Ace Chapman has been acquiring businesses for over 20 years. The first business he bought was an online stock market simulator in the early days of the Internet. He purchased the website, made some changes, and grew it from 10,000 to 250,000 users...
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Ronald Skelton 0:06
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling
Hello and welcome to how to exit.com the how to exit podcast talking about mergers and acquisitions. Today I'm here with Ace Chapman and I'm really excited about the show today. I've been watching his YouTube channel and consuming content this guy's been putting out for a long time, Ace Chapman has been acquiring businesses for over 20 years, his first business he bought was online stock market simulator. In the early days of the Internet, he purchased the website made some changes and grew it from 10,000 subscribers to over 250,000 before selling it. Since that initial acquisition, he has built systems around building private equity funds completing close to 200 deals. Ace has spent years developing his team investors and extensive network. In addition, he has developed proprietary due diligence process on acquisitions as well as a deal funnel process. He has taken time building relationships throughout the world with people and who will one day be interested in selling their companies and his processes. One of the reasons the majority of his partners returned fund after fun. Man, I'm really excited to have you on the show. Thank you for being here. And just just welcome, man. Welcome for being here.
Ace Chapman 1:42
Yeah, it's really good to be here. You know, I feel like I'm in good company. We both have a lot of the same friends in the space. And I have worked with whiteboards with some of the other folks that you've interviewed. And so yeah, really cool. I love like we were talking about just a minute ago, I love talking about this stuff. It's been 20 years, I'm still not tired of it. So always enjoy a chance to dig into some of the new things that we're up to.
Ronald Skelton 2:08
Well, let's just start right with your origin story, man, how did you get into this space? Like, What convinced you to buy that first company? And luckily, it went? Well, because apparently you did it after 200 more times. So just let's just start right there.
Ace Chapman 2:21
Well, the real news is, it didn't go as expected for sure. And, you know, the end of the story sounds pretty good by saying that we sold it. But we started at about 1/10 of what it was worth at its height. So I'll talk about what that what happened there. I was in college, I was a sophomore, when I came across this stock market similar to game. And you know, I was I just love the market. I love Wall Street, you know, so if there wasn't, there wasn't a lot of these out there. And so you could play the market, you could win these prizes, depending on how you did. And so I was like, man, it's a really cool concept. The downside was the site was always crashing, they're always, you know, just customer service issues. We had a forum, everybody was talking about how they would have issues and they would reach out and just literally never hear back from anybody. And so summer was coming. And I reached out to them to to basically see if they wanted to intern for the summer. And this was an early day. So just the idea of going in and being able to work on this little internet company. Like that was exciting. So I was like, man, you know, saved up money last summer, I'll just go and work with these folks for free. And they responded, and they said, Hey, we've moved on to a whole nother business. We want to sell this business. If you have somebody who wants to buy the business, you can get them to buy it and then you can intern for them. I'm like, that sounds like a terrible offer. Like what like me go find you a buyer so that I could get a free job. Like, that does sound like a good deal. But I was really interested. And the business just like okay, you know, this internet thing. It's new, like how's this business operating? So this was 1999. And they're also just weren't weren't brokers. You know what, I have my gut merger shirt on. And so we have a brokerage. Now where we broker a lot of inner business, do a lot of stuff with Empire Flippers, you know, there's FBI, there's all these different brokers, that just wasn't a thing. And even for the offline brokers, they just, it's just like, no, like, this isn't even a real business. You know, what are you talking about? 20 years ago, they'd laugh at somebody tried to sell a, you know, website as a business. So they ended up you know, sending me all the information. I told him Yeah, like maybe I'll come across somebody who wants to buy it and they didn't have anybody else that was willing to help them sell it. So they sent all their information to this 19 year old college kid with fingers crossed, I guess, and I got the information I saw They were making about 70 $70,000 a year. And I realized that, you know, 70,000, like, you know, I had friends that were coming out of college that were making a lot less than that. And I asked them how much they want it for the business. And they said, you know, we'd love to get 60,000. So I'm like, wait a minute, this is, so I would get all the money back in a year. And so the other thing was, I had a lot of friends. And you know, I went to Colgate University costs. At that point, $40,000 a year now it's even more expensive, which is outrageous. But people were coming out after spending that much money and making 40 50,000. And so that was my comparable. But even having a comparable and thinking this is a good deal, not understanding anything about multiples or anything like that there wasn't even online resources to figure that stuff out back then. But it didn't really matter, because I had $3,000 in the bank. And so what what ended up happening was my first, again, unbeknownst to myself, my first LBO where I got them to finance, half of it, basically, you know, okay, just go back through, like, hey, if I came up with half of money, can I pay the rest of it over a longer period of time, they said, Yeah. And then I had a buddy who liked the business as well, and wanted to invest, and then put some credit card money together for the rest of it, but probably about $15,000 worth of credit card debt. But, you know, the first part of story was, was amazing, if they hadn't been paying attention to the business, a lot of low hanging fruit, they didn't have another opportunity that they were really excited about. But I just got to work, doing the simple things, and grew the business, quick college and up, you know, getting that that experience of hiring employees raising capital. And so everything was killer. For us, as old heads will remember, 2001 2002 was the.com, bubble bust. And most of our sponsors, you know, we basically operated off for sponsorships, most of our sponsors, slowly just started going out of business going bankrupt, it was like we were kind of at the end, because we had low costs, but you know, into 2001 2002, we made it for a while, until like, they were just all going away. And then but we did have this big database of young people. And this is something that's interesting, just when you're thinking about what business you go into, you know, if you can have a database of people that are just valuable, that in your in a space where people are willing to pay a lot of money to acquire looking at what's the cost, what's the acquisition cost of these people. That's where we were. So we did a deal with what's now TD Ameritrade, they made some equity acquisitions over the years, and mergers, but we sold that database to them. And I was depressed, you know, had this business, my view of entrepreneurship and being successful at that point was, you start a business or you're in a business, and you're gonna run it forever. You know, it was Microsoft, it was Apple, you know, a mark Tech where it wasn't even a thing then. So it's just more of these old school folks where it's like, you know, the way you do this, or what you get successful, you have that one business that you're going to run for, you know, your life, and it turns into this big thing.
