, again without using any of his own cash. How did he do that? He used what’s called a Stock Redemption Agreement where the original owner would sell his remaining 70% interest, not to Phil, but instead back to the company. The company paid for the repurchased stock over a 7 year period from the profits on the sales most of which Phil brought into the company. The company then retired the 70% stock repurchased from the original owner. This left Phil’s 30% as the only stock outstanding. Thus Phil became the only shareholder and 100% owner of the company without ever coming up with a dime of his own purchase money.
Three months later, Dave used this strategy to buy into a company that competed with the business he worked for. About two years after that Dave completed the buyout of the original owner using a Stock Redemption Agreement. This is just one of dozens of great “no cash” strategies for going into business for yourself that I teach in my online Bizar Financing course. Check out my free online video Getting Rich Your Way and see how other entrepreneurs are using my strategies to start, buy or build their own successful businesses using no cash of their own.
Leave a Comment