Private Equity Practices – Adam Coffey

Adam Coffey:
When things go smoothly. Private equity is probably the most generous potential owner out there when it comes to sharing money with the people that help them create that wealth. I think about all the employees who were not owners of a company when it was founder led, but once they were sold to private equity and a lot of the key members of the leadership team were then granted equity as a part of an incentive pool where the private equity firm may be giving up as much as 10 or 12% of the company’s stock in a certain share class to the employees so that those who are motivated, that work hard, that help create the wealth get a piece of the action.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship in the Exit Plan podcast. You’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson. Along with my co hosts and guests, you’ll hear real stories, tips and tools that will help you plan for the exit you want, whether you are still working at a day job or running a business. Let’s get started with this episode of the Exit Plan podcast.

Dana Robinson:
Hey everybody, it’s Dana Robinson coming at you with another podcast episode on the Exit Plan. And I’ve got Adam Coffey as my guest. He’s the author of the Exit Strategy Playbook and Empire Builder. Very popular, highly reviewed books available on Amazon and on Audible. Adam, thanks for coming on.

Adam Coffey:
Dana. It’s good to be here. Nice to meet you. Talk to all your listeners out there. So ready to rock and roll. Let’s do this.

Dana Robinson:
Well, the, you know, my guests don’t always know all of the sordid history of the podcast, but we get a lot of entrepreneur stories. And I think, you know, my audience is always intrigued by how someone got to do what they’re doing. But a lot of them are entrepreneurs and most entrepreneurs are trying to figure out how do I increase the value of my business, how do I, you know, what does an exit look like down the road, how do I plan for prepare for an exit? I also have more and more sponsors and people that are acquiring businesses trying to figure out what do I do now that I bought this business to optimize it, to professionalize it and that sort of thing. So you have expertise across all that. And I would invite you to start by telling us, you know, sort of your, your own story, your journey.

Adam Coffey:
Yeah, happy to. You know, I think for all of us Life is a set of experiences. I’m 60. I’m remarkably well preserved for a 60 year old.

Dana Robinson:
You look great.

Adam Coffey:
That’s payback for being carded when, you know, when I was 30. Right. So, you know, if I think back about my life, you know, what were kind of the things that shaped it, you know, service in the military, you know, as a young man, you know, served in the U.S. army military, taught something about discipline, teamwork, leadership, engineering background. Made me a meticulous planner, pilot. I don’t take off unless I know where I’m going, you know, and then I deconstruct the trip. Very useful skill. When I was running companies for private equity, for sure, that led me to General Electric.

Adam Coffey:
I was at GE before tech. So GE is number one on the Fortune 500 list. Jack Welch is at the helm. He’s the world’s most admired CEO. Company’s growing so fast, it’s doubling in size literally every 2.8 years. And what a great time as a young up and coming executive to learn how to run a business. I then spent 21 years as a CEO building three different large national service companies, international service companies, for nine different private equity sponsors. Turnaround guys.

Adam Coffey:
So when I got in, usually they weren’t working very well. You know, needed some basic, you know, life support to kind of get the patient stable. And then growing at rates that never grew before in its history. Buy and build guy. I bought 58 companies to build my three large companies. Two and a half billion in exits as a CEO. I was teaching at university level while a CEO at UCLA in the executive MBA program. That led me to start writing books.

Adam Coffey:
And somewhere along the way, I just got bored. I got bored with building and running one company at a time. I needed a different kind of challenge. And so I hung up my CEO cleats and just said, world, I’m done being a CEO. I’m done running one. I want to help as many entrepreneurs succeed as I can. I’ve held every job a guy can hold on an organizational chart. I started as a guy in a truck, you know, and worked my way up the food chain.

Adam Coffey:
So, you know, a lot of experiences that I’ve, I’ve, I’ve gained, you know, over the decades. And, you know, and so I now do three things. I have a consulting business. I work with private equity firms. It’s been my wheelhouse for decades. So I help PE firms evaluate investments. I do what’s called operating partner work in the industry. I sit on boards, I coach their CEOs mentor their CEOs.

Adam Coffey:
I work with 71 founders right now, believe it or not, massive amounts, you know, of companies in different industries. I’m working with nine roofing companies. I’m doing three dental roll ups right now. I’m doing bookkeeping roll ups. I’m on the board of a robotics company, a roofing company, a flooring company. It’s like I’m working in all kinds of different companies and industries. Those entrepreneurs are all scaling, learning how to do M and A and eventually they’re positioning for exit to private equity. And then lastly, I still teach seminars globally.

Adam Coffey:
I write my books. I’ve had four number one bestsellers. And you know, that’s kind of my, my wheelhouse. I actually work more hours today than when I was a CEO. I didn’t think it was possible, but I’ve got clients all over the world and they have to be serviced. I do nighttime calls in the US for morning calls in Australia and I’ve got some weekend clients. It’s like, it’s, it’s. But I guess I’m having fun because I’m energized and I’m doing it.

Adam Coffey:
So yeah, this is how I’m going to take my career home for the next 10 years.

Dana Robinson:
I love it. And what a great way to give back in a way that you’re doing what you really want to do. And that sounds like the only way you’re able to do, you know, that much stuff is if you really are loving it and that you’re only doing the things that really add value. I mean that’s the.

Adam Coffey:
Yeah. And you know, new record for me, you know. You know the extension filing deadline was just recently. I had 52k ones this year. You know and so you know, talk. I think I filed taxes, I think Deloitte filed my taxes in all 50 states. You know, it’s like it’s so the empire is getting bigger and more complicated as life goes on. But I’m having fun.

Adam Coffey:
That’s the key, you know. That’s the key.

Dana Robinson:
Oh, I love it. So the great, great history about you, 58 acquisitions. Maybe that’s a starting point. Well, I mean let’s talk about your, your rise into and you know you’ve been every, every role on an org chart. What, what do you think to what can you tell to somebody who wants to be, to climb that, that you did. That was different.

