One way apartment investors make money is buying businesses that are housed in an apartment building. After improving the operations, they then sell it again at a time when the said business is starting to earn more money. However, one of the unfortunate things about this method is most of the businesses that you’re going to see on the market are jobs. This is something Ace Chapman says that you have to decide as a business buyer where you want to get the most value. Ace caught the business buying bug when he bought his first business at nineteen with some savings from a summer job. Over the last sixteen years, he has been buying and selling businesses ranging from a mortgage company to a clothing retailer. Discover how he was able to make it through the entrepreneur’s gauntlet and created sellable assets that he was able to bring to the market.

—

Buying Cash Flowing Businesses with Ace Chapman

Our guest is Ace Chapman. Rescuing small businesses is all the rage on television, whether it’s Jon Taffer with Bar Rescue or Tabatha Coffey’s Salon Takeover. Despite the fact that none of them actually do it, these shows are fueling interest in a new trend. Move over real estate flippers, Ace Chapman is building a nationwide group of business flippers. Ace bought his first business at nineteen with some savings from a summer job and he caught the business buying bug. He leveraged $3,000. He saved working the summer before college into buying a business for $70,000. Over the last couple of years, he has bought 40 businesses, everything ranging from a mortgage company to a clothing retailer. He has seen an explosion in the market for businesses under $2 million.

He says that there are millions of Baby Boomer business operators who want to bring their businesses to market in the next decade so they can retire. During the recession, many Baby Boomers wanted to sell their company but decided to hold off until better economic times. I’m pretty excited about this. I always loved the show, Bar Rescue. As an apartment investor, we look at it as we’re buying a business that is housed in an apartment building. We’re improving the operations and then we sell it again later at the time when the business is earning more money. This is a pretty exciting one. It’s definitely a unique way of investing. Ace, welcome to the show.

It’s good to be here with you. When it comes to apartment buildings, you’re buying a business. You’ve got to do marketing and you’re looking at occupancies. It becomes a thing of analyzing a business to acquire and on the other side, selling a business to someone who wants to get into that. I’m excited to be here. I hadn’t gotten to be on the show yet where there was that much of a tie in into what I do.

I’m happy to have you because this is very exciting. I suppose as I think about the potential for buying a business that someone else owns and maybe is running especially in the real estate world, we think about trying to avoid buying ourselves another job. When we’re going out buying a business, how can we look at it to target an opportunity where like The E-Myth says we need to run it where we’re working on the business and not in the business and we’re not buying ourselves another job for $2 million?

One of the unfortunate things is most of the businesses that you’re going to see on the market are jobs. I don’t know if it’s the fact that the average entrepreneur and business owner haven’t read The E-Myth or they don’t have time to worry about that thing. It’s something that you have to decide as a business buyer where you want to get the most value. For me, I enjoy buying a business that is going to be some work on the front end. What I look at it is that I’m avoiding the three to four, five years of going from scratch to break even to finally making money. We’re trying to figure out what the products are that are going to work. We’re trying to find the employees that are going to help manage the business the right way and to even show up on time. Finding the marketing strategies that are the right strategies. If you know anything about business, most businesses aren’t going to make it through that gauntlet. I call it the entrepreneur’s gauntlet. It’s because very few people are able to figure out all of those things and make a business that works and actually have a sellable asset that they can bring to the market.

I was telling this story on a call but when I was in Tennessee, I helped to sell a wine business. It was built by this couple that was passionate about wine. They’ve grown this business. They poured a lot of work into it. They’re super passionate about this concept, but for three years they poured all their money, all their time and all their energy to get this thing from zero customers, zero income, zero employees to something that was actually working and it hit break even. They reached out to me one evening and they’re like, “We want to sell our business. We’re told by a friend that you buy businesses. We’re wondering if you can meet.” I’m like, “I’m busy but I can meet you sometime.” They’re like, “We want to sell this. We talked about it and we can’t bring ourselves to go there so we need to get rid of this.” I hear this story time and time again, but you get so burnt out. They were taking a toll on our relationship. All those things come first and in that case, I had another guy that was passive about wine. I came in, I invested in a deal and the reason I was talking about it is that a friend of mine was saying that it was her birthday and that thing. I asked her what she did and she was like, “I went to this spot and it was the wine place.” I was like, “I’m not even in Chattanooga anymore, but it’s cool.”

