E159: Building an Empire - Businesses, Private Equity, And M&A - With Adam Coffey

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit podcast today. I'm here with a very special guest, Adam Coffey. He is the author of not one, but three different books, all in the New York times, bestseller, Amazon bestseller, around the world. And I'm excited to have you back on here. We have interviewed you before but, been a little while.

[00:00:15] You're up to really cool things in the world. Appreciate you coming back on the show and sharing some time with us. Thank you for being here today. 

[00:00:21] Adam Coffey: Thank you for having me, Ron. Hello to all your listeners out there. I really appreciate you as well. And thanks for having me back. 

[00:00:28] Ronald Skelton: I'm a super fan, but maybe there are some people here that don't know you too well.

[00:00:31] Can we jump right in with your kind of origin story? You've done something very significant inside of the mergers and acquisition space, and now you're teaching other people how to do it. So share that story of what you built and why you wrote the books and stuff. 

[00:00:44] Adam Coffey: Sure. And I'll be brief. People who meet me for the first time. I really tell them there's, I'm a collection of experiences as we all are. 

[00:00:50] I'm a veteran U S army. Military taught me something about discipline, teamwork, and leadership. I'm an engineer and a pilot. Engineering made me an anal retentive strategic planner. And being a pilot taught me a really important skill that I only discovered recently and connected the dots.

[00:01:07] It taught me to think about my destination from the beginning. And I think anytime I'm running a company, I'm thinking about the exit. I'm talking about the exit first and I'm reverse engineering it. And so being a pilot, a meticulous planner, think about the destination in mind before you ever take off. I spent 10 years at General Electric during the Camelot era.

[00:01:28] I mean, GE is fortune number one. World's, you know, first original Dow company. It's over a hundred years old. Jack Welsh is at the helm. There is no tech at this point. Um, Steve Jobs is either still in the garage or he got fired. Wherever the hell he is. Tech isn't, hasn't taken over the world yet.

[00:01:44] And you know, it was a special time. And at that time in history, the company, a hundred year old company, fortune number one was growing so fast. It was doubling in size every 2. 8 years. And that's really where I learned that the importance of a 30 percent compound annual growth rate was at GE. And so GE taught me how to run a business.

[00:02:02] And then I spent 21 years as a CEO. Um, building three national empires for nine different private equity sponsors. Turnaround guy. Buy and build guy. Bought 58 companies, you know, put them together. And then sold, you know, these companies. I have billions of dollars in exits. And what happened was about two years ago, I got bored.

[00:02:23] I just got bored. You know, and I was tired of just running one company and doing it in my sleep and decided I want to impact multiple companies. And I had been, been speaking at UCLA for like 15 years. Different executive MBA, um, courses and professors would invite me in. And I love the teaching aspect and the giving back aspect.

[00:02:45] And so that got me to pivot out of the CEO seat, told the world I'm done being a CEO. I started a coaching business. Um, I have three clients today, you know, three verticals. I work with private equity still. I help them as an operating partner, evaluate investments. I invest in their funds. Um, and I coach CEOs.

[00:03:04] I work with founders, like 52 different founders. I've got some in a peer group, um, and we work collectively together and I do one on one coaching. Uh, and these are usually entrepreneurs who are, are growing their business or scaling and at some point planning for that, you know, elusive large, you know, nine figure, you know, whatever the figure is, eight figure, nine figure exit. And then I'm teaching still, you know, and I, I'm now teaching seminars globally.

[00:03:30] I have a following, people come in from all over the globe when I teach them. Uh, and I'm still writing books. Um, and so I've learned how to monetize teaching because you never, I never made any money teaching, but enjoyed it. Now I've figured out how to earn a living writing books and teaching, you know, working and coaching and mentoring, you know, very beneficial.

[00:03:49] And so I think we talked about this off camera. I'm very much all about helping people with strategy. But I now no longer I'm responsible for tactical execution day to day, and that's really has kind of reinvigorated my career. I work more than I worked as a CEO. Work more hours, and I'm having fun, again.

[00:04:08] And that that I think was key to, to my longevity. I'm 59. It's like, and I wasn't having fun doing the CEO thing anymore. Now I'm having a blast and I'm working with a lot of companies, a lot of entrepreneurs and it's special. So that's the background. 

[00:04:21] Ronald Skelton: For somebody who loves a challenge. The variety of the challenges, you know, has to be invigorating, right?

[00:04:27] That's the, cause you're constantly getting different challenges from different areas. I don't want to overstep something that you said. 58 acquisitions in 21 years. I know a lot of us out there that are out there searching and stuff. If you look at the, like the average search funder, somebody doing it on their own. Even if they've, uh, even if they're funded as a funded search, maybe they have one or two interns and they've got a team of maybe three doing the search.

[00:04:48] The average is 24 to 36 months at 58 over 21 years. You're doing two point something acquisitions a year. 

[00:04:56] Adam Coffey: Yeah, well, let me just give you some statistics for my last empire that I built. And in the first three year hold period, I bought eight. In the last two years that I was there, I bought 15. And these companies were not teeny. 

[00:05:13] They were, you know, good sized companies. What's happened is as I got older, I don't want to say I got impatient, but I learned my craft. Right. And, you know, I get in there, I build an M and A team and I hire a by side advisor. I hire a VP of business development. These are the first two things that go on that like the day I'm walking in the door. I'm calling, you know, Dave Harvey or somebody at Harvey company.

[00:05:34] And I'm saying, Hey, I need a by side advisor. Come on over. The water's fine. Let's get going. You know, and then I quickly build a team. By the time I left after five years, we had done 23 deals. In five years. And I had gone from no professionals working in house doing M& A, to having, boy, almost eight people, uh, if you include integration. You know, in house. You know, doing nothing but M& A.

[00:05:57] And so, I built a machine everywhere I go.

[00:06:00] Ronald Skelton: That's the only true self perpetuating machine too. That if you take a company, you build a great, uh, mergers and acquisition team inside of it, and it teaches the company itself how to acquire other companies. 