And so I ended up, you know, selling it for a kind of dirt cheap price, ended up going and working at SunTrust and mortgages for a while. And it just clicked one day. It's like, I wonder if I could just buy a mortgage company, because I didn't see myself as a business buyer. I didn't see that as a thing. And so sure enough, there was a mortgage company in my city, that was for sale. And that was one that was it didn't click until that second deal that I realized, Oh, I could just go out and buy these businesses. You know, it doesn't have to be that I have to have this one thing. I could buy them, I could sell them I should have sold that one. When it was worth 10 times. I should have sold it early. And so I was able to look back and learn a lot those lessons that I just didn't have the perspective to be able to learn while I was in the middle of it.
Ronald Skelton 9:31
So just a I guess it was this week we actually interviewed Adam hasn't even came out on the podcast side of it. So if you listen to the podcast, it'll be right before the show. But Adam coffee actually wrote the book, private equity playbook, and he's really talked about it but our show was really about like how to sell to private equity, what they're looking for. It sounds like you know, you you're an expert on creating a fund. Right, you you talked about that in some of your your video Here's the stuff. Let's kind of talk about that space and like, what does it look like to start an equity fund or private equity fund?
Ace Chapman 10:07
Yeah, so that did come years later, you know. So it took a while for me to understand the value of creating a fund. You know, I was buying and selling businesses. And Baltimore's coming in up doing a home pressure franchise, shout out, it didn't have the name. But someone just popped in and said, I love AES. Here's what's known as the go to guy for tanning salons. So in your period, before I get I got into funds, like, did a roll up of six tanning salons, which that was just as a funny story, the first time I ever walked into a tennis salon. And if you're watching the video, you'll understand why. Or someone ever wanted to a tennis salon, I walked out the owner, because it was just this amazing deal. I learned a lot about the industry. And so I saw this unique opportunity. And so did that. So over the course of 10 years, I'm doing all these deals. And then I meet someone who ends up becoming a mentor of mine, my most important mentor got Mike Aiken, who flipped hospitals. And he was one of the people that started to just really change my vision of like how this whole world work, even going back to my very first deal. You know, one of the things that he made me I was like, yeah, like my first deal failed, you know, we didn't really exit at a good price and that kind of thing. It's like, okay, like, what were the numbers? How much you bought for us, like, bought it for like 60,000? Like, okay, and like, how much did you make over the three years that you ran it? And it's like, oh, about, you know, cost 300? Because, like, What are you talking about? That's, that's a success. And so, you know, again, just seeing things differently, where we're at, you know, I think most people look at business from the perspective of a business owner. What I've grown into through the funds, and through mentors, like Mike, was to really see it almost like a trader, you know, what I mean, to really see it from that I quadrant of being an investor and no investors upset that they turned $60 $60,000 into $300,000. You know, so that, that that was the beginning of that. But still, you know, he's telling me, you need to get this into a private equity fund format. And I'm just like, What are you? What are you talking about, and I had another friend and mentor, Noah, who's telling me kind of same thing. I'm like, Y'all are crazy. Because like, right now, I'm doing these deals, and I get to keep all the money. And you're telling me to do these deals, it gives us other people some of the money. I'm like, I'm not a mathematician, but I get all the money, or I get some of the money. I think I'm gonna stick with all the money.
Ronald Skelton 13:05
Now at that point where you're doing LBOs, like you're doing loans and debt and to structure it.
Ace Chapman 13:10
Yeah, yep. So at that point, I was, you know, I was doing all of the funding myself, I might raise a little bit of equity capital, but you know, as funding through, you know, a lot of cases debt. And again, it just, it works. It worked really, really well. It still works really, really well. And so I just didn't see from my perspective, okay, what is this fun thing? Like, why would I Why would I do that? But fortunately, you know, I had some folks who basically said, Hey, we're just gonna go along this path, let's just try it. Let's do a small million dollar fund and see, you know, just how it goes. I'm like, alright, we can we can try it out. And it's one of the things that until I did it, I didn't really see the benefits. But it just became really obvious. You know, the first thing was, you know, wow, like, I've done all these deals. And now for the first time I'm building a track record, you know, if I'm gonna do something, why not build an audit, you know, I'm working as we're putting it together and work with the audit firms. So yeah, so after this process, like I have this audited track record, and so now like instead of me just doing these one off things, I gotta go to the bank gotta convince them I gotta go to these other folks get some investment money, like now I've got this audited track record. The other thing that was really kind of interesting to me was the tax benefits. So here I was, is out there out here hustling and making money again, tax like crazy. And meanwhile, I could basically be a GP and you know, try to give tax advice here, but suffice to say I was paying a lot less taxes on the deals that I was doing within the fund instead of the deals that I was just doing out there on my own. And so it just overtime became clear that okay, there are some benefits to me doing things within this this fund structure. And a big, you know, at the end of the day when when you look, and you see who are the biggest people that are buying and selling businesses, they're doing it in a private equity fund structure. And there's a reason why.
