The Private Equity Playbook, Part 1

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today, back by popular demand, I have my dear friend Adam Coffey. This show is the first of a two part mini series doing private equity deals from the deal whisperer himself, Adam Coffey.

So Adam is a three times best selling author of Empire Builders: The Exit-Strategy Playbook and The Private Equity Playbook. He's a frequent contributor to Forbes, and has sold over two and a half billion dollars in private companies. He's recently released the updated, expanded edition of The Private Equity Playbook that further outlines strategies that work in today's market.

So what does this mean, well this means that Adam understands how to buy companies for no money and sell them for insane profits.

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Transcript

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it.

Ryan Miller  

Is it just me, or does it seem like you just can't get a straight answer on private equity and how to actually buy your first company? If that's you, then you're in luck. For the first time ever, I've invited back the legendary private equity deal maker, Adam Coffey, for a two part master class showcasing step by step on how to start, analyze, close and exit in this industry. All this and more coming right now. Let's get into it.

Ryan Miller  

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today, back by popular demand, I have my dear friend Adam Coffey. This show is the first of a two part mini series doing private equity deals from the deal whisperer himself, Adam Coffey. So Adam is a three times best selling author of Empire Builders: The Exit-Strategy Playbook and The Private Equity Playbook. He's a frequent contributor to Forbes, and has sold over two and a half billion dollars in private companies. He's recently released the updated, expanded edition of The Private Equity Playbook that further outlines strategies that work in today's market. So what does this mean, well this means that Adam understands how to buy companies for no money and sell them for insane profits. So Adam, welcome to the show, man. 

Adam Coffey  

Ryan, is good to be here, good to see you again, I'm a big fan of this show. I gotta tell you too. You know it's like, I cannot tell you how many people around the world reach out to me and say, hey Adam, I heard you on Ryan's podcast. And I'm like, it's like, you've, you've got to have, like, the biggest following on the planet, because that, that's what I hear the most, is about this podcast. So

Ryan Miller  

Well thank you. 

Adam Coffey  

Good to be back, hello to all your listeners out there. 

Ryan Miller  

Yes, well, it's great to have you, man and you know what, it's not only me, it's, now you got a lot of followers from being on the show. Everybody always talks about, hey, is this Adam Coffey, can you make an introduction? I was like, just email him, he's the cool guy, just go talk to him. So it's certainly an honor and I'm looking forward to doing our two part mini series on private equity deals and how to find them and how to do the right deal. So this is part one of two and so you'll have to tune in for the second part that Adam and I are going to release in the next episode. So let's talk about private equity deals and how to get started. So my first question for you is, how did you get into this industry and maybe warm us up a little bit of how have you gone from starting out to doing 4 billion in exits? I mean, I got to hear this story. 

Adam Coffey  

You know, life just happens, you know, I, It's funny, you know? I mean, early years, military taught me about discipline, teamwork, leadership. Engineering made me a meticulous pot, you know, a planner being a pilot. You know, pilots don't take off unless we know where we're going, and then we deconstruct the journey. What a great skill for later in life, when I started working with private equity, you know, 10 years at GE, during the Jack Welch era, GE number one on the fortune 500 list, the world's largest company, run by the world's most admired CEO. What a great place to learn how to run a company. But you know what when the phone first rang and it was a recruiter, back in those days, we actually answered the phone, you know, we, we, we didn't have cell phones, actually, back back in those days, you know? And it was funny, because, you know, it was a recruiter, you know, trying to recruit, you know, hey, come, come be president, CEO of this company, you know, it's owned by private equity. I didn't know what the hell private equity was that was a total mystery to me, you know and so I was chasing money and title. So I actually wound up getting recruited out of GE, like so many, you know, up and up and coming, you know, young, talented executives do. And I went into my first PE adventure without even really recognizing what private equity was, how it worked, why I would want to be there in the first place. I was just going because someone was calling me president, CEO for the first time. And it was someone my best advice I ever got you know, my mentor at GE was at ex Cleveland Browns football professional football player. And he said, Adam, once a president, always a president, you know. And it's like the world will never see you as anything else other than a president. Leave GE, go be a, you know, a president, CEO and and you won't regret making, you know, making that move and he was right. So that launched the 21 years and working with nine different private equity firms, building, building three companies, you know, it was a great run. I just got bored, you know, and decided to spend my time with guys like you, helping our listening audience here, trying to help people succeed. So I recently turned 60 and said next 10 years of my career are going to be about helping others learn how to succeed, beat the odds. 

Ryan Miller  

Brilliant, well said, and you've certainly done that in many ways. I know you've got your masterminds and your education and your coaching, but one of the things that I first came across was your books, private equity playbook. I can think of no better name for a book in private equity and from no better author than yourself. And so I'm just curious, right? You released the book. It was a wild success for you, and you release more and more, and they're continuing to rank on the Amazon bestsellers. But why would you release a second one? Let's talk about that. Why even release Private Equity Playbook, the extended edition?

Adam Coffey  

You know, it's number one right now, right this second. If you go to private equity on Amazon, that first book, well, so I, you know, the research material that I used, you know, for numbers back then came from 2017. I wrote the book in 2018 and it came out in early 2019. Think of how much the world has changed since early 2019. COVID and the great quitting movement and working from home and high interest rates and supply chain disruption and wars in the Middle East and in Europe, it's like, man, the world has just changed. And so I was feeling like I needed to do an update to the book, but, but also, Ryan, really, to be honest with you, the need hasn't left. You know, to this day, if you put 1000 business owners in a room, and I'm teaching a seminar, I start with a 10 question, multiple choice, basic quiz on what is private equity and and if I do it today, 90% of the room fails. Which means the fundamental reason that I wrote that book still exists, and so I felt updating it to keep it relevant for the next 5 or 10 years was just something that needed to happen. You know, it was never about book sales or quantity, I donate all my royalties to charity. You know, this was really about it's like the need still exists. The information is starting to get a little bit stale, and at the same time, my thinking continues to evolve. And I wanted to equip, you know, the second edition with some of that information that, you know, I continue to learn as an entrepreneur. I'm learning every day and, you know, I learned from my clients, you know, and just as much as they learn from me. So I felt the need was there, and so decided this was my off year. I owe a book every other year, this was my off year. And I thought, well, what the heck, let's, let's go back, revisit the first book, and I had so many Marty McFly moments, you know in Back to the Future, because it's my first book, but the second edition is now, chronologically, the fourth book. And so I'm referring to stuff you know, that I talk about in other books, in the first book, when those books haven't been written yet but you know, it's like it was, it was fun.

Ryan Miller  

Yeah, that's, that's phenomenal. So we've updated all of the information and really, for a world, and you're absolutely right, right before, or right after you release that book, the world changed massively. Now we got AI and inflation and everything is wildly different, and often we like change, right? Investors, we know we need change that we use the nasty word volatility, I don't know, maybe you'll like it, maybe you don't, but we need things to change in order for private equity to work or markets to move. And you know, I've been running this show for a while, we've been very, very fortunate to be in 100 countries around the world, and your episode is by far the most, the best performing one. But holistically, private equity is the best topic, this is the things that people come to this show for, and many other ones and so it tells us that private equity is very popular. Now, with that being said, there are a lot of people starting out, a lot of emerging fund managers, existing family offices, that are looking to enter into this space, lot of people that are moving into private equity. So with that being said, with private equity, let's start from the top. What can you say when buying a company, where does someone even start?

Adam Coffey  

You know, I even forgot to mention Ryan tell when I wrote the private equity playbook back in 2018 the world of private equity was 2.8 3 trillion in assets under management. It's over 6 trillion today. It's doubled in size literally just the last four or five years. Not only that, but, you know, the it's now buying 50% of all companies bought and sold on the planet. So even if you're an entrepreneur and you never sell to private equity, the fact that you have a market with which you can sell a company is a result of all of this economic activity that's taking place. So now let's, let's jump into your question. So you know, before I even think, you know, a lot of our listeners out there may already be in an industry, but there's a lot of people out there who have not yet made a transition, you know, they may still be a W2 employee working for somebody else, or they're trying to plot and plan what's my next empire going to look like. And so I tell people, before we even worry about what we buy or what we're going to build, you know, you can, let me just say disclaimer, you can make money in any industry. God knows that not all the companies that I've run meet all of my own criteria, but there's a framework out there that a lot of people don't necessarily understand. And so when they, when they head off on an adventure to build a new company, they pretty much just start shooting from the hip, and it's like, boy, I want to stack the deck in your favor as an entrepreneur. 

