March 23, 2022

How2Exit Episode 22: Adam Coffey - CEO, best-selling author and Forbes Business Council member.

How2Exit Episode 22: Adam Coffey - CEO, best-selling author and Forbes Business Council member.

Adam is an acclaimed guest speaker. He is also an inspiring and authentic leader who creates high-performance cultures and drives transformative growth.

Over the past 21 years, he has had the honor of serving as President and CEO of three national...

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Adam is an acclaimed guest speaker. He is also an inspiring and authentic leader who creates high-performance cultures and drives transformative growth.

Over the past 21 years, he has had the honor of serving as President and CEO of three national private equity-backed service companies, each in different industries. Two of the three companies he built achieved enterprise values of $1B.

Coffey is an active mentor to MBA candidates and is a regular, favorite guest speaker at UCLA. Coffey, is an engineer, a pilot, a former GE executive, an alumnus of the UCLA Anderson Executive Program, and a veteran of the US Army.

Coffey’s first book, The Private Equity Playbook, was released in February 2019 and became an instant #1 Amazon Best Seller and private equity cult classic. His second book, The Exit Strategy Playbook was released in September of 2021 and also was a #1 Amazon Best Seller. He was named one of the “Most Influential Leaders” by the Orange County Business Journal in 2018, 2019 and in 2020 and 2021 was named to their prestigious "OC Top 50".

Coffey makes his home in Westlake, TX with his wife and daughter.
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*The Exit-Strategy Playbook:

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Ronald Skelton  0:06  
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.

Hello and welcome to how to exit. Today we're here with Adam Coffey. Adam Coffey is a CEO board member, best selling author for this business council member and acclaimed business speaker. Adam Coffey is an inspiring authentic leader who creates high performance cultures and drives transformative growth. Over the past 21 years, he has had the honor of serving as President CEO of three national private equity backed service companies, each in different industries. Two of the three he built achieving enterprise value of over a billion dollars. Coffey is an active mentor to MBA candidates and is a regular favorite guest speaker at UCLA. Two times bestselling author in the field of mergers and acquisitions, first with the private equity playbook. And more recently with the exit strategy play playbook. Welcome, Adam Coffey. Adam, let's just start right here. Tell us a little bit about how you got started. What got you into this space? And let's just start with that.

Adam Coffey  1:34  
Yeah. Hey, Ron, thank you for having me on. Hello to all your listeners out there. Appreciate it. Hey, listen, you know, when I was a little boy, hey, I wanted to be a goalie for the Detroit Red Wings. You know, if someone would have said you're gonna be CEO someday of a medical service company or something even sexier, like a like a CEO of a laundry company or an HVAC company i i just said really, that's That's it, you know, but you know what, when I started out, you know, four things about me one army veteran, US Army military taught me something about discipline, teamwork, leadership, to engineering, engineering made me a meticulous planner. Three Ge in the golden era of General Electric back in the Camelot era, I call it when Jack Welch was CEO, GE taught me how to run a business and then for was just experienced, but when I was first, you know, the phone started ringing. I'm at GE, I'm a, you know, I'm a manager, I'm working at the world's most admired company. At the time, I'm thinking, hey, life is good. I'll be here for my whole career. Recruiters started calling, you know, it's about the time you're getting towards the GM level that the recruiters start picking you off. And, you know, Hey, you want to come work at this private equity back service company. And I'm like, you know, the hell's private equity. I didn't know what private equity was. Nobody knew what private equity was, because 21 years ago, there were only a couple 100 firms, not 6000, and only a few 100 billion in assets under management, not 5 trillion. And so I didn't know what private equity was, but I was chasing money in title. And it was my first opportunity to become a president and CEO of a business. And so it was chasing money chasing title kind of got me started with private equity. And then I started learning more about it, you know, over a 21 year period of being a CEO, and putting all those comforts of the technical background and career aside that I had, and just kind of charting a new course. And so really, quite by accident, literally sitting at work and the phone rings, you know, today nobody would answer the phone when the phone rang. But back then we still answered the phone. You know, there was no caller ID you know, and you would just pick up the phone, you know, hello. And it's like, recruiter. No, thank you. You know, but they were persistent. Eventually, I listened. And, you know, the rest was kind of magic.

Ronald Skelton  3:59  
So great. So you've been doing this for what did you say almost 20 something years now.

Adam Coffey  4:04  
21 years working with private equity building big national companies.

Ronald Skelton  4:10  
Awesome. So I always like to ask the question and usually asked later in the show, but with you I'm really curious as what what do you know now after 21 years that you wish you'd have known day one of working around private equity? There's, there's got to be something like man, I wish that I learned this a long time ago.

Adam Coffey  4:25  
Yeah. Intense intensity and speed. You know, I call working with private equity. The epitome of business, you can certainly aspire to be a fortune 500, you know, CEO or something like that. But when you think about as a percent of the employee population, how many people in the Fortune 500 World earn seven figures a year? It's a really, really, really small number. When you go back to kind of middle market private equity backed companies and what's the percent of people Well, that are earning seven, seven figures a year, much higher number. And so there's a, there's a lot of wealth being created in the middle market by private equity firms. But in order to generate that wealth, you really have to take, you know, what is a slow growth mature company, you know, each company that I've run, had been in business for about 40 years before I got there. And so you're taking something that's growing at the single digits, and you have to instantly bend the curve, get it to grow at about 30% a year, and sustain that for a good five years or more in order to generate the private equity sized returns that they're known for. And so I think if I could learn one thing earlier, it was just the speed at which change needs to happen in an organization. The goal and objective of quickly ramping up a growth curve. And a big piece of that, you know, is mergers and acquisitions m&a, it's called buy and build and the P E space. But you know, it usually these slow growth companies slow growth only because they've been around for a long time, you know, if you were talking about venture capital, and somebody went from $1, of revenue to $2 of revenue, that's 100% growth, you know, but in a 40 year old business, generally, the market is more mature, they're growing in single digits, typical for me was like six to 8%, when I started, and recognizing what needs to be done to bend that growth curve, you know, quickly and make it happen in a sustainable fashion. And I think I really didn't get that right. At first, it took some time for that to sink in. Of course, now I look back and say, Well, of course, you know, it makes sense. But back then there wasn't this book up there. The private equity playbook, you know, that didn't exist. And so I was learning, like the rest of the world was learning how to work with private equity.