The guy that I invested with bought me out. It wasn’t that the business didn’t work, it’s so much sacrifice goes into starting a business from scratch that I’m excited that it’s working and it’s profitable because that puts it in the top 20% of businesses. What I want to do is go in and create those systems and processes, which creates another level of buyer. I want to get a retail sell on that business, which is also what your audience wants to do with any business that you’re selling is you want to buy wholesale. Do a little bit of work because up the majority of the work has been done to work on the business and put those E-Myth strategies in place and create another level of value. I call it the franchise effect. You have these two separate things. They buy businesses because they’re making money. A lot of times it’s going to be a job. On the other end, they’d buy franchises where they’re willing to pay some upfront money for something that’s not making money because the systems are there. You can bring both of those together and that creates something that you can sell at a high premium.

Where do we find a business to buy off-market so to speak? You mentioned your existing network. Is there someone we can go? Do we put an ad in a classified somewhere? How do you get started to buy the business?

I mentioned that story, it’s funny when those people reached out to me. It was because of networking and telling people what I do. I think the interesting thing about buying businesses is when you go to an event or a party or hanging out with even friends, you’ll have somebody in there who may be invested in the stock market. You may have some other people there who are doing real estate. The one thing that nobody talks about or introduces themselves as is, “I buy businesses.” Doing that is one of the most powerful things that you can do. It’s literally how I got the lead for that wine business. People’s psyche, there’s a certain amount of real estate for different things.

They may have a few realtors, but they have their friend. It’s like the main person that they’re going to recommend if somebody needs a realtor. They have their mortgage person. They’re like, “I know somebody that does this.” They have the person that sells cars. You’ve got that real estate. What I want is anytime somebody talks about they know somebody who wants to sell a business, I want to be the only person that they know, even if we’re not close friends. The referral that sent me the wine business, they could not know me at all but I’m going to be the only person in their psyche that they have ever heard of that buys businesses. That’s been one of my greatest sources for deals. For somebody who’s starting, I think it’s more valuable in there.

We’d go through our network. We talk about a hundred different strategies. You can go to the chamber and you can build relationships with accountants. That’s another great source. Outside of my network, I bought and sold more deals through my accountants than any anything else and networking with accountants. There are a lot of ways to generate deal flow down to direct outreach. I was on a call with my network. I would literally walk into a business and gave them a card and we’re talking to the person’s interested and we’re walking through the next steps together. Initially, the best thing you can do is go to BizBuySell.com and look at what’s on the market.

It’s great when I can talk to people that are doing something that is somewhat similar, whether it’s apartment buildings, whether it’s a car, whether it’s a couch from a friend. The best deal that you’re going to get is not something that’s advertised. It’s buying something from somebody off-market. We understand that but to get to know the market, the best thing is to look at the things at our own market before you start trying to generate deals off-market. If I want to get that amazing deal on the Rolls Royce, I want to know what did they sell it for just off of the lot. That’s the only way I’m going to know that I’m getting a good deal. When it comes to businesses, every sector, every industry, every size has a totally different economy, different multiples, different expectations on the deal structure.

You want to be able to talk intelligently with those deals that are off-market. The first thing is to get good and maybe even make some offers on our market deals. The other thing I’ll say is that this isn’t a very liquid market. The nice thing is the same way that I talk about when you’re at the party, nobody else is professionally buying businesses. The other side of that is the fact that there’s nobody buying a lot of businesses. You end up in a situation where even on the market you can find some amazing deals because there’s not as much liquidity. There’s not as much market efficiency in the business buying market especially when you compare it to real estate or even more so when you compare it obviously to things like the stock market.