Adam Coffey  

So how do we do that, you know and I usually run people through an exercise. I first start off by blank sheet of paper,three columns, real quick. Left column, what are you good at? You know, what are your skills? Middle column, what are your passions? And then, and then third column, what kinds of companies in what kind of industries could take advantage of your skills, cater to your passions, because if you love what you do, when you get up in the morning, you're going to be that much more engaged. And a lot of entrepreneurs I talk to, I might just want to make money. Well, no, that's not the right answer. We're going to make money, but let's make money doing something we're good at that we love, you know, and let's put our passion and our heart work into that. Now you've made this list of all these potential companies and industries. Let's start now applying some more filters that are going to help us be just ultra successful stack the deck in our favor. 

Adam Coffey  

So let's talk about things like, is, you know, does the company that you just identified or the industry, is it a needs based business, or is it a wants based business, you know? And so I'm going out to dinner, you know, Friday night, mama wants a new outfit. But if I'm unemployed, you know, and I don't have any money, well, she's got a closet full. She can go pick out something that she's worn before, and then we'll go out. You know, I can delay that expense, it could be indefinitely, because it's a want, it's discretionary. And, you know, hey, if I'm sitting here talking to you, and it's raining outside, you know, like it's raining in Florida right now, and I look up and it's raining on my head, and I'm in the house. Well, guess what, I need my roof fixed. You know, it's like, that's not a want, it's not discretionary. So here's the reason you know why this matters, in the world today, the economy moves in cycles. We've got up cycles, down cycles, strong economy, bad economy, recessions, you know, periods of expansion. If I am a needs based business, I do better in a downturn. If I'm a once based business, I could get hurt. I could get hammered when the market turns south. When it's a strong market, everybody wants to sell, you know, I go buy a company that's based on once, all of a sudden the market turns south. I might find myself over levered, I've got too much debt. My cash flow has dropped because people are avoiding this discretionary spend. Now I've got a problem, right? So I can stack the deck in my favor by focusing on needs.

Adam Coffey  

Next up, recurrent revenue versus project based. So I just mentioned roofing, hey, I work with nine roofing companies. Roofing is a hot space in the private equity world today, but guess what, it's a project based business. So Adam needs a new roof this month. Next month, Adam doesn't need another one, because Adam only needs one every 15 to 20 years or so and so the revenue that you had from me this month, Mr. or Mrs. Entrepreneur in the roofing business, next month, you have nothing, and you're looking for another Adam that needs a roof just to get back to even, and then you're looking for another one to actually produce growth. And so companies that have project based revenue streams can be very hot and cold, very, very cyclical in their own right even in a strong economy, they can be lumpy, and revenue is not smooth. But so instead of project based if we have a recurrent revenue type company. So we could talk about bookkeeping, if we wanted to talk professional services, we could talk about pest control. If we want to talk about Blue Collar services, those could be two proxies. So pest control company, they sign a contract with me. I live in Texas, there's a lot of bugs here in Texas, you could put saddles on some of these bugs. Mama doesn't want bugs in the house, so I sign a contract, and they charge my credit card every month, and they come every quarter to spray my house. And so it's recurrent revenue, it's contracted revenue. They hit all of the credit cards of all of their clients on the first of the month, by the third of the month, all of the money that they billed is now collected. When they find a new customer, it adds on top of the pile of old customers that they had. Then they come to me and say, hey, Adam, we've got termites here, that's a different contract, should I, should I sign you up? Can I hit that same credit card? Yeah, go ahead. Okay, hey, Adam, we got mosquitoes. You know, big ass mosquitoes, you know, would you like us to spray for mosquitoes so that when you're out, you know, having pool parties and stuff, you don't have to worry about mosquitoes. Yeah, sure. Go ahead. Should I hit that same credit card? Yeah? Go ahead. Okay, you know, hey, Adam, in the summer, here we have army worms that eat your lawn and chill it like, in a matter of a few weeks, we got to spray your lawn for that kind of stuff too and that's a separate contract. Yeah? Go ahead. Same credit card, yeah, go ahead. Okay, before you know it, it's like I'm paying hundreds of dollars a month to a pest control company. I'm never going to cancel that contract, I'm never going to even think about it. I bet you that the only time they lose customers is when somebody moves. You know, it used to be you lost a customer when the credit card expired, but the credit card companies doesn't want to lose their 3% that fee. So now, as long as it's a hey, that's a recurrent charge, the numbers have changed but we don't care. You don't even we're not gonna we don't want to lose this to a different credit card company. So now they even make it easy when credit cards expire to where this contract is going to run forever, that is contracted recurrent revenue. So I got a needs based business, contracted revenue stream.

Adam Coffey  

Next up, real quick, we got to talk about capital expenditure. I want low capital expenditure, very high free cash flow. Why? A lot of our listeners out there, Ryan, don't have a lot of money. They don't have a lot of equity to put into a business, which means if we're going to pull this off, we need to have a company that produces a lot of cash that we can use to service the debt. So low, capital expenditure, services, type business, recurrent revenue, needs based, all of these things are conspiring to generate a ton of recurrent cash flow that's very stable. And it's that cash flow that I'm then going to use in order to service the debt that I need and and typically, when I'm looking then. 

Adam Coffey  

You know, last up, I need a fragmented industry and so I'm working with some clients now. I'll give you some examples, bookkeeping, accounting, payroll services type companies, I'm doing three buy and builds in that industry right now, in multiple continents, by the way, ready to start my fourth and in that particular case, there's 1.8 million bookkeeping and accounting firms in the United States, just the United States. I'm working with another company two brothers, and it's quick serve oil changes. So like Jiffy Lube, Valvoline quick oil change place. There's only 1400 of those in the United States, half of them are owned by big chains. If I was going to do a buy and build, I don't have a lot of opportunities. And my buyer, if I'm going to sell this business, doesn't have a lot of opportunity and hey, private equity loves buy and build. It's probably the single largest driver of shareholder value creation that they've got in their playbook. So if you take that off the table, you're going to lose interest of the world's largest buyer, who spends, buys 50% of all companies bought sold on the planet so fragmentation is important. 

Adam Coffey  

Folks, if you just follow that framework that I just outlined, I promise you your odds of success in buying your first company, being successful, doing your first buy and build, just went up dramatically. There's 34 million small businesses in the United States, only 7% of them have a million dollars of revenue, and only 40% of them are profitable. Failure in business is high, and we can stack the deck in our favor by following that little, that little sequence I just laid out. And when I'm buying an existing business that has a track record of customers and revenue and earnings, I'm even eliminating all of that startup risk that I just talked about. So this is kind of the path Ryan, you know, if we were buying companies that traded for 10 times, we couldn't possibly use the cash flow inside the business to service the debt. But when there's a fragmented industry like bookkeeping, accounting, there's so many firms, not enough buyers. And think about baby boomers, transitioning most of those companies owned by baby boomers. I can talk about baby boomers because I'm 60 so I'm the youngest baby boomer. I was born in 1964 and the oldest baby boomer is now 74 and so as we're aging out, we're selling our businesses. There's not enough buyers. It keeps the multiples low, which means low multiple, low purchase price, high free cash flow, stable revenue. I've got all the cash I need to service to debt to buy that company, laying right inside the company that I'm buying. These are the keys to being successful as an entrepreneur, picking an industry and getting out of the gates and making it happen.

Ryan Miller  

I love that and so really, what I think you're saying is this is how you set your True North Star. And so getting your heading is absolutely critical, and so without that heading, you can end up going all over the place, make mistakes, and really just know what you're good at and what you're passionate about. Then look for a business that has a product that people need, not just want, recurring revenue always beats project revenue. And then low OPEX plus high revenue equals free cash flow. And then finally, just look for industries that are highly fragmented, like you said, the bookkeeping market, or maybe laundromats or, who knows. And so that that is really good at setting the True North Star. So this is step one, is to say, where do I even begin, I need a heading. Now that they have a heading, you're going to start to find these deals. You're going to zero in and so I'm curious, Adam, from your experience and everyone that you've helped in your own deals, how do people even know if they have a good deal sitting on their desk? What do you do? 

