2 Advanced Online Business Market Places & a DEEPER Dive Into Using PPMs to Buy or Sell a business.

This Week On How2Exit podcast and Axial Market CEO, Flippa CEO and PPM - Raising Funds to Acquire or Sell a Business

Author

Ronald Skelton
February 28, 2023

SUMMARY:

Peter Lehrman is the CEO of Axial.com, an internet platform for buying, selling, advising, and financing private companies. He explains that he stumbled into the opportunity to work part-time with a private equity firm while in graduate school, and this experience showed him how difficult it was to find reliable information about small businesses. Feeling inspired, he decided to start Axial with the goal of solving this problem for the market at large. 

Peter Lehrman and Ron Skelton discuss how Axial helps sellers, buyers and advisors. Lehrman explains the two primary things that Axial tries to help sellers with. The first is to give sellers data and empirical information to help them narrow down the funnel of potential brokers when they decide to sell their business. The second is to give buyers data and empirical information to help them find companies to invest in. Finally, Axial helps advisors by connecting them with businesses that need their brokerage services. All in all, Axial is a comprehensive ecosystem that is beneficial for all its users.

Business owners looking to sell their business face three main questions: How much is my business worth, who should help me represent myself in the sale of the business, and who are the ideal buyers I should be talking to? To answer the first two questions, Axial provides free data on the productivity, performance, and track records of brokers and M&A advisors. As for the third question, Axial can provide sellers with immediate access to a subset of buyers who are most potentially relevant to them so sellers can see data on the buyers, the kinds of transactions they have done, and why they are interested in businesses like the sellers. All of this is done to help the seller make an informed decision and find the right buyers for their business.  Listen Here: (57:21)

For an Awesome source of information and great articles on buying, growing, and selling a business, check out: Acquisition Aficionado Magazine’s Latest Issue (Sponsor)

Summary/Abstract

Ron Skelton welcomed Blake Hutchison back to the How2Exit podcast, as the CEO of Flippa, which is a marketplace to buy and sell online businesses and digital assets. Blake explained that their mission is to democratize the exit and to help people and enable business ownership. He also noted that they sell around 12,000 online businesses and digital assets per annum, which can include Shopify businesses, WordPress blogs, and iOS or Android apps. Ron was impressed by the fact that Flippa has sold over 300,000 digital businesses since its founding in 2009, as well as the fact that they are constantly innovating and adding new products and services to their existing products.

Flippa has improved its due diligence services and, since June, has added nine new integrations to the website. This includes QuickBooks online, Zero, Magenta, BigCommerce, Shopify, Stripe, eBay, Amazon and WooCommerce for E-commerce. This allows online business owners to connect and expose their data so that buyers can use this data to make informed decisions about the performance of the assets. Additionally, they have added Google Analytics, SCM Rush and a variety of advertising sources that buyers can use to assess the asset. Lastly, they have added insights to help buyers make informed decisions.

The conversation that came next was about a feature called Flippa Insights that helps buyers compare assets. It lets them compare the asking price with similar assets that have been sold in the past, as well as key metrics such as refund rate, average order value, churn, lifetime value, annual recurring revenue, monthly recurring revenue, page views, and bounce rates. This gives buyers valuable information to help them make informed decisions when purchasing an online business.

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Thanks to Sweetview Partners, an Acquisitions company looking to buy Texas-based B2B companies in the $1MM - $30MM revenue range. Click on the logo to check them out. 

This week’s “DEEPER” Dive: 

Use A Private Equity Fund to Buy or Sell Your Next Business

Ace Chapman, an acquisitions entrepreneur and private equity fund manager, shares the key to creating a private equity fund that you can use to acquire businesses. Private equity funds are proven to accelerate business acquisitions and rollups. 

We interviewed Ace Chapman in episode “Mentor Mini Series E6”- Watch it here.

In this article, we talk about raising capital to acquire businesses. In the interview, Ace explains he helps his buyers raise capital to acquire his businesses when selling. To learn more about this process and PPMs (Private Placement Memorandums)… 

Read the full article with a paid account by the Author, Yoseph Israel; click the share below and tag me in your share to get a paid account for a week, refer 3 people (DM me who you got to sign up), and get a paid account for 90 days. Get 10 signups - FREE FOR A YEAR.