Ronald Skelton  7:00  
So interesting. I just interviewed Walker Deibel. I think he's the guy that wrote by then built, right. Yeah. So now I've got the private equity guy on here. And so I'm really interested in what does it take to exit to a private equity company? Like, what are the what is it? Like? What are they looking for? Right? What's the entrance criteria? Like they're looking, I hear different things from different mentors. And I've asked different people I've asked mentors on the show what they're looking for, I'm really interested in what you know, they're looking for

Adam Coffey  7:31  
well, so first of all 6000 firms so private equity is gigantic, lots of money, lots of capital right now, this very second, while people are watching this, there's 1.5 trillion in capital committed out looking for a company to buy right this second. So they're organized kind of in silos and you'll have small private equity firms with small funds, you know, who buy small companies and they grow them a little bit and then sell them to the next size up private equity firm, you know, who then grows it, you know, again, sells it on to the next kinda, and you could go through that two or three times like the inflection points, it first of all, everything revolves around EBITDA so, you know, buyout funds, which are the biggest chunk of private equity capital, not venture venture sexy, but venture is a small piece of the overall private equity world. buyout funds are where all the action is. That's where the mature companies that are real companies with real revenue, real earnings are bought and sold. And so starting at about a million dollars of EBITDA, up to about 10 million of EBITDA is what I call kind of the first tranche and then from 10 million of EBITDA people who take it to about 40 million of EBITDA is another tranche. 40 to 100. Another tranche over 100, you know, again, you know, is where you start your climb in the pyramid. So let's start with just sighs to be an actual platform company of a private equity fund, you're probably going to be in the neighborhood of collet on the smallest size, you know, one to three, one to $4 million of EBITDA. So depending on EBITDA margins, if a company has 15% EBITDA margins, you might have $10 million of revenue $1.5 million at the earnings line, that's about the smallest you're gonna see private equity play, you can be smaller than that and still get in the game. But you're probably going to sell to a strategic buyer owned by a private equity firm, and you're going to join kind of that strategic as they're growing their business and you'll be one of the companies that they acquire as a part of buy and build. So you really have to ask yourself, Do I want to be a platform where tensions on me things don't go right you know, I'm in the crosshairs or do you want to be an add on to a strategic It who's owned by private equity and somebody else's in the crosshairs, the growth profiles are both the same, which is interesting, but probably going to have to be at least around a million and a half of EBITDA in order to attract the smallest tranche of private equity as a platform company.

Ronald Skelton  10:18  
So I have a bunch of listeners who are their goal. They're in the acquisition and merger space, they're being mentored by various mentors, some of which we've interviewed, some I've got lined up to interview. But their goal is to buy a firm that say, a million in revenue, and then grow it to where it's attractive to P and E, to sell to private equity. So what they're looking to do is they need to grow their EBITDA, up to 1.5 is what you're saying one, one to 1.5 minimum to get in the door, what other requirements are there are there any other so,