[00:06:12] Adam Coffey: Um, so let me expand on that for a second. Cause I think it's an important point. You know, if you are a small entrepreneur, small business owner, you're only going to do one or two, you don't need a team and you can get some help, and, and, you know, bring in a coach or somebody to work with to help you get that one or two deals done. Generally, when I'm stepping in, I'm going to be there, you know, I'm planning for a 10 plus year run.

[00:06:34] And I'm going to have multiple shareholders and I'm going to have unlimited capital because I'm running big companies with big PE firms behind me. And so I'm building a machine. And if you're going to do this and it's going to be an integral part of your growth longterm, you don't want to outsource that. You want to own it inside.

[00:06:51] You want to develop what I'll call the IP or the intellectual property. The capability of doing deals is something you want to own inside the business, if it's going to be a main source of growth over an extended period of time. 

[00:07:04] Ronald Skelton: I think I've been, out of all the things I've learned in the last two and a half years and 180 something people I've interviewed 190 something people I've interviewed by this point.

[00:07:13] One of the things I've learned is the private equity route, what you did and what you're, you know, showing other people how to do, is hands down. Probably the fastest growth mechanism that any company could employ, as far as growing a company fast. Uh, I interviewed a, um, company that does security mostly for like hospitals and that type of stuff.

[00:07:34] And they went from zero employees to 5, 000 employees in two and a half years.

[00:07:37] Adam Coffey: Yeah. That's massive. That's massive. 

[00:07:39] Ronald Skelton: They buy some big, they're buying big. Yeah, I think the PE firm behind them has, it was funded with, with B's not M's. Uh, had a billion dollar fund behind them. So they could, you know, if they find a target, they could acquire it.

[00:07:52] They really weren't told no, as long as it fit the mechanism for what they were building. 

[00:07:56] Adam Coffey: Yeah. Well, you know, Hey, the last buy and build I did my two sponsors for the two runs. First one was, was, uh, Audax. Audax big, you know, typical fund size, three and a half, you know, it's a 5 billion. And my second one was Aries, and Aries is the world's largest non bank lender.

[00:08:11] They're like, you know, 150 billion, you know, just in debt. And then they got the PE side, the debt side. It's like, they're the world's largest non bank lender. 

[00:08:20] Ronald Skelton: Yeah. Nice to have that checkbook, right? If you find something that matches, you're not trying to get creative and trying to figure out how you're going to string 15 investor together to make the acquisition.

[00:08:28] Adam Coffey: That's also how I think about it. It's like, I've got a capital issue. And I've got, you know, I need, I need to develop a front end, the funnel. I got to have the deal team to get the deals moving through and I got to have the capital. And what's been fun, you know, in, in helping people do this now is I'm doing it with people who got a million dollars in revenue.

[00:08:47] And, you know, they're just learning for the first time about, you know, the, the, the possibilities of buying two or three companies, putting them together. Making yourself bigger, more attractive, integrating them. And it's like, it's a whole new world of, of fun and boy with the, with the experience that I've got, you know, it can be very impactful to a small company.

[00:09:05] It's just done on a smaller scale than what I had done previous. 

[00:09:08] Ronald Skelton: Let's talk about, you've got three books out there, all bestsellers in different, uh, areas around buying companies, using private equity, doing the exit, thinking about the exit and stuff. Let's do a kind of uh, a short, not a deep dive at this kind of a synopsis of what each of the books is.

[00:09:25] So that when people look at your, like if they buy one of your books, they're probably going to buy all three. But what does each book serve? 

[00:09:31] Adam Coffey: Yeah. So the first book I wrote was in 2019. It became a cult classic almost instantaneously. It's called the private equity playbook. And what I have learned even to this day, Ron, is that the vast majority of entrepreneurs and business people, even very sophisticated people have very little working understanding of what private equity is and actually how it functions and works. 

[00:09:51] And so I wrote that book to educate a generation and just to, to drive home that point. Just recently, a few weeks ago, gave a seminar, a few hundred people in the room, 350 people in the room. I gave this simple 10 question quiz, multiple choice, 90 percent of the room flunked. One person who passed got a six out of 10.

[00:10:09] And then I launch into not the answers to the quiz, but teaching about what private is and how it works. And the reason it's become so important is because today private equity has over 5 trillion in assets under management. Call it, it was 800 billion when I started long ago. Now it's over, over 5 trillion.

[00:10:26] There were, you know, 1, 500 companies back then, there's over 6, 000 firms now. They buy 50 percent of all companies that are sold on the planet, are either sold to private equity or to a private equity backed strategic or private equity funded it. It's because of private equity, we have a secondary market to sell a company into. And the multiples have gone up over time and it's a lucrative way now to exit a business.

[00:10:51] And so I wanted to educate a generation, what private equity was and how it worked. That was that book. Even private equity firms to this day, buy that book, by the case. To hand out on college campuses to incoming associates or when they're recruiting, to teach people how private equity truly works. Um, second book was the exit strategy and playbook.

[00:11:09] And so while private equity does buy 50 percent of companies, you know, there is still 50 percent of the market out there that's sold to someone else. When I bought 58 companies, other than two times where it was the person's second time selling a business, 56 times, it was the person's first primary exit.

[00:11:27] And boy, there's this thing I call, I wrote an article in Forbes, uh, called the, you know, the arrogance of success. And I didn't mean that in a bad way, but you know, boy, when you beat the odds and you build this 10 million, 20 million, $30 million company, whatever size it got to be, you all of a sudden think you're invincible and you know everything there is to know about anything.

[00:11:47] I don't need help with an exit. And I saw that in the eyes, so many times of people who, fortunately, I'm a good soul, good person, and I don't take advantage of people, but boy, there's a lot of novices sitting at the table with sharks. And those sharks, if they detect weakness, you know, fair game is to, to, to make the deal lopsided to somebody else's advantage.

[00:12:09] And so I wanted to teach entrepreneurs about the importance of building a team of people, how to go through the exit process, what it looks like, how to even evaluate who you should be talking to. And I can't tell you how many times I tell an owner, you know, just because your phone rang and it's a PE firm, you know, with 6, 000 firms out there, chances are really good.

[00:12:28] That's not your buyer. You're wasting time. You know, so know who your, your buyer is going to be. And then empire builder, this new book, rather than covering a single subject, you know, as I've been working with small companies, you know, I started digging into statistics and 33 million small businesses just in the United States, only 7 percent ever get to a million dollars of revenue and only 40 percent are profitable.