Ronald Skelton 15:36
So I was going to ask you, if there was an epiphany moment, like, were you like, Oh, I gotta do this fun thing. But it sounds like they actually conventionally Caylus. Let's do one and see what you think. Which is kind of interesting. A lot of people end up in business that way, it's kind of an accidental approach, like, you know, I hear a lot of people, when I talk to, like, why did you start the business? Or how did you start it like, well, I thought I could do it better than the boss. So and I was really frustrated. So I went out on my own try, you know, or somebody say, like, I started doing this for a couple of friends. Next, I know, I had four people. And then next thing, I had 10 customers, and I thought I'd better make a business out of it. So in that realm, it sounds like you kind of had the culprit, for instance, like you really got to go down this path. And we're going to help you go down this path. And, you know, now you can call those guys back and go, that was an absolute blessing, because you've figured it out. You've repeatedly done it looks you, you said you've done over 200 deals, you know, so I imagine a majority of those are inside of this fun structure.
Ace Chapman 16:30
Yeah, so that was about 10 years ago. And since then, you know, I've done seven funds just on my own. And I basically realized, okay, I had a couple of things that happen, I ended up doing, kind of even after that, that first fund, it went well, you know, one of the really cool things was the realization that, okay, like, it's not that difficult for me to generate these really amazing returns from the perspective of those investors. You know, even my worst deal, that first deal have turned into 70 into 300. Of course of of three years, like that was a failure for me. So for us in this space, what we're used to generated, like, they're just like, What in the world, so did the first couple of months, then I did a $5 million fund. And that one got oversubscribed. And so for those listening over scribers means there's more more people want to invest in the money that's available. So ended up raising it and said, Okay, you know, I had friends contacted me, and just saying, like, hey, like, you know, I've got this guy, he's a friend, like, I really want you to get him in. So we pushed it to seven, and then pushed it to nine, and then pushed it to literally 12, before shutting everything off, it just didn't know like, I could not take any more. And that was one of the greatest lessons, because I got to see the difference between doing a two $3 million fund and in the power of those smaller funds in the micro space. What happens is with some of the larger deals that you're doing, right now, private equity, larger private equity funds are coming down. And so they're very happy with a 10% return. And if you're in search for ROI, then you don't want to compete with people who are willing to take, you know, 1/5, the ROI that you're looking for, you know, like, last fund that we ended last year did a 300% return, we can't do that if we're competing for deals with people that are happy to do a 12% they're static about a 12% return. So it's important that we stayed really, really small. So we had these two choices, once I got the 12 million, it's like, alright, I can go out, I can do a lot more smaller deals, which that just gets tough to, to manage and to, to acquire, you know what I mean? So to really keep a high standard and get those deals done. And or I can do larger deals, and then I'm competing with people that don't want to get the kinds of returns that I want to get. And with the with the structure of how I was earning as a GP. You know, if I didn't make those really high returns, it just wasn't as attractive. You seem like you're about to ask a question on that.
Ronald Skelton 19:29
Well, we had a user out there to ask that said, you know, said Wow, very enlightening, but created a fun, sounds very intimidating. And I get that I kind of do it at the surface level. I see the ads now because I'm in this space and people are always advertising create your own fun. And it's always seemed like that's a big project. We'll learn later. So can you break down some of that intimidating? Okay, can you can you go through a couple of like, I wouldn't say the detailed steps but the high level and what it what does it look like to create something like that and maybe dispel the myth that is like really intimidating?
Ace Chapman 20:02
Yeah. I think what one of the first steps to that is breaking down what the person really thinks is intimidating. Because most things, you know, I think part of even buying a business, it was interesting, because, you know, like I said, going back 20 years, it's the same response that I got when I first started talking to people about buying businesses. You know, I would tell people like, Oh, I'm buying business, I would literally have people say, oh, you can't do that.
Ronald Skelton 20:32
I love what people say. Natural responses, no, you can't do that. I do it all the time.