Adam Coffey:
You know, not, not everybody wants to climb, you know, that, that, that organizational chart the way that I did. So you know, let’s start with that there’s nothing wrong with wanting to be a guy in the truck, you know, for 30 years. And, you know, I call myself a guy in the truck. I was a technician. I was an engineer. I worked in hospitals at night fixing cat scanners and MRIs and, you know, advanced imaging systems and hospitals. And there’s people that I worked with way back when who are still doing that job, you know, God bless them. It’s like we need those people who become the journeymen who teach the next generation how to do these.

Adam Coffey:
These jobs. But, you know, I aspired for more, and I wanted to get out of the truck and I wanted to get into the management ranks. And, you know, it was a scary time. I was a really good. First of all, I was a really good soldier. You know, I thought about the potential soldier of the year, you know, way back when, you know, when Jesus was still walking the planet and actually Ronald Reagan was president at the time. It’s like, you know, I was doing really well there. So, you know, it was stay in the service for a career or get out, I’ll get out, you know, and then it’s okay.

Adam Coffey:
Stay guy in the truck, or cross over into that evil thing known as management. And, you know, I was a really good engineer. And I thought, boy, you know, now I got to compete with Harvard MBAs and all that. So I’m going to outwork them, I’m going to out hustle them, you know, and I’m going to. I’m going to let work ethic, you know, carry me up the org chart. And, you know, just opportunities kept coming. And I don’t want to say luck, because I don’t believe in luck. I think we work hard and then situations happen.

Adam Coffey:
And so I had a lot of great mentors, you know, over the years. I had people who believed in me, who gave me chances. And every time I got that chance, I seized it. And I worked harder than the other person to make sure that I made the most of it. And that took me, you know, all the way up the org chart, you know, to CEO. But I always remembered, you know, what, when I was in the service, just coming out of high school, you know, private E1 lowest form of life on the planet. I. I could look up and I’d see bubble gum on the bottom of somebody else’s shoe.

Adam Coffey:
That’s how low I was on the totem pole. But I remembered as I was working my way up, you know, these were good people. I was a good person. I was working with good people. And So I think that really helped me be a better CEO because it taught me the value of the people in the trenches that make things happen. And so I’ve always been a strong proponent of culture. You know, building a strong culture, not managing revenue from the top down, but building up a strong culture to get an engaged workforce. That engaged workforce works hard because they generally like what they do and they just want a voice and they want to be treated well.

Adam Coffey:
They work hard. Customers love it. Revenue rains from the skies. And so I never managed revenue from the top down. I managed culture from the bottom up and it led to revenue. So I think my early days, all those experiences helped me be a better leader, helped me be a better CEO, and, you know, and it helped me succeed in my career by doing it that way.

Dana Robinson:
Yeah, well, let me, let me make a observation that many companies that are owned and operated in order to control of private equity have, don’t have operating partners or operators that have that experience.

Adam Coffey:
And you know, I gotta be honest, Dana, that’s why I wrote my first book, the Private Equity Playbook, was because the private equity I hear about on the news destroys everything. Ruins companies, destroys cultures. You know, you talk to some of your friends, some had good experiences, some had bad experiences. I’m a guy who built three large companies that took care of people and made a lot of money for shareholders. And the private equity that I worked with and got to know over the decades, very different than the one I hear about on tv. You know, the news never talks about good stories. You know, during the pandemic, great example. I was owned by Aries Management, the world’s largest non bank lender, one of the world’s largest PE firms.

Adam Coffey:
And when Covid hit, they literally started a charitable foundation inside every portfolio company that they owned. And they seeded it with their own six figure sum of capital to help CEOs take care of employees whose lives were being negatively impacted by Covid. Well, you didn’t hear about that on the news, you know, that that side of private equity, you know, was never discussed. And so I’ll tell you that I’ve been trying to educate a generation. The reason is, is at this point, private equity. I just saw a McKinsey study yesterday, over 7 trillion in assets under management. When I first started working with private equity, it was about 800 billion in assets under management. And you know, and it’s gone from, you know, 1200 firms when I first started to 8,000, 10,000 firms.

Adam Coffey:
Pick a number, you know, and so it’s this massive Thing now it’s the third largest GDP if it was a country on the planet and it buys more than 50% of all companies bought and sold. So as entrepreneurs out there listening, you better start learning about it and understand how it works and what it needs so that you can feed it. It has created the market. Even if an entrepreneur doesn’t sell the private equity, it’s created the market that lets us grow a business and sell it for a nice multiple and to become wealthy. So it’s a tool. It’s out there. You better learn about it in order to understand it and take advantage of the opportunities.

Dana Robinson:
Yeah, I love it. Well, then let’s step right into that. You’ve got some expertise in it. I’m a practitioner within private equity. Let’s teach and talk about. You mentioned private equity gets a bad name in the news. That’s because private equity tends to. The big acquisitions that are destructive maybe get showcased.

Dana Robinson:
But this industry is massive and as you say, most trends, you know, a half of transactions are into private equity. What do business owners need to learn about private equity in order to kind of get their head around it, get over the mythology? You know, what are some ways you think you can attack this for the listener who’s a business owner and now knows that they have a 50, 50 chance that when they exit, it’s going to be to private equity?

Adam Coffey:
Yeah. Well, let’s understand a few things. First of all, most entrepreneurs building a business think of selling their business as a one and done event. I’m going to work hard, I’m going to build a company, I’m going to sell it, monetize it, and I’m going to ride off into the sunset or, you know, go do my next thing. And I’m like, you just built a great business. Why in the heck would you sell it and walk away? You know, that first exit to private equity that can be just a rest stop on the wealth creation highway. Doesn’t need to be the end of the road. You know, let’s, let’s use that as asset diversification.

Adam Coffey:
Let’s take some chips off the table. Let’s diversify our wealth. But then let’s keep playing. Roll some of our, our proceeds forward now with a financial sponsor. I’ve now got an unlimited checkbook, which really means I’ve got unlimited debt relationships. You know, I can accelerate my growth. I can now focus on still swinging for the fences because here’s another problem entrepreneurs have as they get older. You know, they get into their 40s and 50s and they’re looking now and they’re like, yeah, I know the end of the road’s coming.