[00:12:56] Only 4 percent of the 7 percent get to 10 million in revenue. And more than 50 percent of course, of all businesses fail within five years. And so I'm like, why the hell is it so hard for people to succeed as an entrepreneur? I take it as a secondary notion. I'm going to be Uberly successful. Why are these people struggling?

[00:13:14] So I started looking under the hood and I started digging in. And I discovered patterns. It starts with unit level economics. So what I did in the empire builder book, you know, the road from zero to a billion, is I go through the different stages. So, how many entrepreneurs have told me, Adam, I'll figure out how to be profitable when I'm bigger.

[00:13:34] Like, no. The most important revenue on your way to a billion is the first hundred thousand. It's the first million. Let's break it down. Let's focus on unit level economics. Not too long ago, a very famous billionaire asked me to fly and see him, uh, on a weekend. Wanted to talk to me about a big company. They wanted me to be the CEO of, and ultimately I didn't want to go back to the CEO chair.

[00:13:58] And I said, no. But I went and saw him talk to him. You know, we're talking about world hunger. This company that everybody knows, by name, it's like it's lost its way. And three CEO has been in and out, haven't been able to fix it. You know, how do you fix world hunger? You don't, that's the problem.

[00:14:14] You don't fix world hunger. You know, in this particular case, service business, I don't need to fix world hunger. I need to fix one truck. One service call, one service event. And if I can nail that in, I'm fixing the unit level economics, and then I replicated across 6, 000 trucks, you know, and make it, make it work.

[00:14:32] And so I was discovering this and as I'm right, you know, researching and then writing the book, it's like getting out of the gates and getting out effectively and profitably is the most important step in building an empire. And so I focus on, how to build the perfect a hundred thousand dollars business, how to build the mathematical formula to take you to a million.

[00:14:53] How to go then from a million to 10 million? By replicating what we've learned going to a million, and then from 10 million to a hundred million, now it's time to start thinking about new markets and you know, strategic pivots, potentially m and a. As we get up towards about 30 million, our first exit points now starting to come into site.

[00:15:12] You know, I've got 4 million of ebitda, you know, and as I'm approaching that, that point, I could sell, bring in a partner now. Or I could keep pushing on and go to about 10 million of EBITDA. And then, you know, as I'm looking at that first nine figure exit, I'm telling people in my book, you know, you should not grow a billion dollar empire on your own. 

[00:15:31] You know, this world is volatile. And so I talk about exits as not a destination, but a way station on the wealth creation highway. It's a rest stop. And so at some point we want to bring in institutional capital. We want entrepreneurs to get asset diversification, get money out of the business.

[00:15:50] And then we want to bring in OPM, other people's money, and we want to accelerate our growth trajectory. And when I work with entrepreneurs, and I do a spreadsheet and I do two rows, you know, across. This one is you building your business by yourself over the next 10 years. This one is you selling your business, partnering with private equity. Now a minority investor doing a buy and build, and then having two exits over 10 years.

[00:16:16] And never in my life, when I do that spreadsheet work, does the entrepreneur come out making more by owning a hundred percent of their smaller business. They make more by getting multiple bites of the apple and working with sophisticated capital. And so I teach in this book, you know, that, that private equity gives us asset diversification, liquidity for our families in a volatile world.

[00:16:39] But then we also leverage their capital to help us grow faster. And so this is really, it's the only book you need, regardless of whether you got a hundred thousand in revenue, a million, 10 million, a hundred million. It breaks it down step by step. It helps you with the tools that I used.

[00:16:58] And when to deploy them and then how to deploy them. And like all my books, I'm a CEO, man. I don't like long meetings. This isn't 1, 700 pages. You can knock this out in five hours. It's the cliff notes from a guy who's, who's got 2. 4, 2. 5 billion in exits under his belt. Um, and 21 years worth of learning by making every mistake you can make.

[00:17:21] And so I give you those notes so that you don't have to make them. That's what this book's about. 

[00:17:26] Ronald Skelton: Awesome. Let's show everybody real quick. I'll put it up on the screen. So. 

[00:17:29] Adam Coffey: Yeah, I was blessed. This one rolled out, you know, literally you're talking to me 24 hours after the launch. It hit number one in three continents, in multiple countries, multiple categories. Matter of fact, it was funny in Australia yesterday in private equity.

[00:17:44] Of the top eight books, seven slots were held by my three books, different versions. I had like number one, two, three, four, five, and then seven, eight. It was great. So shout out to all my friends down under for, uh, really being the first to open, and the first to really get it done.

[00:18:01] And then, then it just kind of took off and a lot of people helped me with this one, but it's, uh, it's been special. It's my favorite. I think after you do anything once, just like selling a company or building an empire, as you do more than one, you start to get a little better at your craft. I had a lot of fun with this one.

[00:18:16] This one was, uh, this one was fun. And my commitment now is, a new book every two years. I get one out, I get to take a year off. I've earned a rest. And then I'll go back at it, you know? So. It's, uh, and I, and my, my topics usually come from people I engage with. You know, and I see these patterns or themes and then that causes me to want to, want to help solve it on a broader scale. 

[00:18:40] Ronald Skelton: So as people are building their company, one of the things, uh, questions that come to my mind, when you're building a company, I always heard like, I always joke around, people ask me, what's the most important milestone? I said, you know, well, it depends on how much money you have, right?

[00:18:52] If you get infinite access to cash and you know, that changed your milestone. I was like, well, no, I'm funding this myself. I only, you know, I've got a runway of 12 months or whatever on the current cash I have and the current burn rate. I said, okay, well, your, your first milestone is the first dollar of profit because now you have infinite runway. You gotta, you gotta start turning a profit. You know, and a lot of companies don't do that in the startup world or VC world. If you're funded by somebody else, they try to scale, scale, scale, and they don't look at profitability. For a lot of these small companies, you know, mom and pop companies, companies, heat and air, pest control, online company, software company, whatever your phone, your bootstrapping it. 

[00:19:27] I think that the first milestone would probably be become profitable, now you have infinite runway. 