Adam Coffey  10:57  
you know, capability of growing again, for a company to hit private equity sized returns, and let's just identify that that's really three to four times multiple of invested capital, if you invest $1, you want back three or four bucks, and you want that probably within a normal five year hold period. So what does it take to do that it takes about 30%, sustained, you know, or you know, total growth, about 30% in earnings, it can have various components. So it could be your growing strong organic, you know, but it's as 12%, you know, not enough, you know, a company that's growing at 10% a year, it takes 7.2 years to double in size, a 2x, multiple of invested capital, that would be a really bad return from a private equity perspective, you know, and so to get it to a Forex return, gotta grow at 30%. So, you know, some of the things private equity looks for is, is fragmented market, you know, so let me you know, a lot of small companies in the United States and elsewhere are service businesses. Think about if you're old enough to remember before, remember a phonebook? Yeah. Remember, though, the yellow pages of a phonebook? Here's how I like to think about it. If you could go into any city in the country, and grab an ancient Yellow Pages, and look at the Yellow Pages, what kinds of companies would you find, you know, you would find landscapers, you know, different parts of the country, you know, you, you would find dentist, you would find veterinarians, you would find, you know, all kinds of services type businesses, HVAC, plumbing, electricians, and if you can go to every city in the United States, and find these kinds of companies, but they're not the same. They're all owned by different people, that's what you would call a highly fragmented market. So a fragmented market means there are 1000s of companies out there that you could go out and buy as a private equity firm, you know, and a fund. And so I want a fragmented market, because it lets me do buy and build, which is probably the sexiest, easiest way to ramp up a growth profile, and then get a you know, get good, strong organic growth, if it can be low, you know, high single digits, low double digits, you know, call it nine to 12 13%, that's great, you know, through some process improvement through some scale and size, might be able to pick up two or three points and margin improvement, because you're, you know, doing more stuff, you know, in a repetitive fashion and able to invest in technology and, and become more profitable. It's kind of a combination of all of that. But here's the probably the most important thing you want to sell to private equity, private equity doesn't bring a management team, private equity is really investing in you, they bring a checkbook. And so if you want to sell the private equity, you know, you need to be kind of that charismatic leader who wants to take this small business that you've just tripled. And you want to blow this thing out, and you need other people's money to do that you need a partner to help you navigate, you know, and and so to be a platform company, that's important, you know, so it's the person it's the growth story. It's a fragmented industry, it's an ability to, to put money to work, not just in buying the business, nobody wants to buy a stagnant flat business, you got to have a growth story. What are we going to do differently, hey, with your capital, and, you know, my, my energy and charisma together as partners, you know, we're going to do X, Y, Z, you know, here's, here's what I'm gonna do strategic pivots, you know, get into adjacent verticals. I'm not just going to be a landscape company, I'm going to do landscape lighting and snow removal in the winter, and I'm gonna do you know, all these other things, you know, with my guy in truck, and, you know, and we're gonna, we're gonna go out we're gonna buy some other businesses that are like mine and start to build an empire. And so it's have a growth story, it's having an ability to grow at call it that 30% ramp rate, you know, compound annual growth rate, and then a fragmented market. All of these are the kind of bells and whistles that start to really attract the private equity world. And again, you can kind of start small. And the first first guy wants to go from kind of one to 10. And then you're going to sell it, you're still there, roll over into the next, you know, next guy who wants to go 10 To 4040 to 100. You know, I've gone from 17 to 125 million of EBITDA, that's kind of the range that I've been in. And the three companies that I've run, I've had multiple private equity owners at these different sizes, who come in and exit. And the constant is me, the leadership team, the culture that we build the work that we're doing for our customers. And while private equity looks at me as a tool to generate returns for their investors, their limited partners, I also look at them as a tool, a tool to grow my business. And every time I'm changing out one of these firms, you know, big paydays, I mean, that that that's, you know, hey, yes, we don't build companies to run them forever. We build companies to sell them and get big paydays and, you know, fly around in private jets. And, and, you know, and be happy, you know, and, and take care of our families and our extended families and create generational wealth. And so my personal record, I built a business that I sold five times. Over a 13, 13 year, four month period, I had five multimillion dollar paydays.

Ronald Skelton  16:41  
So my question is, what is the time that a management team has to be running the entity if you build something like that over a three year period, there's got to be a some timeframe where they said, Okay, they've they've built this, they've run it for the last, I don't know, X number of months, 12 months, 18 months? They're still growing? Yeah, we're interested? Or do we have to like where we was, was our timeline realistic in the fact that we thought we could sell it to a pod firm at the end of the three year period?

Adam Coffey  17:11  
Sure, absolutely. My, my shortest time running a company for somebody before I sold, it was only 27 months, okay. And it was four times multiple of invested capital. So it was a, it was a really nice return in a very quick amount of time. And most private equity funds are rated in this thing called IRR. And it's expressed as a percent of return, there's a time element involved. So less time is actually better if you can show strong growth over a short period of time, then, you know, that's, that's really attractive, because, again, we want 30% sustained growth. And if you've already kind of you're on that trajectory, boy, that sexy, not only is it is it, is it okay, that it's not a long time, but it's also going to trade for a very high multiple, because they're coming in already on that growth trajectory that's needed to quadruple the bit the earnings in size, you know, over a 5.2 year period. And I would say, you know, what, what, what you have to be able to do to convince someone, if it's a new adventure, is just the sustainability of the work that you're doing, hey, what we're doing, you know, we can keep doing because there's 1000s of these things out there. And, you know, and the chemistry is right, the business models, right, shorter track record, you know, but three years is plenty, you know, three years is plenty.

Ronald Skelton  18:36  
Yeah, we were actually looking to teach the team like, as we build all these agencies together, we were going to put an acquisitions and mergers team that were permanently there was gonna stay after the transition.

Adam Coffey  18:46  
I always do that, you know, just to be honest with you, you know, usually when I take over a company, there's no m&a capability inside the business. And give me five years, and there's going to be a team of 6 to 8 professionals whose full time job is doing nothing but acquisitions by that by the time I'm done. If it's a fragmented industry, then a company is going to be able to do mergers and acquisitions, or buy and build over multiple hold periods. So for a long time period, and that requires muscle memory and capability built within the organization to perpetuate that.

Ronald Skelton  19:23  
Does that add value when you sell it? That's that's where I was going with it is like, Absolutely. Not only is this company growing at 30%, we've also taught this company how to acquire others, and they've got three other acquisitions lined up, if you just stay out of their way. They're gonna continue to grow at the rate. That was that was the plan. So

Adam Coffey  19:40  
yes. And you know, depending on the space, too, you know, my brother and I ran an insurance agency for 15 years. He ran it, I was passive. But we sold it to a multibillion dollar Insurance Corporation who buys more than 100 agencies a year. I mean, there's a lot of big activity, you know, in You know, what's what's surprising is, it's touching every industry, it's very hard to find an industry that isn't permeated with with private equity. You know, it's they're looking every turning over every rock again, $5 trillion in capital 1.5 trillion in powder, or in committed capital, looking for companies to buy, right this second, really high multiples being being paid great time to be a seller, you know, by the way.