Adam Coffey:
Somewhere down the road, I’m going to sell my business. But until I get there, I’m going to start being conservative. And as I’m being conservative and not acting like I did when I was a young person building this empire, I’m starting to not make good business decisions. I’m no longer thinking about growth as aggressively as I did. And now my growth rates are slowing down. And so when it actually becomes time to sell, instead of selling a growth company, now I’m selling a company that hasn’t been growing because I haven’t been aggressive in investing in it. Now my assets worth less than when I was on a steeper growth curve. And so, you know, there’s a time and a place to.

Adam Coffey:
I hate to say it, folks, but if you hear this, you know, pay attention. It’s okay to be a minority shareholder in a company where you used to be a majority shareholder. And I know that’s a hard concept for some people to grasp. And usually when I talk about that, I talk about two names. Elon Musk and Jeff Bezos. Jeff. Jeff, before the divorce, you know, the two richest guys on the planet both own less than 13% of their companies. You know, you can be a minority shareholder and you can still continue to run your business to find growth.

Adam Coffey:
You know, you may have a sponsor, you may have a boss. Now, yeah, you could be fired. But it’s like, but here’s what I’ve learned. You know, I’ve learned that private equity funds last for 10 years, that they have six years to invest their capital, that regardless of fund size, all PE firms invest between 6 and 8% of their fund in one company, no more than 12%. And that means that big PE firms with big funds buy big companies. Little PE firms with little funds buy little companies. And their average hold period is about five years. Which means if we play our cards right as an entrepreneur, we sell our businesses, we take on a private equity sponsor as a partner.

Adam Coffey:
We’re growing our business. There’s going to be multiple paydays. And instead of selling the business once, we can sell it multiple times. My personal record is getting five paydays running the same company in a 13 year, four month period. You know, so what’s better than selling your company once, selling it twice, and having your second payday be bigger than the first and your third be bigger than the second? It’s like, boy, if we learn what private equity is, how it works. What’s it, what its needs are? We can, I hate to say the word manipulate, but we can feed it what it needs, take what we want, which is wealth creation, build a great company, take care of our employees, take care of future generations of our family. We can really generate wealth. And so that’s the private equity.

Adam Coffey:
I want your listeners out there to, to try to understand and think about and potentially get educated about so that they have a different mindset and attitude. You know, most entrepreneurs out there, your phone keeps ringing, somebody wants to buy you every time you pick up the phone. You know, and I remember a day when we used to pick up the phone. Now we probably don’t pick up the phone, but these people are out there, they’re reaching out to us. We need to learn about them. And just because your phone rings, folks, doesn’t mean it’s the right buyer. There’s thousands of firms out there. You need to do your own diligence on a partnership, just like they’re doing on your company.

Adam Coffey:
And so trying to understand them allows you to ask the right questions about who might be a good partner or not.

Dana Robinson:
I love that. So in just to put some street vernacular, a lot of people refer to what you’re talking about as multiple monetization events as bites at the apple. The, you know, the, the idea that you take a business that, you know, I’ll just speak to the lower end of the middle mark. You take a home services business that’s making, doing 20 million at the top and you know, maybe putting 12, 13% to the bottom, you want to sell that business, you’re going to have a hold back, you’re going to have some structure, they’re going to want you to roll some equity. And I find a lot of sellers are reluctant because they feel this fear that private equity is going to somehow take advantage of them. What they don’t realize is that the rolled equity in most cases is the same kind of equity that the LPs in their fund are getting economics on. They want to triple, quadruple or more that money. The more you roll, the more opportunity you have for that larger next bite at the apple.

Adam Coffey:
Good, good point. And what I will say is that when things go smoothly, private equity is probably the most generous potential owner out there when it comes to sharing money with the people that help them create that wealth. You know, and I think about all the employees who were not owners of a company when it was founder led. Yeah, but once they were sold to private equity, and a lot of the Key. The key members of the leadership team were then granted equity as a part of an incentive pool where the private equity firm may be giving up as much as 10 or 12% of the company’s stock in a certain share class to the employees so that those who are motivated, that work hard, that help create the wealth, actually then get a piece of the action. Just recently, you’ve seen, I think it was KKR recently that started making every employee in some of the companies that they bought a shareholder. You know, they created a pool of capital where all employees in a company were going to start sharing in the wealth creation. And so, you know, a lot of interesting methodologies and ways to make money.

Adam Coffey:
But here’s something I’ll tell you too. In decades and all the investing that I’ve done in private equity, you know, as a rollover investor, as a CEO, as a board member, my worst payday ever in the world of private Equity was a 2x multiple of invested capital. Which, by the way, folks, is better than the S&P 500, right? However, my best payday ever was 11 times multiple of invested capital. And on average, my career batting average is close to five times multiple of invested capital, which means every dollar I rolled forward, every dollar I invested, I got five bucks back, you know, and so you can really generate a ton of wealth by just working with what I call the world’s most sophisticated asset class of investor. It’s like this is business as a professional sport played at the highest level with very sophisticated people. And I don’t have to be the world’s most sophisticated person. All I have to do is know how to run my business, build my business, use their capital, you know, to help feed the beast as I’m growing it. And then when it’s sold, I get to ride their coattails and I get the multiple payday events.

Adam Coffey:
And it’s been a lucrative life for me. And that’s why I spend so much time trying to teach entrepreneurs, you know, about this asset classes so that they can also take advantage of it, right?

Dana Robinson:
So the number one way we just talked about to take advantage of it is to understand that you should take less than all of your equity in that first transaction. Keep enough meat on that bone, keep working for the business, and they’ll probably give you some incentives in terms of structure for that.

Adam Coffey:
And so here’s my math on that real quick. So I tell entrepreneurs, on average, pull 70 cents of every dollar received out, pay your taxes, diversify your investments. That becomes your family’s nest egg. You Know if you will, it’s your armageddon money. The 30 cents that stays in the business. If you get, you know, a forex multiple of invested capital, PE will model a 3x up the middle of the fairway. But when you’re lower in the middle market, the multiples and returns tend to be a bit higher. And so for me, it’s like a 4.4x multiple invested capital that’s the middle of the fairway.