[00:19:32] Adam Coffey: And so I would say before you launch it, do the planning required. You know, truly understand what your unit level economics are. You know, and you mentioned some great ones, you know, pest control.

[00:19:43] Okay. My unit level economics are, I got a truck. I got somebody sitting in that truck. I got some sprayer equipment and I need to go out and generate enough revenue to cover all those costs. And then I have this thing I talk about in my book, I call it the 30, 20, 10 rule. And, and when I'm troubleshooting a company, you know, or starting one 30, 20, 10. I need at least 30 percent gross profit at the operating level in order to have a fighting chance of building an empire.

[00:20:10] And I need my SG& A to be 20 percent or less. And then I need my net, you know, call it net profit to be 10 percent or higher. I apply the 30, 20, 10 rule. If I get into a company, I look at the financials, if I see they're under 30 percent gross profit, I know right where to go.

[00:20:25] It's unit level economics. I got to increase my price. I got to reduce my operating costs to make my delivery of my service more efficient. Need minimum 30 plus percent gross profit. And then SG& A, it's like if I've got more than 20 percent I got too much stuff in the back office. I got to get lean. I got a thing rethink, how I'm processing, you know the back office and acquiring customers and doing things like that. And so, you know, I've learned these little tricks over the year. I'm giving away all my best secrets, Ron, but that's okay.

[00:20:55] It's like, you know, here's the tools. You know, if I cut you loose in this world class wood shop, you know, give you some raw material. Maybe you'll make something good. Maybe you won't. I didn't put myself out of work. I can still help people with these tools, but definitely, you know, have a process around that.

[00:21:10] But what you said is important because of one thing, none of us can buy, no matter how much money we have, we can't buy time. And so if I'm going to fail, I want to learn how to fail really quickly and small, so I don't waste 10 years and a bunch of money, trying to figure out how to make something work.

[00:21:24] That was never going to work from the beginning because my unit level economics were flawed. So get it right small, and get it planned for small. And if you can make it work small, then getting big is just a, it's a mathematical formula and I can show you the tools. 

[00:21:41] Ronald Skelton: Yeah. I think we're going to see a lot of these VC funded things.

[00:21:43] He's unicorns as they call them. They implode over the next few months. One of them just did yesterday. 

[00:21:48] Adam Coffey: I don't mean to be negative on VC funds. It's the easiest source of, of private cap, you know, private equity for people to invest in. You know, for whatever reason, it's like, there's no 5 million minimums.

[00:22:00] You know, there's a lot of VC funds where you can do 25 grand, 50 grand. But every time I see, you know, call it a prospectus, you know, very few VC funds have, you know, have returns that beat the S& P 500. It's not a place for people to play. It's a place for people with sophisticated asset, you know, managers and for sophisticated people who want exposure to the class, you know, to put some of their money.

[00:22:21] It's not a place for, small investors to swing for the home run. 

[00:22:24] Ronald Skelton: You got to be able to follow their model. Like their model is they invest in a hundred, you know, a hundred companies that two of them make it, then they make a home run. Even if it's 25 million, I mean, not 25 million, even if it's 25, 000 minimum, if you can't put a, you know, a hundred of that in there and cover a hundred of their, cover the hundred bases they're trying to cover, you're playing a losing game because they're playing, you're playing a different mathematics than they're playing.

[00:22:45] Adam Coffey: I don't know what you're seeing either, but I would say that what I'm seeing broadly speaking, um, it's kind of a resurgent of entrepreneurism, you know, in, in the country. And I think that's great for the country.

[00:22:57] I think we need to get back to our roots. You know, and this country was built, you know, on small business. And, it gives you comfort to go work for a big fortune 500 company. God knows I did it. That's where I cut my teeth. But, you know, it's just boy, the entrepreneurial spirit, I'm seeing kind of a resurgence and, uh, and I like it, you know, I like seeing it.

[00:23:15] Maybe it's just, I'm closer to it now. But I think for more people. It's like, you know, you go to school, it's like you want to truly create wealth. It's not going to happen working for somebody else. 

[00:23:24] Ronald Skelton: I think it's needed too. We have so many, they're, they're jokingly calling the silver tsunami or the, uh, you know, this, this tidal wave of people retiring out of small businesses and, and they're not getting sold.

[00:23:35] Um, if you look to look at the statistics behind who owns what and here in the United States and, and other countries. If these companies don't change hands, we're going to have an economic crisis like we've never seen before.

[00:23:47] Adam Coffey: You know, that's a scary statistic too. You know, I read one recently that said up to 80 percent of businesses that would like to sell never find a buyer.

[00:23:55] And so we've got the baby boomer generation retiring out, dying out. All their kids want to be TikTok stars and social media influencers and somebody's got to work. And you know, when your internet's down, social media, Tik Tok influencer. You know, somebody got to come fix it. It's not you, you're making the video of it, but.

[00:24:14] Ronald Skelton: I've seen articles right now that it's so bad.

[00:24:16] And, uh, I think it's Japan. People in Japan typically work for the same company for dozens of years to take care of those employees. Those companies are changing hands for little to no money. Like the companies are seeking entrepreneurs and pretty much giving 'em away.

[00:24:30] Uh, there's been a couple articles 'cause there's just not enough buyers and they don't wanna shut 'em down. So we could face that in other places. So inside of your book, you're inside of what you talked about, that private equity play, you're bringing in a team of, and some, you know, well capitalized partners, uh, the private equity. At what level do we wake up those giants?

[00:24:50] I kind of know in my head what I think the number is, but as far as EBITDA kind of goes, uh, what do you need to be to?

[00:24:57] Adam Coffey: So first of all, I would tell you that if you're, uh, below, uh, a $4 million EBITDA mark or 4 million in earnings. And, uh, if you're below that level, um, it said 4 million where the real PE firms that have real limited partners, they have to raise actual funds.

[00:25:15] That's kind of where the PE world starts. There's a false floor below that. So I helped an entrepreneur only had a million, 1. 1 million of EBITDA sell, great deal. You got an eight times you know, multiple. Home run, home services company did great. But you know, I like to tell people either shoot for 4 million or shoot for 10.