Ace Chapman 20:38
Exactly. And so you know, as you as you break down those benefits of like, no like this, you know, the same way that you go out and you buy a car, and you don't try to build the car from scratch the same way that you go out and you buy this, this house, you don't try to buy the house guy, and you go, and you get the financing. And what you realize that the intimidation factor for a lot of folks, when it comes to buying a business was they just didn't know anybody who had done it. You know, there's some people that are intimidated. By buying a house, the idea of buying a house is intimidating. But that's because they didn't grow up in a family, where the maybe the parents did buy a house, you know, even have an uncle who bought a house, where they're just in the conversation. And so just being around people where you're talking to people, and they're talking about an appraisal, so you have an idea, okay, well, that's a part of the step in buying a house. And, you know, if I'm gonna get a loan, it's called a mortgage, and I go to the bank, and I can get that and they'll loan me a part of it, I may have to put down 10%, you know, you just have a frame of reference. And so for private equity is the same thing. It's just being a part of those conversations. So it's not even that it's, you know, it's like you could tell that person that's intimidated by buying a business like, no, like, it's easy, and you just go and you get a loan. And then it's like, okay, no, that's too much at once. What I found though, is as you do surround yourself like now, you know, to kind of get to a little bit of the end of where we are, I created a incubator, called the private equity fund incubator for that very reason. But that's, I don't think it's even a good idea to try to learn this by going through some videos or training, or that kind of thing, you need to be a part of the conversations you need to understand, you know, because it's not just about setting it up. It's about managing it, it's about having the proper distribution, it's about managing your investors on the back in managing the deals, exiting the deals the right way. There's a lot of specific strategies that really unfortunately, I did have to learn on my own, like I was learning buying businesses 20 years ago. But as you get around that, it's the same thing. It's been around people who go from intimidating, intimidated for about buying a house, to, you know, owning, like you a lot of real estate and a portfolio and that kind of thing. The more you're around, I saw somebody even mentioned Ria, you know, I was part of the Ria, back when I owned the whole best of franchises. And you know, same thing, there's just so much value in getting around other people that are doing what you want to do and doing it successfully. And so that's what we've built with the, with the incubator, we just had our our six fund has been incubated very proud of our fund five, where we had four women, who are the GP's of that fund. And so now we're about to start seven, but we take them through the process of, you know, here, here's how funds work here, the case studies, here's historically, you know, in the first 90 days, and then we built literally build a fund from scratch.
Ronald Skelton 24:04
That's awesome. So you now you're in the space where you can help somebody else build a fund, you can actually do build funds for acquisitions or mergers. What's the I mean, I you have an initial sound like maybe I missed it, but what's like, what's the range of funds that you would recommend somebody like, just wanting to do roll ups or acquisitions and mergers to create is there you sound like there was a sweet spot that was easier to operate in. It's,
Ace Chapman 24:34
yeah, it does the pin. I mean, it's not as if those funds that are doing you know, 15 20% returns aren't making money. My it's more of a personal thing. So from my preference, I really love a small short term fund. So we're doing like two year funds. Oh, cool. You're doing something you know, and so it's not so much that it's like, oh, this is the right way to do it or that kind of thing. It's it's, you know, what are your personal preferences? I don't I a nightmare for me would be managing a tenure fund. But that's a personality thing. You know, I want to be able to get in, we're doing literally two year funds, you know, 3 million and are less in that fun, and we're trying to kill it. You know, I mean, we're trying to get literally triple I had were in pet fee six or something where we're doing some, we're closing on a deal. And they were calculating what the ROI should be with those with my fellow GPS that are in that incubator. And one of the guys like, yeah, like, I've gone through these numbers, like a bunch of times, but I just can't it's not coming up, right? Because this is their, their first deal. They're closing. It's like, Mike, what's going on? Like, what's up with the numbers? He's like, Well, you know, I've got this in here, that looks right, I've got this in here. That looks right. But you know, when we get to the end, it's a 456% return, it's a shout out to Jeremy, he's the person that was going through this, like, five to 6% return like now that's this can't be right. Like I'm missing something. I'm like, No, like that. That's right. Like, that's what we're, you know, like, hopefully, we get that, but we want to at least have that as the potential so that we can generate the kind of returns that property wanted.
Ronald Skelton 26:25
So how do you get paid as the founder, I know, you get a management fee of a point or two. I mean, that's a typical structure. And do I seen some of the funds that I'm listening to Adams book on, and he covers a little bit how to funds operate. And he says that, a lot of them, they get a management fee, and then the the investors are guaranteed up to a certain rate before they get a success fee. So how do you structure your due to a management like a 2% management fee, and it's successfully at the end or as as
Ace Chapman 26:54
the important things, and that's why I like doing my funds, the way that that I do is I don't charge a manager fee. Okay, so I do everything on performance. So that means that, you know, I can go in and we just absolutely kill it, then I'm, you know, my upside is really huge. So, the investors will typically get the first eight, nine, now inflation is a little bit higher, so maybe 10%. And in some cases, so we get, they get the first 10%. After that, we end up, you know, in most cases, doing a 50-50 split with the LPS. So, you know, if we're literally if we're doing a 300% ROI, then that becomes you know, basic numbers, you know, 140 essentially does more than 50, to hit to them. So that is kind of what, what motivates me to get excited about doing those ones. I think the other thing that you know, and this just goes to, as I got into this, my realization, even 10 years ago, I think that, you know, eventually we basically all have to get really good at managing our money. You know, at the end goal, we're going to end up as a fund manager, it just so happens that your only fund is your nest egg. And so for most people, whether they're an entrepreneur, whether they're, you know, an employee, whatever, they're saving up their money, and then one day, they want to stop working, and they become a fund manager,
Ronald Skelton 28:35
I get an interesting alignment there, right?