Ronald Skelton  20:27  
So, we talked a little bit about, you know, private equity, we're talking a little bit about you have two books out there and that type of stuff. What's got you fired up right now? What are you working on, like, you know, are looking to work on in the next few months, what, you know, what's got you excited,

Adam Coffey  20:41  
you know, I just recently did a career pivot after 21 years of being a CEO, Okay, done, don't want to be a CEO anymore. And you know, why I'm gonna call it boredom, you know, boredom, I can run a company, you know, I know what to do, I can hire a team, I can get it, you know, growing at 30%, I can sell it, it's like I've been doing that I was looking for something new, new challenges something different. So I started the CEO advisory guru, to kind of serve as you know, CEO, coach, mentor, exit Sherpa, is what one of my clients calls me. So I consult to private equity firms, to private equity portfolio companies, to founders, you know, who are building to exit, you know, and, and I'm having a lot of fun. So I had this concept, going back to being a speaker at UCLA for a number of years, you know, love the teaching aspect, you know, and working with groups of people. And I'm like, I want to work with multiple companies at a time and help them all achieve these outsized growth rates and returns. So that's got me fired up. My pivot wasn't about semi retirement or working less, it was about working different, working with multiple companies, helping them all at the same time, which, which is fun. I'm having I'm having a blast.

Ronald Skelton  22:07  
So you're working with multiple companies at the same time, it also gives you the variety, right, there's one thing I learned inside of this is number one, I'm gloriously ADHD, I might vary. I can get distracted at the drop of a hat. Right. And so I know that, but what I like about this space is I'm constantly getting something new to learn something new to see, like, you know, last week, I was evaluating a commercial furniture company, you know, and then two days ago, I was looking two days ago, I guess it was last week, or the week before last I was looking at commercial furniture company. Last week, I was talking to a guy who wanted to recreate a rebuild a tow truck company, he had built one before. And that's not what I do. It's a startup. So I ended up giving that to a friend who invested who is investing in helping him get going, but I'm only looking for things that are up and running. But the cool thing is, is the variety. And I didn't know anything about commercial, you know, real estate, corporate and real estate, sorry, commercial furniture. The, the I know, there's there's just chairs in the building, I didn't know what it took to like order those sell those licenses, you know, different vendors and all that. So I started learning that a little bit. And I learned enough about it to know that I like to still want to be in that space. It's, I have some friends. Luckily for me, I have some friends from the Rotary International, who had been in that space for 35 years. So I called her and said, Tell me everything you know about your space. I'm thinking about buying this Colorado company that's in your space. And turns out is like, it's one of those you know, she's like, I've been doing this for 35 years, I can tell you're not going to hire a salesperson off off the street that knows how to sell, you know, corporate furniture, yes, it's a very niche type of skill set you have we have anybody that you're going to get any goods that have come from this industry, or just be really naturally good that organically moves up inside of the companies. So but the point is, is the variety is the spice of everything here, I really believe that you get to look at different things, you get to see different people in different environments. A lot of them have the same problems. After interviewing over 200 marketing agencies, you'd be surprised that I was surprised that he was that that guy's doing $20 million a year in revenue, have the same top four or five problems than the guys do. Trying to push a million.

Adam Coffey  24:25  
Yeah. You know, it's interesting. You mentioned that because when when I'm working with a firm usually there's, there's like different criteria, you know, so a lot of people know me as the buy and build guy. So I'm, that's why we're doing for my whole career. So I'm working in a couple of different industries with a couple different firms. One is robotics, industrial robotics, systems integrators. Shout out to my boys ikaho partners, you know, and then I'm doing another one for a large global bank and the fire life safety as like you know what, I haven't worked in fire life safe. III haven't worked in robotics, but I am the viable guy. And they're both doing by it, you know, they're both doing by and builds. And so they they put industry experts on the boards who know the industry, but I bring the process and the rigor around the m&a how to do it, you know, from go from nothing to a team in house, what does good look like? How do you integrate, you know, how do you get them done. And so I'm doing the same thing, but it's two different industries. And so I'm learning a lot about new industries that I otherwise would have just never never been exposed to. And then, you know, I'm on the board of a medical company that was founded by a bunch of doctors, you know, and, you know, doctors are brilliant people, but they have a reputation of not being very good businessmen. And so they're I'm like a CEO, coach, and in a business mentor, and I don't understand at all what they do from a medical perspective, but I'm there to help them grow a business, you know, which is more my focus. So I'm finding different kinds of assignments, different industries, I'm getting exposed to a lot of new stuff. And, you know, like you that that keeps that keeps an interesting for me.

Ronald Skelton  26:10  
Is there any industry you just wouldn't touch? Like, I'm not getting anywhere near x?