[00:25:33] And here's the magnitude, you know, in the type of companies that I'm, I'm always around, call it home services type stuff. If I get the 4 million, I'm probably looking at eight times, you know, if it's a contracted recurrent revenue stream. And if I can get to 10 million of EBITDA, you know, a little bit higher, I'm now looking at about a 10 to 12 multiple and I can, I can get $120 million, $140 million deal.

[00:25:55] And so I look at those as the two exit points. And I, and I say, and here's the why, you take these 6, 000 PE firms, they're all doing the same things. They're all investing six to 8 percent of their fund in any one company. They can't invest more than 12. And because of this, they all got 10 years to five, six years to invest it, improve it.

[00:26:15] And then they got to sell it on the back half of the fund light. Because of that reason, big funds buy big companies and small funds buy small companies. And Mary do the two crossover because they can't. And so there's five levels, I call them swim lanes, you know, of capital. And the first swim lane starts at 4 million of EBITDA.

[00:26:33] So people who buy at four usually take companies to about 12 to 15. Those buyers that come in and swoop in there, they take companies up to about 40 to 50 million. 50, then up to a hundred, then a hundred to 200, 200 to public. And those are the five layers. And so it makes no sense to get in the middle of a swim lane.

[00:26:52] You get your multiple expansion at the beginning of a swim lane. And, uh, matter of fact, if you get bigger, it gets harder because people are like, yeah, it's bigger than I normally buy, or it's smaller than I normally buy. So you gotta, you gotta match up your exit with the natural points where PE is buying.

[00:27:10] And so I tell the entrepreneur, look, you know, if you want, if you want to build a company and then exit for, you know, 30 to 40 million, you need 4 million, 5 million of EBITDA. And if you're looking for a hundred million plus exit, you need to get to 10. Why 10? Well, these these pyramid steps have flexed down. So much capital in the system, not enough good companies to buy. Everybody's kind of reaching down a little bit.

[00:27:35] So guys that used to buy at 15, they're now looking down 10, 12 and they're looking for a good company that they can buy early. And then because of time, they're not going to go all the way to 50. They're going to take it to about 35, 40 and then they're going to exit because their time clock, you know, their five year old period kind of time clock starts to run down.

[00:27:53] And the next firm comes and they're looking down. So everybody is kind of shifted down a little bit. And so I say 4 million of EBITDA or 10 million of EBITDA. Those are the two places. No real reason to go to six or to go to seven. Well, there's this, this that's that I don't know if you've seen that.

[00:28:10] That's a, that's some kind of AI thing. And it's like, it's built into the software.

[00:28:15] So four and 10. Four and 10, those are my two exit points. And no larger than that. I don't think there's any point, you know, in going larger than that. If you can get a nine figure exit and you're not taking it, we need to have another conversation about asset diversification and wealth management.

[00:28:30] And today's world is so volatile. If you can take a hundred million off the table, then by God, you need to take a hundred million off the table. Now you can play with house money. You know, roll over. You know, get a capital sponsor and use their money and, and keep growing your empire. But now at a faster pace.

[00:28:46] Ronald Skelton: So for all the people I've been telling out there, you need to get above 1. 5 million to $2 million in EBITDA to wake up the giants and get a bigger multiple. The new number is four because that's just what I learned from the other people I've interviewed is, uh, I think maybe, maybe even because it's a strategic buyer start kind of being interested at, you know, at that level.

[00:29:05] But, uh, No, I've had a few people come to me and go, you know, why am I only getting offered three X? I hear people getting her six or seven. I was like, where are you at? And they're like, I'm at 900, you know, K and EBITDA. I was like, well, you got to get above 1. 5 to 2 million to even draw the interest of the PE guys.

[00:29:20] Adam Coffey: It doesn't mean that you can't sell Ron. You can sell, you'll find buyers down there, but it's hit or miss as to whether you're going to get a good partner who's capable and has the capital and the background and structure. You know, are they writing your coattails or are you writing theirs.

[00:29:34] And on a small company sometimes you, you don't know the right answer to that. There are plenty of good firms that buy below that point. I'm just telling you at 4 million, you're getting real institutional capital, people with real funds, you know, and real firms, and these people have the resources to accelerate your growth trajectory. 

[00:29:54] Again, I, I helped somebody sell at just over a million, you know, in the last year and they got a good outcome. But you don't always get a good outcome at that price point. 

[00:30:03] Ronald Skelton: Well, a lot of the people don't get this, you know, there's, there's tears to this. There, it's a, there's an arbitrage. 

[00:30:09] And a lot of the people listen to this show they're playing that arbitrage. They're trying to buy that home services company that heat and air pest control company, you know, that's Uh, one million EBITDA and they're trying to grow it and maybe buy a second one that's at two.

[00:30:24] And then they're wanting to hit that because if they can buy those companies at 2. 5, 3x. You know, cause that's, what's going on, you know, at that lower, lower, uh, EBITDA level. And the goal is, well, they get that number above four. Now they get to sell it at seven. 

[00:30:37] Adam Coffey: And so I, you know, and I talk about examples of that, you know, in my book and, and just, let's assume we had unlimited capital. And I bought four companies with a million dollars EBITDA each, and I paid five times for each one of those.

[00:30:49] And so it costs me 20 million. When I sell those companies integrated, those four companies, million each, I paid 20 for them. I also have to integrate them and get them starting to grow and show I've got growth. So now I sell 5 million of EBITDA at eight times. And I get 40 million. I pay off my 20 million of debt and I got a 20 million profit and I just joined the Deca millionaire club.

[00:31:11] And if I had the capital just sitting in the bank, you know, and I'm not saying that, that, you know, raising capital is not hard. I don't think raising capital is hard, but if, if I, if I had the cash in the bank, I could do that in a year. I could do that in a year. Year to 18 months. Go find four companies, buy and put them together.

[00:31:26] If I wanted to build a $10 million company, I buy 10 of those companies and I pay five times for each million dollar company, 50 million. When I sell it for 12 times 120, now I just made 70 million profit. Maybe it takes me three years, four years, five years to get that done. Keep in mind it cool says, you know, so like my last company, my average kind of buy size, I'm paying about five times.

