The managing director of Empire Flippers Capital, Mike Vranjkovic, joins us on the podcast this week.
EF Capital is a part of Empire Flippers – it's their fund to aline accredited investors with operators. They take these investors and pair them up with operators to help them run a portfolio of assets.
- Content sites
- FBA sites
- SaaS sites, etc
Mike goes into the background of EF Capital and shares all the details of how it works. He also discusses what it's like to be an accredited investor vs what it's like to be an operator in this program.
Importantly, Mike shares the interesting ways they're aligning the interests of the 3 different parties: accredited operator, investor, and EF Capital.
As more money flows into this space, make sure you're up to date with what's going on by watching, reading, or listening to this podcast interview today.
Mike Vranjkovic From Empire Flippers Capital
Topics covered in the podcast:
- Trends in the acquisition market
- The effects of Covid on the industry
- Expected distributions for all parties
- The world of asset investing
- How online businesses are being viewed by bigger investors
Links and resources mentioned:
READ THE FULL TRANSCRIPT:
Jared: Hey, welcome back to the niche pursuits podcast. My name is Jared Bauman. And today we're talking with Mike , who is the managing director of empire flippers capital.
Now ETF capital is a part of empire flippers and what it is is their program. It's their fund to align accredited investors with operators. And what they do is they take these investors and they, they pair them up with operators to help them run a portfolio of assets, whether it be content sites or FBA sites SAS sites, et cetera.
And so Mike goes into depth on the background of ETF capital, and he gives us all the info on the details of how it works. Mike and I talk a lot about the details on what it looks like to be an investor, and also what it looks like to be an operator in the ETF capital program. He shares a lot of the interesting ways that they are aligning the.
For all three players that are at the table, the operator, the investor, and of course, ETF capital themselves. We walk through a live example where we really take a model or a case, a dollar amount and look at how it all plays out over the course of a couple of years, which is how long these funds take to mature.
Mike is generous and shares tips for people on how to start their own fund and the comparisons in running their own fund versus going with an ETF capital model. We of course spent some time talking about trends in the asset acquisition market specifically what they're seeing inside of the ETF capital fund itself.
So it's a really, really fun conversation as we dive into the world of asset investing and how our websites, how our online online businesses these days are being viewed by bigger dollars and bigger, better. So without further ado, let's dive in. Hope you enjoy
All right. Today we're joined on the podcast by Mike Frankevich, who is the managing director of empire flippers capital or ETF capital, as I think it's commonly referred to Mike, how are you doing?
Mike: Really excited to be on the podcast.
Jared: Yeah. Thanks so much for joining us. Where whereabouts are you calling in from?
I feel like the question is appar pro, because I know that empire flippers is such a great community of digital nomads and you guys support that. So where are you joining us from?
Mike: Yeah, I'm truly in Midian, Columbia. I'm originally from Chicago, but I've been here for the last eight months or so.
Jared: Okay. Very good.
All right. How's
Mike: Columbia this time of year. It's good. It's a really nice warm weather, probably similar weather to. Yeah.
Jared: Yeah, it's beautiful here. It's a fall as a recording. And so it's, it's good weather so, well, I'm really excited about today's conversation. There's a lot that's been talked about certainly on this podcast, but I think as an industry, in terms of this idea of operators, running websites, growing portfolios on behalf of investors it kind of underlies this idea of monetizing websites and the growing multiples that have been, that have been happening in the industry for the last five years or so.
Let me kick it over to you to just give us some background on yourself, introduce yourself and kind of kick us off here for what we're talking
Mike: about. Sure. So my name is Mike Frankevich. I've been with empire flippers since 2014 working in various rules, operations, including vetting the businesses that we sell.
I've worked with buyers, helping them align up their acquisition criteria with our available. This thing, worked with sellers, getting their businesses ready for sale. And I'm currently the managing director of EFT capital, a brand new program that we launched earlier this year.
Jared: And I remember seeing the initial announcement of if capital and being really intrigued and excited about it.
So let's, let's dive into F capital. What give us some background on maybe the Genesis of how it came to be. And what it looks like right
Mike: now, it might be useful to just give you a brief background on empire flippers. I'm guessing a lot of your audience, 30 familiar with it, but just, just in case they're not.
Yes. So empire flippers was started about 10 years ago, founded by Joe McNatty and Justin Kirk. We started off building and selling your own niche sites, monetize with ads. That we transitioned into a brokerage where we no longer build their own sites. So we sell other people's businesses. We do all monetizations, anything from content to Amazon FBA, to SAS ranging from small $50,000 businesses up to eight figure $10 million plus businesses.
We've done 1500 deals sold 15 more than 1500 businesses worth more than $300 million. And we have a audience of 200,000 to active buyers and sellers, like you mentioned earlier, our team is fully distributed. We're all over the world. We have about 90 people. And actually the reason we started ETF capital is because we kept getting these two frequent questions.
The first one was. If I buy a business, can you just run it for me? Or can you introduce me to somebody that knows how to run a business? So we had a lot of people in our audience that liked the idea of online businesses, but either didn't have the time to run them or didn't have the necessary skillset to run them.
And then we also received the question of, Hey, I know how to run these online businesses. Do you know anybody that's looking to invest in these online businesses passively? So that's, that's why you have Capitol was was started.
Jared: Yeah, you guys, obviously at this point with with how many deals you guys are doing, have a real network of.
Website owners and operators, but also with investors and people who are looking to enter the market. This is a conversation that happens in the hallways with website owners and this conversation about this being a really good space to be in going forward. What has in your experience with EFT capital?
Has there been a growing swell of interest in websites as an asset for investors? What's, what's the, maybe the background there a bit on this being a growing interest for, for investors to enter the
Mike: market. Yeah. I mean, I, as I'm sure, you know, you know, on online businesses, I feel like, you know, what has happened over the last couple of years with, with COVID has just accelerated the trend with online business, especially on the e-commerce site.
We've received a lot more interest from, you know, not your traditional website builder or somebody that buys online businesses, but somebody that understands these multiples relative to other types of investments and is very interested of getting into the space. So, so, you know, our, our long-term goal here is to make investing in online businesses, accessible to everyday people.
