Summary of points discussed:
- The importance of timing the market when selling a business;
- The opportunity of finding hidden value in business acquisitions;
- How young future entrepreneurs can buy a business with little or no capital;
- The fact that a business is worth zero if there are no interested buyers; and
- How properly documenting five areas of your business can help increase business value.
About the Guest
Ace Chapman has bought and sold 11 companies using funds raised from high net-worth individuals and institutions.
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At 19, Ace Chapman came across an online stock market simulator. He loved what they were doing, but felt like they were not promoting it.
He started a web development company. He got the CEO of the simulator on the phone. He negotiated his first leveraged buyout as he was a college student with little money. They did half owner financing. With credit cards and a friend he ended up buying the business.
His friend was technically sophisticated. Find the right partner with a different skill set. The friend programmed in what was needed to facilitate good growth and Ace handled marketing.
They took the site down, did a complete rebuild. Sent out invites to other college students. We put in viral aspects where we would give them money to play trade if they spread the word.
They built a database for 500 people because they thought it would be crazy if they many over the course of the school year. In the first hour it’s 50 people and then 100 and 200. It exploded from there.
This was before the internet boomed. After the boom, they had seven-figure offers to sell the business. After the bust, the model changed. They got less than a tenth of what was offered during the boom. Now Ace is quick to sell businesses for a profit.
Cash flow attracts buyers. Assets are not a focus. Ace looks for businesses that aren’t pushing marketing as much as they could.
A recent acquisition had a 10,000-person database of past clients and customers with email, phone numbers and addresses. They never emailed, called, or direct marketed. Ace doubled the month-to-month revenue and ended up selling it six months later by targeting past customers.
Ace looks for a hidden opportunity or a hidden asset to leverage or a situation where the seller is highly motivated to sell (divorce, death) and is highly flexible about deal structure.
When selling, Ace likes to provide several very attractive deal structures to appeal to different buyers.
Creative deal structure and leveraged buyouts will become necessary as 12 million businesses are coming to market as baby boomers retire. Nobody is training a younger generation to take over those businesses.
With young folks, there’s preparation and the structure. Many times you can only go to a very select group of buyers. 99% of general buyers don’t have the financing or experience or don’t understand due diligence. Preparation starts with training, then building business credit.
They target businesses a buyer will be very comfortable with. They just did a publishing software business for a client. The seller is an amazing programmer. Operations were exceptional. She built a large business because she built an amazing product. The buyer brought marketing consulting from PriceWaterHouse. She saw what the business was missing. To create a win-win we allowed the seller to keep some equity.
They do not deal with banks. Banks have only done 7% of business lending. In 2008, it went down to 1%. 99% was picked up by everybody else.
They keep a database of alternative lenders and can select lenders based on the buyer's financial situation.
Examples:
- Gold’s Gym acquisition, they leveraged the equipment.
- Carwash deal, they found an SBA program.
- Banks are going to seek some SBA-type guarantee that ties up all your business and personal assets in liens.
They look for different types of financing to get a better deal for the business buyer.
There are a lot of local opportunities to obtain financing for specific programs. For the publishing company, part of the deal is a local loan that the state of Pennsylvania for people bringing jobs to Pittsburgh.
Every deal is unique and they go after every type of financing that might work. They see what is leined then pick out the best financing and deal structure for the business buyer.
Ace has focused on micro-private equity (owners who are not actively involved) over the last six years. With buying a business under the $5 million dollar, the multiples are incredible. With the private equity model you need to be able to manage the business. You have to work it. Paying off a business in 3 to 4 years, is a powerful wealth building strategy. There’s just no other asset class where you’re buying something at that low a multiple.
Above $5 million, you’re competing with private equity. Below $2 million you’re doing deals max at a two multiple. The micro-private equity concept was born out of past clients who see the opportunity but just don't want to work the business. They work with younger buyer clients and invest in them and their deals. They not only put up money, but experience, time, mentorship, and strategic planning without the day-to-day responsibilities.