[00:31:51] You know, and I'm buying, you know, 2 million to $4 million EBITDA companies, and I'm buying them all day long. When I sold it last time, it was like 14 times. Yeah. That arbitrage is huge, and, and that's also, Ronald, why you need to buy good companies, not fixer uppers, in my mind, it's like arbitrage is going to make your wealth. So why buy a fixer upper that takes all your energy and can potentially derail you, when you could buy good companies, pay fair market price, and still make a bunch of money?

[00:32:20] Ronald Skelton: Absolutely, absolutely. So let's talk about like what goes into that? At this stage now you're say you're at a million dollars in EBITDA. You're trying you want an exit in the next four or five years. You want to get past that four million. Is acquisition one of the fastest ways to do that?

[00:32:36] I mean in my mind it is because that's that's the world I play in. 

[00:32:40] Adam Coffey: Yeah, no to me it is too. So, you know, I want strong growth. But think about growth for a second, if I'm growing at 10%, it takes 7. 2 years to double in size. That's the law 72 in investing. So a million dollars of EBITDA becomes 2 million, you know, in seven years, if I'm growing at 10 percent.

[00:32:59] And it becomes 4 million in 14 years, you know, 14. 4 years. And so that's just too long. And so if we can grow it 30 percent organically, we're going to double in size in 2. 8 years, triple in size in 4. 2 years and quadruple just over five. So if I can hit a 30 percent organic growth rate, I'm going to get there in under five years, you know, from a million EBITDA.

[00:33:23] But if I can't get to 30 and I want to be efficient with time, I want to use some M& A. So maybe I buy one, you know, another company or two, and I go from one to three. And now I just need a little bit more organic growth and some trajectory and I can get to that kind of four exits. So from my perspective, absolutely. 

[00:33:44] Look, this is how private equity generates the majority of their returns. We can do it too on a small scale. My books teach you how to do that. And, and we're just doing it on a smaller scale. There's tons of capital out there. There's no shortage of places where we can go and get money. Even today's world, you know, even the SBA in today's world. Maybe the interest rates are higher than we'd like, but that's why I like service businesses.

[00:34:10] You know, and my rule of thumb generally is, you know, if I'm buying EBITDA, EBITDA in a service company is generally the same as free cash flow because I don't have a lot of capital expenditures. I just got to buy some pickup trucks, you know, or, or, or steak trucks once in a while. And so it's like, I'm looking for service businesses because they're low capital expenditure need.

[00:34:28] They have high free cash flow. And my rule of thumb is, I can use up to 50 percent of the free cash flow that I'm buying to service debt. And so if I'm buying a million dollars in EBITDA, and I'm paying 5 million for it, let's hope we can get it cheaper, but if I'm paying 5 million for it, then I'm borrowing 5 million at 10 percent interest, I need 500, 000 a year in interest payments to service the interest.

[00:34:51] And I've got a million in free cashflow that I just bought. So I've got double coverage and I feel pretty good about that. So that's kind of my, my rule of thumb. 

[00:34:58] Even the SBA recently started to allow for rollover investors. So I can use rollover investors for equity. Join my merry band of brothers and, you know, become a part of my buy and build, my mini buy and build and you'll pocket a second payday for joining me along the way.

[00:35:16] Their rollover becomes your equity. You leverage the rest with debt. Small cashflow, you know, to service that, that debt. And you know, you've got three times the coverage ratio now if they're rolling over 30%. And so it's, it's easy to do once you demystify it and you'll learn what the steps are to doing it. Then you move slow the first time through, you learn, you get your feet wet and you know, eventually you become a guy like me who buys 23 companies in five years. 

[00:35:48] Ronald Skelton: You know, when I first learned about all this, one of the things I did is I went out and I won't say the industry cause it's, I'm going to say the city and it'll, it'll tell you there's not that many in that area.

[00:35:58] But, um, yeah. And Tulsa, Oklahoma, I, I took the courses and, you know, I thought, why in the world are these companies selling on their own? So I, um, why don't they just partner up with two or three people? Let's get past that mark. Uh, I'll show, I'll show them what I know. I'll, I'll actually, you know, not broker the deal. 

[00:36:15] That said, I walked out and I went, I cold called and I went and sat down with probably 20 of the 30 companies were in that range. You know, they're doing about a million and a half, but I could guess. I knew the industry fairly well. And so I knew based on how many employees they had, how many service trucks they had and stuff, they're probably doing a million, million and a half. I knew they're all, all of these owners were probably 55 plus.

[00:36:38] So I tried the realm of, Hey, like, let's sit down, let's pick three or four of you guys that are ready to retire in the next two or three years. Let's combine it. Run it as one unit and then sell it instead of selling it for, you know, in my world, I've always seen them selling for 2. 5, three X, maybe four X. 

[00:36:54] Five is unheard of like in the small communities I've been. I just haven't seen it. Now we get to go to seven, eight. Like everybody gets more money and I was trying to carve a piece out of the deal by pulling these people together. And the funny thing is in these small communities, the owners really don't like each other. 

[00:37:08] Everything I can, I'm like, I don't want to go work for the numbers. Cause you know, we, we looked at, okay, we need at least 18 months where you guys are congealed work together. It's one brand. That's the other thing is who, who's the legacy, who's the brand, right? There's some roadblocks.

[00:37:19] Maybe it was in my communication style or skills that I couldn't get past. Uh, You get the owners to be at the same table, but that, you know, that was my brilliant thing. Like, why don't these people just work together? They're wanting to retire anyway. 

[00:37:30] Adam Coffey: I've worked on a number of these, you know, recently, just in the last year, year and a half. 

[00:37:35] A guy who's over 70, got about 5 million EBITDA. I'm preparing for my exit, you know, I'm looking at the industry, looking at the trading multiples, you know, at 5 million of EBITDA you're going to trade for eight times on a good day.

[00:37:46] You're going to get 40 million. And I told him, I said, do you know anybody similar to you? Well, yeah, I've been in this industry for 40 years. You know, there's another guy I know he's in his seventies and he's been around for 40 years too. Great. You know, if we put your two companies together and you each have 5 million of EBITDA, you each would have sold for eight times.