Adam Coffey  

So I start running by building a model, I want to actually before I buy anything, I got to know what good looks like. So I've just stacked the deck in my saver by doing all those things, I now have my North Star, I know what I'm going to do. My next step is to kind of build a model and to try to lay out on paper, what do I think is going to happen? How is it going to play out? How much equity am I going to need? How much rollover equity from the seller am I going to need? What kind of debt financing am I going to need? You know and I try to lay out a road map, you know, call it the strategic plan, you know, before I even look at a company, you know, I'm going to do that. And, boy, I don't mind, I actually have a model sitting here on my desk, if you if you want, I can share my screen, 

Ryan Miller  

Yeah. 

Adam Coffey  

And I'll show you what a model might look like. So here is a model that I'm using for an accounting roll up, and I'm gonna buy a group of companies, and I'm gonna get to, you know, kind of my first exit point, about $4 million in EBITDA over here. You know, it's gonna be about 13.5 million in revenue. And so I'm gonna pay for this first company, a little bit bigger than the rest, you know, $3 million in revenue, 900,000 in EBITDA. I'm going to pay 3.5 times for it, here's my purchase price, 3.1 5 million. I'm going to ask the seller to roll over 19%, why, because I'm passive, I'm not accounted I'm not, I don't, I'm not a CPA. I don't play one on TV, I need a CEO, I'm going to be a non employee, Executive Chairman. I'm going to be riding shotgun over this, this buy and build. So I need that first person to get a second bite of the apple, be incentivized to want to play along. So that's going to amount to about $600,000 of rollover. I'm going to also say, hey, seller look, you want to clip a coupon, you want to make some extra money, I'm going to go get debt. You know, may as well give some of this to you, let's do some seller financing note. You know, maybe we do 20% it's another 630,000 and in this case, I need 1.9 million cash at close, you know. I've decided I have some capital, so I'm going to put down 25% you know, I'm going to put down 480, I don't necessarily have to do this. If you look at this, I've already got 19% of equity, because I'm going to have a holding company that buys all the assets of this company and that former owner, founder, is now going to be my partner. I'm going to be an 81% shareholder, they're going to be a 19% shareholder. So we collectively, in this new holding company, already have 19% equity, maybe on this seller financing. Maybe I'll tell them, look, you're going to get a couple million cash at close you don't really need more. Why don't we put this note on full standby, which means no payments due for a couple of years, and then we'll fully amortize it, you know, over a 10 year period. No, don't worry, I'm going to sell a company long before then we're going to get that second bite of the apple. But now the SBA lender might even take a look at that seller note and declare that it's equity, because it's on standby for a while, I now have like 40% equity in this business. But if I've got money, you'll notice that I only put money in just, just in the first three companies, and then I put my checkbook away. In this particular model, I was going to put in 1.2 million of my equity, and then the rest of the time it's going to be just, just financing. And I was just doing that to stack the deck, to build up some retained equity, plus the seller rollover. I was going to let the other sellers roll over 10% just to get a second bite of the apple. Let them do some seller financing. 

Adam Coffey  

And so I built this model. I have a cap table that lets me add all these people in as they're coming in, and then, don't tell anybody, Ryan, but when you look at the output of this, I'm actually going to be selling, you know, because this company is going to be growing, we can't just grow and be a one trick pony, where we bought a bunch of stuff and put it together. We're going to also get some synergies out, we're also going to continue to grow this business organically. We're going to have balanced growth and so I'm going to be selling a company with over 5 million of EBITDA, you know, I believe it's going to trade for about eight times. It'll be about $40 million transaction, I'm going to have some fees. I got debt to pay off, you know, I've got 27 million coming to the cap table. And lo and behold, I invested 1.2 million. I'm getting almost a 17x multiple of invested capital. I'm walking away with 20, you know, over $20 million but that first owner, you know, who, who got 1.9 million cash at close rolled over 600, 598, right here, they're getting almost seven times their money as a second bite of the apple. And so I can, I can put this together now, and I can show you know how much money an owner is going to make. I'm not going to show them that I'm making 20 I'm going to show them that they're making 6.7 million on a business that they were completely satisfied selling for 3 million. And they're going to get this in however long it takes me to do this, but I, I'd say getting to four or 5 million in EBITDA, I'm probably looking at it three years, you know and so they're going to get two bites of the apple in a three year period. 

Adam Coffey  

And so I start with this model, you know, the reason, reason I start with a model is because I want to have, you know, kind of my preconceived notion. This is now the flight plan, this is now the map that I'm going to follow and as I buy company one, I'll make adjustments to the model. Maybe I didn't get it for three and a half, maybe I had to pay four. Maybe I got it at three times, you know, but I'm gonna, I'm gonna keep and update this model, and keep it with my thinking and but I start with the model, because once I've got the model. I know the industry, I know I've stacked the deck as much as I can in my favor. I need to create, I call it an avatar, you know. I think the other day we were talking and you called it a buyer's box, you know. It's like, what is the profile of the perfect company that I want to buy, you know? And it's like, I start with, what's the revenue, what's the earnings, what are the different products and services the company's providing, you know, what's the verticals that they're servicing? Who's the customer base, you know? But I'll also include things like, how old do I think the person is that owns this business? Because later on, when I start marketing to these people, it's going to be relevant. You know, if I'm buying businesses from Baby Boomers, I'm not going to find 70 year old accounting guys selling his business, or lady you know, on tick tock, you know, or on Instagram. I'm probably not even going to find him on LinkedIn. I'm going to be doing outreach, snail mail, you know, old fashioned, sending him a letter, sending him an email, picking up a phone and calling him. And so I build a profile of who the perfect company is, and then who the owner is, and that's going to inform my thinking later. 

Adam Coffey  

But I start by knowing what good looks like, because too many entrepreneurs suffer from what I call shiny Penny syndrome. Once we get an idea of what we want to buy and where we're headed, we're in buy mode. And now we take any company that we look at, and we try to find the excuse as to why it's a great company and we should buy it, and we overlook the obvious flaws that mean we shouldn't buy it. And so here's my first coffee mug or T-shirt, I'll call it moniker of the day. I would rather not buy a company I should have than buy one that I should not have. And so think with that mindset, we want to buy good companies run by good people, with good reputations. I'm going to make my money through something called multiple expansion and arbitrage. We can get into that later and so small companies, fragmented industry trade for small prices, not a big enough pool of buyers to buy them all. But as I collect them and get bigger, I'm getting, you know, getting larger, bigger companies trade for higher multiples. This multiple expansion occurs naturally, multiple arbitrage, which means I'm buying companies at a low multiple, selling at a high multiple. The difference between the two that's known as arbitrage. You know, that stuff is all naturally occurring, I don't need to buy fixer uppers and waste my time trying to fix something that's broken. I can just buy good companies, hard enough, just buy good companies, put them together, and I'm going to get the outcome I'm looking for regardless. So, so I think that's that's a good place to pause and let you back in here.

Ryan Miller  

That was very good. That was brilliant, I love how simple you were able to outline that those I obviously have a couple questions for you. So we've got our True North Star, we understand that now we're understanding our company avatar or our Buy Box. Now you mentioned that your prices you peg off of EBITDA, earnings before interest, taxes, depreciation and amortization. That was a mouthful, since that is really the foundational number that you're driving the price you pay? Is there a minimum range that people should look for, where maybe it's if it's too small, walk away, if that even exists? Is there an EBITDA number, a sweet spot that you think, where people are jumping into this industry that's a good place to start?