Adam Coffey:
$0.30 times a 4x multiple equals $1.20, which means the second payday, $20 is actually bigger than the first payday, which is $. And so second byte bigger than the first bite, third bite bigger than the second bite, and so on. And it’s like, hey, this can get fun. If I leave too little inside, you know, if I, if I only roll over 10 cents on a dollar and I got a 4x, that’s 40 cents. So my check is 4/10 of what the first check was. Well, that’s not as fun. You know, I’m in Vegas, baby. I’m playing on a blackjack table, and it’s like I took my chips back off the table and stuck them in my pocket.

Adam Coffey:
Now I’m playing with house money, you know, and I can be aggressive and I can be focused on really doing those things I need to do to accelerate the growth of the business. And now when I get paid, it’s like I’m getting a check that’s bigger than the last one. And I like the last one, but bigger is better. So it motivates me to work hard. So kind of 70 cents, take home 30 cents, roll forward. That’s kind of been my working math my whole career.

Dana Robinson:
Yeah. And to some extent, I, I think those that understand this, as a seller, you can bridge the value gap there. There’s always a seller want. The reason most transactions don’t transact is because a seller has higher expectation than what market is. And, and buyers don’t pay more than market. Right. They. So you, you have a business that is being offered five times EBITDA and you’ve got a seller that’s like, well, I’ve seen Joe sold his business for six.

Dana Robinson:
They the with rolled equity, it doesn’t matter. Like, you can take, you know, if you’ve got the right buyer and you believe that, that that partner as a capital partner is really going to help you accelerate that business. You’ll make that all back with that 30% that you roll.

Adam Coffey:
Boy, I got to tell you, you just hit on something that’s just so important because you know, boy, the horror stories are, the war stories are big, you know, in, in this, in this world. Well, my buddy sold his company for, for 15 times, you know. You know, 15 times what? 15 times the length of his eyelash. You know, it’s like there’s all these great, you know, folklore stories. Well, there’s actually databases where I can subscribe and I can look at any industry and I can look at every private transaction that’s taken place on a no names basis and I can actually find out what companies are trading for. So great example, my last company I was in H Vac, you know, H Vac and refrigeration. Commercial service company. This was not residential.

Adam Coffey:
We bought 23 companies in five years and we paid on average 5x because that’s what those businesses sell for. And that doesn’t mean that I didn’t encounter somebody who said I want eight times. Well, good God bless you. You’ll find some idiot out there who’s undisciplined, who will pay it, but it won’t be me because I’m a disciplined buyer and I buy fair market value for great company, you know, and So I pay 5x. So I buy 23 companies on average 5x each. I think the lowest was 3.9. The most expensive was 6 point something, you know. But then when we sold the much bigger company, and big is rare.

Adam Coffey:
34 million small companies in the US alone, only 3,000 companies on the planet with a billion dollars in revenue. As you get bigger, you get rare. When you get rare, bigger PE firms who can’t buy a bunch of small companies because they don’t have enough time. And they’re fun to do that. They have to buy bigger companies, they pay higher multiples because there’s fewer companies that get up into their, into their atmosphere that they can put the money to work. So I take that, that collection of companies that I integrated, built, you know, on top of a platform, and then I sell it for 14 times. So every dollar of earnings that I paid $5 for, fair market value for the size, I then sell the bigger company and I get $14 for every dollar I paid $5 for and I make $9 profit. And the math was huge, you know.

Adam Coffey:
And I’ll tell you that that’s the single biggest value creation lever that private equity firms are using to generate returns for their shareholders. And when you become a rollover investor, you’re riding their coattails and you’re getting a little piece of that action. So as you mentioned, you own the same stock that they do and they bought your company and now they go out and buy 15, 20 more companies. You’ve rolled over. You’re getting a little piece of that arbitrage. And as that company’s getting bigger and climbing up the PE pyramid, it’s selling for a higher multiple. And you’re getting a percentage of that. You know, as the founder that sold the business and joined a PE roll up.

Adam Coffey:
And oftentimes, you know, when I bought 58 companies, I told you. But I’ve worked with hundreds of entrepreneurs who’ve been selling to companies. Anytime I build a spreadsheet and I show them staying alone and independent and owning 100% of their business, and I take their current size and their growth rate and I roll tape forward five years and then rotate forward 10 years and say, somewhere in here you would sell. How big would you be? What would you sell for? Now take the alternative spreadsheet. Let’s sell the business today. Take 70 cents home, roll 30 cents forward. Now we’re riding on a, on a buy and build. And someone buys another seven, eight companies sells it, buys another 10, 15 sells it.

Adam Coffey:
They’ve climbed the pyramid. Now take a look at what your paydays have been along the way. 70% coming out, 30% rolled forward. All this money getting invested, you know, and every time I build that spreadsheet 100% of the time, an entrepreneur makes more money by joining a buy and build, by working with a private equity firm than they do by staying independent and alone. And it’s because of that compounding of the multiple expansion, you know, the arbitrage on the M and A, which is I buy at a higher price. You know, I sell it, I sell at a higher multiple than the multiple I bought it at. So I’m getting multiple expansion. As I’m getting bigger, I’m getting arbitrage on the, on the companies I’m buying.

Adam Coffey:
You know, I add all that kind of action up and it just, it’s money, it’s gold. That’s why private equity keeps growing. And that’s why potentially it’s a, it’s a, it’s an exit path that we should consider when, when we’re building a business and we don’t have to wait till we’re 60 or 70 to do it. We can do it. You know, when we’re in our 30s or 40s. You know, it’s always, always fun to have smart people around the table and to bring on partners and use other people’s money to grow your business.

Dana Robinson:
Dana Robinson here.

Dana Robinson:
Quick plug for my book, the King’s Fly Swatter. You can see it here behind me.

Dana Robinson:
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Dana Robinson:
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Make it giftable, something that you can share with a family member, buy as a gift.

