TAE EP 10: Lessons From the Buy-side - Ace Chapman

Show notes:

About Ace
Financing the first acquisition
Growing the business
Deciding not to Sell
The Private Equity World
Fund structures
Online versus Offline
Acquisition lessons and their effects
Fund management and the skill set required

Lessions from the buy-side Ace Chapman Truth About Exits

Contacting Ace:

Email: [email protected]

Website

Youtube

Mentioned in this episode:

Cool Wall Street
Ameritrade
Suntrust bank
Openrooms.com

Article/Transcript:

We are live today on Truth About Exits I have my good friend Ace Chapman on the line. Now if you don't know who Ace is I'll just give you a quick preview of why you might want to listen to today's show and then I'll let Ace fill in the blanks. Ace once said at dinner we were having dinner together here in Austin I don't buy sports cars I buy businesses. Ace has been acquiring businesses, operating them and scaling them for quite some time now. That's what we're getting Ace onto the show today to talk all about. Ace, welcome to the show.

It is great to be here with you I love talking about this stuff. Even just the intro to this call has been fun. Excited about today's episode.

Awesome. It's only up from here or down let's see what happens. Ace you've got a pretty interesting story and I'd love to start with that, actually before we go into that, I was going to ask you about your first acquisition but we will get into that in a second. When people ask what you do, how do you actually answer that question?

1. About Ace

My main thing right now is that I'm the manager of a private equity fund that keeps it short and sweet. Before that I was buying and selling businesses which is a little bit of a conversation starter just because the average person has never considered buying or selling a business.

Perfect. Okay. That's awesome, that is a good introduction at a cocktail party. Let's rewind and go right back to the first acquisition that you did. It's a pretty interesting story. Would you be able to tell us a little bit about how that came about?

Yeah, the very first acquisition was at a time when I was studying Political science in New York and was excited about a career in Law and my plan was to go to law school afterwards. While I had been an entrepreneur for a long time internally I didn't really see that as a smart career. It was like, all right I want to be able to make money. Maybe I'll do something in a business later but this is something that I know I'm going to be able to make money at. While I was in school I still had that entrepreneurial bug and was interested in things like the stock market and had some buddies of mine I was in school with that were pretty prominent at some Wall Street banks. I'm like man I'd love to play around the stock market.

At that time there was a stock market simulator called Cool Wall Street. It was basically a place where you could take virtual money and put it into the stock market. If you did well, you won prizes and games and all of that. I was just a user I had no intentions of investing or being a part of the business but like a lot of other users I was frustrated by the fact that the site was always crashing. The customer support was impossible to get a response from. Here was a business that has much potential had a few thousand users. It just seemed like the people running it just didn't care. I reached out to them. I figured they must just be overwhelmed and maybe I can go and intern for them for the summer and help them out and learn a little bit more about the market and this business and all of that.

It's when I reached out, I was surprised to get a response that basically said we're not looking for interns. We want to sell this business because we've moved on to another business that has a lot more potential. It's funny because we closed on a five and a half million dollar deal about a year ago and the thing that people always ask me, why would somebody sell something that's making over a million dollars and don't have to do a ton of work on it. That's still to this day, 20 years later, one of the biggest reasons is because they got something bigger back then they had a small deal. They may have had something else. They felt like had more potential. In that case of the $5 million deal he had a $50 million business that had the potential to be $100 million business.

Even if you just spend a few hours away from that business to work on the smaller $5 million deal, that was a very high cost. That's the calculation that these guys that made. We can't spend any time on this thing. There I was a 19 or a kid who was absolutely broke but I'm like, hey, maybe I know somebody who wants to buy this. I only asked or told them that because I was curious about what the price is. I wonder how much they're making. Back then we had no concept it could have been $100K business or $100MM business and it turns out that it was making $60K and they wanted $70K forward. Unlike today where we know that's an amazing deal that had barely a one multiple well back then it was no way to know. In fact, there were some deals that were still at a 0.5 multiple back then. I had no clue that even that existed. My one comparable was that I was at a school that cost back then $35K. Now it's over $50K, which is outrageous but it was $35K a year to go to school.

2. Financing the first acquisition

I have friends that were graduating and they were coming out of school making $30 or 40K. I'm like all right, $140K to make $40K or $70K to make $60K. This seems like a good deal. At that point I'm trying to figure out how can I buy this thing or can I get them money to try to buy this thing. I got them to finance half of it. Went to a buddy of mine that came from some money, who actually was one of those Wall Street guys that I mentioned before, his dad was and he was like, oh yeah, l'll put $15K and I'm like, you just have $15K for me. You have $15K lying around, like, are you going to ask your parents for that?

