Capital Allocation
This is Your Business
There are really only three buckets for allocating retained earnings in your business, and the decision is entirely yours:
As an Acquisition Entrepreneur you are the new CEO and Principal owner of your business. As your minority investor, one of our only controls is to fix the CEO salary (generally at ~10% of the 12 month trailing EBITDA when you bought the business, e.g., if you acquire a $1.5M EBITDA business your salary would likely be ~$150,000). If you want to increase your personal earnings — and hey, who doesn’t? — we would love that for you. Every dividend goes to SHV and/or your other minority investors until we receive 1X our investment back with interest, and then every $1 beyond that gets split per the cap table, with our Acquisition Entrepreneur partners generally owning 80%+ of the business, ie you would receive 80%+ of every additional dividend you issue and declare, forever.. we expect our CEOs to make high 6-low 7 figure income per year from the combination of their base salary plus dividends, though it may be 3-5 years before they get into their dividend yield after returning principal plus interest to the investor group.
If you see an opportunity to grow the business, whether organically (additional hires, marketing spend, product R&D, etc) or inorganically (ie acquiring other businesses) we know that given our structural alignment you must really believe in those opportunities and use of cash vs paying a dividend (near term benefit). We need to legally formally approve of any acquisitions, but we trust your gut and defer to you as a rule.
Net/Net - this is your business and you decide what to do with the free cash flow the business produces, not us.
If you want to send dividends, great (and appreciated); if you want to reinvest to grow the business, we will follow your lead; and if you want to pay down the debt at an accelerated rate, go for it — it’s likely not the highest and best use of cash, but if it makes you sleep better at night, we are all for it. We chose to back you. What’s the sense of doing that and then telling you what to do with the cash your business produces? We are mutually aligned to benefit from dividends, growth and debt reduction, so the allocation between the three buckets is up to you, and given you are closer to the business than we are in your operating seat, you should make the call, not us.
If you'd like to learn more about SHV, or share a deal, please get in touch!
“What matters is having a great product and the hustle to move it.”
— Jay-Z