Adam Coffey  

So I, great question and I think for all industries, regardless of what we're doing, there is such a thing is too small. We want to avoid what I'm going to call lifestyle businesses. And so, like, we were just showing an example that was bookkeeping and accounting. If I'm buying a bookkeeping business, and there's one CPA and maybe two or three people in the whole company, and it's got 500,000 in revenue, and it, you know, 200 you know, 220,000 or something in free cash flow. You know, the reality is, is when that person walks out of the business, the business. Walks out of the business, it's like, there's, there's too much, there's too much transition risk. It's a lifestyle company that this person's owned for a long time. I want to buy a company that's big enough to have a staff of accountants, you know, or has, I'll call it infrastructure, that we're going to need. Because when we're buying multiple companies and we're putting them together, remember, if we're not in the business running it, then the first company that we're buying, you know, I want that entrepreneur to stay, and if they're, they're older and retiring, I need them to have a key lieutenant. I was just talking to one to today, actually, earlier today, you know, and they had a COO and so the founder was older, but they had a COO. They had staff accountants, they had people, they had 20 some odd employees. And, you know, 4 million in revenue, and they were earning, you know, around, you know, 1.8 million, you know, in earnings. And but they had a staff of people and so even if the founder left, I still had a COO, I had infrastructure. There's a large book of business, it's not all going away if the founder, you know, were to walk out the door, so there's a lot less risk. So yes, I would say, you know, I normally figure that if I'm starting, you know, and I'm building something, I'm looking for around a million. Million dollars in earnings, and generally speaking, at a million dollars, that is probably larger than a lifestyle business, not necessarily in all industries. You know, I see this a lot in tech too, I work in the managed services provider space, MSP, working with multiple MSP platforms and, you know, there's a lot of lifestyle businesses there. There's people that build up a book of business, IT services, their lifestyle needs, and they don't get any bigger. And so we need to get away from lifestyle business, it has to be what I call an ongoing concern. So here's the litmus test, if the founder literally could go on vacation for a month, not answer email, not respond to urgent messages, and they come back, and the company is still there, it's still servicing customers, it's making money, it's got revenue. It might even be growing, if that business can survive the entrepreneur stepping out. And funny side note, Ryan, I actually do this with some of the companies like Coach. It's like, okay, time for you to go on hiatus for a couple of weeks, let's stress test. It's almost like Bar Rescue, if you've ever seen that TV show and like, they bring in a bunch of people to see how bad the bar performs. You know, I'll be working with someone. I was like, let's do a stress test on your business. I want you to go away for a week. Don't answer email, don't let's see what fall do we think the train is going to fall off the tracks, yes or no? You know, but, but we don't just do that in the beginning, we're actually, we're stress testing, do we think we have a leadership team in place? Do we think we've got an ongoing, you know, concern, you know, then let's test it. Let's see if it really happens. So I actually do that sometimes, but, you know, about a million bucks in earnings could be a little bit smaller for some industries, but we want to make sure that it's an ongoing concern. You know, if I'm buying a pest control company, and there's two trucks, dad and Junior, you know, I'm in trouble, you know, buying that business if Dad wants to retire, you know, potentially. But if I've got eight trucks on the road, and I have a service manager, and I've got some structure to it, then that's a key indicator to me that, okay, I've got enough clay on the potter's wheel to work with to where it could serve as my mini platform. 

Ryan Miller  

Brilliant. So about a million. I mean, it could vary in industries, but you're right, the point is that million dollar line is, it's just big enough, usually, to help avoid buying someone's lifestyle business, because the business is that person. And so when you, when you buy them out here you're you might be in trouble. Now, I also noticed that, so for that particular example, you said three and a half times EBITDA, it was the price, so basically EBITDA times three and a half, that's purchase price. Where do you get that kind of market analysis, that market intelligence, what's a good source that people can go to? Because, remember, we're talking about people buying their first company, where do you find market valuation stuff?

Adam Coffey  

Yeah, great question. I use a tool, business valuation resources or BVR, and the tool is called deal stats. This is a database of private company transactions, and I can literally, so all companies, when they're formed, they have to tell the state, you know, where they are. And I'm sure other countries have similar rules where it's like you're registering your company, you've got to tell them what industry you're in. You know, here in the US, there's an N A I C S code, or an S I C code, service industry code, or, you know, whatever that stands for, any ICS you know, is this is the kind of company. So if I just Google and say, what's the NAICS code for an accounting firm? You know, it gives me the number. So I go to this, this deal stats tool, I put in the NAICS code for bookkeeping accounting firms, and boom, it brings up a database, and it shows me, here are all of the recent private company transactions that have occurred in this industry. You know, in the last, you know, time period that they think the comp is still relevant. So then there's another thing, is sometimes you'll find that comps don't, you know, unlike a house, you know, comps don't really change in businesses that much. And so sometimes the data set might include companies that were sold six months ago, five years ago, 10 years ago, in some industries. But at any rate, I could find that, hey, there's been 460 firms that have been sold in the last recent history that are still valid comps. I can go into that data set, and then I can start putting in filtering parameters. Show me companies that have 750,000 in earnings, and EBITDA up to 1.5 million. Okay, that subset smaller, but here's 50 transactions that have taken place at that size. 

Adam Coffey  

And when I now have this, I'm looking at a summary, and they throw out the bottom 25% of the deals, and they throw out the top 25% they call those anomalies, they focus on the 50% in the middle, and they give you kind of the average sale price multiple that's being paid. I can then go in and look at every company transaction individually that was sold. They do it on a no names basis, but keep in mind that brokers need to know what companies are selling for, investment banks need to know what, bankers need to know what. Everybody in the world kind of needs to know what stuff is selling for in order to know, you know, if they're asking too much, too little, if they can get financing, you know, it's like the world needs to know. So there, there are databases where all this information is contained, you know and BVR deal stats. I just got my renewal, I literally just got my renewal. My renewal for the year is $1,300 you know. So I'm gonna pay $1,300 you know, to renew this tool. I'm on it every day, you know, virtually every day, you know. And I'm using, I'm working with 71 entrepreneurs and dozens of industries, and so I'm in it all the time, and I'm looking for comps. And so that's where I get the comp that says, hey, the typical small bookkeeping, accounting for you know that I'm hunting the size I'm looking at, they're selling for three, three and a half times. You know, there's just too many of them, and there's too many baby boomers seeking to get out retire and so this is market value. Because here's the thing, Ryan, we can't pay more than fair market value. So I'm a very disciplined buyer, I only buy good companies run by good people that have a good reputation in the marketplace, and I only pay fair market value. So if somebody says, I want six times Adam, I'll be like, well, God bless you. I'm sure there's somebody to eat out there who's going to pay it, but it's not going to be me, you know, because I buy at three, you know, three and a half. 

Adam Coffey  

So I need, you know, that's a part of my deal Calculus, I'm going to have to get these at fair market value, fair market determined by what companies are actually selling for. And boy, there's a ton of industries where people, people, you know, I'll call them their hero stories. You're out at the bar drinking, and someone said, yeah, my, you know, million dollar this company sold for 18 times and I'm thinking, yeah, yeah, sure, yeah. You know, according to my database, they sell for four times. But hey, I don't want to ruin your war story, you know, cheers to you, let's, let's drink to that one. So, you know that, how do I get rid of the hyperbole, and, you know, all of the war stories that are out there about all these great transactions, I use a database that actually has real transactions in there. That's the comp stats, you buy and sell a house. You know, it's a square foot, what is, what a house is in this neighborhood sell for, you know, of a given age, you know, in my neighborhood, there's two price points, has your house been remodeled, or is it original? You know, and there's two different price per square foot, you know, it's like, we need comps and so that's the most reliable way to know what, what companies you're selling for. So, so BBR deal stats, that's the tool, $1,318 a year.

Ryan Miller  

Yeah so about, yeah,  about a 100 bucks a month, so much better than the bar stool analysis that we talked about. Yeah, that's awesome. So, you know, so we're talking about valuation, getting the price right. But there was a point in your model where, and I love this being, you know me, I'm a finance guy as well. So a model is just a way to tell the story with numbers, that's all. And one of the stories, it depends on who's reading or listening to that story, or who's reviewing the model, one of those people are debt financing. And on there, you mentioned that you're going to add some leverage and obviously in private equity, this is a very important part of buying companies. Folks, I told you to be getting Adam and I are going to go deep on this. So when it comes to buying companies, well, how important is it, because we know, not only are we going to look at it as far as analyzing the deal, but so is a banker or a lender, and so is there anything on the income statement that deals with the ability to service debt that you also look at or you leverage as far as finding a good deal?