And you know, there, there, there's a few things that we did to structure you have capital. Would it be useful to give you a very high-level overview? What this would look like to somebody brand new coming into it?
Jared: I mean, I already have three or four questions, so go ahead and yeah, give it, give us that overview to kind of set the stage for some of the future conversation.
Mike: Yeah, absolutely. So I'll give you like the one or two minute overview here. So, so the main thing with U capital it's completely passive. So the investors are not involved in the day-to-day operations, the strategy, or even picking the business. What they do instead is they pick an operator. That's been vetted by empire flippers capital based on that operator track records based on their acquisition criteria, based on their strategy and the, and then the operator buys the business from empire flippers, they manage and grow the business.
The operator puts in their own money on every investment. They put in 5% of their own funds. So if they're doing a $2 million deal, they're putting in a hundred grand of their own money for investors, the minimum investment is 20,000 per deal. This whole program only works if you diversify them. So we're looking for investors.
Or would like to do multiple deals, ideally more than five deals in this way. They can invest across multiple deals with different operators, different monetizations, different strategies, and build a diversified and passive portfolio in terms of fees. There's a 33% carried interest set. Another way to keep it simple.
The investors are giving up two thirds of the profits to make this a passive investment and diversify. Typical hold period is two to four years. And then there's a regular, quarterly distributions and quarterly reports with financials and commentary from the operator all audited by EFT capital in terms of returns, we're expecting 20% average annual returns.
And that's, that's the very high level overview. What it looks like for invest.
Jared: Well, that's the high level. I know the details. Okay. So basically in a nutshell, empire flippers has existed as a brokerage for a good amount of time. And most people in this industry who are listening to his podcast probably have heard of empire flippers.
It's certainly one of the best known names for a brokerage and a website owners can bring their sites to sell to empire flippers who will basically present them in a marketplace and hopefully match them up with a good buyer sell for a very high, multiple, and life goes on. Now, ETF capital has really emerged as, and again, I'm just trying to summarize a bit to make sure I understand that.
And maybe a few other people have the same questions, but if capital has, is is, is really like a much more specified programming side of empire flippers that matches investors who are not interested in running their sites, investors who are interested in investing in multiple web. I matching them up with operators.
People who know how to run websites and operators put some skin in the game. They bring 5%. And then with the funds that multiple investors bring, go and buy websites from the empire flippers platform and run them and provide updates on them with a target of selling them down the road. And everybody gets profit.
Now profit is distributed along the way, but then obviously the profits at the end, when the sale has happened is where probably the investors see the majority, the majority. Yeah.
Mike: Yeah. I think, I think that's a really, really good summary. That's a, it's a better summary that I put there, but yeah, the pro profits happened quarterly after a year after the initial investment, a significant amount of the profits do come in the form of the quarterly distributions, but there's a big chunk at the end when the businesses are sold as well.
It depends on the operator strategy and the operators are all buying established, larger cashflow, positive businesses.
Jared: Okay, good. Well, before we dive in, maybe to a deeper dive on both the investor side and the operators side and cause let's go deep in on what it looks like for both of them. Maybe let's talk about EOF capital, a couple more questions about it before we move on.
How much money at this point has been raised so far with, with the efficacy.
Mike: And that's, that's a really good question. So we launched the first round earlier this year, we raised $7 million for five different operators, each one, running a different strategy, different monetizations. We just launched the second round two weeks ago.
And so far we've raised $4 million. The second round is currently open, depending on when the podcast is published, it might still be open or it might be closed. Okay. Yup.
Jared: Yup. And do you have a target for this, this round or is it roughly the same that you're looking.
Mike: We re we have a range for this round.
So each, each deal has a different amount that they're raising money for anywhere from one to three to 4 million. Overall, our target is about $10 million on this round. Okay.
Jared: Okay. How many deals have been funded in? So, I mean, let's look at the first round of 7 million. How many, how many deals did that end up being?
Or how many, how many acquisitions ended up being a part of that, that, that fund?
Mike: Yeah. Good, good question. So it was five different operators each each operator had their own separate deal and then each operator within their fund, the refund, their deal, and made anywhere from two to four acquisitions.
So each operator is also diversifying and building their own portfolio.
Jared: Right. Taking a certain amount of funds and ended up buying somewhere between two and four assets. I'll say, I don't want to say websites because I noticed some other components there, but you know two to four assets. Okay. And so what's the interest level been like?
I mean, has it been I'm guessing pretty popular with investors and operators or, you know, has it, has it, has it been more interest on one side of.
Mike: Yeah. I mean, w overall we've had, we've had really great interests that, you know, one of our goals that, like I mentioned earlier was bringing this to a much wider audience, but we knew when we were starting out, that it would probably be, or we expected it to be mostly our past.
Buyers and sellers. So people that have bought and sold businesses with us that fully understand the online space. And we expected a small percentage to be people that are not in our space. And then when we ran the numbers at the end of round one, we were shocked. 80% of the investors never bought or sold a business.
And that's, that's even more interesting because all of our marketing was geared to people that know how to build, buy, or sell businesses. So we weren't even going after that audience yet. So, so really excited about that. So, so we're able to reach a wider audience much earlier than we expected. So, so the interest has been great.
We've had lots of interest from operators as well. I can get into that a little bit more when we talk about operators in depth, but overall we're, we're off their green star. We've got a long way to go, but often a really good. Oh,
Jared: congratulations. I think it's I mean, no one really cares my opinion, but I'll, I'll just give you a quick I'm impressed and I'm excited for our industry because it's, you know, it's such a great thing that somebody like empire flippers and really you at the helm is grabbing this brand new concept.
I mean, it's been done on the side in individual private deals, but as a public offering by a well reputed company, I just, I'm so excited. So I'm just really glad to hear that it's going so well. It's so good for our industry.
Mike: I'm really excited about it too. And to be honest, we didn't, you know, we didn't think of this from scratch.
We saw people doing it on a smaller individual level. We saw large funds doing it for specific monetizations. And then we saw a whole other industries doing it. Like this is really common in real estate. There's multiple investment platforms. There's even an art investment platform. You figured, you know what, why don't we do this with online businesses, we will provide a little bit of oversight and this'll be a great way for somebody brand new.