Ace Chapman 28:38
Yeah, there's one very bad thing about it, they've never managed to fund in their life. And now they've got to manage the most important fund of their life, which is their nest egg. And they know nothing about how to oversee and manage that. And even more scary is, if they lost that nest egg. The only way that they knew to build that as nest egg back up, was to work for 40 years, or have a business for 20 years, or 30 years or whatever. And so now they're going back and I have to figure that out. And so one of the things you know, again, you know, just kind of it just all these things started to click as I'm in it, but one of those things was, this is the most important skill set that you could have is you know that power to manage and oversee it. But the other thing is, if you are going to spend time getting the skill set, why not understand how to to raise the capital, and instead of being instead of having to spend 20 years to build that nest egg and then make an earning got what at the end of the day, we all want to be able to live just off the returns of that fund. This is just skipping that it's kind don't have the ultimate hack to the end. So you're skipping that process and getting to the end where it's like, alright, I can just raise a fund and five years. And you know, hopefully it does go really well. But if I get really good at this, then I don't need to spend the 40 years to be able to then figure out how to manage my nest egg fund. I just get good at that now, and then I'm still making the returns off of that fund. But it just happens to be that the nest egg is someone else's money doesn't have to be my money.
Ronald Skelton 30:32
I got that. So one of the questions that just popped up from a LinkedIn user, and it didn't say their name, it just says LinkedIn user. Let's see if I actually I think I could click it on the screen, so everybody can see it, that it show up there. So they're asking if you like, all you're doing is microdeal. So what is this just because like your your funds are two and $3 million, or $5 million. That doesn't mean that deals are that size, right? Because you use it, you can, maybe you can negotiate my hand, you could buy $100 million company, and they only need a million dollars down and you could fund it with the fund. I mean, technically, right.
Ace Chapman 31:02
Ronald Skelton 31:02
So. So having what he's referring to as a micro fund, doesn't mean you're doing micro deals Correct?
Ace Chapman 31:09
Exactly. And one of the reasons you get really good returns is using as much leverage as possible. So it's a combination. So you know, I love the micro deals as well. It's one of those things where it really is some people ask, you know, what are the types of industries that you guys are doing deals in? And, you know, it's been across? Like, if you look at our recent deals, were doing a second deal on the animation business, right, now we've got a business that's in the, that is a lender, essentially, and has a portfolio of loans, which you know, you that come do you do a lot of that, so we're buying a business that has that that portfolio loan, so for animation studio to, to finance, to we have a business in the, I guess you say music training space. You know, it just it just has so many ecommerce, you know, just across the across the board, we're doing a deal right now on an offline deal, that's a franchise. So it's the cool thing is what we're going in, and even that measurement when it was mentioned in Jeremy a second over he's doing what we're looking for is is literally ROI. And what you understand, I think one of the other keys and there's, there's so many of these things, you know, even when I'm talking about the being the the nest egg manager, fund manager, whatever. But, you know, one of the other interesting things that that we go through in the training is thinking about this, like a private equity fund manager, you can't really like even that that question is more like an m&a person, or more like a business owner. And really, private equity is just a totally different thing. So the best private equity fund managers in the world, most of them have never owned a business in their life. And it helps them it's almost a detriment, if you've owned a business, you're gonna think like a business owner. And you're just not gonna be a good fund manager I saw a lot of even with we have people that have owned businesses before I'm literally having to train them out of thinking about things like a abyssal, you know, kind of in, you know, there's just so many levels to it. But the best thing on the space, they're coming from finance are coming from investment banking, they're coming from a different thing they don't, they're not coming from actually buying businesses themselves, in most cases, or even owning a business themselves in most cases. So and then some of the people who have done that have been some of the biggest failures in the space, because it's a much different way of thinking. I think one of the things that a lot of people because they've done an amazing job of amazing job of p of managing kind of the PR around private equity. Most people will forget that private equity comes from corporate writers. So corporate raiders got such a corporate rating and Raiders got such a bad name in the 80s they had to come up with a way to switch it. You know, Dan Bilzerian is dead. A lot of these people who are out there doing like crazy stuff and didn't got better. It's not like they were doing a lot of the craziness they were doing back in the day. But private equity. The reason you don't hear about corporate raiders anymore, is because it's called Private Equity.
Ronald Skelton 34:39
I got it. So what's the script? Look at the logistics a little bit just because I know these I've got Stan on here. He's a friend of mine. Through some of the mentoring I've done, he's done some of that same mentoring and some of these other guys which looked at the logistics are we when we set up a private equity fund is is that like private placement memorandum? Or is there a different set of legal documents you got to do?