Adam Coffey  

Yeah, so my world, when I'm building a model and deciding how much equity needs to come in. You know, if I, if I've done all of those precursor steps correctly, I'm dealing with a business that's I'm buying for a low multiple, it has high free cash flow, not a lot of capital expenditure. So, you know, I could buy a company that manufactures stuff, and it might have a good EBITDA number, but that's before I have depreciation, amortization and all that stuff. And it's like, if I got to buy a bunch of capital equipment every year, it's like there's no free cash flow. And so I'm working with the assumption of I want to use other people's money as much as possible, and I want to limit the amount of equity that I put in, because this to occur correctly. If I've got all of my dynamics lined up, then everything I do is around debt service coverage ratio, you know, and so it's like, so let's take this, this because a bookkeeping firm as an example, you know, the product is up here. It's a professional services company. I got to buy some desks and I got to buy some computers, but I didn't have to buy the trucks and the sprayers that a pest control company as which is better than many other industries to start with. So I'm looking at what's the free cash flow conversion, you know, of EBITDA, so EBITDA is just an arbitrary line on an income statement. Actually, it's not even on most income statements, because QuickBooks doesn't even have it out of the box, you have to put it there, you know, so that you know what it is. But it's kind of the litmus test. It's the place on the income statement where private companies are typically valued as a multiple of EBITDA, especially in the private equity world. 

Adam Coffey  

Sometimes in industries, you know, you're you've got some insurance background, sometimes, I used to own an insurance agency. You know, we think of as an insurance agency owner, we think sometimes there's a multiple of revenue, but that multiple of revenue is being deconstructed by the PE guys you know, who are saying, okay, EBITDA multiple. He thinks about multiple, so we can criss cross applesauce and talk to each other's language, but they're using EBITDA and so EBITDA is kind of the line where private companies are traded. So when there's a high free cash flow conversion, then what I see at EBITDA is essentially cash and so accounting firm product is in here, very little capital expenditure. The EBITDA line is a proxy for free cash, because they have very high free cash flow conversion. So this is the amount of capital I've got. So let's just play this out. I'm gonna buy, let's say I'm gonna use 100% debt period, I'm buying 100% of the company. Companies got 3 million in revenue, 900,000 in free cash flow, and I'm paying three times. So three point something, let's just make it a $3 million purchase price. I've got 900,000 in cash to service debt, and I need to service 3 million in debt. Let's just use 10% interest for round numbers, you know. So I need 300,000 a year in cash to service the interest, and then if it's fully amortized over 10 years, typical SBA 7(a) loan or whatever, a little trick is, okay, I can just take half of the interest and add it back, and that's going to be around my principal. So I'm going to be about 450, 475, somewhere in that neighborhood. Okay, let's use 475, I need this for the principal and interest to service this note, I've got 900,000 in free cash flow, 900,000 divided by 475 you know, it's roughly a two to one debt coverage ratio, just under and so in my model, I didn't scroll down and show it, but I actually had a debt service coverage ratio calculator. And my company that I was putting together in that model is never below 2.89 times debt service coverage, you know and so what does that mean? That means, for every dollar I need to pay debt, I have $2.89 to service it. And so from a lender's perspective, you know, SBA will will help underwrite and approve a loan that has like, a 1.2 to one debt coverage ratio, which means, for every dollar I need to service the note, if I've got $1.20 they'll approve it, you know, they'll help me get it approved, that's too thin for me, you know? And so why did we do needs versus wants and contractor rental? Because if the economy cycles down after we buy this company, if I only had a 1.2-1 debt coverage ratio, I might all of a sudden not have enough cash flow in the business to service the debt. I'm out of pocket, and if I don't have a wallet, I'm in trouble. I could default on my loan. So I'm looking to build a 2-1 debt service coverage ratio, because at that level, even if my revenue drops off pretty significantly in a bad economy or a down cycle, I still have ample debt coverage, and if it never fell down 50% to where I was in trouble from a cash perspective. Excess cash could either be used to pay down debt quicker, or I could actually take distributions myself and now my business that I bought is not only servicing the debt with the cash it's got, I'm now using it as an ATM to actually pay for my own personal cash flow needs. You know, and so I'm deriving strong income while I still have strong debt coverage. If the business cycle down, I might take a little less out on my ATM, but I have plenty to service the debt. So everything we do is about debt service coverage ratio, and at 2-1, we should be able to get any, any lender to approve a 2-1, 3-1, even better, that's like, you should be able to walk into any bank in the United States and just say, I want a commercial loan. I'm not guaranteeing crap, I've got enough cash flow in your you know, for you not to be worried, you know. And so it's all about debt, debt service coverage ratio. That's why the profile that we've been talking about stacks the deck in the favor of the entrepreneur and helps them avoid these kind of troubles and pitfalls.

Ryan Miller  

Brilliant. So, just to recap. So the original question of this is, how do you know if you got a good deal on your desk, and boy, did you deliver my brother, so that was a pure master class of just analyzing deals. So if you're the guy, the chief investment officer, or you aspire to be, this is what you're gonna have to do. You're gonna have to figure out do this and don't do these. How to do it? Well, one of the things Adam says, just write down the owner demographics, like their age or place of life, capacity for earn outs, management, support, all that. The other one is only look at companies with a million in EBITDA or more, right? You need those profit margins to be there, but you also need some indicator to suggest is this too big or too small. Next one, you gave us a tool deal stats, that helps you to find out, what should I pay for these companies? Realtors would call it comps. So how do I find out? What are companies, bookkeeping companies, pest control companies, home security sales companies. Who knows, what should I pay for that? And that's where it goes, so you're not that guy who's saying somebody bought my company for 18 when everyone should have been buying it for four. So don't be that guy, do your homework and make sure that you are paying a fair market value. And then the other one, really a key one, you said it comes down to everything, is you gotta put the deals together that only have a debt service coverage ratio, a DSCR of two or more, so that bankers will be willing to lend on what you need is that a fair summary.

 Adam Coffey

It's a fair summary. You can get lenders to approve lower I'm just telling you, if you use 2 you will never get in trouble.

Ryan Miller  

Exactly. So it's not just convincing, making the sale to the lender is that's a great point, it's saying, more importantly, yes, obviously you need to get the money and acquire these businesses. But more importantly, once you have that business, did you do it in a way that this company can endure? And so building that endurance in your company starts with the revenue profile, the capital stack, between debt and equity. And now what Adam has walked everybody in the world up to is to say, here's how I do these deals. These are really easy deals, these are the key things to look for. Absolutely love it. So now that we have we've got our heading we understand how to analyze these deals. The next step is, how does a PE manager even start to tell the story to investors? What do you do? 

Adam Coffey  

An investment thesis is a vehicle that I'll then kind of summarize all of this. You know, if we're going to go out and speak to, you know, capital providers, not just banks, but if we're going to include family offices, investors or other people, we're going to have to demonstrate our expertise that we've done the research we know about the industry, you know, we've done, we've done industry research, we've built a financial model, you know. We've used tools like deal stats, you know, to property value it, you know, as like, now I need to tell that story. I need to actually script it and make it into, you know, something, you know, I'll call it a 50 page, a 100 page, you know, kind of investment thesis. This is the Bible for what we are going to do together and that, you know, that document lets me now talk credibly and demonstrate my expertise. So many people, Ryan out there just don't want to put in the work, you know? And they just say, hey, I don't want to be in the business. I want to be passive. I don't have any money, I don't want to guarantee anything, and I just want a lot of money. And I'm like, well, go buy a lotto ticket because in life, this is not reality. 