That's looking to invest to get exposure to online business. Yeah,
Jared: you're right. Very popular in real estate. That's that's a good analogy for those who, who might, you know, be able to wrap their mind around that or maybe in the art model as well. That's, that's a good point. So well, okay. Let's let's deep dive, kind of each of these topics.
What do you say? We start with investors first and then move on to operators and you know, talk about what it looks like on each side. Maybe a little bit of a deeper dive into what this does look like as an infant.
Mike: Yeah. Yeah, absolutely. So the most important thing to remember here for investors that this is a passive investment we've had a number of investors ask us if they can take a more active role in its current form, it's completely passive.
Right now we really only have two options. You can buy a business and run it yourself from the empire flippers brokerage, or you can participate in ETF capital as a passive investor. So that's, that's the most important thing to remember here. And then the other thing I would really, I can't stress enough is diversification.
So I typically tell investors, if you're going to invest in one deal, don't do the program. The risk reward just doesn't make sense. No, we're expecting this whole thing was built from the ground up expecting investors to do a portfolio of deals where some fail in the client, some increase and grow, but overall the portfolio of those really well.
So I think those are the two most important things through. Remember for, for investors.
Jared: So, if I'm going to, cause you talked about how you were, you guys were a bit surprised about who ended up being investors that played a role in the F capital in the first round, if I'm an investor and why would I, why would I be attracted to ETF capital as opposed to buying say three of my own websites?
I get diversification. If I buy my own sites, I, you know, so I have diversification box checked I'm I could, I, you know, run them myself or pair up with someone like, what are some of the advantages to ETF capital over doing it
Mike: that. Yeah. Yeah, that's a, that's a really good question. There there's two things going on here.
The first one is if you don't have the necessary skillset on how to run those three websites, this would be a good, a good opportunity for you to get exposure to, you know online businesses or websites. Even if you do have the necessary skillset, you might not have the time. So we have multiple investors that sold large businesses with us, and they want they're at the point where they want to become more of an investor and not run these businesses day to day.
The other thing is with VF capital, you're buying a fractional share. In a much larger business. So if you're investing 20 grand and the operator is buying a million dollar business, you know, you're, you own it. You own 20%, sorry. You own $20,000 of a million dollar business. The risk profile is very different.
It's on a $20,000 business versus a million dollar business. And the other thing is these operators are experienced. They have a track record, they do this for a living and it's very hands-off for the investors.
Jared: Right, right. That's a good point. You know, you're buying a different set of asset class when you're diversifying and pooling your money, that if you were to buy three websites and they're all $50,000 websites versus taking $50,000 and put it in into a much bigger
Mike: fund exactly where you're going to have some investors that do know how to run their own online businesses.
So for example, we had some investors that have their own content site portfolios. This is, you know, this is what they do for a living. They have small, large content portfolios, however, they're interested in Amazon FBA. They understand that conceptually, but they're not at the point where they can run their own business or where they don't want to run their own business, but they want the exposure.
So they've used F capital as a way to diversify their exposure to different types of monetizations. So that's, that's really interesting. That's something that we didn't expect when we launched this, but we had quite, quite a few guys doing that. Yeah,
Jared: that is fascinating. That's another good point. Okay. So yeah, it almost is.
And I haven't, I'm sure through the reporting and through being able to follow along, you, you are going to learn a lot about a different model, like FBA and you get to watch from the sidelines as an investor, dip your toe in the water, but also get to learn hands-on in terms of how things are done. So that's, that's a, that's an interesting.
Mike: Yeah. So, so I think, I think investors will get a high level overview of, of how things are done, but I do want to point out it's probably not a great way to get in depth knowledge of how a monetization works. So, so we will have the quarterly reports, you know, we'll reveal the businesses that were purchased.
We'll explain what the, what the operator did the previous quarter for growth, what they plan to do going forward, but it will be a high level overview. So we'll be getting into the nitty-gritty detail details. For example, for a content site, it might be, you know, operator added to this many links, they've added this much content.
But I want to explain exactly what they did for for keyword research, what they did for conversion rate optimization or things like that. So it'll be a high-level review. Good point.
Jared: Good point. Okay, good. So it is a truly passive investment really. You know, it's very, very passive anything else on investors before we move on to talk more details about.
Mike: No, I think, I think that pretty much covers it at, at a very high level. If anybody wants to learn more, go to empire, flippers.com/capital, that you can find a very high level view there. And then there's a very detailed FAQ that answers most of the questions.
Jared: Okay. Okay, good. And let's talk about operators.
I mean, I think part of the Genesis of this conversation is that we've had one of your ETF capital operators on as a previous guest Mohit tater who joined us previously and talked through what it looks like from at least from his perspective on being an operator. And it sparked a lot of great conversation and really led almost in many ways to, to the introductions here and to this.
And so let's talk about the operator model. I think there's a lot of interest in this community about what that looks like conceptually and what it looks like. Not just conceptually, but more in depth.
Mike: Yeah. Yeah. That's that's I think that makes a lot of sense. So I think we might've even had a second operator on there, but but I'm not sure.
I think we might've had a couple operators on, on your podcast, but yeah, for uh, for the operators, basically what we're looking for is somebody like Mohit with an experienced track record of running their own portfolio. And, and we're looking for an operator that has a relevant and successful track record in the same strategy that they want to do with enough capital and, and really in terms of why an operator would want to do this.
There, there, there's a couple of things. You know, most of the operators that we work with, they could go out and buy their own businesses. Some of them even have run their own funds before with outside investor money. But the appeal for operators is they get a investment fund in a box with enough capital.
They can focus on what they enjoy doing the most, which is buying these businesses, running them and growing them. And EDF capital handles the legal structure, the investor relations, the reporting and provides a bit of oversight as well for, for the investors. And then the operator gets a significant part of the Kerry or the feed that investors pay and they get leverage on their money.
So they're putting in their own money and then they get leveraged on that as a result of the curated.
Jared: Is so the operators do need to bring some, just some of their own money to the deal. Is that flexible? I mean, is that something where, because they're picking a which sites or which assets to acquire that will, will vary, how does their money differ in terms of an investor's money?