He was like no, I can do that. That was astonishing. But he put in $15K. I still only had $3K. I still had to come up with some more money. This was at a time, I don't know if this happened in Australia or other countries but back in the day they kind of kicked them off campus nowadays. I think now but back in the day credit card companies made deals with colleges to set up tables at colleges and basically recruit kids and to convince them to get into this horrible debt in exchange for tee shirts and those kinds of things. I went and got three different credit cards and was able to get some cash and that was how I made up the difference for the down payment.

Wow I’ve got to pause right there. That's probably the best use of credit card debt I've ever heard off for starters. There are many micro points along the way in that story. A lot of people ask how do I get started? You got started because you saw the opportunity. But even though I think even at the beginning when you were just reaching out to intern for the company, I think that shows your level of awareness that hey, there's something wrong here. Maybe I can make it better and if we're willing to intern to make it better. Having that curiosity reaching out not being afraid to put your hand up and ask questions has kind of got you started, got The ball rolling. Right. That's a pretty good intro to the first deal. Could you tell us a little bit about the deal structure on that deal? How did you actually take that deal down? If it was a $70K purchase price, you've got $15K from your friend and three credit cards. I don't think that quite gets you to $70K. How did you bridge the gap there?

They were willing to finance $35K. They did seller financing for the rest of that. I only had to come up with the $35K. $3K of that was my own money and 17 was it credit cards? Since the $3K was all I had to by name, I literally at that point and had a negative net worth of about $17K.

Wow, that's awesome that you had cash flow. Nice people with credit card debt like that or debt in general don't have the asset on the other side. Maybe it's a nice car or a watch or something crazy, a huge holiday. But you actually had a cash flowing asset. I don't want to spend too much time on this first deal but after you actually took over the deal what happened next?

3. Growing the business

It was actually a transition even in thinking because while I was excited to buy the business, I still was surprised that first week that I got money deposited into my bank account. I've checked my bank account and I was freaked out. Where did this money come from? Oh yeah, it's from the business. This thing makes money. Yeah. That was definitely a sigh of relief that I wasn't scammed this thing did make money and after that when we bought it was right under 10,000 users. The goal was to try to grow it, obviously if I could buy it at a one multiple and grow it then it becomes a really incredible deal. The first thing was just fixing up the service. It's funny how similar a lot of the work we're doing now is but we closed on the deal that's a SAS business and just very similar situations, smaller deal and larger companies started as a side project but just really neglected it and the customers weren't happy and that kind of thing.

The first thing we started with on that deal was just improving customer service and building a relationship with the customers that we had. If you've got a really great business where the customers are raving fans, you don’t even want to announce that it has been sold, we've got a deal right now that we closed and we were like we don't want anybody to think that there's anything different about this business because it was already really well run. The brand was great. The reviews were awesome. There's no reason to change anything. If anything, they're going to be concerned that it's going to go down. When you announced to a group of users that the business has been sold and the customer service that they've been kidding, it's horrible and unresponsive all of those things.

Then there's like this glimmer of hope of, “Oh wow, maybe these people will actually run this business.” We made that announcement. I'm in my dorm room hustling. I give everybody access to my email and my phone number and I’m like hey if you need to reach out I'm here we're going to turn this thing around. What we did was create a referral program because I realised that there were a bunch of nerds out there just like me. Keep in mind too, there was a ton of novelty to something like this back in 99. Today, people will get really excited about some new thing that comes out. There was that kind of excitement when the Internet was brand new. Building those relationships with the user base I realised, wow, okay there is some people out there out of those 5,000 there may be 500 people that are just like me that they would work for free to make this thing grow and be able to connect in the forums with other people like them and talk about this stuff and nerd out on those kinds of things when there weren't a lot of outlets for those kinds of things. A lot of the growth after that came from a referral program that we created and it definitely went viral. It took a while but from the point that I bought it to the end and over the course of a two year period we grew it to over 200,000 users.

Wow. That's amazing. What did you do with the deal? Did you sell it again?

4. Deciding not to Sell

Well, I know one of the things we've talked about was our biggest mistake and biggest lesson before we jumped on. This was definitely my biggest lesson that you really crafted the business that I run in and how or the strategy that I use today and during 2000 we were approached by Ameritrade to sell our business because we had this huge database of young people interested in trading. We'd love to buy this thing and got a really great offer 20 years old, seven figure offer seems amazing but I'm thinking things are going great. If we can get that I could wait a few more years and get 10 figures, eight figures, whatever. I'm just gonna roll the dice. Well, the year after that 2001 as some of you oldies in this space will know was the .com bubble bursting as they say.