Dana Robinson:
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Dana Robinson:
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Dana Robinson:
The King’s Fly Swatter by going to danarobinson.com where you transact the more opportunity you have to get back in the game and sort of you see what it takes to do buy and build and you can go execute that. And you know, even with non competes you sell your business when you’re young, you go through a cycle, you monetize a couple times, you’re stuck out of the market for three years or something. You’re back in the business when your non compete is up and private equity. Be eager to bring in an operating partner or an operator that has had that experience. Yeah. So just for the listener’s sake, multiple arbitrage, simply buying smaller Businesses that transact at a lower price. So like million dollar Ebitda business worth five times and say the home service business and once you get above say $10 million, you transact at 10 to 13 or 14 times EBITDA. That that isn’t for free.

Dana Robinson:
I I’ll say as you probably know the it’s not pure multiple arbitrage because you actually have to hold together the 20 companies that you bought into a unified organization that an up market buyer feels is portable and sustainable. Right.

Adam Coffey:
They there’s sure they want to see balance growth, not just M and A, but it’s got to be growing organically, it’s got to be improving margins as it’s getting bigger, it’s integrating, it’s becoming an integrated platform. You know, they need to see all of those different aspects to pay maximum price for the company.

Dana Robinson:
You have any stories from. Maybe it’s the commercial H Vac because it’s got so many of. That might help understand the good, the bad and the ugly. Like you bought 20 something businesses into your H Vac. Roll up. You know what, some of the lessons that came into that.

Adam Coffey:
Let me give you a line for a T shirt someone needs to make. I’d rather not buy a company I should have versus buying one I shouldn’t have. So let that soak in for a little bit. What does that mean if we’re going to buy companies and use M and A as a vehicle for growth? Too many people get what I call a shiny penny syndrome. Every company I look at is great. Everything that has obvious flaws I’m going to overlook because I’m all about buying stuff and slamming it together. It’s like we only buy good companies run by good people. We pay fair market value because this thing we’ve been talking about called arbitrage and multiple expansion, this is naturally occurring.

Adam Coffey:
We don’t want to buy fixer uppers. Life’s too short for fixer uppers. You make one bad acquisition and it can derail you for years. So I buy 23 companies. There was probably one that should not have been bought. And for less than 5% of my revenue, it created 80% of my headaches for like the next three years. So folks, it’s hard enough to buy a bunch of companies and get a bunch of entrepreneurs who’ve never had bosses that all just became rich to sing Kumbaya around the fire. We need to buy good companies run by good people, you know, that have good reputations in the market.

Adam Coffey:
Leave the fixer, fixer uppers and the dogs with fleas to somebody else. Just buy good stuff and most importantly, know what good looks like before you go looking for companies so that you have a standard. Some people call this the buy box, I call this an avatar. It’s like I, you know, who is the perfect acquisition for me? What’s the revenue size, what’s the earning size, what are the customers that are being served, the verticals, you know, what’s the margin profile? And I’ll even go so far as to is to also model the age, you know, what’s the age of the entrepreneur? Where are they at in their life that I’m targeting? And so right now there’s a cool, cool thing going on. I’m the youngest of the baby boomer generation. I just turned 60. The oldest baby boomers are now 74. The largest wealth transfer in human history is happening right now.

Adam Coffey:
And if you’re young, boy, can you take advantage of it because all of these baby boomer business owners as they’re seeking to retire, need to do something with their businesses. Buying an existing business, if you don’t own a business today, so much better to eliminate the startup risk. You know, 33 million small companies, only 7% are ever get to a million dollars in revenue. Only 4% of those get to 10 million in revenue. Only 40% are profitable. And 65% of those small companies won’t exist, you know, in 10 years. And so, you know, I can beat all that startup odds, you know, by just simply buying a company that it’s been established, it’s got revenue, it’s got history, and it’s been around the block for a while or two, it’s already beat the odds. I’m starting with a winner.

Adam Coffey:
And if I, if I profile the right kind of business, and you’ve already touched on this like home services and what have you, commercial services, home services. You know, I want a company focused on needs, not wants. I want a company that has contracted revenue versus project revenue. You know, I can make money with any company, but I’m building you a profile of where you can be the most successful. So recurrent revenue, contracted revenue versus project needs versus wants. Low capital expenditure, high free cash flow. What does this all mean? It means that I can buy a business, pay fair market value. I can use the cash flow in the business to service the debt that’s required to buy the business.

Adam Coffey:
Yeah, I told you, I bought 23 companies. What I didn’t tell you is I didn’t use one penny of equity to buy 23 companies, I used the cash flow inside those businesses to service the debt while I was collecting them. And then upon sale, you pay off the debt that’s been accumulated. And because you’re selling EBIT or a dollar of earnings for a much higher multiple than what you’re bought at, even after you pay off the debt, there’s a ton of profit there. And so, you know, there’s so many different things that we can do as entrepreneurs out there. But, but using M and A as a tool is a great way to accelerate the growth of your business and to achieve larger critical mass quicker. And because of that multiple arbitrage, it’ll be worth more than the money you plowed into building it. And so these are some of the keys that, that can unlock entrepreneurial success.

Adam Coffey:
And that’s what I teach entrepreneurs how to do, is how to play this game. I played it with institutional investors on a very large scale, but small entrepreneurs with small businesses can play this game too.

Dana Robinson:
Yeah, I’m glad you went there because that’s, I think, Let me, let me tease some of that out. If you’re not in business, the idea of a startup like you should just probably put a bullet in that. The Shark Tank myth, that big idea is going to make you a bunch of money is ridiculous. And you and I know, and I probably know I paid the price dearly for being a startup entrepreneur. Entrepreneur numerous times. The only success, the only real success as a Startup entrepreneur took 13 years to sell to private equity. So when you, when you look at that, and the private equity group that bought us, sold, re, monetized within less than three years for five times what they paid us. Four times.

Dana Robinson:
Four or five times what they paid us. So, you know, we, we would have been far better to been them than to have been us. But the so, so to the point of an entrepreneur, someone who wants to be in business and wants to develop this, they can, someone can buy a business that is the maybe hairy business that private equity buyers like you aren’t going to buy and then do the things that will make it more attractive to a private equity buyer. And then they have those chips at the table to sell 70% and roll 30 and take that business, clean it up and use private equity as the exit plan from the very beginning when you make that acquisition.