Mike: Yeah. Yeah. Good, good, good question. So, so the operators money is treated exactly like the investor's money. And it's a hard requirement on the second round of the requirement was 5% of the amount that we're raising for them. So if we went out and raised the $2 million funds, the operator needed to put in a hundred thousand dollars of their own money, and the reason this was important for us, we wanted the operator to have skin in the game that we want them to have capital at risk.
It really helps us line up everybody's interests and incentives.
Jared: So let's talk about aligning those incentives. I mean, you have really three different parties here. You have the operator, you have the investor, and then you have enough capital. What are the things that you guys do to align incentives when it comes to all three parties?
Mike: Yeah. Yeah. Good, good question. So when we build this program from, from the ground up, we really focused on two things. So one making this attractive enough to operators so that we can go out and get the best operators possible. So this, this is one of the overarching things that we always keep an eye on, and that we're, that we're, that we're focused on.
And the second thing was aligning up everybody's incentives. So we figured if we can get the best operators possible and line up everybody's incentives, we can make it a win-win all around. This might be a little too much detail, but you know, one, one of the things that we looked at is, for example, there isn't, there's no salary for operators.
So the operators profits or incentive from participating in this program is the carried interest. And the carried interest is based on the profits. How much, how much money the businesses or the websites make that the operator buys and runs for the fund? There's no markup in the expenses. So any expenses are a cost, whether that's their team, whether that's a service.
However, on the flip side of that, there's no hurdle rate or there's no preferred returns for investors because there's no salary. And because there's no, no expense.
Jared: This is, do you mind if we go through a little bit of a actual theoretical case study here or we play through it? Cause I, I feel like any more questions I keep asking my topic and I think it always helps, right.
To just like walk through as an investor and an owner, you know, let's say that we're dealing with a $1 million fund here to just keep the numbers kind of round and nice. And so in that environment and operator would need to bring 5% of the table, so they need to bring about $50,000 and they've got skin in the game now, and now they basically have access to a million dollars to go on the empire flippers platform and purchase assets.
Right. Correct. Is there, maybe I'll ask questions as we go. Is there a timeframe that I need to make those purchases by? Is it kind of just, okay, here's your money go, go on the act of on marketplace right now and try to try to use that in a certain way.
Mike: Yeah. Yeah. Good, good question. So after the money is raised, the operators have a 90 day period to make their acquisitions any money that's not spent, goes back to investors.
And when, when they make the acquisitions you have capital has oversight. So we approve the acquisitions. They make, they pick what they want to buy. We simply have veto power and that's to make sure that the acquisitions that they're making are exactly what they outlined to investors. So for example, that $1 million fund, if they say they're going to buy two to four content businesses, two to four websites, monetized with affiliates or advertising, and then they look at a $1 million SAS business that they really like, that one would get rejected because that's, that's different from what they told investors.
When we raised.
Jared: Well, Hey, SAS is supposed to have great returns. Why not?
Mike: We could definitely have a separate SAS operator, but that guy would be able to buy a content business. Yeah.
Jared: If, if you say you're going to buy a SAS business, then the investor probably wants to SAS because it's not a bunch of content businesses.
Exactly. Okay. So we spend that 90 days and it's spent through the assets available on empire flippers. Now I've, I'm just doing some back of the napkin math. If I spend a million dollars on, on empire flippers, I'm just going to run and let's do it. Let's go content sites. Cause a lot of people who listen to the niche pursuits podcast are running a content site or several you know, I'd say let's just use a generic 40 X multiple right now.
And so I'm going to be getting at a million dollar, spent about a collection of sites that are probably generated about $25,000 a month in profit.
Okay. Okay, good. So let's run with that. So now I've got to grow these sites. We talked about having an exit period of, you know, a couple of years. And I have at my disposal, a team that I can use to grow these sites and every month as an operator, I'm going to be investing content and links on page work, technical changes, updates, and all those kinds of things.
You talked about how expenses are addressed in EDF capital. Let's look at that is every, every month I've got $25,000 of profit to work with. Let's let's work inside that model. How is that going to work with the distributions investor returns and extended.
Mike: Yeah, they're really, really good questions. So before the operator goes and makes these acquisitions, before we even start raising money for, for them, they're going to lay out their strategy in depth.
So they're going to say, this is my existing team that will be working on the fund. This is how much I paid them. This will be their roughly monthly costs. My strategy involved. When I buy a new content site, I'm going to reinvest all the yearnings are 50% of the earnings for the first three to six months to front load growth by adding additional content, adding additional links, whatever the strategy may be.
So, so they're going to lay out a broad outline of their strategy before the investors even invest. And then keep in mind if, if they, if they buy a portfolio, you know, at 40 X making roughly 25 grand a month, that portfolio is revenue is probably a bit higher because the, the, the price is based on that profit.
So there's some room already built in there for additional content, for additional links for existing VAs or an existing team. So they're going to use. That money, but they can also add additional expenses that the portfolio did not have built into it. And that would come out of the top. So let's say, let's say to keep the numbers simple, let's say an operator buys a 25 K a month net profit portfolio, and they decide, they decide to spend an extra five grand a month to grow that portfolio that leaves 20,000 leftover to be distributed to the investors and the operators going forward.
Jared: Okay. Okay, good. Yeah, it makes sense. Makes sense. What happens if you know you have a plan and, and, and things need to change, right? Maybe it needs more content than you anticipated, or maybe it's going so well that the operator says, Hey, we could, we could put in more content than we originally thought, because it's going so well, one way or the other.
How does how do adjustments to the plan take place? Is that within the full operator? Sorry. Is that up to the operator exclusively? Or is that something that ETF plays a role.
Mike: Yes. So, so the operator has full discretion on how to run the business. So this is what I was talking about earlier. We really wanted to line up the incentives and then give the operator, you know, more, as much discretion as possible so they can run the business as if it was their own business.
Of course, it gets a little bit more complicated when you talk about e-commerce businesses and a working capital for inventory, but for a content business, let's say they want to spend more or less on growing the business completely up to their discretion. The only hard requirements that we have are the operator has to hold a business for at least one year before they sell it.
And the reason for that is if they're able to grow a business really quickly, we want to make sure that the investors get long-term capital gains treatment on that. And then. The average holding period, like you said earlier is two, two to four years. So it's up to them when to sell and we'll advise them on it.