Adam Coffey  

You know, we can structure deals that don't use our cash, and we can structure deals that are very friendly to us if we don't have a lot of equity or no equity. But at some level, it's like the bankers still may look you in the eye and say, you know what, kid, you did good. You got good debt coverage ratio, you got a good story, like everything I'm seeing, I still want you to write some kind of check. I still want to see you write some token, you know, kind of investment to just so I know you're alive, you got skin in the game. Friends and family, you know, private investors, my investment thesis, here's what I'm doing, you know, come along and ride with me. You know, I'll give you a piece of my action and I see that kind of stuff happen all the time. So I create the investment thesis, you know, I'm now ready to, I've created the avatar, I now know what I'm looking for. We're now, you know, we've done a lot of work, and we haven't even started hunting yet, you know? And so now we're going to transition from, I've done all this prep work, I've identified the industries that are going to stack the deck in my favor. I've got my model, my investment thesis is written, I'm now ready to go what I call from passive to active. Now it's time to go, start building a funnel, doing outreach to companies, putting together, you know, and looking for, and building the roadmap for, how am I going to build a funnel? Do outreach actually get, you know, people on the phone or on Zoom or in person, and actually start now trying to trying to do a deal.

Ryan Miller  

I love that you and I have spoken offline a few times now, and you mentioned there's really three drivers of growth, I don't know I call them the three kings, but the three drivers of growth, what have you found? Maybe you can explain that to our fans around the world, is, what are the three areas of growth that either you look for or you look to implement when telling the story?

Adam Coffey  

I love the three kings. The analogy I use is I'm a chef and I'm in my kitchen and I'm gonna bake an earnings cake, and I only have three ingredients in my kitchen that I can use. But the reason why it's important I use all three is that buyers are not just looking for a collection of companies. You know, I bought five companies, I slam them together here, it's for you. It's your meal, you know, you go ahead and buy for me and I want to make a lot of money on this. No, they want an integrated platform that's geared towards growth, and M&A is totally acceptable, Wall Street says that's great. But we also need to make sure that we've got the fundamentals correct, and that this is truly a business that is growing, not just from M&A but it's a healthy business in its own right. And so the three ingredients, you know, the three kings, you know, organic growth, price, volume, pivot, tiering, products and services. Boy, anytime I go into a company, it's like, I pull out the same playbook. I pull out the same tools out of my tool bag, no matter what industry, every time I go into a company, I find that price is on the table. Price is not being managed correctly, too many companies, it's cost plus. What's the cost to produce my product or my service? What's the margin I desire? This is the price I'm going to sell my product at. Customer may be willing to pay this, but I'm down here, and I've limited my growth. And so price, I want to sell products and services for more, more, more price, because every penny I get in price falls right to the bottom line, so that's organic growth. Volume, can I build a sales effort that produces a higher close rate on opportunities that leads to, you know, an increase in sales, you know and so that's the volume. Strategic pivot, hardest thing for me to do is get a customer. Once I've got them, what else can I sell them? Classic example, we talked about pest control. I used them for perimeter, and then they got me for mosquitos, and then they got me for termite and then they got me for army worms. It's like they've got, like, five different things to sell me and hit my credit card, you know, that's, that's the strategic pivots, you know. 

Adam Coffey  

And then I, you know, I also, for me, it's like, we should never offer, you know, a customer one option. It's like, I talk about tiered products and services. I talk a lot about Mercedes Benz and the S Class, the E Class and the C Class. And I've been teaching roofing companies, it's like, look, normally, you give one bid, don't give one bid. That one bid becomes the middle product, good, better, best. Let's delight the customer, give them something more expensive. Because there's some people out there in the world who, no matter what you put in front of them, they're going to pick the best. Those are the people driving the S Class Mercedes. And then you've got some people say, I don't want the best, I don't want the worst, I'll take the middle, that's the E Class, good enough for me. And then I've got other people say, brother, I love you, I'd love to do business with you. I just can't afford it, I'm gonna take the cheap thing. I'm selling my house next year. I don't need to put a 20 year roof on it. I'll put an eight year roof on it, because I'm gone, you know, in 12 months anyway, so let me save some money. So, you know, I teach people how to tier products and services. All that stuff is organic. Great. So that's one component. Can I? Can I drive the top line higher? Our focus is, and the magic formula is these three levers of growth that we're talking about here. You know, need, in a perfect world, to equal 30% per year, 30% compound annual growth rate in earnings. Most companies, I can get organic growth to go 10, 12, 14, 16% you know, price volume pivot, cheering products and services, doing all this stuff, I can get to double digit growth somewhere in the teens. 

Adam Coffey  

I also need then margin improvement, so as we get bigger, revenue is growing at this pace. As we're getting bigger, we need to learn how our expenses grow at a slower pace than revenue. This difference in between the two is called operating leverage, and I need to demonstrate that. So let's go back to pest control for a second. If I've got a big pest control company, I might have a fleet of 100 vehicles out there. And if I'm replacing, you know, 8% a year, you know, then I'm going to be buying eight trucks a year, and I'm going to get a better price on those trucks than I will if I'm only buying one a year, you know. And as I'm getting bigger and I'm buying five companies, I don't need five accounting departments and I don't need five customer service departments, I might be able to find synergies. It might be a bigger one than what I started with, I might need more people, but I should be able to create efficiencies. If I'm buying chemicals, you know, for my pest control company, if I'm buying larger quantities, bigger volumes, I should be able to leverage my suppliers to get lower prices because I'm buying more of it. So as we get bigger, we need to be able to demonstrate to a buyer universe and to ourselves that as we get bigger, we become more profitable. Our margins are improving. And that margin improvement I'm normally looking for, I'll call it 3-5 points a year. So I've got teens growth organically. I've then got some margin improvement, two ingredients in my cake, you know, and a lot of times for margin improvement. I'm also investing in technology. 

Adam Coffey  

And so I think of every job on the planet, I don't care if you're a janitor or CEO, some stuff we do is high value work. Some stuff is low value work, high value work for a technician, you know, in a truck, if I'm a pest control guy, is being in my yard, spraying my chemicals and earning the revenue, that's high value work, low value work is filling out paperwork. It's chasing chemicals or parts or whatever I need to do. It's driving long distances between clients. It's like, there's high value work, low value work, it's, so I typically look for the low value work, and I either want to automate it, outsource it, or eliminate it, those are my three choices. But I want to improve margin, so I've got growth organically margin improvement. And then finally, the third lever, the third bucket of growth, is simply M&A, you know, the combination of those three ingredients in a perfect world equals 30% growth in earnings every year, you know, sustainable. Why 30% because 10% is too damn slow. At 30% a company I'm running will double in size in 2.8 years, it'll triple in size in 4.2 years, it'll quadruple in size in just over five years. Five years is the typical PE hold period and if I can grow at 30% compound annual growth rate. My PE buyer, when they put together their model and determine how much they're going to pay me for my business when I sell it, you know, they're going to look at that and say, that's a four to a 5x multiple of invested capital, that's a home run. I'm going to pay up because I need to own this business, because they've got the magic formula to bake the perfect earnings cake right there, you know? And so the more I can do while I'm building my business, the better it's going to be received by the buyer universe. 

Adam Coffey  

And I tell you, entrepreneurs, selling your company is not the end of the road, it's not one and done, and roll off into the sunset. Selling your business the first time is just a rest stop on the wealth creation highway, that's my second T-shirt for this episode. Selling your business is the first rest stop on the wealth creation highway. What's better than selling your company once? Selling it twice or three times? And so I now bring on a partner, I've built my business. I've done my model, live my model. I exit the business the first time. I become a minority shareholder, a rollover investor. I have a PE partner, someone working with me now. I'm using their capital, their debt relationships. I never have to worry about capital ever again. All I have to do is worry about finding good companies to buy, you know, and running my pest control business, running my accounting firm, whatever I'm doing, and I'm going to get multiple paydays. Because if I understand how PE works, I'm going to know that on average, they're going to sell the company every five years. And so I'm going to get paydays every time they do and if I've got a strong growth rate, I might be able to sell the company in three years instead of five. In a 20 year period, I might get seven paydays instead of four, but I can be there for all of this economic activity. And so those are the three kings price, you know, organic growth, and then margin improvement, and then M&A.