Adam Coffey  26:17  
Well, you know, no, I mean, can I honestly say, is there an industry I wouldn't want to do? Boy, you know, what, retail, large box retail is tough, you know, so think of the old malls, you know, you know, movie theaters, you know, I mean, restaurants, I mean, you know, there's people who are very successful in these areas. But when I think of that, it's not that I don't like the industries, I'm just thinking about current economic conditions, you know, malls have been dying since long before COVID. But COVID Certainly accelerated that death. But what would be interesting are those people who are converting those, those spaces, to new mixed use type projects and environments, that would be fun, there's a giant movie theater near me right here in the Dallas area that is going from like 16 screens to like four. And they're also putting in a bowling alley, you know, some not a big one, but just like, some lanes, and then they're putting in an arcade. And it's like, making like a Dave and Busters on steroids kind of thing. And I mean, that's cool. There's a lot of people, there's a lot of excitement in the air around my town about this thing getting ready to open up. So again, it's not that I don't like a specific industry, it's it's about trying to think about what is the economic times that we're in today, what's happening from a consumers spending habits or business to business, you know, spending habits, you know, I certainly wouldn't want to be in commercial real estate right now, that may offend a lot of people. But, you know, I just think of people working at home, and hybrid work environments are going to be the thing of the future. And COVID, if there was any good that came out of it, it taught us that we can be flexible as employers, you know, you can work at home and be productive. And so I think most companies coming back will be in some kind of a hybrid environment, a lot more flexibility for employees, which is great, you know, especially those with families that have to get kids to school and things like that. But I think commercial real estate is going to have, you know, as current existing long term leases expire, we're going to be hard pressed to keep people inside, you know, inside large commercial leases, because the workforce has just changed so dramatically as a result of COVID. So that's another industry that I wouldn't really want to be in right now. And that would feed your your, your furniture business, who's selling commercial furniture to, you know, to business is the business footprint is changing. And so I think most companies will be looking for less square footage. And more hybrid, more shared workspace are Hotelling type space, and less dedicated to individual space, unless an employee is just working full time at a company, so the economy is changing. And that's more or less how I tune in into what might be interesting, either from an investment perspective, or from a board perspective. You did mention the furniture business, so I'll just stay on that tangent for a second. You know, so instead of designing furniture for corporate use and commercial space, I'd be thinking more about, well, with millions more people working at home, not everybody has dedicated space to home office, you know, Murphy beds, you know, it's shared space, if you have an extra spare bedroom, it's like sometimes it's got to be a guest space. Sometimes it needs to be an office. How do I pull that off? In a very comfortable professional looking, you know, type type environments? I mean, you know, as the world shifts, we need to change I always think of Warren Buffett and you know, invest in what you know. Well, if I go back five years, what did I know? I knew that Amazon came To my house multiple times a day and dropped off boxes. Now it's gotta be I mean, the you USPS guy, you know, the mail guy is dropping them off FedEx is dropping them off the Amazon drivers, Rama. I mean, there are packages coming from Amazon here, you know, by the truckload, literally every day, and my wife and I were joking last night, you know, when's the last time we actually went to a mall, you know, it's been been forever. And part of it was COVID. But part of it was just, you know, everything's coming to us, you know, I live like five minutes from this giant Amazon distribution point, I can order something at breakfast, and it's here at lunch, you know? And so it's like, you can get really lazy, but that's what I knew. And I think if all your listeners out there, you know, potential entrepreneurs or business owners think about what do you know what's going on around you, you know, that can help you clue in on on where to potentially spend your time or invest your money or, you know, help you create, you know, kind of that next incarnation of you.

Ronald Skelton  31:00  
I think I'm at a stage right now, if Amazon didn't come to my office within like, say two days, they come knock on the door and see if I was okay.

Adam Coffey  31:08  
Can you do a health check? Or you know, or whatever they call wellness check,

Ronald Skelton  31:11  
wellness check on the building over here. They're usually got two packages a day coming up. It's interesting. We are we're a delivery society now. So I'm looking for stuff like that the only thing is like, so just as a gauge, right? There are certain industries also where a single person or a single entity I should say, because it could be the comp a big company like Amazon has the authority to disrupt the snot out of your life. So I have friends who are buying like FBA businesses, for we're we're Facebook arena, sorry. Amazon does they're probably just put your the acronym, but Facebook does their fulfillment, their delivery and everything. So they got all their products on Amazon stores. Like I know people right now they're doing 25 $30 million a year. And it's all 100%. Amazon is like, Why? Why? Like, what do you mean? Why? You mean, we're doing great. I was like, Yeah, you're one decision from me of Amazon away from being a total disruption of your tire business. That scares the snot out of me, Does that scare PE firms?

Adam Coffey  32:13  
You know, I think PE very sophisticated investors, they spent before they invest in an industry, they'll spend millions of dollars and a lot of time and horsepower, thinking about disruption. And you know what disruption was really sexy A while ago, you know, I think you had like, you know, the world's largest, you know, hotel space coordinator, if you want to call it that was like didn't own any hotels, you know, it was just like, you know, Airbnb kind of thing, and that the world's largest transportation company didn't own any cars, you know, and it was Uber. And so I mean, the world and disruption, you know, is here to stay, I think technology and, and it has made the world come closer together real time information everywhere. And there's so much data being collected, you know, and so much knowledge being created, that I think private equity sees those types of evolutionary stories going on. And so they're, they're mindful of where to invest or where not to invest. And so I don't worry as much about that. And even if it is a, you know, just disrupted part of the world, there's also distressed funds out there that look for, you know, those opportunities, where the sum of the parts is worth more than the whole, where they can buy it discount, and, hey, that brand is worth a lot of money, you know, or that thing, you know, is, you know, is worth a lot of money. And I think a thing is like, you know, Sears and I think of like Craftsman tools and the Craftsman brand, you know was was worth a lot, you know, in hostess and you have some companies that had some problems in their old format or fashion where, you know, disruption came in and altered the world. But there were still a lot of assets around that were worth a lot of money. Kmart it was a real estate play, for sure. So I think there's very sophisticated smart people in the private equity world. What I love about working with private equity over the years is that I get to kind of grab onto their coattails and just kind of pull me along, you know, and it's ride the coattails of the world's most sophisticated, you know, business people and investors.