We will help them optimize the sales price and we'll coach them on that and all that stuff, but really how they run the business is completely up to them, how much they reinvest is up to them and keep in mind that all the operator track records will be public. So, and we're looking for operators that are, that want to be repeat operators.
So we're looking for an operator, we'll do one fund with us, build a successful track record, deliver good returns to investors, and then they'll do a second fund and a third fund going forward. So, so that's where the invent of the incentives are lined up because the track record is public. It helps them do additional funds with with the of capital.
Jared: Okay, great. Okay. That makes lots of sense. So yeah, I mean, it really is very passive for investors and very, very much in the hands of the operators to use their strategic knowledge and their past experiences to grow that that collection of assets as much as. Exactly. Yeah. So let's say we get down the road, you know quarterly, yearly distributions.
How, what are the percentages for those again? How would those be distributed at the end of you said quarterly, I believe you said, but whenever distributions are made, what are the percentages that an operator can expect? And, and again,
Mike: Yeah. Good. Good question. So the first distribution happens nine to 12 months after the investors invest.
And that's just because it takes time to acquire the businesses. Like we talked about before they have 90 days to acquire the businesses, then the businesses have to be transferred over. And then typically on a lot of these monitor monetizations, you know, like your listeners are familiar with there there's net term.
So you might earn the money today, but not get paid till 60 days later. And when you add all that up, it adds up to about nine or 12 months. And then the first distribution happens after that. And it happens regularly every quarter. So just going with with your simple example here, let's, let's say rehab at 20 K, about 25 K a month portfolio over a quarter, it will have made 75,000.
The investors keep two thirds of that profit. So the investors will get 50,000. That leaves 25,000 to be split in, in carried interest. And out of that curate interest out of that 3,300. 20% goes to the operator. 10% goes to Eve capital and 3% goes to outside advisors.
Jared: Okay, good. Okay. And is that the same basic split down the road when these when these assets.
Mike: Yeah. Yeah. Good, good question. So same example million dollar portfolio. Let's say the operator runs it for three years. Does a regular quarterly distributions. Let's say they were able to grow the portfolio and it's sold for a million and a half later when the business is sold, the first 1 million, it goes back to investors and then the $500,000 in profit has the same split.
So the investors will get two thirds of the profit. And then one third goes to the operator and you have capital.
Jared: Okay. Okay. Very good. It's a really, it's such a fascinating model. So congratulations then they, a lot of details there. So you guys must have to spend a lot of time getting all the details, ironed out and finding the right balance of operators.
Feel like they're getting rewarded. Investors feel like they're getting rewarded. If capital is rewarded for all their energy and their time. So great job on putting it all
Mike: together. Thank you. I mean, we've definitely got room for improvements. We're tweaking the program as we go, but, but I think I think we've got a good base here with everyone's interests being like.
Oh, that's good.
Jared: That's good. So let me transition a bit. I, this is something that if if you and I were at a bar having a drink, I might ask you this question. So why not just do it here? Right. If, if I was, if I was playing devil's advocate and I was saying, okay, so I understand now all the benefits for an operator.
To partner up with enough capital, but what if I wanted to start my own fund instead? You know, what would that look like? You have more experience with funds and this sort of things, and anybody else that I know, what would like what, what, what kind of, what would that look like maybe? And do you have any tips for people that might be interested on that side of things?
Mike: Yeah, absolutely. I can definitely talk about that. So, so when you're starting your own fund, then there is pretty much four things that you need to do. And some of them are, some of them require different skill sets. So the first one is you need to go out and raise the money from investors. The second one is acquisition, so you need to go out and buy the businesses.
Then you need to, the third one is you need to run and grow the businesses. And the fourth one is ongoing reporting. I can give you a few tips on each. If you wanna, if you want to dive right.
Jared: Yeah, that's great. You even had a step-by-step model.
Mike: Fantastic. So, so the, the first part with raising the money, a lot of people make the mistake here of focusing on the legal structure and the contracts and all of that first.
So my recommendation is if you're starting your own fund, go raise the money. First after you have hard commitments or you've raised the money, then do the contracts. Afterwards. I've heard stories from models, from operators, spending a year on getting the perfect legal structure, and then they can't go out and raise the money.
So for raising the money, I would focus. I mean, realistically, you're not going to be able to raise the money from strangers or most people will not be able to raise the money for strangers. So the best place to look is. Possibly family and people that you've worked with in the past. I would also recommend having as few investors as possible.
So if you're doing your own funds and you start with a hundred investors, that's going to be a logistical nightmare. Try to have one, two or three investors and, and start small, build a track records and then go from there. So that would be my recommendation, do that first. And when it comes to raising the money.
So as an investor, what they're going to look at is they're going to ask, you know, what is your track record look like? And what I would do is copy, we'll read that, go to one of the ETF capital deal pages, look at how we laid it out. So make sure you have your track record lead out in a presentation, or you have it written down somehow.
So this is, this includes your existing portfolio. This includes any past businesses that you've build grown and maybe sold and then lay out your strategy and acquisition criteria. You know, what type of business will you buy with the investor's money? What are you going to do to manage it? What are you going to grow it?
What does your team look like? And that will help you raise the money once you have. Go try to raise the money. Once you've got the money raised, then focus on the legal, I'm definitely not a, not a lawyer, but work, work with a lawyer that knows what they're doing here, and then have him put together the simplest structure possible that you can based on on the fund that you're building.
Jared: Right. Right. Okay, good. Yeah. That's a really good point. Cause I could see people who spend a lot of time and energy on that legal side of things, which it's important. I think we ought to underscore. It's not that it's not an important aspect to have the legal to have your legal ducks in a row. But if you, if you getting the money is the hard part, getting the legal stuff dialed in is just a matter of plugging in various pieces together into the right framework, but getting the money.
That's the really important and difficult part.
Mike: Exactly. Especially if you have few investors that makes the legal part a lot easier. If you already have the structure figured out how much you, you will be. How much, how much of the profits you will keep? How much of the profits the investors will keep.
You can work with a lawyer that does this for a living and they'll create the contracts. They'll create the legal structure.
