Trading Equity for Services
Tony Marrero thought he had found the perfect investors. Not only were Brant and Brock Bukowsky well heeled -- in 2005, the brothers sold their online ticketing company, ShowMe Tickets, for seven figures -- but they also had a track record as investors in other companies. Plus, they owned another business, Growth Partner, that was staffed with precisely the kind of online marketing talent that Marrero needed to build the website of SoccerPro, his Columbia, Missouri-based retailer of soccer shoes and accessories.
There was just one problem: The Bukowskys weren't interested in investing their cash in his business. Instead, they offered to trade him the services of Growth Partner for equity in SoccerPro. "At first I was hesitant," says Marrero. "But the truth was, I couldn't afford to hire them otherwise."
In August 2007, he agreed to grant Growth Partner a 15 percent stake in SoccerPro. In exchange, Growth Partner promised to supercharge the company's online marketing efforts. If certain revenue thresholds were met, Growth Partner would get additional equity, up to 30 percent of the company, as well as a cut of its sales. In essence, says Marrero, "the Bukowskys put their expertise into my business instead of their money."
It's the kind of thing we may be seeing more of. Credit markets remain tight, which means that resource-hungry business owners may need to rethink exactly what constitutes an investment. "This model in which you swap expertise for equity is a relatively recent development," says Robert Okabe, an angel investor and managing director of Chicago-based RPX Group. "But it is the next evolution."
That's certainly how the Bukowsky brothers view it. After selling their ticketing company, the two men formed Growth Partner, which began providing marketing services to the six other companies the brothers owned. When one of those businesses made the Inc. 500 and another was acquired by the Weather Channel, it occurred to the Bukowskys that their marketing expertise might be as valuable as cash. "We began to realize we were really good at some things, like online marketing, and that we should leverage that as much as we could," says Brant Bukowsky. "Our challenge now is finding established businesses that can really flourish -- say, triple in size in just a few years -- as a result of the skills and experience we can bring." Says Nathaniel Broughton, a veteran of ShowMe Tickets who is now the CEO of Growth Partner, "We want part of that upside we know we're bringing to the table."
The pitch appealed to Marrero. "When you hire a contractor or marketing agency, you always worry about how much of a priority you will be compared to their other clients," he says. "In this case, not only were we able to defer the costs of bringing in the marketing expertise we needed, we also reduced our risk, since the company providing that expertise had a vested interest in our success."
Of course, this kind of arrangement comes with its own challenges. For one thing, the company providing the service needs sufficient cash flow or capitalization to operate without the income generated by a standard fee-for-service deal. Then, there's the question of how to value the company. That's an issue in any investment, but it's especially tricky when a service, rather than money, is the medium of exchange.
In the case of SoccerPro, Growth Partner came up with a valuation based on the company's operations and the selling prices of similar kinds of businesses. Then Growth Partner estimated how much it would cost to provide marketing help to SoccerPro -- and used that to buy a 15 percent stake. The two parties also agreed to the 30 percent cap as a way to allay any concerns that Marrero would be giving up too big a stake in his company as part of the agreement. The deal was sealed with a handshake, with no lawyers involved in the negotiations.
There is also the challenge of deciding upon an exit strategy or some other way that the service company can cash out its stake and get paid in a reasonable amount of time. With SoccerPro, the market wound up forcing the decision.
Both parties had hoped for a significant acquisition. And for a while, that seemed possible. Growth Partner revamped SoccerPro's site, making over everything from the keyword strategy to the shopping cart. Traffic jumped 600 percent, and revenue doubled in less than two years. Then the recession hit. Though traffic remained high, sales dropped. SoccerPro suffered a cash-flow crunch and supply problems with vendors. That led Marrero, with the support of his investors, to sell the company to SoccerMaster, a brick-and-mortar competitor based in nearby St. Louis that was looking to sell online.
Marrero admits that wasn't the exit he expected. But neither he nor Growth Partner has regrets. "I think that a lot of companies could benefit from arrangements similar to the one I struck," says Marrero. "I would do it all over again."
For more on innovative approaches to dealmaking, as well as an online calculator to assess the value of your company, go to www.inc.com/keyword/may2010.
Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.