In this marketplace, there isn’t that efficiency. I’m rarely in a bidding situation. It’s me sitting across from the seller and the most valuable thing that I can have is my ability to structure the deal in a way that has that seller feel like, “I’m getting what I want out of this even if they are getting an amazing deal.” How you communicate that deal with that seller. The second most important thing is how you do due diligence to make sure that you’re buying what you thought you were buying, which is one of the reasons that the opportunities that exist do exist is because most people don’t know what they’re doing. They get into space. They try to buy a deal. They don’t know anything about due diligence, which is so fun to me. I get people who come to us after they bought a business and like, “I got screwed on this deal and I ended up buying this thing and it wasn’t what they said it was.”

I’m like, “Tell me about your due diligence strategy.” It’s like, “I didn’t have a due diligence strategy.” I’m like, “I don’t think they screwed you. I think you did that to yourself by buying something and not understanding what you were buying.” When it comes to these deals, due diligence is crucial. The final thing is being able to put together the capital. Where you get the money from and making sure that you’re getting a low cost of capital is that final piece. Those are the three crucial things before you even worry about generating the off-market deal flow.

The point I was going to hammer on is if someone’s thinking about getting into this or they might be interested, what are you talking in terms of the level of investment? It probably ranges significantly but putting a capital together, at least from my understanding, it’s not quite as easy to get on business investment as it is on a piece of commercial real estate. Are you going to bring an equity partner and take out a loan and work it that way? What’s a process financially to close on a business and what are you talking in terms of the level of investment?

You’re exactly right. When it comes to these deals, there are a lot fewer places that are like, “Take 80%, take 90% of what you’re trying to buy and you come up with 10%, 20% and we’ll finance the rest.” You’ve got to be a lot more creative. That’s the downside. The upside is because of that, seller financing is way more prevalent. We’re going over some numbers on this between my entities, which I do also have a small private equity fund. We have borrowed about $11 million from sellers and that’s either in earn-outs that we’re paying or sellers that are seller-financing a part of the business. The amazing thing about that $11 million is I didn’t have to do an application for that. They never pulled my credit. The crazy thing is the sellers 90% of the time do not ask for interest because they’re not a bank. They’re like, “I want to sell my business. You pay me this over this period of time.” I’ve been involved in 180 deals. I’ve got 40 deals that I’ve bought personally and then 180 that are either in other entities and client and in the network. We have one deal out of 180 where the seller realized like, “I’m loaning you money. Maybe I should charge interest for that money.” Of course we paid it, but on that $11 million, we don’t have the time of interest that’s been paid.

That’s one of the pros and we won’t do a deal if it’s less than 50% seller financing. I want the seller to be in the deal with me and almost a partner. I like it to be more than 50% but I want at least 50% of them. The rest of that either comes from me. The cool thing is that we’re able to bark as assets in the business. We’re doing a deal that’s actually an internet business where it’s an FBA business. We’ve got 60% that the sellers doing an earn-out on and then we put 40% of the money, but 30% is being paid alone based on the inventory that’s in the business. It’s an interesting loan. It’s almost like a consignment of the inventory. It’s not like a regular loan. They get a portion each time a product is sold until the loan is paid off. You have to be creative between AR and invoice financing, individual investors, asset financing and inventory financing, with all of these things you can combine them. In some cases, people are interested in some of the stories and different examples of no money down deals. Even cashback deals where if you get creative enough you can put these things together in a way that allows you to buy the business without you come in out of pocket.

Let’s say I put myself in the shoes of the audience out there making a few $100,000 at their W2 job and they want out. Maybe they’re interested in buying a business. They probably won’t replace that income right away, but they’re making enough of an income to support oneself off of by buying a business and then rolling that upward and eventually fully replacing that W-2 income. What does that typically look like? Especially for someone who’s getting started and maybe buying their first business, it might not be advisable to go all in on the first one.