Jared: Yeah, I can imagine. I have a friend you brought up the breakfast story of, I have a friend who invest in some real estate deals, but he's one of a hundred or 200 people I can imagine the logistical.
I don't wanna say nightmare because obviously they have people that manage that fund exclusively. That's their full-time job just to manage the fund, not grow the fund, not grow the asset, not buy the asset, but just to take care of all the owners at that point when you have so many owners.
Mike: Yeah, yeah. I mean, there, there's definitely an investor relations component to it.
As the funds get larger. As you have more investors, there's all kinds of securities compliance that you have to deal with. For example, read through, we have to file a a registration and every single us state that we have investors in, in every single deal, but we can do it at scale. But when you're first starting out, try to have the simplest structure possible, have the lawyers figure it out for you.
But focus on raising the money first and then really, you know, that gets into the acquisitions piece and doing organizing your acquisition criteria is going to make your life much easier when you do the acquisitions. So acquisitions, you have many different options, most large buyers who work with brokers simply because that's where the deal flow is.
But of course you can have your own deal flow if you're in communities, things like that. And acquisitions are tough because you're competing with. Repeat buyers that have been through the process many times before. So they have a competitive advantage that they're able to do due diligence faster, and they're able to snap up deals before a new buyer possibly could.
So I would look at acquisitions as a competitive advantage over other funds or over other buyers and spend the time that it takes to get good at. Mm. Hmm.
Jared: And I'm guessing that the people that you see who are operators, NEF capital have a, have a really good set of chops when it comes to acquiring sites, how they do their due diligence and how they evaluate.
Mike: Yeah. Yeah. So, so we have a bit of a framework for them to use. We have some tools that we give them because running, acquiring a business for yourself with your own money, we're a little bit different than acquiring a business inside a fund, because you have restrictions with capital calls and things like that.
Typically, most of the operators have sold a business. That's the more common background they've built and sold the business, but a lot of our operators have bought multiple businesses. And this is actually something that we found out on, on round one, you know, buying a business and managing and growing a business are very, very different skillsets.
So for round two, what we're doing is we're introducing independent third-party advisors that will have. Just specifically with that process that will help with negotiations that will help with moving things through due diligence. So we're doing that in addition to the regular training that we've done, but I would say don't underestimate this part, make sure you put in the time and the, and the work required to figure this out.
If you're doing your own funds. Yeah.
Jared: That's a good point. Acquiring a business very different than being in the trenches day in, day out and growing it. Yeah. Good. Let's talk about 0.3. You said the third point is growing, you know, I mean I'm so over summarizing what you said, but that, that was, that was what I wrote down is growing that asset.
Mike: Yeah. Yeah. I mean, honestly, this will be the part that most potential operators will be the most familiar with, right? Because you're running your existing portfolio. This is what, this is what you've been spending the majority of your time on. Just make sure that when you're running the business, this, this, this is the biggest thing I would recommend.
And if you get the acquisitions part, right, this part will be much easier, make sure that you're doing something that you're, that you have experienced. So for example, if your, if your plan is to buy a business, let's say a $500,000 business making 15 grand a month, I would recommend to only buy that. If you already have an existing portfolio with individual deals in there that are roughly in the same range, Also, I would say if you have, if you currently have a portfolio with five deals on there and you plan to go through a two, a portfolio with 30 deals, that might be a little bit of a, of a jump.
So, so you want to, you want to make sure that you have a team in place that can handle this. And that's, that's one of the things that we really look for in operators. So all of our operators have existing teams. They all have portfolios with multiple assets in there and they can run these and they can scale.
And some of them even have specific plans. They say, this is my existing team. This is, this is my additional plan team for the fund. These are the resources that we're going to share. These are going to be the dedicated resources. Same thing for people starting their own funds. Think about any outside contractors that you're going to work with.
You know, one, one common type of contractor is a PPC agency. So paid traffic. Outsourced contractor think about stuff that you're growing that you can, that you can make scalable. Mm
Jared: that's good. Yeah, that's a good point. I think yeah, running state, staying within your lane when you're working with other people's money is wise and Sage, and a good way to not ruin the entire thing.
On the reporting side of things. Now, that is interesting. I, everything you had said at that point, number one one big, big thing is to raise money. Number two, acquiring the asset, number three, growing, and then you kind of, I didn't expect number four to be reporting, but it makes sense now that I start to think about it.
So why is that so important? What are some tips on reporting, especially as it relates to investors?
Mike: Yeah, so, so this, this part is crucial. So if you did the raising money part correctly, this part will be fairly easy. If you did it incorrectly, this part will be a nightmare. So, so, so let's say you have. One investor that you work with closely.
In the beginning, you set clear expectations that you know, the investor is passive reporting should be a breeze. You put together a monthly or quarterly report or whatever timeframe that you guys agree on. However, this might become a problem. If let's say you have 15 investors. And four of them think that they will provide daily input on operations or strategy, and then 11 just want to be completely passive.
And you also have a completely different idea. So it's crucial to, to set the correct expectations when you raise the money only, except the investors that, you know, make sure that you and the investors are on the same page and then figure out what kind of reporting you're going to do. Especially if you have different types of investors, some investors might want tons of detail.
I mean, like you mentioned earlier, some investors who are looking at this as an opportunity to, to learn more about running these strategies, some investors are, are busy and don't care. They just want the wrong numbers. You're going to need to put together. Financials again, working with investors that you personally know that trust you will make your life a lot easier to hear that for reporting.
But let's say you're working with somebody that you've never worked with before. You know, they're going to want to see some financials. They might want to see audited financials. You're going to need to explain what you did exactly. Like we talked about before, you know, you said you were going to reinvest 30% of the earnings, but you decided to reinvest 60.
Why did you do that? Or why did you only reinvest 10? You're going to, you're going to ask you to explain your strategy and really if, if you're starting your own fund, your goal should be to over-communicate. So to be as transparent as possible, and then you're most likely going to get repeat investors.
So in this ongoing reporting is actually quite time-consuming. So I would make sure that you budget enough time for this as well. In addition to running the business.
Jared: There is so much that goes into being an operator when you're dealing with other people's money. It's, you know, and you've outlined it really well.