Ace Chapman 35:03
Great question. So what what is a fund a fund is a, a couple of agreements. One is the general partnership. So the general partners, those are all of the managers, when we are doing our incubator each time we bring in for folks, that partner with me, and we all act as the GPs. GPs are always going to put up some amount of money. And you know, the more that the GPs are putting into the deal, the more that it gives confidence to the LPS. So you've got two things that are gonna give them confidence once one is track record. The other is, you know, are you you know, heavily invested. So in our GPs, usually, I'm going to take control, so I'll put up half more than half of the money. So I basically mapped whatever the other GPs and incubator are putting up. So we basically serve as the GPs. The other part of the fund is the LPs. So you have these LPs, each of those, you know, it's it's limited partners, each of those people are investors in the fund. So they're going to get have their share of the fund, based on how much they put in and don't have to do any work. But it is really powerful. And this is one of the things that I again, just learned over time, it's really powerful. If you can get LPS who number one, are really interested in the fund and have connections expertise or whatever, you know, it's kind of bad, but they want to they wanted to be successful. And that becomes a little bit of free labor, like I've had just some outrageously bright LPs. And I think one of the unique things about our space is just a, it's just so much, but they're one of the things that's really unique is for a lot of these people, they want to be able to tinker with smaller businesses, but they don't have any motivation or reason to do it. But it's a really fun for them. And so I've had people that have a net worth of $100 million, have absolutely no reason to be, you know, in the weeds on our watch e commerce, you know, few billion dollar business, but it's fun for them. And when you can give somebody that outlet to, for them to be able to go back, you know, 30 years to when they were just getting started. That's a whole nother ROI that just can't be measured. And one of the biggest kind of benefits. But the other thing is, there's nowhere else to get access to that type of investments where you're looking at those LPs, you're trying to figure out who are the LPS that are gonna get excited about this. And so one could just be excited, because it's one of the other side could be where else are you going to go to get you know, in a time that we're living in right now, where inflation is absolutely nuts. And everybody's trying to get as as diversified portfolio as possible, and get some exposure to as many different asset classes as possible. One of the asset classes that it's near impossible to get access to, is the small business arena. And so by try everybody wants, it's so funny, because every wants to get the bigger and bigger and bigger deal. And it's like no, the opportunity is giving those people who are investing in the bigger deals access to this smaller micro market. And you know, you got the Russell 5000, which is a joke, and there's just nowhere else to get access to this. And so you know what, one of the reasons that I ended up creating the incubator is that there's a plethora of LPs that are out there and want to put money in this space, what's missing is the talent to go out there and put the money to work. So you've got the LPs, under the LPs, we're going out and we're acquiring these businesses, we put those into LLCs. And that's what the actual assets will sit in. So it's a very, you know, when you break down the actual structure, it's a very simple structure. It's easy to do those agreements are easy. The tougher part is the actual strategies around managing the fund and generating really great returns.
Ronald Skelton 39:09
Now, these GPS and LPs are they all accredited investors?
Ace Chapman 39:14
Yeah, so I only deal with the with the GPs are really the hustler so they don't have to be accredited. They're doing the work. LPs, I really only deal with accredited investors.
Ronald Skelton 39:28
The reason I asked is coming from the real estate invest investment space, I can tell you I'm absolutely positive. There's good investors and bad investors. I had a I had a couple of ladies that I met at a event where they were learning it's funny is I used to raise money going to events where people are need to be private investors, I mean private lenders, so I had to go to the private lending event and like, you know, because I wanted to learn some of that too, but it was mostly because I meet everybody in the room trying to learn that and go oh, by the way, I've got six houses lined up to buy you know, or you're interested in funding them and I've walked out of the room on some of those meetings with 100 $200,000 in investing. I did that out of Texas once and I got 200k from a couple Asian ladies, which are there were good people until I had their money. And I, it was a horror story. I mean, it was just absolutely not because of any thing other than they just wouldn't do it this. Give me an example. The day we closed a wire the money I closed and bought two houses with the money 190 $187,000 A loan. I bought two houses here in Tulsa with the day we closed. After they wire the money we closed, I get this phone call one Hey, I'm at the airport. I was like, Okay, where are you flying, though? I mean, I'm at the Tulsa airport, I flew into town, I want to go see my houses. I was like, first of all, you're the lender. They're not your houses. You're the bank. The second of all, what are you doing in town? Well, you know, my partner wants me to come up and check out the houses we bought. And like that was the mentality, right? And the next thing I know, she was like, hey, my son's coming up there for the summer. And he's an intern with you. I was like, No, he's not like didn't even ask, right? This was the mentality, right? It's just like this constant. You know, they would call me and try to, like, hey, we need to, you know, go to those houses and send me photos of your of your progress. And it's like, you're not you're not a hard money lender loaning me money to fix these houses up, you basically are the bank. So it was one of those there are bad investors out there. They typically she, you know, I could have, she offered to loan me more money when we close those deals. And they had 5 million in cash setting. They're like, No, I'm not interested. It was just such, it was a, you know, I'd never had an investor where I like I borrowed money to buy some houses. And I was on the phone with them three times three hours a week just managing them. Right?
Ace Chapman 41:40
Yeah. So why is horrible?
Ronald Skelton 41:44
I say I know, for a fact, there's no such thing as a bad investor. So as you're going through your get your general partners, and your limited partners, is there like an interview process you go through? Like, is this going to be a good fit for me? And to work with these guys? Or what's your process for selecting people, you know, like, and trust, you know, benefit the fund and benefit you as a human being adult? What I refer to as, you know, time vampires. So they basically, they don't suck the life out of you. It's like, you know, needing your time.