Ryan Miller  

Brilliant man, so I love it. Then bake that cake man, that sounds good, I'll be over for dinner soon. So I've heard you mention before that people can buy these. This sounds absolutely crazy, and if I don't hear it, or if you don't explain it, people are not going to believe it, but folks, I've heard it. This is true. I've heard you mentioned that it is quite possible, and these are your favorite ways to structure deals, or one of your favorite ways to structure deals is to buy a company with no money. Can you walk us through exactly how that's possible?

Adam Coffey  

Sure. Yeah, happy to so first of all, it's got to be the right company in the right industry. So everything we've talked about Ryan already is already baked in this. Needs not, not wants recurrent revenue, not project based, low capital expenditure, high free cash flow, you know, and then also a highly fragmented industry which keeps the entry multiple, I have to pay low. So now, you know, I've got all the dynamics that are there, and I want to buy that first company. How could I potentially do this? Well, number one, I can use no longer equity from the seller as my equity by, you know, put a holding company in place, buying all the assets out. So I'm buying 100% of the assets, but this person is selling me the assets is going to roll over a portion of the purchase price into the holding company where, where two of us are now the shareholders, and so the holding company is borrowing the money, and I've got two people that are up there, and we already have some level of equity, you know that. 

Adam Coffey  

So let's get away from SBA, because SBA has a 19% equity rollover limitation. If it goes above that, the seller has to also guarantee a loan. And so it's hard to tell a seller, I'm going to pay you 3 million and I'm going to get a loan, and then you're going to sign a guarantee if I default that that says that you're going to pay back the loan, well, that's a hard pill to swallow. But maybe I don't use the SBA so maybe I use 30% rollover, and I'm not going to be doing an SBA loan. And then I get the seller to give me some seller financing. And so maybe I get them to provide 20% seller financing, and maybe I put that note on standby for some period of time to where I don't have to service it. It's just going to be really what it is. I'm going to have a balloon payment due when I sell the company that I'm going to wind up paying, you know, paying this entrepreneur, and they're going to get a payday when they sell to me now. They're going to get, you know, service on that note at some point down the road, and they're going to get a second bite of the apple from the rollover, you know. So it's like they got, like, three payday I got lots of payday streams coming to them. And if I've targeted someone who is, like, 60 to 70 years old, they usually don't need the lump sum, they're looking for an income stream over time. 

Adam Coffey  

And so I'm gonna give you an example of a real one that I did. So my brother and I bought an insurance agency, so we paid 4 million for it when we bought it 20 years ago, and we had the seller provide a 25% note. My brother and I were able to borrow 50% then from a lender, it was at 10% interest. The seller rollover was at 10, so essentially, we had 75% that was provided by somebody else. And then we brought in some investors to give us the 25% that was the equity that we needed, we gave them some ownership in the business. And so we are then off and running, we had, we had no, you know, no equity out of our pockets to speak of. We actually borrowed our own equity from the people that gave us the debt money to do this. And so, you know, there's so many different ways that we could do this, though. Ryan, so, you know, maybe I'm stepping into business. And so 70 year old says, look, I just want, you know, I want a down payment. Go get some kind of small loan, and then I'll just give you, you know, I'll give you 90% seller financing. I want to clip a coupon, you know, over the next 10 years. And if you default, I take my company back and I sell it again to somebody else, you know. So it's like, I can, I use the cash in the business, I use seller rollover equity, I use seller financing, you know, I've got cash flow that can service the debt coverage. And so literally, if I can engineer it to be better than a two to one debt coverage ratio I've got, and I did that by prescribing the rollover equity the seller note. You know, all of these, these different parameters, you know, I literally, you know, I have everything I need to service the debt in the company already, there's just, there's no need for anything out of pocket. You know, can I do that? You know, yes, it's done every day. I'm doing it now with a young gentleman who is in a collision company, so like a you crash your car, you smash it up, you take it to my good friend here, he's buying another company. He's doing it with no money down. He's using seller rollover. He's using seller debt. He's got implied inherent equity in the first company that he bought with no money down. He's actually borrowed a half a million dollars in working capital in addition to that, and the cash flow inside the business, cash flows at all. 

Adam Coffey  

I want you to know one thing, too. Not all lenders are created equal. You know, if you go to like sba.gov, as an example, and you register, you can download a list of lenders, and if you need to shop money, just like you shop for anything else, because some lenders will say, look, I don't care how much roller equity you got. I don't care how much debt service coverage you got. My underwriting criteria, you know, I'm Wells Fargo. I need 25% period. End of story. Okay, you're not my lender. You know, these aren't the dries we're looking for, you know, I'll go call another lender, you know. And that lender might say, I want 10% and another lender might say, look, if you got enough debt service coverage ratio. Numbers look good. Just write me a check. I don't care, you know, give me 50 grand, give me, give me 10 grand, give me something, you know, just come out of pocket with something. Somebody else may say, boy, you engineer three to one debt coverage ratio, I don't need anything. There's a lot of lenders out there, they are not all created equal. 

Adam Coffey  

And what I typically tell people is, if you don't have any equity and you need to get your first, the hardest deal to get done is your first. Once your first is done, all these other add ons, you know, they get easier, you know, as you're building this mini empire, first one is the hardest. All you have to do is treat money well, you know, if you can't get bank financing for whatever reason, but the numbers look good, you'll be able to get private financing. When you get private financing, you know, if that lender typically is looking for 10% then give them 12, you know, and and give them a percentage of ownership in your company. Look, I'll give you 10% ownership that will help you juice up your returns and instead of 10% I'll give you 12% do whatever you have to do to get the lender to yes, they have money they want to deploy. Your Cash Flow looks good, your model looks good, get them to Yes. A mezzanine lender, when it's a non-traditional lender, it charges higher interest, and they usually take warrants, which is some percentage of upside on your deal based upon how much you borrow from them. And so this is how we solve for this, but can it be done? Absolutely, it's done every day. You don't need to be rich to buy a company, but you do need to buy the right company, and you do need to do your homework that we've laid out here. And if you do that, you can pull this off.

Ryan Miller  

Brilliant man. So now that you have the structure, the model and the plan. How do you enter the market and start getting deals? 

Adam Coffey  

You know, a lot of people say, geez, I'm going to do outreach to brokers, I'm going to go on databases or websites that have listings of companies for sale. You know, I'll tell you, here's my third T-shirt logo for the night. My best deals come from sellers who don't know they're sellers when they meet me, so they're not a seller when I do my outreach, and they become sellers as I get a chance to work with them. So here, yes, I'll look at deals through brokers, I have no problem with that. I'd say probably a third of the companies that I bought in my career came from brokers, but the best deals mostly come from sellers who don't know their sellers yet when they first meet me. Why do I say that? Once you're a seller and you hire a broker, or you've listed your company for sale on a website, you know you're already in a seller's mindset, your focus now is entirely priced. You're going for the highest price, that's what you're doing, and I don't want to be the highest price buyer. That's not my model. My model is by good companies run by good people pay fair market value, not above market value. 

Adam Coffey  

So I like to hunt, I like to go out and find my own companies. If I walked into a big company, I have a standard playbook that I play. I start my hiring what's called a buy side advisor. If I have money, in no time, I can literally hire a buy side advisor for about 3500 a month. They're going to create marketing material, they're going to create a master list of companies within a certain geography that I'm hunting in, and then they're going to do the outreach. They're going to bring me warm leads. You know, they're going to bring me companies, they're going to help me close them. They're going to they're going to help me due diligence, they're going to help me find financing. They're going to essentially, because they want to get paid their success fee, which comes at the end, they're going to make sure I get to success. And so if I can afford 3500 a month, you know, then I could hire a buy side advisor, and I might pay a minimum success fee. It could be something like $90,000 if I buy a million dollar earning company, that's a $3 million transaction, could be 90 to 150,000 these are like closing costs when I'm buying a house, I can finance them into the deal. This person gets paid by finding me a company, getting me to yes with the seller, and then getting me financed. And so a buy side advisor can, can work a lot of magic. 