Ronald Skelton  34:24  
It's interesting, I was talking to the guy who's in private equity and you know, getting some advice from him on his deal. I was looking at it, he says, the first thing you do is you go pay, he gave me a company, so you pay for them to do an industry report for you. I was like, All right, because he goes you got to know the industry inside and out before you buy company and the industry is like, all right. So I contacted him and was like, they want to like want to say it was 60 or so it's closer to $75,000 to the to do this and

Adam Coffey  34:47  
I've seen him cost you know, almost a million depending on who you're doing and how much is being spent. You know, you know, I have seen, you know, you call it like a 500 million dollar transaction like eight to $10 million gets spent intelligence, you know, getting market studies and reports done, you know, from from BCG or le K or Bain or Mercer, you know, just some of the big names. And you know, it's remarkable the amount of money you can spend and how fast you can spend it just to find out whether or not you know, you want to want to be in that space.

Ronald Skelton  35:24  
Senator, as soon as I have a friend who's I say I have a friend I had a friend he passed but uh, his father actually is owns a company that does those reports for the computer chip manufacturing companies. And so I get that that's there. But I've just kind of a shock for me, because this guy was like, yeah, go get your free credit industry report, know the industry inside and out, acquire the company use that knowledge. And I'm like, I'm not I was, you know, the down payment for what I was trying to negotiate to buy the company was less than the report he wanted me to get. Like, yeah, that's not happening. So I love it. Brilliant idea. Probably not at the level we were we were discussing with this particular company. So let's, we've asked a lot of questions here. And one of the things I always like to say is like, you know, what should I be asking like what what is what should a business owner acquisitions and mergers investor a buy and build? Investor? What should they know about that space about? Like, either working with private equity or buying something to eventually sell to them? Is there is there something I should be asking? Or is there something we talked

Adam Coffey  36:29  
a little bit about kind of the what private equity is looking for, and it's that that sustainable growth, fragmented industry, good leadership team, you know, or charismatic leader who can can carry the ball for them, because they're just bringing a checkbook, we haven't talked about it on buying build. And so I'll tell you, some of the biggest mistakes I see people make when they're doing a lot of m&a activity and trying to build something is not being disciplined on the buy side, I like to call it filters. What does good look like, before we ever go out and look at something real, let's spend a lot of time talking about what it is we're trying to buy, what good looks like. And then let's be really disciplined, as we're out there screening potential companies to buy because one bad purchase, can derail a management team for multiple years, you know, it can take years to recover, because of the amount of energy that has to be put into fixing a bad acquisition. I also tell you don't buy fixer uppers, you know, it's like, let somebody else do the remodel, you know, there's enough out there to where your focus should be ongoing concerns that have all the growth characteristics you're looking for. And good, you know, is worth more than bad. And if it's bad, it's been bad for a while, you're going to spend a lot of time and effort trying to fix it. So I call it chasing chasing shiny pennies, when you're trying to buy stuff, everything looks like a shiny penny, and you go off on tangents just you know, trying to buy stuff for the sake of buying stuff. And you know, most companies, I use a cheap sports analogy. But if you think about the Ty Cobb had the highest batting average, in the history of baseball, it was in the four hundreds, which means he struck out six times or made six outs for every 10. At bats. In business, when you're doing acquisitions, you got a bat better than 900, in reality, probably got a bat about 950 to 980. You know, in order to make it work, if you buy 20 companies, you can maybe afford one bad one and 20. But you really need to focus upfront on what is good look like, you know, and then you break it down into its different components, you know, well, its revenue, this size generated from this vertical. And it's this percent of profit margin or EBIT DOM margin. And, you know, if the entrepreneurs are going to stay, the personality of the entrepreneur really matters if they're staying with you post, you know, post close, doing a buy and build. And so there's all these different criteria union non union, customer concentration, verticals served, you know, by the company. And, you know, the more you can define what good looks like up front. And then what you do is when you're looking at all these opportunities, you apply these filters, and that's your funnel. And there may be 4000 companies up here and as they're shaking through your funnel, all you're focused on putting energy and effort into are those that clear your hurdles, and those are good companies. And if you're disciplined by doing this, your chances of doing a bad acquisition are reduced just dramatically, and your potential for a better outcome is much more sound. And you could do this don't even have to be done. Think of buy and build, you may be an entrepreneur seeking to buy a business to run. And you're looking at different kinds of businesses, it's really focused time and effort, know what good looks like be disciplined by good companies. And if you do that chances of being successful are dramatically improved.

Ronald Skelton  40:16  
Center as in, when we were talking to all the marketing agencies, like I said, in a matter of less than 200, and probably 200 220 days, we talked to over 200 agencies, and we were, you know, doing 30, there's three of us on the phone at all times, we're doing probably 35 to 36 hours of conversation per week, talking to these agencies, you know, one and a half, one hour to one and a half hours apiece. And I remember at least probably six, maybe more times where the agency had done an acquisitions before. And the first one like was great, like, oh, the first acquisition was awesome. We did it. We thought we're gonna grow this way. And then they go to the second one and almost singsong. Yeah. And then he talked to him. And it's because the first acquisition was by mistake, or by coincidence, meaning they knew the owner. They were friends, they go to lunch all the time, they had similar businesses. They thought, why don't we just put this thing together? I kind of want to retire anyway. Or, hey, let's put this together. We can grow faster together. Something happened. There was already synergy. Yeah. And the second, they thought they were good at it. So the second one was they reached out to coal to somebody they didn't know. And in our little circle of mergers and acquisitions, we refer to it as deal heat, meaning they got excited about the deal itself, and made and made it work. And that's the one thing I always tell people in our circle is like, when somebody goes off, they're gonna wait to make this work. Because like, whoa, whoa, whoa, if it doesn't work, it doesn't work. Yeah. So there, we acquired all the equipment and did a pest control company, because one of one of my relatives was working for one, he tried to talk me into it. And I kept telling him no, for about two years, and like, Yeah, I'm not interested in that. And then one day, I was getting into mergers and acquisitions, and I see some stuff popped up online as they their profit margins are insane. Like, that's a mistake. Right? So like they were posting, people are posting pest control companies on stuff like buy biz sale or whatever. And I would look at it they claim 35% profit margins. No, no, no, no, I looked at next 45. Like, yeah, you're making that up. And I started doing the research, it is not uncommon for service based businesses to have a 20% profit margin, shatter fact, where most industries will tell you normals, 10 and DNA in a great, great company is 20. Profit Margin is the average or, you know, if you're running a pest control company under 20% profit margin, you're probably missing something up.