Ace Chapman 42:14
Yeah, so part of that does come from, I'm glad that I got into the space the way that I did. Because, you know, it was basically with feet dragging. And so, you know, it was just known and very clear that I didn't really want to do this, I'm doing this as a favor, you know. And, you know, the other part of that was really saying no, to more people than I let in. And it's really interesting, if you watch, like the show billions, where, you know, if you're good at what you do, and you know, the strategies around it. It's kind of interesting, but yeah, like they the people, the investors will have to spend more time convincing you to let them invest and why you should let them invest than they would, then then you even trying to filter them. So you know, you're trying to figure out the best. And so that's what I was saying. Like, even with LPs, like one of the things that I'm looking for in the LP is like they're selling me, I'm not really selling them. So like, what are your connections? Can you get us deal flow? Can you get us good strategic partnerships? Are you willing to provide advisory services when we acquire a business? Like, it's like your your money isn't enough? You know what I mean? It for most people that listen, you know, when I tell people this and even when people first come into the incubator, it's like no, like, you know, for, for a lot of people, which is counterintuitive, they just printed endless trillions of this stuff, like the commodity is not money. The commodity is not money. It's not a commodity, it's more of it than frickin rice, just printing it out, they can create it, you know, quick, quicker and easier than most things on earth. So the value is your ability to generate an ROI. So the money is endless, like there's men right now, with inflation, you think about the person that's worth $100 million. They're desperate to get a return because next year, if they don't have it working, you know, just like those ladies, even though they're giving you a headache, they still want to get their money to work, because the next year that it's 8 million if and which is a low end of where inflation is 8 million of that 100 million is in the wind. So you want to understand how to create that that dynamic because I would never want to run or create a fund where I'm actually trying to go in and raise the money like yeah, like, it sounds weird, but like I literally have not I think even just from the beginning, like I've never raised money, I think the last time where I will raise money, and this is interesting, but where we've raised money and did hustle is like, if we're selling a deal, so we had a deal, where we had invested. And we took that business through we funder and did a crowdfunding race. And so but that was at the exit of that business, and we hustle raising capital, but I would never hustle or try to, you know, like, really aggressively raise capital, it's more like, Hey, we got this, if you think you can add something to it, we'll consider allow you to be an LP.
Ronald Skelton 45:42
That's interesting. So on exit, you are raising funds, where you're raising funds to help the acquirer be able to pay you. Ah, so that's, that's actually a kind of a fresh thing. Like, look, you're the right fit for this, you don't have the money, I'm gonna reach out and actually, you know, spend a little effort and help you raise the money to buy this because I'd love it to land in your lap. That that's, that's the first time I've heard anybody out of 2530 people I've interviewed and probably 100 People I've said in the Zoom calls with in this space,
Ace Chapman 46:13
a game changer for sure.
Ronald Skelton 46:16
I mean, think about it, like you could really run across somebody who's almost there with the funds or like has half the funds. But you absolutely know that if it's in their hands, it's in great hands. So I can see that I can see where they get smarter to like, Look, I'll give you a hand here. So Stan asked, one of the things he did ask is, where's the best? What's the best tip for how to get started creating a fund? You know, I would say reach out to ace and have him help you start one. But what would you say is the, you know,
Ace Chapman 46:45
yeah, I want to go through like, you know, our process is a very specific process, and we take you through the incubator. But if you're going to try to build one on your own, I do think that the stuff that I did before, is what led me to being able to do the fund. And so like doing those deals, raising capital for on a deal by deal basis, is the way that you're able to start that fun, you don't want to start a fund from scratch, and you've never built relationships with investors, you've never gotten returns to those investors. So while I just went a long time, so you know, I had years where they're telling me, hey, you should do this, you should do this. And I still just like no, like, I'll let you put little capital in on this deal. I don't need to do that fun thing. But I think that that is where to start is get get some deals under your belt and give a good return. And then, you know, once you're ready to raise your fund, you've got those contacts, you've got to experience. You know, I think even that's just a nightmare. If you've if you don't, you've never really done done deals. And then it gets more and more complicated. You know, like, the other thing that we're aggressively raising capital for is just a company public called Fiji. And so in that case, again, it's just like going through those steps is what allows you to do the future things. And so you know, I wouldn't try to rush like we do have a specific process with the incubator. But I'm glad that I went through each of these stages, because taken Fiji public was just like everything else 10 times 10. And so that was a lot of work.
Ronald Skelton 48:36
So I get it. The this is a wide open space. I've met at least two people on the show, just interviewed one yesterday, times yesterday. He's he's in the acquisitions and mergers, he does turnarounds. But he in the last year, they've created two funds, and both of them around 100,000,001 here and one here in the United States and one in Australia, I believe is what the second one is, I might be messing that up. But uh, you know, what you're talking about seems and you know, it is taking them a long time to get those up and running and a lot of work. It sounds like
Ace Chapman 49:12
Tom Ryan, life is too short to spread out. You know, it's again, it's, it's great. That's a great model. It takes a long time to get those up and running. It's just everything is things that I don't want to do. We've got to negotiate with those, like with my investors, my LPs, like it's the non negotiable, like our terms are not with $100 million fund. You've got sophisticated investors, they're getting their attorneys, those attorneys are calling your attorneys, they're debating they want to change stuff in the LP agreement. They want these funds, you know, it's just it's such a different world that you know, if I'm going to deal with again, and that's why I kind of mentioned the taking the company public. So if I'm going to deal with Fat. And you know, again, I don't want to get into the weeds. But bottom line is, if I'm going to deal with that much headache, it's going to be in my own company. I'm a CEO of not to do a fund. Not right. And that's way too much headache. But to each his own.
Ronald Skelton 50:17
I get it. So we've been in this for we're right at the 50 minute mark, we're gonna have to start wrapping up the show. We covered a lot of topics and stuff. Is there anything like we really miss like, man, we probably should tell them this. One thing that comes to my mind is a lot of people think that when you create a fund, people have to wire your money and you don't have money sitting in there. That's not true. It's a pledge, like it's a contractual pledges and I pledge a million dollars to your fund. And it doesn't get wired or transferred until there's an acquisition on the table. Is that correct?