Virtually most of the companies that we were doing business with that paid us for ads and that kind of thing went out of business or had to definitely cut back on what they were spending. We got hit by that really, really hard and ended up basically just shutting it down, sold a little bit but it was to pay off lot liabilities. I walked away with nothing outside of the income and savings that I had received or kind of built up while I owned the business.

Wow. That's quite a lesson from that deal what did you do next?

The first thing I did was lick my wounds and sulked and be sad and woe is me because during that interim I had been approached by investors who basically said, hey, we'd love to invest this thing is growing like crazy, but we're not going to invest our money if you're going to be a student and try to run this thing from your dorm room we want to invest in, having you run it and building a team. Like any investor would. I ended up leaving school and it was kind of all in on this thing. I've been at this point had paid my debt was making money, all of that stuff was great but the upside was worth it for me to leave school.

Now I don't have the business, I don't have a degree. I'm like well this has just gone completely wrong. This whole thing just a huge mistake. I kind of took two weeks just to kind of sulk and be sad which I even today I tell people when you have those failures like that it's good to take a little bit of time but then you got to bounce back. It took me awhile. I did some consulting for a Suntrust bank because they want it to attract younger people and minorities and that kind of thing. They were interested in like how in the world that you grow this thing to 200,000 users, as this 20 year old kid at this time where the internet was just new.

That gave me some exposure to cause they were trying to recruit, customers for their mortgage business. While I'm doing consulting for them to help them get more customers, I'm learning a lot about the mortgage business and I'm like man there's good money in this. This is interesting. I can apply some of the lessons that I've learned with marketing online to mortgages. Then I started looking into what it takes to start a mortgage company and it's just didn't hit me. This is something that's interesting from back then guys listening to this are folks listening to this podcast are probably in the loop now where there's a podcast and blog posts and information out there about buying and selling businesses because there it was just even today, I mean it's like 1% of all media that's about getting into businesses about buying or selling businesses. Back then that 1% didn't even exist.

I know right.

I was just like oh there was this fluke thing where I got a deal but you can't just go and do that again. I just had this assumption that there was no way that you could do that. Then I decided, well, let me check and see and came across on brokers and kind of discovered that. Long story short, I came across a mortgage company that was for sale and instantly was like, okay. That was the first time that it clicked that this wasn't just a fluke. I could go out and just buy income instead of trying to work for income by doing consulting jobs like what I did for SunTrust or trying to start a business from scratch and hope that it works out. That ended up being my second deal which led to a small roll up in the real estate space.

Wow, that's amazing that people would be thinking of this thinking that first deal was you're just on a roll. Of course, you'll be able to go find other deals. But it's interesting to hear you say that even though you'd done that one, you've taken down this deal from nothing that even you were hesitating to go out and do this again. Now if we skip forward a little bit we're definitely going to dig into more deals on other podcasts. Leave some of that for later. Right now, well let's fast forward into you've mentioned you're managing a private equity fund right now. What do you look for when you've got capital to deploy buying businesses. What are you looking for and how do you specifically, how do you think about online businesses versus brick and mortar offline businesses?

5. The Private Equity World

Yeah that was really neat to have done an internet deal and then moved to offline, which I did for about 8 years and did 17 businesses that were offline. When it comes to private equity, the most important thing is I kind of security. When I'm doing my own deals it's a bit more of being a cowboy. I want to get out there, I want to get some really aggressive terms. I want to have some upside. I'm not afraid to get in there and do some of the nitty gritty work and make the deal happen. When it comes to private equity it becomes a little different for several reasons. Number one, you have more capital to deploy. Now, not only is it not necessarily smart to do more of a renegade style deal where you're going to be hustling because you need to do more deals.

You need to have put more of that money to work. It also isn’t smart because you've got the money and those people are expecting you to deploy that in the smartest way possible. In this space, the benefit that we have and now we're at a place where we're helping people start private equity funds that we can invest in those funds. The interesting thing is that we can get such great returns even if you pay cash. I mean if you look at buying a deal at a three multiple, even paying cash that generates a 33% return, where else are you going to go and get a 33% return? Now we don't do that but start there and then we work down like how can we improve the return?