[00:38:02] In that industry, when I put some professional services industry, when I put the two together and it's 10 million of EBITDA, that's going to sell for 120 and without doing anything. You're going to go from 40 million to 60 million, just by putting yourself together with a friend. And a cashless merger, put the two together, climb the pyramid, you know, show it's an integrated platform, like you said. 

[00:38:22] By the way, since we're both 70, we darn well better have, you know, Young Buck somewhere around or, uh, you know, a leadership team below you two, you know, that can take the company forward and that'll become the, the person that'll take it out front and be out front and you guys will sneak out the back door.

[00:38:37] It's that easy. But as you said, when you're doing mergers like that, you know, I, I am looking for a short exit because personalities create the difficulties. 

[00:38:47] Ronald Skelton: I think if I had a proposed doing it in six months, if I knew integration well enough, I knew I could get them together, get them on one set of books and prove something. You know, but I, I, what I did is I went out and I called cold call, you know, you said there's 7, 000 PE firms.

[00:38:59] I cold called probably two dozen of them that I knew bought that industry and said, interview them like I interview you and other people and said, if I brought you something, how long, you know, that's a merger that's been merged together, they've acquired or they merged together, how long did they need to be operating as a concealed unit before you would be interested?

[00:39:15] And almost all of them said at least 18 months. The thing that I backed away from doing it was, I don't know that I could get these people to behave and work together and actually progress for 18 months. 

[00:39:26] Adam Coffey: Yeah. So I would tell you, you could do it quicker. Part of your value prop is, is okay.

[00:39:30] Am I buying a collection companies or an integrated empire? And if I sense there's risk, I'm going to discount the price paid. So maybe instead of eight times, I get seven or instead of seven, I get six. But there's still people out there who need to put money to work. And, and I think, I think you'll find a buyer. 

[00:39:43] Ronald Skelton: Since the last time you and I talked, um, you know, was about a year and a half ago now, probably it seems like. Maybe, maybe longer. Um, you've been on quite a few stages. I, I, I watch you on LinkedIn. I see stuff you're doing like that.

[00:39:56] What have you learned? I, is this book, you're just, you know, the empire, uh, builder book, is that because you went out and you, you seen what people needed and then you delivered like, you know, the answer to that. I, you can't, you can't be on that many stages and see that many people and hear that many stories without like learning stuff and figuring out, wait a second, people need X, Y, and Z also. 

[00:40:18] Adam Coffey: So I had my skillset, but I was higher upstream, you know, and, and I, I was focused on larger companies, call it a hundred million up. And as I've been on stages, you know, and have been coaching and consulting with people for two years now.

[00:40:33] Um, you know, I've looked under the hood of hundreds, literally hundreds of companies and working with PE firms, helping them, you know, understand investment potential of businesses that they look at. Oh, look under a bunch more hoods, read a bunch of books. And it's like, I keep seeing these common themes.

[00:40:50] And you know, uh, Empire Builder started as a seminar. And so I, I taught a two day seminar in Dallas, 350 people came in from around the globe and, uh, and they participated. What they didn't know was they were helping me perfect the material for my book. And I did it in February of this year. And literally when the seminar was done, I sat down in March, picked up a pen, you know, the proverbial pen and started writing.

[00:41:15] And now, you know, we're into October, you know, so yeah, six, seven months later, you know, it's that seminar is now a book and it was based on everything that I saw that was kind of going on with these small companies. And I'm like, well, wait a minute, I can help. And if I can help you think of all the other people that are out there that I don't know yet, haven't met yet, but they have the same problems because you guys are all kind of a microcosm. The 350 people I'm talking to and working with and seeing, you know, they're a microcosm and a reflection of, of the broader, broader society globally.

[00:41:49] And so I have clients all over the globe now. And I've been looking under the hood and boy, a good company just stands out. You know, talk about, I can look at a lot of haystacks and I can pick out the diamonds just really quick, you know, and, and figure out. You know, boy, that company, I call it, that company has legs and it just needs a little bit of coaching, a little bit of help it's going places.

[00:42:11] And so all of those kinds of learnings, I was like, okay, I've got all these skills that I was applying up here. But I can break it all down now and I can start applying it in this, this, you know, really lower part of the middle market, you know, and, uh, and boy, it's impactful.

[00:42:27] Ronald Skelton: You mentioned earlier, and we both talk about this on a regular basis.

[00:42:30] It had something like 80 percent of all businesses that need to sell don't ever sell. And I honestly think it's because of large percentage of those aren't good businesses and their respect of, great businesses. Uh, in the respect that their books are right there, they've got strategic operating plans.

[00:42:47] They're profitable. I've looked at, you know, even, even this year, since I moved out here, uh, I cherry pick things. That's like, I'm going to look at things I really want. And I go in there and then you got a cognitive bias. Cause you want the thing, right? Like you go into this thing with, I really want this.

[00:43:02] And I still have to tell him no, because, um, they're like the last one I looked at. I won't say that cause it'll, it'll say who they are if I tell it too much, but they made some big changes. So now they're in a decline in the last couple of years, they haven't recovered from the big changes they made of how they run their company.

[00:43:17] So they've declined in revenue. And all of a sudden now they're in a, in a market that had a bunch of new competitors come into it. When they first started the space, there's four or five of them that are doing it. Now it's a diamond diamond. There's no competitive moat, right? There's no, strategic advantage to them.

[00:43:36] They haven't carved off a niche inside of that. So now I'm in a situation where they're declining revenues and problem with the company and they're going to get some more competitive force and they made all these changes and they're trying to sell it, you know, based off of where they see it going and where they've been years ago.

[00:43:51] And I was like that, there's a lot of that going on. There's a lot of companies that they go to the market and they like, they want to sell by either something they did a couple of years ago and like, Hey, this is where we were and you could be there too. And, uh, what I call shoulda, coulda, woulda's. 

[00:44:04] Adam Coffey: Yeah. Right. I, I call it mixing kool-Aids. Magically after you gimme too much money for my company, it's gonna grow. Like it's never grown before. You know? And, and you know, you're gonna be the benefactor of that. Pay me for it. And it's like, that's not how it works.