Ace Chapman 50:47
That's correct. And so I'll give, give another little quick, kind of expert level tip, something that's interesting. And this is something that happened in one of the Pepys is, you know, the you can pledge whatever doesn't mean that we're going to use all the money. And so for instance, one of the got one of the GPS that was a part of the program really killed it, because, you know, we have a minimum that everybody basically all the GPs are going to put in 25,000. And he basically said, hey, I want to put in 150, because I'm just like, what, what we're doing? Well, it turns out that with leverage, and everything we did, we only ended up calling about 50% of the money. Because we might refinance, take that cash back out. And then we've got more capital go and reinvest. And so if you're if you play the game, right, and you know a little bit about the strategy, there is kind of some chest to be played, even with your commitment. So he only put up about 75. But he got to make aural why as if he had put up the whole 150. So some cool, cool things there. But yeah, you're exactly right. So you're just making a commitment. And then as you find those those deals in you know, just all these other things come into play that are so important when it comes to managing a fund understanding, have fun understanding ROI, because time is the most important part of that ROI equation. So you know, we're looking at getting that, that that money to work, it's, you know, how quickly you know what it is, we're tired, we try to time it like we're doing our first deal right now. And Pepe six, I have them completing the LP and GP agreements, at the same time that we're completing our first Roi. Roi loi, we're getting are gonna wind down the same time. So we can close both of those at the exact same time, the fun poses the same time, we're closing our first deal.
Ronald Skelton 52:55
So one of the things one of the LinkedIn user just asked is, How do we read? How do you refinance out of those short term funds? I'm thinking on exit? Maybe I don't understand you understand the question there. And I'll post it up there. So here's the question.
Ace Chapman 53:10
So I think that they're not completely like REIT, you could refinance, but you're most time you just gonna sell a business. Right? So a refinance might be in before you're gonna sail. So it might be like, we just did a deal, where we wanted some financing to actually, you know, so we bought a business and this business in the Artspace. And then we had another business that we want to buy, that was a great complementary business with a great database and that kind of thing. So we got, basically a refinance, to get cash into the parent business to be able to use that to buy the next business. And so this is one of the things you know, again, some people may hear even those crazy returns and be like, Oh, that's just nuts, like no way that that's possible. But we know when you take a deal like that, it's, you know, when you and you're looking at the ROI, the income that comes from that subsidiary business, or the business that we acquired, that's infinite return, because we use $0, from the fund to buy that. So you might use a refinance and something like that. But then when you're exiting those business, you just sell them at the end of the fun.
Ronald Skelton 54:24
Awesome. So we're at 53 minutes now, we probably need to make sure people know how to get
Ace Chapman 54:30
like, the deeper the rabbit hole goes, the more that's why I've been trying to be careful of like, if I go here that I gotta explain to.
Ronald Skelton 54:37
Yeah, we both love this topic. We both love helping people get involved in this topic. So with that passion ever because I've had people that never been on a podcast before and they're like, I don't know if I could do an hour. I was like, trust me, man. If you're excited about this industry, I'm going to have to cut you off at about 55 minutes, right? So we're at this stage, we're about that 55 minute mark. I have your website up. It's Believe it for those you guys are just listening to the podcast. It's simply ace AC E. Chapman, CA, CH APL man just like it sounds.com. So ace chapman.com. You can find him on Twitter. I didn't see a LinkedIn in our notes. But you're
Ace Chapman 55:16
building? Yeah, you're right. We didn't send that. But yeah, just so tasty.
Ronald Skelton 55:20
And just just jump right there on the website, you got a great YouTube channel with some content if people want to dive into that. So that's kind of interesting is when I was trying to figure out what next to go to. I stumbled across your videos years ago, and it's one of the years Dan lock, and a few other guys are the ones that like, you're gonna probably want to take a look at this. I was just telling that on the last episode of this, I told the story of I hired a performance coach, and he told me one day, man, you should be playing a bigger game, then every time I would close the house, you know, even if it was a big win, and like there's this voice in the back of my head, but you shouldn't be playing a bigger game. So I started looking around years ago, even before I closed the real estate investment group I had, you know, looking around, what would be my next game. And that's how I come across your content and some of these other guys. So it's exciting to have you on here. Thank you for being on here. Is there any parting notes you want to say before we shut this off?
Ace Chapman 56:14
No, no, I think that's really a great note to end on. You know, when my mentors were telling me like, no, like, you need to get into the private equity game. It's like, okay, even for me, like maybe a little bit that was the intimidation or whatever, going on this path to take the company public and getting that done. Like in each one of these cases, you know, it's like, Okay, what's the next bigger game to be played, but trying to be smart about it? You know, I know for me and my personality, the 100 million dollar fun game isn't a game that I want to pay. I got to learn that at the $12 million level, like, wait a minute, like, No, this isn't life I'm trying to live. But figuring out what the game just like you did, looking around, what's the game that I want to play? And then how do I play it on this bigger level as possible?
Ronald Skelton 56:58
Man, I do appreciate you. We're going to end the podcast right now hanging out for a few seconds afterwards. So we can wrap up a couple of things and, you know, answer any questions you might have about it. And that's the podcast thank you guys for listening in. The investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind introduced first in Napoleon Hill's famous book Thinking Grow Rich, with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to tiepm.com That's T i e. P m.com. And check out the investors and entrepreneurs professional mastermind