Adam Coffey  

But if I have time and no money, then I have to hunt myself lot of tools out there. So I'm going to mention a couple. If I want to go cheap, Dun & Bradstreet, D&B Hoovers is the name of the product. Think of D&B Hoovers as a phone book. You know, I can go into Dun & Bradstreet Hoovers, I use that tool almost every day. I go in there, I type in my any ICS code for pest control or for bookkeeping. I put in my zip code. I tell it within 100 mile radius, 200 mile radius, wherever I'm hunting, you know. And poof, it gives me the phone book with every company registered under that SCI or any ICS code that's within that geography that I just specified. I have a lot of work to do. I have now a raw top of the funnel. I'm going to have to go to, you know, in there, there'll be, it'll show the website, you know, it'll give information. But I can't rely on Dun & Bradstreet Hoovers having accurate financial information. So just know that up front I can get a phone book, it's cheap, you know? I think is as low as $600 a year and I can build a list, but I'm gonna have to do a lot of work sorting to see, remember that avatar we talked about. I'm gonna do a lot of work to make sure that I'm kind of lining up, you know, I'm looking at the companies. Does that look like my avatar? No, you know. Does that look like my avatar? Yes, that stays on the list, you know and I'm building a list, I'm calling through it, you know. And I can build the list, and then I'm going to have to eventually do outreach. There are other tools. 

Adam Coffey  

So if I want to spend more money, Grata is one that I like. Grata, G, R, A, T, A .com so grata.com right now, they'll probably tell you, it's 18,000 for a one year license, single, single license. It used to be 12. You know, I don't know how long it'll last, but if you tell them, hey, you know, last month when I talked to you, he told me it was 12 or six months ago, it's like, okay, we'll give it to you for 12, at some point they'll stop doing that. But, you know, around 12 to 18,000 but that's like Google for buying companies, because they've got web crawlers out there, you know, sneaking around. They've got great algorithms that they've developed, and so they can tell me who owns it, all the contact information, how many employees, what's the revenue, earnings? It's like they're so nice tool. So, you know, Dun & Bradstreet Hoovers is only 600 bucks, but I got to do a lot of manual work. Grata does a lot of work for me, but I'm going to pay again, you know, about 18 grand, you know, call it's the current price. There are others out there, other tools that are out there, for sure, but I'm going to build a database. I'm going to want 1000 companies at the top of my funnel, to find 100 that somewhat resemble my avatar, to find one that I'm going to buy. And I'm going to keep that loaded in 1000 and companies will fall off. And I'm going to keep about 100 in a working pile because I'm looking to buy four or five to effectuate this little buy and build that we're doing. 

Adam Coffey  

So I can outsource it entirely for about 3500 a month, plus a success fee. Or I can do it on the cheap, Dun & Bradstreet Hoovers, or somewhere in the middle, Grata, I have time, no money, I go cheap. I have money, no time, I go expensive. This is kind of the formula, and I'm building the funnel. And a buy side advisor will tell you, on average, you have to do six to eight outreach attempts to get a person that owns a company on, you know, on the hook to come talk to you or get on a Zoom with you. So be prepared for low odds, here's the numbers you can expect. My last company in five years, I bought 23 companies, I bought 1 in the first year, I bought 7 more in the next two years, I bought 15 in the last two years. So think of it like you're on a farm, and there's one of those old pumps with the big handle, you know, and here in Texas, that well is probably 700 feet deep, and so you're pumping this thing until the cows come home. But eventually you get rewarded, just about before your arm falls off with water starts coming out. That's M&A deal flow. There's a lot of work, you know, I'd expect in the first six months, you're starting to have good conversations with potential candidates, but it takes four to six months to close the deal. Your hope is close my first deal in the first year. 

Adam Coffey  

But now I've got deal flow, you know, now I've got some repetitions under my belt. I've been doing outreach, talking to people, and I start picking up steam, and before you know it, it's like, you get true, you know, really good volume starts coming out, and been a number of buying bills I've been involved in recently where it's kind of that math. It's like six months I'm finally having good conversations, first year I closed my first deal, and then the deal flow starts to happen, you know, and it's building up steam and momentum and then pretty soon, it's like the industry knows I'm buying companies, and they're just reaching out to me. And so, you know, on my website, you know, for the company, I always put a tab, sell me your company, literally and and at full maturity, about a third of my deals are self sourced. About a third come from brokers, but, but these are not brokers running a wide process. Brokers, you know, just wants to get paid, they're being a little lazy and so instead of calling a bunch of buyers, they know I'm buying. So they just bring it to me, you know, and they know that I'm going to get it done, and they know that they're going to get paid. So it's like semi proprietary deal through a broker, and then about a third just walk in through my website and say, look, I know you're buying companies in this industry. I've got a company I'd love to sell, or a friend of mine sold his business to you. Still there talks well about the experience. 

Adam Coffey  

And so I'll also tell you, Ryan, when we do outreach too, that always be nice and kind of these people, because chances are it's no today, but five or six months from now, they may come back to you and they sell them, you know that I sell them. You know it's like, I see this happen all the time. They come back, they just come back. You know what? They've got your information, your little marketing material. It's sitting in their inbox. They're 65 years old, and they're like, you know what, today was a crappy day. Who was that kid that reached out to me? Where's this thing? It's like, I'm gonna call that guy, I'm ready to go. Or they have a health scare, you know? Or something happens in their own personal life. And it's like they decide, you know what, life's too short, too much stress. I'm just I'm done, I'm done. I'm going to reach out, I'm going to call that person back, I'm going to sell my business. So be nice to everybody, you know and I always tell them, look, you know, I'll give you a number, and if that number doesn't work, hey, let's stay in touch. You know, your number may change. My number may change, you know, and, and we'll see, you know, where we go. And so I always treat people very well, you know. And don't take offense if they say, ah, it's too low. You know, that that price isn't right. It's like, understand that, you know, it's like, somewhere down the road, your number changes, my number changes, let's get back in touch, you know. So, so, no, that's it. I think, I think that's the story. We can use tools D & B. Hoovers, Grata there's others, buy-side advisor, those are kind of the three levels of engagement I could use to generate a funnel and to get deal flow.

Ryan Miller  

Absolutely brilliant man, spoken like a true master brother. So now that we have covered how to get started, I am sure our fans are on the edge of the receipts of what to do next. So tune into the second part of our two part private equity playbook series, where we cover how to close the deal, how to improve those assets, and how to exit for life's changing profits. So before we let you go, are there any parting remarks? Any, anything at all that you'd like to say to our fans around the world? 

Adam Coffey  

Well, I'll just say, Ryan, I know that if these are the first time you're hearing concepts like this, these, these are very complex, you know, you got to remember something, you know, I started at the bottom, you know, in life, you know, I worked my way up an organizational chart. I became a CEO, I didn't know any of this stuff, you know, I learned it across decades. And you can learn this too, and you don't have to go it alone in today's world, people out there are so willing to learn from others, you know, to have a coach or a mentor or someone that they can work with to help them avoid the pitfalls. You know, if Ryan and I were each on your side walking down the road of doing M&A and building an empire and selling a company, you could walk right with a big hole sinkhole right in front of you, and I'd get one elbow, Ryan, you get the other, and we just walk you right over the top of it, you'd never even know it was there, you know? And so it's like you can actually get help from people who can help you. If you've never done this before, I would not recommend that you just go it alone. There's people out there who do, but, but, but still, even though it sounds simple when we lay it out, you know, it's like anything else you do, you need reps, you need repetition. The reason why I can talk about it as an expert is because I'm now an old guy who's been doing it for decades, and I've already made every mistake that a person can make. And so through my learnings, through Ryan's learnings, you're learning about it. And you hopefully don't, don't make the same mistakes that are common pitfalls. That's why we stack the deck in your favor. We got the right kind of business and the right kind of industry, with the right kind of mechanics, that give you the right kind of cash flow to service the debt at a high enough level so that you can get it financed and get it done. You know, now we're teaching you how to hunt. Next episode, we'll get into the rest, so thanks for listening everybody, appreciate it.

Ryan Miller  

Yeah, and appreciate having you. So just to summarize everything that Adam and I spoke about, start by getting your heading and set your North Star, then design your avatar and your buy box. And then once you've done that, just build your model to tell your story in numbers, and then next, prepare to purchase any whatever private equity rollovers, just get ready to make that transaction happen, then you get it's time to hunt man. So build your list and get out there and hunt. You do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.