If you scan Onfolio’s financials, one number stands out in a way that makes most investors uncomfortable: interest expense has roughly tripled over the past two years.
At most companies, that’s a red flag. It usually means the company took on debt to fund operations, is struggling with cash flow, or is overleveraged. The instinct to avoid rising interest expense is, most of the time, correct.
This isn’t most situations.
Where the Interest Comes From
Every dollar of Onfolio’s interest expense connects to a specific acquisition.
When we acquire a business, we typically finance part of the purchase price through seller notes. The seller receives payments over time rather than getting the full amount at closing. This creates alignment: the seller stays economically connected to the business performing well. It also means Onfolio takes on a note payable, which carries interest.
We also issue preferred shares as part of acquisition structures. These pay dividends, which show up in parent company expenses alongside interest.
The 2024 acquisitions illustrate how this works:
DDSRank was acquired for $600,000. The business generates approximately $200,000 per year in EBITDA. Part of the purchase was financed through a seller note and preferred shares.
Eastern Standard was acquired for $2.16 million. The business generates approximately $630,000 per year in EBITDA. Same financing structure.
In both cases, the interest expense exists because capital was deployed into a profitable business. The interest is the carrying cost of ownership, not the cost of keeping the lights on.
The Spread Between Profit and Financing Cost
This is the number that matters more than interest expense in isolation.
Onfolio’s portfolio generates $575,000 per quarter in operating profit. The financing costs from acquisition debt are a portion of the parent company’s total expenses, which run $750K to $1M per quarter.
As the portfolio grows and generates more cash, and as the financing costs shrink (more on that below), the spread between what the businesses earn and what the financing costs widens. That widening spread is the holding company model working.
Rising interest at a company that’s burning cash means the company is drowning. Rising interest at a company whose portfolio profit is growing faster than its financing costs means capital was deployed effectively.
Why the Interest Is Temporary
Every seller note has a fixed amortization schedule. The principal balance decreases with each payment. There’s no revolving credit facility here. The notes don’t renew. They pay down and then they’re done.
We recently cleared over $1 million in liabilities from the balance sheet. That eliminated approximately $150,000 per year in interest costs. As remaining notes continue to amortize, interest expense will continue to decline.
The businesses those notes financed, on the other hand, keep generating cash. DDSRank doesn’t stop producing EBITDA when its seller note is paid off. Eastern Standard doesn’t expire. The assets are permanent. The financing cost is temporary.
This is the key distinction that gets lost when investors look at a single line item on the income statement. Interest expense is a snapshot of how much financing is currently outstanding. It doesn’t tell you what that financing bought or whether the return on that capital exceeds the cost.
How to Think About Interest at an Acquisitive Company
For a company that grows through acquisitions, rising interest expense in the early years is expected and often healthy. It’s the natural result of deploying capital into deals.
The questions to ask are:
1. Does every dollar of interest connect to a specific asset generating cash? For Onfolio, yes. Every note ties to an acquisition with known EBITDA.
2. Is the portfolio’s cash generation growing faster than the financing costs? At $575K/quarter and climbing, yes.
3. Are the financing costs temporary? Yes. Fixed amortization schedules on all notes. No revolving debt.
4. What does the picture look like after the financing rolls off? Portfolio still generating cash. Interest gone. That’s the math behind self-funding.
The interest line will peak and then decline as notes are retired. The profit line will keep growing as the portfolio matures and the central sales operation drives agency revenue. At some point, those lines cross and the company funds itself from internal cash flow.
Full portfolio breakdown and the four charts tracking this trajectory: onfolio.com/path-to-profit
I put together a deeper breakdown of how acquisition multiples compound over time and why the math looks so different at 3x vs. 15x: The Math of Serial Acquisition.
If this was useful to you, it would probably be useful to someone you know. Feel free to share it or forward it to a friend. One of the hardest things about being a small public company is simply being discovered, and word of mouth goes further than anything else.
Disclaimer: This discusses Onfolio’s financial performance using data from publicly filed reports with the SEC. It is not financial advice and should not be taken as a solicitation to buy or sell any security. For complete financial information, refer to our SEC filings at sec.gov.