Use a Private Equity Fund to Buy Your Next Business

FROM THE Editor:

Disclaimer: This newsletter is provided for informational & educational purposes only, and should not be relied upon as legal, business, investment, or tax advice. We are not attorneys, tax, or financial advisors and not qualified to give any such advice. 

Before you go any further, know that you need legal assistance to set this up. What you need is likely a Private Placement Memorandum (PPM). This is a legal document used in the process of raising capital from private investors for a business venture or investment opportunity.

The PPM provides detailed information about the investment opportunity, such as the nature of the business, the investment structure, the risks involved, and financial projections. It also includes legal disclosures, such as the securities laws that govern the investment and any potential conflicts of interest.

Not only is this document needed, but it must also be filed with the SEC, and certain rules pertaining to who you can contact, how they are contacted, what you can say, and when you can say it, all apply and change depending on how this document is set up. 

If you wish to follow this method, we suggest you work with an SEC-qualified Attorney team to ensure you are in compliance with the law. 

—End Editor Notes—

Ace Chapman, a private equity fund manager, shares the key to creating a private equity fund that you can use to acquire businesses. Private equity funds are proven to accelerate business acquisitions and rollups. 

Table of Contents

IN THIS ARTICLE, WE’LL COVER:

  1. WE ARE ALL GOING TO END UP AS FUND MANAGERS

  2. THE PRIVATE EQUITY FUNDING FORMAT

  3. BUILDING A FUND WILL HELP YOU BUY BIGGER BUSINESSES FASTER

  4. HOW TO OVERSUBSCRIBE YOUR FUND WITH INVESTORS BEGGING TO GIVE YOU THEIR MONEY

We Are All Going to End Up as Fund Managers 

“In the end, we're all going to end up as a fund manager,” says Ace Chapman, entrepreneur & private equity fund incubator, alluding to the natural progression of a business buyer to the world of private equity (PE). 

Chapman presents the idea that building the skillset of raising capital can not only secure your future but accelerate your present business buying aspirations through the use of a private equity fund.

Private equity funds are a proven way to accelerate business acquisitions and is far safer and more efficient than using your life savings or a bank loan to acquire a small business.

Many entrepreneurs are always looking for ways to reduce their personal financial exposure, and private equity presents a way to not only become a more sophisticated buyer, but to become a bigger buyer faster.

In this DEEPER Segment, we are going to do a deep dive into the world of private equity and how building a PE fund can help us significantly increase the number of businesses we can buy without the use of a bank. Watch the full interview here.

The Private Equity Funding Format

Ace Chapman has been acquiring businesses for over 20 years and has done over 200 deals. 

At one point in his career, he entered the tanning salon space, where he did the successful roll-up and exit of six tanning salons. The funding for those acquisitions was on a deal-by-deal basis via debt, savings, and money he raised from private lenders. 

A few of his mentors suggested the private equity funding format, where instead of going to the bank or private lenders on a deal-by-deal basis, through the creation of a fund, he could continually use fund money for business acquisitions. 

The private equity funding format provides an “audited track record” where if you need money to make an acquisition, you don’t need to go to the bank to convince them to loan you money to do a deal, you can just go to your investors to get the money. 

A Deeper Thought

When you really break it down, banks and private lenders are looking for a return on the money they are lending you. 

They force you to jump through hoops because of uncertainty, but with a private equity fund that has a proven track record, you have the ability to make your investors jump through the hoops in order to give you money.

We will address this a little more in-depth later in this article.

Building A Fund Will Help You Buy Businesses Faster

Chapman discovered that the biggest players in the M&A space are private equity groups. 

So why not become one?

First, you’ll have access to more money to buy businesses and second, you’ll pay less taxes on your earnings. It’s truly a win-win. 

Let’s say you have a private equity fund of $3M…yes, you can buy a $3M business, but what if you used that money to buy three $1M businesses. 

And what if instead of paying cash for all three businesses, you leveraged that money with a combination of seller financing and corporate debt where you only had to put $300K-$500K down?

This is very similar to Ace Chapman’s fund model that he’s used to buy animation studios, finance companies, e-commerce businesses, and even franchises.

“And one of the reasons [we] get really good returns is using as much leverage as possible.”