Our goal in the deal is on paper for it to look all right, on a cash on cash return will get a 50%, kind of return. That's how we want to structure the deal because number one, we know when we'd take it over from the seller there's always going to be some kind of dip because you're never as a buyer unless you have somebody who's neglecting the business you're not going to know that business as well as the person that built it from scratch. That person's always going to have a leg up on you, being able to grow it. The second thing though if you do want to grow it then that's going to take reinvesting in the business. If that's hiring customer service, if that's adding new features, if that's doing research on the competitors and seeing how they're beating your product and improving the product that way. All of those things are going to cost money, which is going to decrease your return. If you're looking for a 30% return, you really have to structure the deal that you're getting a 50% return in order for that to happen.

Right. Yeah, that makes a ton of sense having sometimes even as entrepreneurs running your own business you think that more capital will solve everything. Sometimes that creates more of a burden because for you to get a return on the fund do you need to get a return on all the committed capital or just the deployed capital? Do you have a timeline is there a set horizon for the fund to close?

Yeah, there is always going to be a time horizon. The great thing is you only pay returns on what's deployed. For those that are unfamiliar with how Private Equity Fund works, essentially when you raise the capital those people aren't giving you a check right there you sit across from the person you talk about what you have to, you go through the prospectus, you go through all the legal lees and walk through that. Usually there's a lot of back and forth with a lot of investors and then you get down to the commitment and they say yeah we like it. We want to commit $1 million. They don't write you a check for a million. But what they do, what they will do is sign a contract saying, we're committing a million and we'll give that to you as you need it as you come across a deal because it was the last thing you want or they want is the money sitting in an account unused because you haven't closed the deal yet and you're kind of building up the expense there to pay them. You will draw down some cash cause a deal may come across cross that you want to jump on but it's really unlike a hedge fund where somebody sitting there at a screen and they need the cash available as soon as they see an opportunity in the market. For these deals, we know at a minimum 30 days, if not 60 or 90 days in advance of when we're going to actually need to get the cash to the seller.

Okay, sure. Then you make that capital call, the cash comes in and you can, you can close the deal. There is an expectation, right? The investors said we'll commit $1 million to your fund within seven years, five years, whatever the time horizon is. If you only have a call $100,000 of that million what happens then?

Yeah, there not happy.

Because they investor wants the return on that capital more than they want the capital. Right? Obviously they want the capital to be safe, but they need a return on their capital is what I am getting at.

The key there and it’s one of the benefits to being a fund manager is they have to keep the money, semi liquid they can't go in and commit that to another private equity fund. It has to be there and somewhat available they can make a little bit of return. It can be in the market but they probably don't want to enter anything that's too risky in the market because they made that million dollar commitment and it goes down then they don't have that money there. What happens that's kind of neat for the fund manager is the fund manager doesn't necessarily have to use the money because no smart investor wants to tell a manager, okay if you don't use this money then you're going to have to pay me or there's going to be a penalty. No smart investor wants to do that. But on the other hand, the fund manager does tell the investor, if you do put this money on something else and you lose the money or whatever you decide you don't want to invest the million and in that example then you will have a penalty. It is a contractual agreement that they have to hold up their end but the fund manager doesn't have to invest those funds and he doesn't feel like there's a good enough deal out there.

Okay. Yeah, that makes sense. You're not trying to rushing out and shovel the cash out of the door. Right?

We’ve funds were we have given some cash back at the end because we didn't want to rush it. You've got a certain time period where I'd say you've got two years to get it invested and a five year total life of the fund, if you could come down to the end of those two years, you got $1 million left and you don't want to just spend that because it's there. You want to spend it because it's a really great investment. Sometimes you get mixed reactions, sometimes investors are like just put them in something. We've had that. Then the other times investors are like hey thank you. Because I say that the fund manager doesn't have a penalty. The penalty is that we don't get our management fees for that million yet. When we're giving them back a million, like we're losing money even though we don't necessarily have a penalty written into the contract like they do.

Hmm. Are you using a fund structure where you take a percentage of capital as it's deployed and that a management fee on top for what your willing to disclose to that is? How does your fund work?

6. Fund structures

Yeah, we have done it a lot of different ways everything from a management fee plus a split starting from zero, a management fee plus a preferred return to the investor and then a split after that. I mean it’s kinda cool because I think some people think, oh, they're like specific rules to how you structure even the fund. Like you have to be smart. It's like we talk about deal structure and how you put those together. Just like you want every structure to be smart for what you're what you're using it for. That's the same when it comes to funds. You want to have a fund structure that is a win for your investors and a win for you and makes sense for the types of deals that you're going to do. For instance, if you've got a fund that is full of e-commerce businesses, you want to structure that differently than a fund that is full of SAS businesses. Even that's going to be different from a fund that is full of content businesses.