It depends. I’ll give as many examples as you want. I’ll give you one and then we can go to another extreme. One extreme would be the person that has a very high six-figure income. We’ve got a guy from New York. He lives in Manhattan. He worked in private equity. One of the things that are interesting is that when you get into micro private equity space that we’re in, it’s totally different than bigger private equity. It’s like, “I want to spend more time with my family. I’ve got to get out of here.” Anybody who knows anything at Wall Street, they don’t care how much time that is. That’s not on their list of priorities, “You didn’t get to spend more time with your family. Let’s see if we can figure that out.” He’s like, “I’ve got to get out of here.” He had a deadline. He’s like “I am quitting.” Anybody that knows anything about living in Manhattan and having kids in private school in Manhattan, it’s expensive. We needed to figure out how we are going to replace his income.

In that case, what we ended up doing was we did an SBA deal. We bought a business. It was a $1.3 million business. We bought it at three multiples. That means it’s making $300,000 a year. Basically, we were able to structure it where we got the majority from the bank. We have some seller financing. We had some inventory financing but between everything, he put in $100,000 in the deal, but that $100,000 was a transfer of the funds. He was putting $100,000 into his own bank account that was going to be used for the business. He didn’t have to actually spend the money. It was, “I’m putting this amount. It’s transferring over to this LLC and now I have the operating costs for a few months.” You can get creative with the deal. The nice thing about SBA was it was less about creativity and more about, “I want to stretch out the payments and make sure that I’ve got this income coming in.” For me, it was rewarding because I took off for a month. It took the family to Europe. I traveled around and I got to see the manufacturing plant where the product for the business sales was and tied in a little bit of business. That was something that was a complete and utter impossibility from his previous job and what he had to do to generate that.

What did the calendar look like on that from when he decided, “I’m doing this,” to when he was out?

The other thing with these is you’ve got to be familiar with the apartment buildings. The downside is it takes a long time to close. We got the contract on the deal in February and it ended up closing around May.

That did take a little while, but the timeframe prior to that of finding the business from when you started working with him to when the actual businesses were located, what did that look like?

That was from November to February. It’s about three to four months.

I would say that’s pretty fast. That’s very impressive. Is that a typical case or is that on the fast side?

It changes based on the person. What I prefer is I’ve got somebody who comes to mind who’s in the same group. Usually, I’ll work with people in groups of fours. Somebody in that same group sold a business and she wanted to start building up a portfolio of passive income. For her, she was doing smaller deals that were more passive. I think her first deal was that it was actually an internet blog that was very passive. It’s a deal that’s under $100,000 but it’s super passive. Those can be done in 60 days.

At the other end of the spectrum is the person that is, “I love sports. I want to buy something that’s in the sports arena.” When you put those other filters, the great thing about that is, “I’ve got to do whatever it takes to make at least $300,000, whatever that thing is. I don’t care what the product is or what the niche is or what the business model is. Let’s get the very best deal that we can get the very best deal structure on.” If we can have that as the filter, that becomes easier. When it’s, “I’m a retiree, I’ve got some income. I don’t want to do work unless I’m going to make some make money, but I want to enjoy it while I’m making money as well,” that becomes an extra filter. It’s impossible to quantify because it’s like, “I want to do something cool. Let’s go find something cool.” That’s where you end up looking.

As far as going out to buy a business, you’re only buying businesses that are at least breaking even. You’re not buying anything that’s losing money or do I have that wrong?

We’re only about things that are making money because we buy it based on the multiple cashflows. If we buy something that is break even, which has been done, we’ll buy that for $1. We won’t pay money for anything that is at break even or lower.

Ace, what is the best investment you’ve ever made?

The very first business I ever bought will always be my best investment because the deal was a great deal. I’m nineteen-years-old. I’ve saved $3,000 from working the summer before. The next summer, I reached out to a company that had a stock market simulator that I wanted to intern for, mainly because I love the product and the game that they built, but it was always crashing. They were unresponsive. I was like, “They must be so busy that they can’t respond to people. Let me go intern for them and learn how this whole thing works.” They responded back saying, “We’ve actually moved on to another product. We want to sell this. If you know anybody who wants to buy it, let us know.” They actually said, “If you find us a buyer, you could intern for them.” I went, “That sounds like a terrible deal, finding you a buyer for your business and get a free job.”