The additional leverage that he uses allows him to buy more businesses, leaving more capital for cash flow and growth. Building a fund will help you buy businesses faster and more efficiently.

How to Oversubscribe Your Fund with Investors Begging to Give You Their Money

By now, you are probably really excited about starting a private equity fund. Below are six keys to starting a fund that will have investors begging to give you their money!

  1. In order to oversubscribe your fund, a proven track record will be helpful.

Chapman is a seasoned, experienced business operator that honed his craft of managing debt in leveraged buyouts (LBO) for business acquisitions.

His fund eventually was oversubscribed because people wanted to do business with him. One of his funds started as a $5M fund, that was pushed to $7M, then $9M before he had to close it at twelve million dollars. 

Chapman’s M&A experience provided him a track record that increased potential investors’ confidence in his ability to perform. He leveraged that confidence to start his first few funds, then he used the success of those funds to create buzz around his ability to provide an ROI.  

Building a proven track record will help would-be investors gain confidence in you. Go out and do some deals!

  1. Immerse yourself in Private Equity—find a mentor in the space.

Chapman doesn’t believe you should learn private equity from watching videos. He believes you should be immersed through controlled experiences before getting into the real heavy stuff. 

“I don't think it's 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 [that] 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 backend, managing the deals, exiting the deals the right way…”

He believes you should have someone guiding you so you can avoid the pitfalls, whether that’s through a formal mentorship, an internship, or sweat equity.

  1. Micro Funds can provide investors a better ROI than larger funds and there is less red tape.

Regarding ROI…a key lesson that Chapman learned was that with smaller funds, i.e., micro funds, he could promise his investors a better return because he can acquire smaller businesses that can grow faster, leading to higher ROI.

With larger funds there’s a desire to acquire larger businesses, but the returns are much more challenging to achieve.

If you think about it…it’s easier to take a business that you bought at $100K in revenue and get it to $300K, than it is to take a $5M revenue business and get it to $15M. 

Both are 300% gains. 

Regarding red tape…with smaller funds it’s easier to manage the investors. 

“With my investors, my LPs, it's the nonnegotiable. With larger funds, it becomes a lot more complicated. With a $100 million fund. You've got sophisticated investors, they're getting their attorneys, those attorneys are calling your attorneys, they're debating [because] they want to change stuff in the LP agreement.”

  1. Set up your fund based on performance.

Many funds charge management fees, but Chapman does not.

“I don't charge a management fee. I do everything on performance. So that means that if I can go in and we just absolutely kill it, then my upside is really huge.” 

He sets his funds up strictly on performance where his investors get the first 8-10% return, allowing him to negotiate for a higher fund manager return based on the ROI of the acquired company. 

In some cases, he’s able to do 50-50 splits with his investors when the ROI is high enough.

  1. The real private equity opportunity is in the smaller M&A Space!

Why would anyone invest in a fund for small business M&A? Investors want to invest in small businesses because it’s a way to diversify their portfolio and get better returns than the stock market.

“Everybody's trying to get a diversified portfolio and get 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.” 

Chapman says everyone wants to get the bigger deals, but really, it’s better to provide investors with the opportunity to invest in the smaller M&A space. 

“Everyone wants to get the bigger deals. And it's like, no, the opportunity is giving those people who are investing in the bigger deals access to this smaller micro market.”

Besides the Russell Index there is no other place for people to be able to invest in small businesses. 

Private Equity creates opportunity for potential investors.

“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.”

  1. Vet Your Investors

Chapman doesn’t require his General Partners (GPs) to be accredited investors due to the “hustle nature” of their role, but he does require his Limited Partners (LPs) to be accredited.

“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.”

To Chapman, his investor’s capital is not enough to make them good investors. They need to bring more to the table.

“One of the things that I'm looking for in the LP (Limited Partner) 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?”

Within his model, capital is a requirement for both GP's & LP's, but it is paired with sweat equity for the GP's.

About the Author, Yoseph Israel

Yoseph Israel is a staff writer for How2Exit who’s intrigued by the world of M&A. He has a small business M&A themed TikTok channel called @SkipTheStartup where he discusses topics such as Seller Financing, Negotiation, and how to do small business M&A deals. Along with real estate investing, he has successfully closed multiple small business M&A transactions.