Adam Coffey:
Yeah. And you know what it’s like. So, boy, there’s, there’s so much there. You know, one thing we can’t buy, no matter how much money we have, I can’t buy time. I cannot buy time. And so being efficient with time is important. And when we’re in that startup mode, bootstrapping it, struggling, you know, and we’re wasting time, but we’re not getting traction. And you know, I look at a typical VC fund prospectus and I gotta be honest with you, I don’t know that I’ve ever seen one that beats the S P500.

Adam Coffey:
It’s like for every home run there’s a bunch of failures and there’s a bunch of wasted time. And so growth needs to happen. It needs to happen quickly. And in order to be most judicious with time, there’s a combination of organic growth, inorganic growth opportunities, all these different things that we could be doing, you know, and accelerating, you know, the growth of our business. You know, think about two companies, one company with a million in revenue that’s growing at 10%. And so it’s going to take law of 72, it’s going to take 7.2 years to double in size. So seven years down the road, I’ve got 2 million. 14 years down the road, I’ve Got 4 million.

Adam Coffey:
21 years down the road, you know, I, you know, I now finally have gotten to 20 some odd million, right? It’s like, it’s slow, very slow going. If I can grow at 30%, you know, if two companies, one growing at 1%, one growing at 30%, that 30% company will get to $190 million of revenue. And if it’s throwing off 15% at the EBITDA line, it’s got 24, 25 million of EBITDA. You know, that’s a really nice exit for 20 years worth of work. But if I’m growing at 10%, you know, then that 1 million is only going to get to 1 to 2 and 7, 2 to 4, you know, in 14, it’s like, and then, you know, I got to 8 million in 20 years and that company at 15% got a million, you know, and my, my parting gift is a 5 million dollar exit for the 10% company and you know, a 400 million dollar exit for the company with 25 million, you know, and so it’s like, boy, we need to do both. We need to be very good at growing organically, but we need to really think about accelerating our journey because time is working against us. We don’t have forever to build our big empire.

Dana Robinson:
Now we know, like I just said, you could buy a business if you’ve never been in business and you probably should versus starting one. What about how hard is it in Your experience for someone who has a business that might not be ready to transact to, to play the game and borrow and buy and acquire and sort of grow.

Adam Coffey:
Well, it’s a great question. I’m going to give you a real life example. So my first client, when I hung up my CEO cleats, still my client today. Three years later, when I started working with this person, he had less than 2 million in EBITDA. I helped him hire a VP of business development, I helped him secure financing, I helped him close his M and A deals. And we’ve closed something like six companies. We now have, less than three years later, 15 million in EBITDA. We’ve hired an investment bank.

Adam Coffey:
We’re going to sell for about 230 to 250 million for this particular industry. You know, it’s going to trade around 15, 16 times, something like that. And this person will have gone from a company that was worth about 14 million three years ago to a company that’s now worth 250 million. Yeah, he’s got some debt, you know, it’s probably 30, 32 million, something like that in debt. So you pay off it. He’s got like 200 million in shareholder value creation in literally under three years. Now if he would have just grown organically, yeah, I’m sure he would have grown bigger, but not at that magnitude or scale. And so don’t think you have to be a giant company to play these games.

Adam Coffey:
You don’t, you know, there’s, there’s so many, you know, great companies out there. A lot of these industries we’re talking about are highly fragmented. You know, I’m doing three roll ups in the accounting space. Accounting, bookkeeping, payroll services type companies. There’s 1.8 million of them in the US. I can buy 3 million in revenue with a million in EBITDA. And since there’s no capital expenditure and it’s contractor recurrent revenue, it’s got like a million dollars in actual cash profit. And I can buy it for three times, three and a half times.

Adam Coffey:
And not only can I have a 2 to 1 debt coverage ratio where I have, for every dollar of earnings I’ve got, I could use 50 cents to service the debt to buy the company. I also got an ATM that can distribute a bunch of money to me, you know, and so it’s like, boy, you know, fragmentation. Lots of companies in an industry keeps the entry prices low, successful, great profile, high fragmentation. It’s like boy, there’s, there’s just all kinds. I’m, I’m currently working on 18 different buy in builds.

Dana Robinson:
Wow.

Adam Coffey:
You know, I told, told you I didn’t want to do one company at a time anymore. I wanted to do many. So I’m now doing 18 of these. And you know, it’s rinse, repeat, you know, different industries, sometimes same industry, but different part of the country. You know, but it’s, it’s, you know, there’s a formula here, there’s, there’s a process here.

Dana Robinson:
And what, what are some of the challenges that, that you end up helping consult people through? And as they’re, you know, if you’ve got 18 clients that are, that are coming to you.

Adam Coffey:
So funding’s one, funding’s one. And everyone thinks money’s their problem and money’s readily available. There’s trillions of dollars out there. We just have to learn where it is and how to treat it well. And you know, if I don’t have money and I need money, I want to treat money well.

Dana Robinson:
Right.

Adam Coffey:
And, and if I pay slightly above market rate interest, if I potentially give up some warrants or a percentage of ownership in the business to go with a little bit above market rate interest, I’ve got people that want to deploy capital, they’ve got choices that they have to make and maybe it’s, hey, you know what, thank you for the extra return. I’ll fund your project instead of somebody else’s. I’ve got the SBA here in the United States that helps small business owners get the capital they need to buy, you know, buy companies. So there’s a lot of different vehicles. So people think it’s funding, but we always solve for funding. And you’d be amazed at deals I see where people have no money and they get these things done. They get them, they get them done. You know, that’s, there’s money out there to be had.

Adam Coffey:
So that’s one. But two is teaching people how to hunt what good looks like, you know, to help them model. What would the, what would this really do? Well, let’s look at your company or if you don’t have a company, let’s, we got to find the first. But then let’s build a simple model that shows us buying three, four or five companies, going from zero to four or five million of ebitda and a first, nice exit, you know, home services business. You know, let’s buy one at a million dollars of EBITDA. Let’s buy two or three more at a million dollars of EBITda. Let’s combine them together, get some synergies. Out take 4 million, purchased a million of organic growth, now integrated 5 million.

