When people see ELOCs and convertible notes in our filings, dilution is the first thing they worry about. It’s a reasonable worry.
If we use stock to fund an acquisition, our share count goes up. So what do shareholders get in exchange?
That’s the right question. It’s the question any thoughtful investor should ask a public company issuing new equity, including this one. And the answer lives in math more than in narrative.
One shareholder put it this way in a recent email after our LOIs announcement: “I don’t view dilution as automatically good or bad. If it’s accretive and grows earnings per share over time, then it’s a no brainer.”
That is the right framework. The work is in figuring out whether dilution is actually accretive, in any given case.
What Accretive Actually Means
Accretive dilution is what happens when the per-share value goes up after shares are issued, because the capital deployed bought earnings worth more than the shares cost.
For example, a company with 10 million shares and $1 million in annual earnings has earnings per share of 10 cents. Issue 5 million more shares to acquire another $1 million of annual earnings, and the company now has 15 million shares and $2 million in earnings. Earnings per share is about 13 cents instead of 10. Share count up 50%, earnings per share up 33%. That’s a basic example, but is accretive dilution.
The whole framework is about one number: the spread between the multiple we issue shares at, and the multiple we deploy that capital at.
If the market is willing to value our shares at, say, 15 times earnings, and we use the proceeds to buy already-profitable businesses at 3-4 times earnings, every dollar of share issuance buys roughly four dollars of valuation. The spread does the work. The share count goes up. The per-share value goes up by more.
That is also why acquisitive holding companies look so different from operating companies on this question. An operating company issuing shares is usually funding growth that hasn’t happened yet, especially at our scale. Marketing experiments, R&D, capacity expansion. The dilution is paid now. The earnings come later, if at all. That kind of dilution earns its bad reputation.
An acquirer issuing shares to buy already-profitable businesses is doing something fundamentally different. The earnings already exist. They’ve been audited and verified by years of P&L. The diligence question is whether those earnings will keep showing up, not whether they’ll ever exist.
That’s the difference between dilution that destroys value and dilution that creates it.
What It Looks Like With Numbers
The math is easier to see than to describe. The numbers below are illustrative round numbers chosen for clarity, not a forecast and not our actual share count. The point is the structure of the trade.
Imagine we have 10 million shares outstanding, roughly breakeven, and our shares trade around $1. We see a pipeline of profitable businesses we can acquire for about 3x trailing earnings, structured the way we usually structure deals: a chunk of upfront cash, seller notes, and earnouts tied to post-close performance.
To fund the upfront cash, we issue 10 million new shares at $1 each, raising $10 million. The share count goes from 10 million to 20 million. Each existing shareholder’s percentage just got cut in half. That is the part that feels bad, and it’s the part most investors stop at.
We deploy that $10 million as upfront consideration on deals that add $5 million of annual earnings to the holding company. The earnings are real, they were already being generated before we acquired them, and they keep showing up after close. The rest of the acquisition might be deferred or paid off with debt in this example.
Now the question is what multiple the market assigns to $5 million of cash-generative earnings at a growing public acquirer. Comparable companies trade in a range. Larger serial compounders trade at 30x or higher. Mid-size ones in the 12-18x range. Smaller and earlier ones at 8-12x. Call it 15x as a moderate middle.
At 15x, $5 million of earnings is $75 million of market cap. Divide by 20 million shares: $3.75 per share.
The share count doubled. The per-share value nearly quadrupled.
Each shareholder owns a smaller percentage of the company, but the dollar value of what they own is up about 3.75 times. That is what accretive dilution actually looks like.
And the math compounds. If we run that same playbook again, we issue more shares, deploy more capital at the same kind of multiple, the spread keeps working, and per-share value keeps rising even as the share count grows. The slice keeps getting smaller. The pie grows faster than the slice shrinks.
What This Looks Like Today
The worked example above assumes a 15x trading multiple. We don’t currently trade at that multiple.
Right now, our trading multiple sits closer to our acquisition multiple than to 15x. The immediate spread is thinner than the idealized case, and the dilution today is real in a way the framework’s ideal version minimizes.
The bet we’re making is that issuing stock now is what gets us to consistent parent-level profitability, and profitability is what eventually earns a higher multiple. The earnings come first. The market reward follows the earnings, usually with a lag. We think absorbing that lag is worth it because the alternative — staying sub-scale, never proving the model — is worse for shareholders than the dilution today.
And if we’re wrong about the multiple expansion, the framework still has an answer. If we reach steady parent-level profitability and the market still doesn’t reward it, we have the cash flow to buy back the shares we issued, at whatever depressed valuation the market is giving us. The dilution from this phase becomes somewhat reversible.
That’s the part most dilution conversations miss. Issuing stock to acquire earnings isn’t a one-way decision. If our shares end up more efficient as a buyback target than as M&A currency, we have the optionality to switch.
When the Math Breaks
The other way this framework breaks is one specific scenario: the capital doesn’t buy real earnings.
If we raised $10 million and spent it on overhead, marketing experiments, or acquisitions that looked good on paper but didn’t generate the expected cash flow, then the dilution is real and permanent in a different way. More shares, no more earnings. Per-share value drops, and buybacks don’t fix that because there’s no cash flow to fund them.
That is the pattern that has burned a lot of micro-cap investors over the years, and it’s why share issuance has such a bad reputation in this corner of the market. Companies raise, miss, raise again, miss again, and shareholders watch their ownership shrink while the business never gets to scale.
The discipline is entirely in the deployment. Not every dollar has to hit a perfect ratio on day one, but over time, the aggregate capital deployed has to generate earnings that justify the shares issued. That’s the line we hold ourselves to.
The Bottom Line
Back to the original question. If we use stock to fund an acquisition, our share count goes up. So what do shareholders get in exchange?
If the acquired earnings grow per-share value over time, what shareholders get is value that grows faster than the share count. Sometimes that works through the spread between trading multiple and acquisition multiple, and the gap creates value immediately. Sometimes the trading multiple is tighter at the time of the deal and the per-share value gets built more slowly, as the earnings compound and the company grows into a larger multiple. Often both, in sequence.
If the acquired earnings don’t show up or don’t persist, what shareholders get is real dilution and not much else. The math is observable either way.
That’s the same standard we have to hold ourselves to. The same standard applies to every acquisitive holding company. The math will tell you which one it was.
For information about our actual capital structure, deal multiples, and acquisition history, our SEC filings at sec.gov are the authoritative source.
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Disclaimer: This is a general educational discussion of how equity issuance and dilution work at acquisitive holding companies. The hypothetical examples use simplified assumptions and round numbers for illustration. They are not projections, predictions, or promises about any specific company’s performance, including Onfolio Holdings Inc. (Nasdaq: ONFO). Actual market valuations depend on many factors beyond EBITDA multiples. Nothing here is investment advice or a solicitation. For information about Onfolio’s actual capital structure and financial performance, see our SEC filings at sec.gov.