Adam Coffey  42:30  
Yeah, yeah. You just mentioned an industry solvents and private equity, again, private equity in that industry, there are you know, so first of all, it meets my phone book criteria, right Yellow Pages, every City's got a ton of pest control companies in there, some big national ones, and then bunch of little mom and pops. So there's 1000s of them out there, private equity has been active in that space for a long time, there's some billion dollar pest control companies, you know multibillion dollar, and then there's a lot of still a lot of mom and pop. So classic example of, you know, highly fragmented in every phonebook in America, you know, and, and, you know, there's, there's a lot of activity there. And you're right, very high margins, service businesses tend to have high margins, because they're not manufacturing a product, their capital expenditures are usually fairly low. You know, in a company like that. It's the equipment, it's the truck, you know, it's probably their biggest capex, spend. And then outfitting the truck with the equipment, you know, and

Ronald Skelton  43:28  
even top of the line that the liquid like, we felt we have pumps on the back for a truck, because we do, we live in Oklahoma, we spray a lot of yards, right? The pumps and stuff because shoot fifth that shoot that stuff, 50 feet up from the trees, if we want, I mean, it's a gasoline pump, with 80 gallon tank on it. So even that if it's brand new top line, it's 18 to 20 grand, so it's not huge. It's not a huge expense. Yeah. And you can find a lot of that stuff on the US market fairly reasonable. So the reason I brought that up is I bought that thing way too small before I got into like learning this space. Right? I bought, you know, low, you know, it's best a it does, you know, low six figures. And, you know, that's where we're gonna get to right with this with the local one, right? Yeah, I'm one guy not showing up for the day or being busy from having to be on the phone, you know, and answer your calls and scheduling guys out. So it's just not where I want to be. But the reason I brought that that industry up is there's a lot of little industries like that, but that one that one I would maybe not recommend for everybody because I when I bought it I didn't realize all this stuff I'd have to jump through and about eight different tests later. Yeah, I had to go out like, you know, the owner here really needs to hold the licenses, all that stuff where in some states that you can just have one senior guy hold on the license. I was getting some pushback by the you know, the Ag department here and stuff like that where the owner really should just hold those. I'm good at taking tests. I just went down there studied went took the test. So Hindsight is 2020 Tonight as I intend on growing it through acquisition, but I'm looking for, you know, people who have 15 trucks and already doing, you know, high six figures or seven figures in revenue. But what, and I get that I come from the reason I just said yes eventually was like, I'm from the real estate space, I know, every real estate investor in this town. So I figured I'd be an easy sell. But there's, you know, 200 companies in town doing it. So there's that too, right? So buying something that was almost a startup was was one of the biggest mistakes I learned from. And so what if you were going to do a buy and build? What is your like, threshold? It's like, okay, it's not because I got a number in my mind and what I'm actually targeting now. And I'll just say it, it's 5 million in revenue to $15 million in revenue, you know, 10, or more employees been in business, probably 10 years or more has system and processes. You know, that's kind of where I'm looking? Where do you see that they start shaping up and don't need, like, day to day, like you, if you buy this, you're buying yourself a full time job.