Adam Coffey:
You know what, Pick a number. Am I selling it for eight times, nine times, you know, 10 times? Pick a number. But that’s 40 million. But if I paid five times for that 4 million, well, that’s 20 million. But I sold it for 40.

Dana Robinson:
Right.

Adam Coffey:
Well, that’s, that’s 20 million of profit that, that I, I make here potentially. So, you know, it’s teaching the mechanics of how it’s done, teaching people how to hunt, how to find companies, how to reach out. Because here’s the other thing I’ll tell you too, just a best practice. My best deals come from entrepreneurs who don’t know their sellers before I meet them. You know, so if I’m focused on only plugging into what brokers are bringing me or the broker market, and I do buy companies from broke, but that’s a seller who’s already decided that they’re a seller and they’re now focused, just extremely focused on price. Highest dollar wins, you know, and I don’t want to be the highest bidder and win at auctions. So, you know, I like to do outreach and cold calling and develop sellers. And so my best deals come from people who don’t know their sellers when I initially make contact with them and eventually.

Adam Coffey:
So teaching people how to hunt, how to separate good from bad, how to truly understand an income statement and a balance sheet, to know good and to detect anomalies and to do the right level of diligence. You know, when private equity buys a company, they spend four to six months crawling in our shorts and they really piss us off. You know, as entrepreneurs, it’s like they ask every question known to mankind three different ways to Sunday. But we as entrepreneurs, when we buy other companies, we ask almost no questions. We don’t do quality of earnings, we don’t do enough diligence, and then we can get into trouble. So we have to learn how to do diligence. We have to learn how to sort out good from bad. And then we need to do the same kind of level of diligence to protect ourselves.

Adam Coffey:
But when we find good companies, then we can pounce. And so it’s teaching the mechanics of how to do this. And so if you’re an entrepreneur and you don’t know how to do this, then you have to seek out help. You have to seek out and learn from others. You know, when we do something once, we may get a good outcome, we may not. When we do something 58 times, we learn you know, and there’s, there’s, there’s learnings that come from doing something on a repetitive basis.

Dana Robinson:
And are you running a, like, is there, is there a group you’d suggest or do you have a group where if someone’s like, I learn how to do that? I mean, is that, is that before they’re ready for the big time, they’re ready for you? Or is there some way for someone who’s like, I would love to do this and I don’t have the knowledge?

Adam Coffey:
You know, what I love about this generation of business owners today is that we recognize there’s value in coaching and mentorship and surrounding ourselves with people who’ve done this type of stuff a time or two. When I was younger and up and coming, there wasn’t a place for that. It’s like we had the bravado of we are the creator. This generation now loves to learn from others. And I think the digital world has certainly brought, you know, podcasts like this into existence where we can learn from others. And so I can read books, I can, I can listen to podcasts. You know, I can join peer groups. And so, you know, I have a peer group, we call it the Chairman group.

Adam Coffey:
I’ve got 38 founders inside that group. I do minimal individual coaching and then, but we do group events and we learn how to hunt and how to, how to value and you know, we best practice share amongst the group. And then I have, I have one on one clients. And so, you know, I’m not trying to be self servant here, but, you know, someone’s listening. No, you know, if you don’t know, surround yourself with people who do.

Dana Robinson:
Yeah.

Adam Coffey:
And stay out of trouble. And either we have time or money. If we have money, we can eliminate time because we can hire people to help us. We can level the playing field. If we have time and no money, well, we have to do it ourselves. And so we have to learn, you know, and we have to learn from somebody. And I can learn from books and podcasts and, and videos and, you know, and what have you, but I wouldn’t believe everything you hear in a Tick Tock video, you know, because if you did, you’d believe that, you know, there are just gazillionaires everywhere and, you know, that’s not, that’s not life. You know, there’s, there’s less than 3,000 billionaires on the planet, you know, and so, you know, it’s like success at a very high level is not common.

Dana Robinson:
Yeah, the. How do you, how do you Avoid the. I’ve seen, I’ve seen ads recently for like, you know, it shows a picture of a guy who’s got to be like, 25. And it says, you know, join this thing to learn how to start a fund. And I can tell you after, you know, raising tens of millions of dollars and paying lawyers millions of dollars for compliance, that this is, you know, this is not a thing you just get out of school and go do. And I also think, you know, there’s a lot of people that are like, buy my program and you’ll learn how to, how to create a hold company and get a bunch of people to roll their equity and, you know, and sort of arb the multiples. And there’s sort of like slick, make it look easy stuff going on out there. And I know from being sort of in the, in the ecosystem that it’s hard work and you around smart people that have done it, and it’s not going to be something you can get from a, you know, a 25.

Adam Coffey:
And even these smart people make mistakes.

Dana Robinson:
Yeah.

Adam Coffey:
And not every outcome is great and easy. So, I mean, you’re hitting on it, right? So if I think of all the PE firms I work with, you know, on the fundraising side, you know, those partners are old and have gray hair like me, and they’ve been around the block a long time. And so it isn’t, it isn’t a place, you know, where you can do it overnight or make it done easy, but that doesn’t mean it can’t be done. So I think you have to do your homework, you know, and am I talking to someone who’s walked the road I’m seeking to travel, or am I talking to a, you know, a get, get rich quick, you know, scammer or schemer? And, you know, so it’s like caveat emptor. It’s like we have to always be cautious, you know, in this world, you know, and it’s interesting because, you know, people can find me on LinkedIn. That’s where I’m at. You know, that’s where I’m at because there’s 800 million business people there. And I’m a business guy.