Could you explain the differences as far as your acquisition model or how you would view those businesses different in a fund and why you would separate them?

What I'm talking about is how you structure the fund is different from the other two. I mean there's a lot of intricacies and I don't want to bore them with too much. The intricacies of the funds themselves but just to keep it kind of simple on an e-commerce fund you've got inventory if you tell investors, all right, when we invest this and we're going to give you a 15% preferred return is going to begin on the day that we start and really you're coming up in November, you're going to have to or your buying the deal in October you're going to have to buy a ton the inventory you need to, you really can't structure, you don't want to structure it that way because you need time to build up cash or you need them to give you more cash or you've got to structure it that you can pay for that inventory

On a SAS business It needs to be structured that you have money set aside for when you need to redo or update the software on a content business. For instance, there's a cash between when you've closed the deal and that first check that comes from the affiliate network, which could be 60 days or 90 days after your close being mindful of how the deal works when you buy it. Then there's a whole different set of circumstances that you want to consider on the exit and how your investors are paid on the exit of those different deals. Those are some of the things that we walk people through when they want to create a fund. The funny thing about all of this stuff is with my first deals, I made some mistakes and learnt from them but it was really walking through the dark trying to figure this stuff out bumping into things realise that oh, okay. Don't do that. Don't go that way. It's better to go this way. Even having done and I spent a lot of time with people helping them do deals that I can invest in their deals helping them avoid a lot of mistakes and it was a lot of fun. Especially I know you want to talk next about offline versus online, I really love offline deals but walking people through those is a lot of fun. Then as we started to create funds, what we realised is Oh wow, like learning this stuff. Because at first I didn't realise that it seemed that like how we set up a fund, from e-commerce needs to be different from a SAS. All of these little tin bits and in how you raise the money, who you raise the money from all of those things are important. But that's what we walk people through when we're helping them create their private equity fund.

That makes a ton of sense. Thanks for explaining that. I like to play devil's advocate and go a little bit deeper on some of these topics that makes total sense to me. I mean, I spend a lot of time in the e-commerce space setting aside the structuring of fund you can handle inventory makes a lot of sense for me. One of my favourite sayings right now is capital is a fucking commodity. When I say this to people and their eyes go wide because they don't really understand, I don't think what that means and that's because I spent so much time in this space but you've just kind of walked through how money isn't just money. You wouldn't necessarily raise one fund and buy all different types of business models of verticals, you really need to think through how you deploy that capital and how your returns work when you're paying out to keep the business running.

7. Online versus Offline

Right. That makes a lot of sense. Thanks for explaining that a little bit further that was super helpful. Let's talk just briefly about online versus offline. Brick and mortar businesses you mentioned before the first deal you had a great multiples around a one it just over one times multiple, which is pretty amazing. How do you think about multiples with a brick and mortar business say a few years back actually, I was looking at offline deals in the UK and I was seeing a lot of beauty salons with under a 1x cash flow multiple. But when I dug into the deal that was that there was a lot of overhead and commitment that you were taking over, which is why the seller was willing to sell for under one times cash flow because you'd take on the lease you'd take on employees should take on and whatever else came with the business. How do you view or how do you think about an offline deal? What would make a good offline deal or something that you would go out verses an online deal? How do you think about that?

Yeah one of the big differences is you’re doing a ton of filtering when you're looking at those deals. The really exciting thing is that you're right, you can find a salon that is a bunch of salons that are at a one multiple. What that does is it brings down all the salons and the key is filtering through all of the crappy ones. I mean, it's just the biggest difference is you want to look at these deals, like you're looking at the whole internet marketplace. What that means is that the Flippa deals are mixed in with the FBA broker deals and you realise that I've got to deal with a bunch of spammy, terrible businesses and then find that diamond in the rough. But the difference with the offline is that a lot of really great businesses are also going to be at a one multiple or maybe they are one and a half multiple just cause they're better but they can't go get a three multiple for sure. Then the other neat thing is I love the liabilities. If somebody has a business I've bought most of the offline, I would say the average age of offline businesses that I've bought us is 30 years old. There is nothing like buying a 30 year old business.

Wow. What can you do with the liabilities?