I, I, I appreciate you sharing a bunch of tips just so that people who are at the, maybe the infancy stages of thinking this model through can start to kind of process which direction is best. Okay. It, it sounds like, I mean, how difficult is it to run your own fund on your own? Do you have any experience in talking with people maybe who had, did it had done it before becoming ETF capital operators or just people, you know, who are doing it successfully?
I mean, it just, it sounds really like a lot of extra work for a typical site owner or.
Mike: I mean, it's, it's definitely not, not impossible. Right? I've, I've talked to multiple people that have done it successfully. I've talked to some people that have not done it successfully. I've talked to some people that have done it successfully previously in the realize that working with EFT capital is a great option because they can focus on step number three, running the business, which they enjoy the most in which they're the best that's.
And I've talked to some people usually it's easier to do at scale. It comes with some additional challenges at scale, you deal with additional legal reporting that you have to do. But at scale let's, let's say you're starting with, you know, doing this for a $500,000 fund versus doing this for. $22 million funds.
You're going to have dedicated people doing certain pieces of the process. And that's, that's really why we started this, right. We have, we have all these people that are all these potential operators that are really good at step three, but maybe they're not, maybe they're terrible at step one and they hate doing step four and we can coach them a bit on doing step two.
So, so this is, this is why this was the whole reason for starting if capital to solve that problem for potential operators in addition to provide oversight for the investor. So as an investor, you might be familiar with empire flippers, but you might have never heard of this awesome operator. So you might not trust this guy.
You don't know the guy. And honestly, most investors don't even have, they might not have the, the necessary knowledge on how to properly vet an operator. However, you know, if we can provide a little bit of oversight, we do the initial vetting and then the, then, then the investor can choose whether they want to work with that operator or not.
It just makes things a little bit easier.
Jared: Oh, yeah. I can see it being a win-win for both sides in many levels. What are the skillsets that you think, or that you have seen an operator needs to possess? You've touched on a lot of them, just to be clear, I'm trying to kind of bring out and maybe bring us a succinct sort of list here.
You know, obviously the ability to grow websites or assets, whether you're in content or FBA, SAS, these types of specific businesses, but what are their skill skillsets lend themselves well to being an operator at a, it say something like an F capital.
Mike: Yeah. Yeah, absolutely. So the, the biggest, most important thing is a track record.
Track record running a, the same strategy and similar sized businesses. And then I can talk a little bit about our vetting process and that will show you the things that we look for. But I think even if you're starting a fund on your own, or you plan to start a fund in the future, developing these skills over time would be, would be useful.
Jared: Yeah, please do. Yeah. W what does that vetting process look a little bit more?
Mike: Yeah. So I'll, I'll, I'll talk about what we did for round two. So for round two, you know, as, as, as we talked about earlier with having sold this many businesses over time, we have a large audience of people that build businesses.
So for round two, we received over a hundred applications from from operators. The first thing that we looked at was their track records. Do they have a successful track record? Has it been steady or have out of the assets in their portfolio been steady or increasing? That's the first thing that we looked at, and then we booked initial due diligence calls with 40 of those operators.
And then after, after that initial call, we really deep dove into their track record. We looked at the types of strategies that they run. So, you know, as, as you know, in, in the content space, you can do really aggressive SEO strategies that pay off really quickly, but the night might not be sustainable. So we eliminate it.
Any, any of that, we looked for. Especially for these first round first few rounds of view of capital. We looked for more conservative strategies. So maybe they won't be able to five X a business, but the likelihood of that business declining is less. We looked at everything as a risk reward for investors.
So if you're starting your own fund, I would, I would recommend looking at it like that. I would explain the different strategies that you're running. I would build up these strategies over time. And then one thing that we did is we actually had each of the, each of the potential operators do in depth due diligence on a potential potential acquisition for us.
So we said, okay, I've got your track record here. This is what you said. Your acquisition criteria is now go look at an actual listing and then put together a due diligence package for us of why you would buy the business, what exactly you would do for to implement growth and then put together some investor returns, projections.
And that actually showed us a few things. One, it showed us how well did you do diligence that they miss anything? That's kind of like I talked about earlier and not necessarily at bad business. But a bad acquisition based on their specific skillsets. So did they acquire something where they don't have that skillset or they don't have the experience of running that exact type of business?
So that was a criteria for us. We, we also had them put together a, a negotiations plan before they even make their first offer. They need to be able to accurately project. How much should they expect the business to make forward? And then how much could the business make with a base case scenario at best case scenario and a bad case scenario.
And that helps them put together how much they could pay for their business. And then after that, we got that, we got that list down to about 20 people. We did a second call with about 10 people. More in-depth do the due diligence on their team, their strategies on their track record. And then we cut that down to five final people.
That'd be invited for round two and then be invited to repeat operators from round one. So I was, I was jumping around a bit there, but is that helpful? Like what what would be useful for, for instance, Oh, yeah. It was
Jared: really helpful. Yeah. Aside from the fact that you know, I think you'd you gotta, you gotta go through a lot of interviews here to make it it's a, it's a well curated list of people.
Mike: Yeah. I mean, I mean, it's very detailed, but it does start off fairly easy. So if anybody's interested in being an operator, don't worry, you won't be thrown in the deep end of this process. The first thing that we collect is your information and some general info on your track record. And at that point, we'll be able to find out if it's a good fit or not.
Before we put them through this, through this entire process. And we actually ended up rejecting a few operators on round two. And honestly, I was a little worried. I was worried putting them through this whole process and then rejecting them that they were going to be really unhappy. And the overwhelming feedback that I got was, you know what, I actually, I appreciate going through this process.
I think this will make me a better. This will make me better at buying my own businesses in the future. I'm going to go and buy a few businesses on my own. I'm going to build up more of a track record and may, maybe we can work together in the future. So, so we do try to add value. It is a little bit of a grueling process, but we do try to make it a win-win all around.
No, I was
Jared: trying, I was, it's funny, you brought that up because I was thinking, man, what if I was person number six? You know, I got all the way through, but it really sounds like there's so much value that you would gain from this because you know, you don't know what you don't know. And even if even if you don't end up getting chosen, but you do get down to that final stage.