[00:44:17] Yeah. I draw your trajectory out and I plot what your trajectory is and all that hockey stick stuff you're talking about, I don't pay any of that. You know, so you can talk to me to your balloon face. So what I do when I'm working with entrepreneurs, because I work with PE firms and I help them evaluate what to buy, I know where their risk bias is.

[00:44:36] And so when I'm working with entrepreneurs, it's like, I'm going to teach you how to look attractive to a PE buyer so that when they are looking at their risk and they're in their investment committees, you check all the boxes that mitigate risk and they overpay for the investment. Or at least they're going to pay you a really fair market wage for that because they're not going to discount you.

[00:44:56] Cause I've addressed the elements of risk. We've got a strategic plan in place. Instead of selling a hockey stick projection, we're going to actually work together, bend the growth curve. We're going to send a new, we're going to sell a new trajectory. And I'm going to show that you can be a platform because we're going to do an acquisition and we're going to integrate it.

[00:45:13] And here's our strategic plan. And. You know, here's all the stuff that we've done. And so when the PE firm start looking, it's like, boy, this company's got legs. It checks all my boxes. I'm not seeing a lot of risk here. I'm going to pay up. I want, I want to own that asset. It's, it's the diamond in the rough, you know, and I'm going to, I'm going to grab that thing before somebody else does.

[00:45:33] It all has to do with risk. Everything relies around risk. And so the, you know, if growth is a story and not a reality, that's a risk. Yeah. They're not going to pay you for that risk. 

[00:45:43] Ronald Skelton: There's soMething in my head that might have created a myth during this conversation. I want to dispel right now. Tell me about the different types of clients you have. Cause we talked about home services. I own a pest control company. You've done heat and air. We've both done home services stuff.

[00:45:55] I'm not buying that now, but I think you deal with just about any type of company. So can you give us an example of the breadth of different types of companies you service?

[00:46:04] Adam Coffey: Sure. I'm working with, uh, currently some MSP companies. So that's, uh, you know, uh, an IT services provider, managed services provider in the IT space.

[00:46:14] I work with fire life safety companies. Um, so think security, fire suppression could be like a sprinkler systems in homes or in multifamily housing. Doing a couple of those. Um, I'm working in a robotics buy and build. 

[00:46:29] More and more manufacturing coming back to the United States. We don't have enough workers.

[00:46:33] Robotics is the key to the future. We've bought four companies this year. We'll probably buy seven by the end of the year. You know, it's like, it's a buy and build in robotics. Um, I'm working with roofing companies, flooring companies, pest control companies. The breadth is just like, it's endless the way I describe it. You know, not to be glib is.

[00:46:52] You know, dudes, trucks, broken stuff, you know, dudes, trucks, building things, dudes, trucks, fixing things. I am working with some manufacturing companies. I do have a real estate investment cohort, you know, that I, that I work with and try to help and coach. Um, and so the breadth is endless.

[00:47:09] You know, I think of my skillset as being generic. When somebody calls me, you know, and they're looking for me to help them because I have an industry expertise. I know they don't know who I am and they don't know my value. You know, likewise, when someone calls and says, Adam, my idea in your wallet, then we can go places.

[00:47:27] And I'm like, if they're asking me for money, they don't understand my value either. You know, the guy who calls and says, Adam, I'll give you 30 percent of my company to help me do a buy and build in my home services or commercial services space, that person knows what kind of value I bring to the table. You know, and I'll help them solve for money.

[00:47:44] You know, you don't need my money. My skills are generic. What's working now. I take your industry expertise, you know, whoever that your is, match it with my experience and expertise, building, scaling, you know, doing buying builds, exiting, and together, you know, we create an expertise at a, at a much higher level. 

[00:48:05] I was never an industry expert in any company I ran until I was hired as a CEO. A few years later, people think I'm an expert in the industry. And Christ, I just walked in the door two years ago. I bought 25 companies, put them together. That's my expertise. You know, I'm not an expert HVAC guy. 

[00:48:20] Ronald Skelton: So How do people find you? How do they, how do they reach out to you? If they have questions. Let's make sure people know, uh, their books on Amazon. I'll put links inside of there. Um, To all, all three of your books inside of the show notes so people can get those.

[00:48:34] Adam Coffey: Yeah. I have an author page on, on Amazon too.

[00:48:36] So one link covers all books and, and, uh, you can do that. Um, LinkedIn, you know, I think, you know, it's like, I'm very responsive on LinkedIn to people. Um, I do get a lot of inquiries every day, so I apologize if you don't hear back from me. But I, you know, other than the people who say, Adam, I want your money, or I got something to sell you, or, you know, it's like, boy, I'm a fitness guru and you look like a dumpy old white guy that needs some fitness. And, uh, yeah. That shit sailed brother. 

[00:49:01] Other than the flavor of the day, you know, Adam, would you like, uh, you know, to get project management certification? I'm like, nah, I don't need that. Yeah. But you know, so I, I am very responsive LinkedIn, uh, adamcoffee.com. 

[00:49:13] I try to engage. I try to be responsive to people. I try to be respectful of people. People who genuinely reach out, you know, I, I try to, I try to give them some encouragement as well. It's hard to do in a busy world, but I, I, I still do it.

[00:49:26] Ronald Skelton: Well, I'm a big fan. I'm a big fan of what you're doing. I'm a big fan of the books you put out there. I, uh, people always ask who are some of the favorite people you interview. Uh, your name always comes up. Uh, I refer people to, uh, you know, anytime I see somebody is needing help to get from one level to another, I ask them if they know who you are.

[00:49:42] And, um, so I appreciate you being here today. I think we can call that a show. And, uh, thank you. Thank you for being here. Thank you for giving us your time, your knowledge. And thank you for taking the time to write the books.

[00:49:51] It takes a lot of time, effort and energy to get these books out. So thank you for taking time in your life to share your knowledge, uh, for those of us who are kind of following your path. 

[00:50:01] Adam Coffey: Well, thank you. Thank you for having me back on. It was good to be here. Um, hopefully we won't wait a couple of years for the next book. We'll get back together before that, or we'll do something together.

[00:50:09] That'd be fun too. I appreciate everybody out there. Thank you for listening.

[00:50:13] Ronald Skelton: Hang out for just a second. We'll call that a show.