What I want to do with the liabilities is just take them over. What I'm selling them on is that in some cases, literally, I had a retail shop where I got paid to buy the business. A lot of you were talking about no money down. I know of other deals where you literally can get paid to take over that business because you're saying, hey, I don't want to sign on the bottom line of this lease. It's getting you out of the lease and then I've got to get on it. I need you to pay me, you made the money from last year and I'm not going to make that money. I'm starting from scratch. I got to take on this liability without me receiving anything and then I hopefully, will start to make money. One of the things that I love about a lot of these businesses that's much different from online is somebody who's owned a business for 30 years. They a lot of times don't need the cash and it's just because they're just a normal person. They save for retirement and if they're there $401K or their IRA that's self directed they've got different things that they've done, just regular investments that they could walk away. One of the stories I like to tell is I had bought a tanning salon where I bought the business. I introduce myself to the people that were in the plaza that we were in. There was a retail shop that was right next door to us that a man, they just got a tremendous amount of traffic.

We benefited from their traffic because it was just the overflow and it was well known. One of those things has been around for 20 - 25 years, well known store in my town. One day I show up to the salon, which I know at this point I had maybe four or five, I wasn't there a lot and I just came by to check on it. Probably been a few weeks since I've been to that location and I see a store closing sign now walk in, I'm like, what's going on next door? My manager's like I don't know. They've been selling everything up and I bought some stuff. It's rock bottom it's been put up the sign up a couple of weeks ago. It's been up, it's been for sale. I go in, I talked to the owner, I'm like what happened? Is Everything okay? Yeah, everything's been great. I'm like was the business not making money? She was like, oh no we made great money. I'm like, why did you decide to close? And she was like I want to retire. I'm getting older I just want to retire. Why didn't you sell the business? She said, who would want to buy this?

You’re kidding.

I bought the business this door. Why in the world wouldn’t you just call me but this is the thinking that's going on because they're not necessarily any information. Like I there's 1% of the information out there is about buying and selling businesses. Like 99% is all about just start and make money and start making money. That's what the gold is. That's your entrepreneur. I think sometimes we get into this world and we think once you start looking for this stuff, you find it. But when you compare the amount of information that's around building your business to get it ready for sale and the number of books at the bookstore or Amazon about starting a business from scratch there's just absolutely no comparison. Most people aren't in that mindset. I love finding those deals where if I could have gotten to her just a few weeks before obviously I could have gotten that for nothing.

Wow, that's amazing. That's amazing. To be fair with a brick and mortar type business, it's a very different process. The buyer pool sometimes or most times even needs to be local and then it's who's going to run the deal. A lot of these brick and mortar retail locations specifically are often run by the founder. That's one of the things I've enjoyed selling their products and meeting the customers. But when they want to retire they think they have to shut the doors. That's super interesting. One other thing I want to touch on with offline deals that I know you've had a lot of experience with is getting not only creative on the deal structure but creative on the finance side. We asked all the time in the E-COMMERCE space how can banks lend on this? What other lenders can we can we go to? There's very few options because it's a lot of goodwill. There's a small amount of inventory compared to the revenue that the business is doing for traditional lenders as not enough for them or not a lot for them to grab hold of as far as assets to take can take a lean on or control. That's usually very different in a brick and mortar business. Have you ever used any financing really around specific assets in the business to take a deal down?

A great example of this would be the Salons. Because that's what I realise is that each one of these has this equipment that I can go and get financed and I can use that as a down payment on the deal. I ended up doing that in four different cases. It was interesting. I actually sold those businesses as a package and the way that I got those businesses were off market was we did a lot of outreach to tanning salons and had the owner's contact us and we really built a process for making the offers and all of that. Well after I agreed to sell, I had a really great deal come in that it was a great opportunity but it was like man I don't really want to buy this cause I've already got the sellers.

I don't want to get them confused with adding an additional one on. I don't know if I want to own just one alone. This will be a fun one to dig into the specifics. But long story short, I make a low ball offer get cursed out by the owner and it's like okay cool. Two weeks later I get called by his wife were even further down the line and the package being sold. She says “Hey, I apologise for my husband cursing you out and we were actually interested in the deal.” I'm like at this point, I just think y'all should sell to somebody else and it's not going to be a great deal. I want it even less now. She's like, well just make us an offer.

I'd mad an even lower offer which if he was upset about the first offer, I just assumed he would say no. He says yes and I mean it was pretty rock bottom. I'm like what if he's going to accept that then I will buy it. It turns out he was upset, which I didn't find out after we closed the deal. He sends out an email to the entire member base saying that they should cancel their membership.

Oh wow, that’s pretty rough.