There's so much value in hearing and learning what it is. Other parties are interested in when it comes to this service, we provide right as, as website builders and people who grow websites very easy to get locked in our own world. But if you're someone who's considering marketing these services and I run a marketing agency for 11, and I'm even thinking about how valuable it would, it would be to hear some of this feedback because an investor is a bit like a client, right.
And, and hearing you talk earlier about how important the reporting is. It makes me think about my job at my agency. And it's super important that you're very transparent and you give clients a lot of information about what it is you're doing and what it is that they're seeing in the data. And so I just think there's so much to learn from this, whether you're considering being an operator, even if you get to the, you know, th th the, the second or third round of interviews, there's just, if you have an open mind, I could see there being so much that you've learned and then be able to take to your next to your next area of your.
Mike: Yeah, and absolutely. And some of the operators that didn't make the cut for round two, we will circle back and fish around. So, you know, one, one guy that we looked at as an example, he just made five acquisitions in the last 12 months. And some of them are doing really well, but it's a little bit too early to tell how that strategy will do over at least a couple of years.
So we really liked that guy, but we just need a little bit more of a track record. So we're definitely going to circle back with him in, in six months or so. So just because you missed the cut on the next round, doesn't mean you know, you're, you're out for all future.
Jared: Right. Good, good. That's a good point to make.
As we start to wrap up any, I mean, I'm just curious about this. Any trends you're seeing in the types of assets that are, that are being acquired in these funds, any unique data points because you have the ability to kind of see into a lot of the different acquisitions that everyone's making across the fund.
What are people looking for nowadays? What what sites, what, you know, even, and again, go into FBA if you want or SAS, but like, what are the things that funds are, are, are gravitating towards right.
Mike: Yes. So again, it comes back to risk and reward. So at business that has had a longer track record will typically sell for a higher multiple.
So looking at a content site for an example, if it's been around longer, it has been through more Google updates. And, and you can, it, you can more actually projected earnings going forward. If you did nothing with the business, if you kept it the same. Now, now the flip side of that. Larger businesses, typically the ones that are being bought for of capital they don't have as much low-hanging fruit.
So at $50,000 contents site might have a lot of low-hanging fruit that you can two X, three X, or even, even more than that at million dollar content site, it might not. However, it looks like the operators have already been able to implement some impressive growth. So that was actually a little bit of surprising on run one it's it's we don't quite have all the hard data yet, but we will over the next one or two quarters, but there, there seems to have been more low-hanging fruit than I expect.
That's so that's, that's really nice to see in terms of multiples and trends you know, as I'm sure many of your readers know multiples have been increasing steadily for. As long as I can remember, I've been with empire flippers since 2014, and I've seen them increase pretty much every year. If we look at the last four years specifically, they've increased about 50% about 10% a year and then more in the last year.
However, they're not increasing at the same pace at across all monetizations. We've seen more of an increase in Amazon FBA businesses than than other monetizations. And that's obviously because of the, because of the aggregators, there has been so much investor money going to Amazon FBA aggregators.
There's been a lot more demand and those, those multiples are increasing as a result of that. One thing, one, one resource I would recommend if you are a, if you're looking to buy businesses, check out the empire flippers state of the industry reports it's an annual report that. Almost, I think it's around a hundred pages and it actually breaks down it's based on our real sales data.
So not, not list prices that are publicly available, but actual sales data. And it breaks down the average multiple for a affiliate site for a ad site for an Amazon FBA business for a Kindle business. And you can use that information for when you go out and buy your own businesses.
Jared: That is a great resource, true story.
I when that came out the last time it came out, I I was so excited. I actually asked my wife, if I could have an hour on a Saturday morning to, to I just said, Hey, can I just, I just need about an hour don't to look over something. And she said, sure. And she came out about halfway through. She was, you know handling the kid and she's like, what are you, what are you looking at it so important.
I showed her this and it's about a hundred pages. And I think I was in a very detailed section and she just. This is what you want to do on a Saturday morning. I said so good though. That's that's a great point. We'll try to get that in the show notes, because it, it is and you guys have been doing it for quite a few years, and so it's really fascinating to go and look at the different trends that have emerged over the years in these
Jared: Good. Is it okay, so bringing us all back, is there anything that we haven't touched on that you think is really important to mention about this entire concept of VF capital and owners and operators coming together to grow to grow assets, anything we didn't touch on that?
Mike: Well, I think, I think we covered everything pretty well.
It's a, it's a new industry, passive investing in online businesses, especially doing it across different monetizations, different operators. I think it's very exciting. I'm really excited to see where this goes over the next few years. Yeah, that'd be my main thing. I guess, if somebody wants to be an operator and to
Jared: fill out well, having people take the next steps where we're working, you guide people to write.
Mike: Yes. So, so a good place to start is go to empire, flippers.com/capital. That'll give you a high level overview of the program. If you want to be an operator, you need to understand how the program works. Look at our existing investment deals. You can read about our past operators or current operators.
That would be a good place to start. And then if you want to take the initial steps to apply, go to empire, flippers.com/operator, it's a pretty short form asking for your contact information and for your existing portfolio. We'll look that over and if it's a good fit, we'll move you through through the next steps.
Jared: great. Yeah. And we, we talked about how, depending on when you're listening to this podcast, there might be an open call for operators. It might be coming up in the next round. Regardless empire flippers.com/capital is where you get an overview of everything. And then for specifically to apply as an operator, it would be empire flippers.com/operator.
Mike: Correct. And we can, I guess we could probably share those in the show notes as well. Yeah, yeah,
Jared: yeah. Let's make sure I'll make sure we get those in the show notes. Well, Mike, I tell you it's been a really great time delving deep into the world of operator investor criteria and and funds. And it's again, I, I just want to say thank you again for not only joining us today and just bringing a lot of insights, but also just for your role at empire flippers.
I think it's wonderful for our industry and a great step forward as we all continue to focus on building our online businesses and and, and hopefully seeing them grow and, and and appreciated around the around the industry. So thank you so much.
Mike: Yeah, this has been so much fun. Thank you so much for having me.
I've been a long-time fan of niche pursuits. So it was, it was really nice to, to be able to come into the podcast.
Jared: Well, thanks again. And until next time, we'll talk soon. Thank you.
Mike: Goodbye. .