I ended up getting some information about the business. Long story short, over some time I made them an offer and got them to finance half of it. I got a friend of mine to put up $15,000. I had $3,000 and took out credit cards, which is something I do not recommend people do for the rest of it. I ended up closing that deal. We grew it. I ended up leaving college. It was the thing that changed the trajectory of my life, which makes it an incredible investment. Also I was able to leverage that $3,000 into something that ended up becoming worth seven-figures because we literally got a seven-figure offer from Ameritrade. Also, the best lesson of my life is that something is always for sale. At that point, I told Ameritrade that it was not for sale and in 2001 the dot-com bubble burst.

On the other side of that, what is the worst investment you’ve ever made?

The worst investment was I had bought a small internet deal. The business was a neat little business. It was turning a profit. I knew that it was going to be somewhat risky because it used a trademark word in the domain name. It was PhotoshopOnline.com and Photoshop is owned by Adobe, but it was making so much money. IWAS like, “I’m going to go ahead and buy this thing.” I negotiated the guy down and it was 100%. “I’m going to make them a rock bottom offer.” He accepts it, which should have been my first sign. If he accepted it that quick without a calmer, it was probably low enough. I went ahead and closed. Three months later, Adobe reaches out and then it was even worst deal because I got out of it. I gave it away to a client because he was like, “I think I could turn it into something.” The great news is that he did some work on it and changed the domain and it actually started making more than it was making while I owned it, but I didn’t have the time to do the work on it. Kudos to him for putting in that work.

One other terrible deal is I had a deal where I did give a super rock bottom offer. I was doing a roll-up of tanning salons. I already have five and I had the buyer from our five already lined up, but this was the sixth one. I’m like, “I don’t want it.” I tell the guy like, “I’ll make you an offer but it’s going to be low.” He’s like, “I like to talk to people in person, so I want you to come to my house and talk to me in person. My wife would cook for us.” I said, “That’s cool. I’ll get my partner.” We go to the house and we’re having dinner and we’re wrapping up and he’s like, “What’s the offer?” I told him the offer and he doesn’t say anything. In my mind I was like, “He’s going to do the whole thing we all know like ‘Don’t make the first response.’” He’s not saying anything and I’m eating. I look up and he is like beet red. I was like, “This guy’s upset.”

He burst into a string of expletives and kicks my partner and me out of his house and tells me he never wants to see us again. I get the car, my partner was like, “That was crazy.” “I know. It wasn’t a great offer.” “I don’t think we’re getting that deal.” Sure enough, his wife comes back to me sheepishly, maybe a week or two after that she’s like, “I want to apologize for my husband. We were willing to take the offer.” I’m further along in my other deal. I should have walked away but I told them, “Now, the offer’s lower.” I make an offer even lower than the one that he got upset about rather than walking away. They end up taking it, we closed on the deal and the first day I get a call from the manager, she’s like, “You may want to come in.” I was like, “What’s going on?” I got there and she shows me this email that he sent out to all the customers saying that the new owner is a jerk. Don’t go there anymore. Those are my two biggest mistakes.

My favorite question and the last question, what is the most important lesson you’ve learned about investing?

I think it is that. I love those two stories because when I was getting into this, I didn’t have anybody else that had bought and sold businesses. I was fortunate that I had somebody who connected me to a guy who flipped hospitals. We met and he was like, “It’s amazing that you’re out there doing this stuff.” I think he also was like, “You must be a mad man.” You’re wandering through the dark without any knowledge of the proper way to do these deals. I learned an absolute ton from him. The biggest lesson has been the value of going out there, trying things, learning and reiterating. I’m fortunate enough to pull together that information and make sure that other people aren’t making the mistakes as I talked about in those two deals.

This has been a great conversation. It’s a cool type of investing that you do. If the audience out there wants to get in touch and want to learn more, what’s the best place for them to find you?