Complete nightmare. One of my favourite parts of the email was guy Ace Chapman should change his name to the Acehole cause he's an asshole. I'm like, Oh man, I gotta figure out a way to use the Acehole at some point. But I haven't figured that out yet. But the crazy thing was I had bought it at such a low price that I actually made more money by just closing that down. Going back, it would have added so much complexity to try to add a business to the roll up that I was already in the middle of. What I did was went to those guys like, Hey, these machines break down you're going to have issues. I've got 20 machines that I can sell you at a great price as backup to have across all four of the other salons and added that to the deal at the last minute, which was actually easier to add on then then the business and made money. It turned out well. The saddest part was that he hurt his employees more than he hurt me like these people that have been with him for over 20 years, one of them. It's like, dude I still got out of the deal and made money but now the thing was closed and those people lost jobs. That's a was an unfortunate side effect but it wasn't any fault of mine.

Wow, that's amazing. There's a ton that just happened there but I want to break down one specific piece as a dealmaker and broker myself. I would have definitely advise the same. Just to break out that one piece about adding a business versus adding equipment. In the diligence process you've got, it was it four locations you said. Yeah. You've got four locations, they're doing diligence on these four locations. If you were to add in a fifth at the last minute, even if they were excited to do it would have extended the time at minimum would have extended the time it took to do diligence on the deal. This was a new deal for you. You probably didn't even know all the skeletons in the closet on that deal either. You wouldn't have had that much time to really get things polished up and ready to go.

By just pulling out the machines, the equipment was actually a really good play at that point. That's amazing. There's always more assets involved in a business than you think. I'm constantly amazed when when we have calls. I just had a call earlier today actually, where a buyer was really digging deep into one part of a business. We were taking a market to sell and it was on the supply side and some of the supply side questions that we're asking made sense in a vacuum. But once we actually got through the process okay you've got some advantage here. It turned out yes, they actually had some leverage with a certain type of supplier. They were digging into these digging in with these questions to find out if they could actually use their own leverage. Now they're not going to pay more for that of course but there's always leverage that you can look for as a buyer. That's a pretty cool story. That's a really great example their. Could you give us an example of your biggest win? Maybe something like that. You’ve gone into a vertical and managed to sell the deal or was it a great deal like you got into, it sounds like this deal both of those examples but is there a biggest win or biggest mistake that you'd like to share with us?

8. Acquisition lessons and their effects

Yeah since I’ve talked about a couple of the lessons from that deal that I'm very adamant about now is I won't buy a business from somebody if I feel like they're not happy. I've literally been with a seller and like, hey, I need to know that you want to do this deal and you're excited and you're happy to do the deal. Let's say that they're like, oh, like I don't really want to do it but I'll go ahead and sell. It's like, nope I don't want to do that. If you're not 100% in on this let's just not do a deal. Find the right buyer. I'm not the right buyer if you're not happy with the deal that we're closing. A lot of that is because that deal. Whereas yeah I ended up getting a really great deal like I mentioned the big downside was having to let go of employees and that kind of thing which it's just not a fan of even if it's not my fault but that is something that I've added to my processes.

I still consider that a mistake slash learning lesson. I would have sat down like, Hey, listen, I need you to tell me you're happy, not just willing to close this. Now a lot of the biggest kind of winning deals for us. This comes from strategic buys when we can buy one business that has a huge benefit or access to a database or some kind of complementary business that we can tie together. I think one of the ones that was neat is we bought a toilet business. Just a lot of fun, right? Everybody wants to get in a toilet business and had a ton of traffic and had a small email database of folks but the traffic was really awesome. Then later we came across a shower business. Between those two businesses the interesting thing is that we thought, okay, like we're going in most cases when we have those deals, let's say we have a hotel business called openrooms.com and combined that with the air conditioning or actually one of the things that we're closing right now is a business that has about 500,000 followers in the travel space. You cross promote those and that becomes a win. For the deals that are SEO sometimes it's tough to know how are you going to cross promote. If you've got emailed database in the case of open rooms there's a million people in the email database and the other one they've got half a million so you kind of force that.

When it came to the total business shower business, we did some links to both on both sites. We did a little bit of a promotion where we just added some showers to the toilet site. But the interesting thing was that it had no effect on the shower business but it tripled the toilet business. To be able to buy a site and this is what's beautiful in the spaces. In both of those deals we've got sub three multiples. Let's say an average across a two as a two and a half, multiple you're still making money. It's not like the first deal. When we did the shower business we're getting a great return.