Adam Coffey  46:04  
Yeah, you know, and it's different for each industry. And it's different based on profit margin. But generally speaking, I mean, you hit the nail on the head, if you're going to buy companies, multiple companies to put them together, you have to start with a platform that's sizable enough to have sound processes to have some scalability to it. So they have systems in place. It doesn't have to be sophisticated, you know, it could be as simple as QuickBooks but, but they have enough revenue flowing through it, you know, they have enough enough people in the organization, to where process has to be there in order to keep it keep it functional. And, you know, generally speaking, I would say, for any given industry, it could change based on profit margin, you know, if you've got so I'll go back to EBIT dA. So if you have call it 20%, profit margins, you know, then, you know, a $5 million company has a million dollars profit, that's probably a decent size right there, you know, and if it's got 10% margins, you probably need to double that revenue, you know, in order to get the same million dollars kind of kind of earnings. But, you know, competition is fierce. As the companies get bigger, it's so fierce, that I've seen kind of a new trend with with a lot of different private equity firms where they want to buy something with 10 million in earnings, which may have at a 10% margin, 100 million in revenue, or 50 million in revenue line on a 20% margin business. But there's nothing to buy the multiples are so high, that they're starting to do Greenfield I'll call it where they'll buy four or five of these small ones and cobble them together in order to build a platform at a price that makes sense, you know, so maybe there are a guy that goes from 10 to 4010, to 50. But they can't find anything at 10, that's attractive, that that isn't at a 20 multiple, or, you know, the multiples are too high for the industry. So they go down lower, they go downstream by four or five little ones to equal the same amount of clay as that $10 million, one that they normally would have bought. And then they have to put it together and then grow from there, it extends the whole period out when people do that. So if it's a normally a five year hold period, takes two years to go zero to the to the small size they want to start with. And so it winds up becoming more of a seven year type hold period. I'm seeing that a lot more though, because of high multiples. So it's it is going on out there. And when I'm consulting with those types of firms that want to get into that activity, I'm always telling them, Look, you buy four or five companies and they all have 2 million in revenue, the first problem you're going to have is integration, how you're going to get it to run and harnessed any synergies and be cohesive first thing, you're going to get bogged down by all the sudden you're talking about platforms and software and ERP and you know, so something has to be sizable enough to be considered scalable, doesn't have to scale to a billion, you know, but it needs to be able to handle four or five acquisitions. And so if you can buy something, even if it is small, that is scalable, that has good sound processes, good technology in place, then you can use that as the kind of platform that you'll integrate other ones into, and you'll be much more successful than if you just go out and buy four or five small businesses, you know, so that has to be one of the filters again, when we're going back to filters. You know, can I scale this can I grow it? But there's an entrepreneurial glass ceiling. I'll talk about two and I think it occurs I see it happen anywhere from 10 to 30 million in revenue depends on the person in the industry, where to be successful entrepreneur has their total arms around everything their anal retentive micromanagers of everything. And I'm not a big classical music fan, but I know how orchestras are put together and they're put together in sections. And each section has a first chair and a second chair and a third chair and then the people and you have, you know, when you're an entrepreneur led company, they're the first chair of every section of the orchestra. And they're anal retentive control freaks. And they have to learn how to reprogram and become a conductor, and hire people to be the first chair, and let them be empowered to think. And then you become the orchestra of that business. And if you can do that, you bust through that glass ceiling. And I wrote about that in Forbes recently. And, you know, I've worked with so many entrepreneurs selling businesses that I've seen it real time enough to know that what makes you successful, kind of at a small business size eventually has to be reprogrammed. Because you have a limitation of bandwidth and capability, you know, as an individual, and you have to learn how to get to a different gear. You know, I've often said with Tesla's boy, if they just had a low high gearbox, not only would they be the fastest cars in the world on the whole, but they'd have a top end to end for entrepreneurs growing businesses, they need a low high gearbox where they go from anal retentive control freaks to orchestra conductors, you know, hiring creativity and letting creativity flourish. And if they can do that, they can bust through that entrepreneurial glass ceiling and keep growing.

Ronald Skelton  51:16  
Awesome. So we're getting close to the top of the hour here, I want to make sure people know how to reach out to you. So I put on the screen, your LinkedIn profile, it's, coffee, spelt EY at the nc o FFEY. For those who are listening, the links always going to be in the show notes. And then your website, let me put that up to is right here. It's CEO advisory And that's spelt exactly like the sound CEO, a de VISORY. Guru Guruji U R. And if you want to reach out to Adam, we got a few more minutes here, Adam, what are you looking for, if somebody has X, Y, and Z, they should reach out to you right now.

Adam Coffey  52:01  
It's so I assume private equity guys aren't, aren't listening, because they already know who I am. But you know, founders, I love working with founders, founders who are considering an exit to private equity, there's a lot of work to do to get prepared for exits. As I said, one of my clients is calling me their exit Sherpa, you know, which I laughed and loved. Because when you're climbing Mount Everest, you need someone who knows the road. And you know, when you're an entrepreneur, building a business and contemplating or business owner contemplating a transition or an exit, you need a team of professionals and I'll help you find them and hire them. But in addition to that, there's a ton of business decisions that have to be made along the way. And selling a business, if done right is probably done about three years in advance, and you're preparing the business for sale, you're developing everything that's necessary to have a great business. And I tell people with me, it's not about exiting fast, we can certainly do that. But it's about exiting at maximum value. And in order to get maximum value, there's a process that needs to go through, you know, to get a business prepared for sale. So I love working with founders, I am on several boards, you know, private equity backed companies love working with with private equity, both firms and their portfolio companies, you know, and the CEOs who run those businesses. And so I also do guest speaking, you know, so I've done a lot of, you know, keynote addresses for for different groups. And so, from my perspective, it's really, you know, hey, when you're the CEO, you know, a lot of people turn to peer groups, you know, or, you know, they need input who they talk to, you know, they gotta develop a network. And one of the things I think that makes me a little bit unique is I'm not just a consultant, I'm a guy who's built multiple billion dollar businesses, and been doing this for 20 years. So I'm a practitioner, I'm not just a theory, you know, theoretical physicist, you know, on Big Bang Theory, you know, I'm actually a practitioner, I'm the guy who's done this, been there, done that. And so it's, it's a lot of fun working with entrepreneurs, founders, people selling businesses, still love working with private equity. But that's kind of my new niche that I liked, that I haven't done in the past is get to work closer with founders and people who are thinking about transitions.

Ronald Skelton  54:26  
Awesome. Well, it's been great having you on the show. I think we covered a lot of good stuff, hang out for a few minutes after we end the show here. And do you have any parting comments, anything you want to say?

Adam Coffey  54:37  
No, thank you to everybody out there for tuning in and listening to Captain Ron and hope you enjoyed it, learn something new. And look me up right here on LinkedIn. Thanks.

Ronald Skelton  54:49  
Yeah, that'd be great. Thank you. And that was the show. The investors and entrepreneurs professional mastermind, the investors and entrepreneurs professional mastermind combines that are Traditional peer to peer mastermind introduced first in Napoleon Hill's famous book Thinking Grow Rich, with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to That's T i e. P And check out the investors and entrepreneurs professional mastermind