Mezzanine Financing an Internet Acquisition

In the next two weeks, I will be acquiring a site for $400,000. Obviously, there are risks involved; the market for the services could collapse, a new competitor could spring up and take away traffic, or Google Could just give us the Flaming Finger and take away half the site’s traffic overnight.

Now, I’m confident we can continue to grow the site and there is great synergy with some of the other projects we work on. I like to think I know a thing or two about managing Google, so I’m not overly worried about the Search Engine traffic. The price we agreed on is very fair; not so cheap that it’s a steal and not so expensive that it doesn’t make sense.

$400,000 isn’t chump change for me . . . not yet anyway. For an acquisition like this, I like to mitigate some of the risk and preserve my cash position for future acquisitions. It’s also important to me not to give up equity if I don’t have to.

Enter our Mezzanine Financing Structure

We’re working with a private investor or two this week to loan money to buy the site using the domain and site revenue as collateral. While I will be taking over the operation of the site, I’m not personally guaranteeing the loan, so the rate has to be attractive to the Investors. Moreover, Investors like to see that I actually believe in the project and have some “skin in the game.”

So I’ll be putting up 20% of my money to buy the site: $80,000. The Investor puts up $320,000 and gets a monthly payment of $ 15,200 – $16,000 for 24 months depending on what rate we finally agree on; that’s a yield of 13%-18%.

With this Financing structure I’m happy because I don’t have to give up equity, I mitigated my risk and acquired the site.

The Investor is happy because he gets a great return on his money and doesn’t have the hassle of running a site.

The current site owner is happy because he gets a nice payday and is relieved of all the risk and responsibility associated with the site.

It’s the kind of deal you always want to craft: one where everyone wins.

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8 Responses to “Mezzanine Financing an Internet Acquisition”

  1. itrends says:

    What a wonderful example of the perfect sale and buy. You worded it fantastically, made it clear, and gave me a lot to think about when it comes to site aquisition in the future. Will you be getting your new “mini me” black hatter onto this new project? Indeed… will we ever know what it is? 😉

    Cheers,
    David
    http://www.freebet1.com

  2. meegwell2 says:

    Considering the risk levels in web ventures, IMO you got a fantastic deal. I’ve studied an enormous amount of these type of structured financing ventures (VC, Angels, etc) in grad biz school and been involved w/ a few in the real world.

    Assuming as you stated, the site (domain, traffic) is the only security for the loan, that is quite a risky investment for someone. As far as risk/return goes, you should see rates much higher than the 15-18 you are paying.

    If it were a VC, and lets say for the sake of argument you had an equity buyback call option for a certain term (since you dont want to giv eup equity), the investors would still be looking for upwards of 50-100 return given the risk factor.

    There is one theory that when it comes to seo/web marketing we are all noobs to some degree since the technology and rules are changing daily. It is that change that creates such a high risk, and that high risk that demands such high returns for investors…whether it be debt or equity investment, for small entrepreneurial type operations.

    So the debt investor will get some sort of fixed payment secured by nothing more than the perceived value of the site (which Im sure is quite good). And if, hypothetically, the whole thing goes belly up (make up your own crazy scenario) – are you still on the hook for payments?

    Sounds like you made a great deal. Best of luck to you!

    meegwell

  3. QuadsZilla says:

    the domain has existing revenue that covers the note payment. The site in question jells with other white hat properties I own, so the synergy should help everything to grow.

    Plus, they’re dealing with me and my track record of successes. So the rate of return makes sense given the actual risks involved.

    Anyone paying 50-100% is crazy or desperate. I’m neither. You know the old saying, “only lend money to people that don’t need loans”.

    And if, hypothetically, the whole thing goes belly up (make up your own crazy scenario) – are you still on the hook for payments?

    Of course not. If that were the case I would expect to pay only 8% given my financials.

  4. mikepeters says:

    IMO either:
    1) a ridicuously low price for the website was paid.
    2) a ridicuously low return for the lenders is being paid.

    The risk you have assumed in buying the website does not match the implied risk given the rate of return to the lenders. Assuming annual profit of the website of $200,000 (a guess but how else are you going to make the repayments) you have paid 2 times annual profits which seems to indicate a extremely high risk investment not consistent with the rate of return offered to lenders.

    In conclusion, either:
    1) A “Fair” price is $2,000,000 for the web site
    2) Lenders should be getting a 50-100% return.

  5. QuadsZilla says:

    1. If you can find me people that pay 10X annual, I’ll sell most of what I have right now, including this site. I’m not talking about these “2.0” sites with no revenue here. (the only exception would be domains that, by themselves, should fetch a premium).

    2. If you can get me 100% on my money lead by someone with my ability, let me know.

    3. Think about it, if the LBO (leverage buyout) rate should be 100%, then how can a 10 P/E be justified?

  6. QuadsZilla says:

    “you have paid 2 times annual profits which seems to indicate a extremely high risk investment not consistent with the rate of return offered to lenders.”

    Ahh, but those profits do not come with the management that got the site to where it is now. If you assume that top management is worth 200k per year, then suddenly everything makes sense.

  7. […] September 8th, 2007 | Finance submit_url = “http://blackhatseodiary.org/finance/risk-vs-roi-real-case-study-on-the-works”; plugim_url = “http://blackhatseodiary.org/finance/risk-vs-roi-real-case-study-on-the-works”; plugim_title = “Risk+VS.+ROI+-+Real+Case+Study+On+The+Works”; I must admit, when I read Quadszilla’s post about financing an internet acquisition, I felt the same way most of the people who commented on the thread did. […]

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