Adam Coffey:
And so I’m, I’m there. I’m not on Instagram or Facebook, but there’s a fake Adam Coffee on Facebook and there’s a fake, you know, Adam Coffee on Instagram, you know, who’s trying to monetize people and take advantage of people. And, you know, I report stuff like that to Meta and it’s like I don’t know if there’s so many of these scammers out there that they just don’t, can’t, can’t police it, don’t care to police it because the scammers got more followers than I do. I’m not on the platform, who knows? But we have to be careful in today’s world. We really need to be focused, we need to be careful, we need to learn from others. There’s a lot of great organizations out there, whether it’s YPO or it’s vistage, but a lot of that’s group dependent. Is my cohort a good group? Am I getting as much as I’m giving? And so don’t be afraid to also bounce around and to say, you know, I’ll try this peer group, hey, that didn’t fit me. I’m going to try a different one.

Adam Coffey:
But I think people are very open to learning from others in today’s world. And that’s a, that’s a good thing. And the digital, you know, world has created a lot of new opportunities to learn that didn’t exist, you know, a few decades ago. And so the knowledge is out there, the expertise is out there, and when you vet those people, you know, you can find, you know, kind of people who can be a good guide to you and those who can’t.

Dana Robinson:
Yeah, okay, great. I appreciate that advice. And probably the people that are taking their time to create long form podcasts around private equity, around, you know, corporate finance, around best practices that probably find a much richer vein of sorts of gold in the podcast world. Because those old guys with gray hair are doing, like me are doing podcasts and talking about the profession and talking about things like, you know, that people are going to learn from.

Adam Coffey:
The local guys like us are teaching the next generation all of the, you know, all of the potholes that we stepped in in mud puddles, you know, over the years, you know, we’re teaching people what we know and that accelerates their learning. But there still is, you know, an element of risk and everything, and actually doing it is different than hearing about it or thinking about it or reading about it. So, you know, we definitely have to work hard.

Dana Robinson:
Yeah. Hey, so as you know, I could keep going, you and I could wrap for another couple of hours about this stuff because there’s plenty of things that you’ve experienced that I’d love to have our listeners learn. But we’ll have to make another podcast episode and say that the remaining five minutes or less. What did I miss? That is an Adam Coffey, specialty piece of information, a tidbit of something that you, you feel like parting words of wisdom that.

Adam Coffey:
Yeah, well, so first of all, I’ll tell you, if you’re going to build an empire, you’re going to need people and people don’t want to work anymore. Everybody wants to be a tick tock star and be a, you know, be a social media multi millionaire, you know, overnight. You know, we need people as leaders. We need to take care of people. If we want talent, we have to pay talent what it’s worth. We have to treat that talent well. We need a strong culture. That doesn’t mean we coddle people and we don’t expect a lot from them or hold them accountable.

Adam Coffey:
But, you know, it’s like you need to be a good steward in today’s world if you’re going to build an empire. You have to have a strong culture to attract talent and retain talent. I would say don’t be afraid to try. Don’t be afraid to try new things. You know, there’s so many people in the world who talk about, you know, doing something someday. Well, someday is today. I can’t buy time. It’s like, now is your time.

Adam Coffey:
Now’s the time to kind of stretch yourself, learn, you know, never stop learning. You know, if I shine the camera over on the wall at some of the sheepskins on the wall and the different programs that I’ve been in, you know, some of these are recent, you know, and I had been serving on boards for years. Well, I finally went and took a, you know, took a class, took tests, became a certified director, you know, in my 50s and, you know, did an executive program in my 50s. It’s like, you know, never stop learning. You stop learning, you stop growing. Try to avoid, for those of you who are successful out there, avoid the arrogance of success. You beat the odds. God bless you.

Adam Coffey:
You know, you’re, you’re doing a fabulous job. You’re growing your business, you found success. But don’t let that success turn into arrogance and, and prevent you from amping it up and reaching another level. No matter who you are. There’s plenty of people out there who are richer, who are more successful. You haven’t arrived anywhere. There is no destination in our entrepreneurial journey. There’s only, I’m better today than I was yesterday.

Adam Coffey:
And I’m going to keep on, you know, digging and trying to reach higher and looking for more. And then finally, I would tell you just, you know, there’s this thing with work, life, balance, when we’re a small business owner, when we’re, we’re working hard so many times where we’re putting our passion and our effort into our business and we’re neglecting, you know, our kids and being there 50 years from now, you and I, Dana, are dead and gone. It won’t matter what our titles were, how much money, you know, was in the bank account, or what the name of our company was that was on our business card. The only reason we will have ever lived is our kids. And so being present and trying to find work, life balance while we’re continuing to learn, push ourselves to grow, you know, and never be complacent, never find arrogance in success, you know, these are kind of the keys, I think that, you know, if most of us out there could live by kind of those mantras and then, you know, how do I give back, you know, and reward others around me who’ve helped me be successful? If you focus on things like this, you’ll, you’ll go farther, faster, you’ll get where you want to be sooner and you’ll enjoy it longer. So, you know, those are, those are kind of my little parting tidbits, you know, and how to be successful, you know, in life and in business.

Dana Robinson:
I love it. That’s a great way to finish an episode where we mostly talk about how to grind it out and grow something big is that you’re people matter and you and your family are people. And so whether it’s people that you’re surrounding yourself with that you want to help make them a success and have them make you a success, that includes self care and family.

Adam Coffey:
Absolutely. And you know what? There’s always going to be haters out there too. And people who don’t want to see you succeed. Don’t let them stop you.

Dana Robinson:
I love that. Yeah, absolutely. Well, Adam, you’re going to have to come back on the podcast another time and get into some more nitty gritty, buy and build ST stuff, talk about finance and, you know, how to manage debt. And there’s a ton of things that I think people could learn. But I don’t want to push it past an hour or I might lose our listeners attention. Thanks for coming on the Opt out. I’m sorry, the formerly Opt Out Life the Exit Plan podcast. Adam.

Adam Coffey:
Hey, Dana, it’s good to be here. Nice to meet you and thanks to all your listeners out there for tuning in and maybe, maybe we’ll do number two and get into some of these other rabbit holes for a while. So good to see you.

Dana Robinson:
Thanks for joining me on this episode of the Exit Plan Podcast. I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com or leave comments and questions by calling 858-252-7785, call 858-252-7785 and leave a message.