Feel free to shoot me an email. It’s [email protected]. If you’re on Instagram, you can hit me, @Ace.Chapman. If you want free information, I give case studies. I walked through a lot of examples and more detail than we had time for here. You can go to YouTube and search Ace Chapman.

I know I’ll be checking out your YouTube channel because it sounds like a funny watch at the very least. There are some good stories in there. Thank you for joining us and for all the awesome lessons and stories. I hope the audience out there learn something and reach out to you and learn more.

Thanks for having me, Taylor.

For everybody out there who are reading this, thanks again. If you’re enjoying the show, please leave us a rating and a comment on iTunes. That’s a super big help. If you know someone that is looking to sell their business, send them our way. If you know someone that is needing to passively grow their wealth and needs that additional information to get them over the hump, we’ll be here. Please invite them into the fold. Have them join our team and we’ll all get wealthy together.

Important Links:

• Ace Chapman
• The E-Myth
• BizBuySell.com
• PhotoshopOnline.com
• [email protected]
• @Ace.Chapman – Instagram
• Ace Chapman – YouTube
• iTunes – Passive Wealth Strategies for Busy Professionals
• https://www.YouTube.com/channel/UCaNlGb8yu09Pvp-kUsyeW-w?view_as=public
• www.PartnersEquityFund.com
• www.AceChapman.com

About Ace Chapman

Rescuing small businesses is all the rage on television. Whether its Jon Taffer with Bar Rescue or Tabitha Coffey’s Salon Takeover. Despite the fact that none of them do it, these TV shows are fueling interest in a new trend. Move over Real Estate Flippers, Ace Chapman is building a nationwide group of business flippers. Ace bought his first business at 19 with some savings from a summer job and caught the business buying bug.

He leveraged $3,000 he saved working the summer before college into buying a business for $70,000. Over the last 16 years, he has bought 40 businesses. Everything ranging from a Mortgage Company to a Clothing Retailer. And right now he is seeing an explosion in the market for businesses under $2,000,000. “There are millions of Baby Boomer business owners who will bring their business to market in the next decade so they can retire.

During the recession, many baby boomers wanted to sell their company but decided to hold off until better economic times.” At the same time, many entrepreneurs are realizing the risks associated with starting from scratch are too high and are deciding to buy an existing profitable business instead. Business sales saw a spike in 2013. While we saw a 68% increase in 2013 according to BizBuySell.com, business brokers expect 2014 to be even bigger. And while private equity firms are well positioned to take advantage of this increase in inventory, very few are paying attention to what Ace calls the Micro-Private Equity Market.

Ace began working with first-time business buyers of business buyers and helping them find, do due diligence, and finance small business acquisitions. “I have had a lot of people who find me and ask to invest in my deals. I’d rather show you what I am doing than take your money and have to split my returns.” Since starting his network of business buyers he has helped members close deals all over the country.

From 2 Sylvan Learning Centers in Seattle to a Software Company in Pittsburgh and from a Fitness Gym in Huntsville to a Catholic Retailer in South Dakota were deals done in recent months by the network. Business buyers are attracted to buying a business instead of starting one for obvious reasons.

 It’s easier to get financing to buy an existing business than to start the new one. Bankers and investors are more comfortable in dealing with businesses which already have proven work results.

Starting a new business requires investments in a period of 3 to 6 months, and many entrepreneurs never get to the period of earning. When buying an assisting business you have an idea of what your salary is going to be day one.

 Business buyers do not have to go through hiring and training new employees, developing operation systems, and marketing plans. They start day one improving the business instead of building each department from scratch.

Still, Mr. Chapman says buying a business is risky, especially if you do not know what you are doing. “Whenever you are buying a business you are looking at the past, there is no guarantee that those numbers reflect the future”, says Chapman. “You should find a business broker or advisor who has your best interest at heart. The more experience you and your advisors have the easier it is to find the hidden landmines in any business.”

• Here’s How »

• passivewealthstrategy.com