What I'm always looking for, I don't want to have to spend a lot of money especially on ads. I've got to spend $30K and actually this is a another great case is I got a deal that was spending a ton of money on Facebook ads and we basically bought a business that has those as basically a political blog that has that same demographic, has that crowd. I’m trying to be careful what I share here. But basically we're out of the $30K Facebook ad budget, we're able to cut that to about $15K and in the other ecommerce business by just using the access to the customers and the data of those customers in that second business. We paid for the eyeballs that were in the business itself instead of paying, renting the eyeballs from Facebook and having to pay them $30K a month. I think that's one of the places that's probably been missed the most is instead of me spending money on Facebook or Instagram ads or youtube ads I would put that effort and work into where can I find a blog contact that owner see if I can just buy the blog from them and now I can get paid their $30K grand a month to have access to those customers and still advertise my product.

Yeah, absolutely. That’s gold right there. I think you could do that even with a brick and mortar business. You could do some cross over there if you can get the eyeballs. Obviously if it was brick and mortar and you had one location, you'd want it to be location specific. But yeah it's interesting to look at a business like that and say, what are the expense line items? For example, it was ads for earlier like I was saying with those buyers that were looking at the supply side, getting margin there. It's almost like you want to have some sort of lever to get a better return. You're not necessarily looking at the deal as it is thinking forward, especially now that you have a fund with cash to deploy you're looking forward into how do we make this an even better deal an even bigger home run. With your model, with what you're doing now on the acquisition side are you predominantly looking to build these up and sell or are you looking too hold these businesses long term? What's the bigger picture you can share or want to share?

9. Fund management and the skill set required

Yes, we got several things that are exciting. Obviously the goal now is taking a lot of cash flow that we're getting from the deals that are in the fund and putting those into other funds. That's the main reason that we want to help people start these funds is to kind of create expertise in these different verticals and for us to be able to put some capital into those funds. The other exciting thing that we're doing is we're taking a few of the deals and we're working right now to go public. Hopefully, if we get it done sometime this year, we'll be able to make that happen. But that's something that we're working on right now with an investment bank.

Wow and on the investing in other funds piece I know the search fund model is super popular. A lot of MBA programs are essentially recruiting people into search funds right now. It's interesting that you bring up expertise. Are you looking for someone who's interested in a space or you're looking for someone who's been ideally an operator in a certain vertical or business model to take over or to engage and then get them to run that vertical or fund?

Sometimes having somebody that thinks they know a lot about a space can hurt you. We want somebody who's going to learn from a seller how to run the business and then begin to AB test and figure it out. We live in a world now where knowledge isn't as important or trying to project something isn't as important as just like doing the testing to figure it out. The most important thing for us is that we get somebody that can handle the mechanics of managing a fund, managing the team, running the fund and then knows how to oversee the people that are running businesses because that manager isn't going to be running those specific deals. What we need is to get the roadmap from the seller put it into our SOP process and get them to put somebody in place to run the business day to day and then go out and get the next deal. That's a little bit of like what it looks like to be that manager but it's a different skill set. It's not saying all right we want somebody who is an expert at starting SAS businesses to run the fund. While we might bring in somebody that's an expert at SAS businesses to be a consultant or to be the manager of that specific deal. A little bit of a different skill set.

I love it and how would you describe the skill set of that person? What would make a good person for the manager of the fun role?

I think it is somebody who is interested in deal making and enjoys negations, really good at networking because they need to be able to network on the side of generating deal flow. Then network on the side of the investors. A lot of what we do internally, what I want to do is duplicate that blueprint do all the things that we're doing to generate deal flow but do it in this vertical or do it for this specific size of deals or for this specific niche. For that fund do the same things that we're doing to network with investors but do it for this fund and within your network to expand what we're doing. It's a lot of those same deal maker skill sets but obviously applying it to a specific space.

Wow, that's awesome. That's really cool that a lot of effort into finding other people to help create their own funds essentially. Go do what you've done to people want to reach out more about you. What's the best way to get in touch?

I would say to just learn more about what we are up to go to youtube and search for Ace Chapman. If you want to reach me directly feel free to shoot me an email [email protected] I do get a ton of emails and things go to spam and the best way is to go to acechapman.com and fill out a form and then we'll make sure that we get in contact with you.

Awesome. Well mate, this has been super awesome for me. I'm a deal nerd like you this has been a ton of fun. I know that people listening would have got a ton of value and the good news is this isn't the last time we'll be talking. We're actually working on a podcast together as well, which we will release shortly. There's going to be lots more to talk about and we'll definitely get into that tanning deal a lot more. I've actually written that down to talk to you more about it. Maybe we'll talk about it more off recording before we go record just in case. But I'm sure there is more to that story, thanks for jumping on the show way. It's been awesome talking deals with you and I can't wait to do it again.