Making Billions: The Private Equity Podcast for Fund Managers, Alternative Asset Managers, and Venture Capital Investors
Thanks for listening to another episode of Making Billions with Ryan Miller: The Private Equity Podcast for Fund Managers, Startup Founders, and Venture Capital Investors. This show covers topics connecting you to some of the best investment funds that won in their industry—from making money and motivation to alternative investments, fund managers, entrepreneurs, investors, innovators, capital raisers, money mavericks, and industry titans. If you want to start a business, understand investment funds that won the game, and how the top 0.01% made it, then this show will give you the answers!
Making Billions: The Private Equity Podcast for Fund Managers, Alternative Asset Managers, and Venture Capital Investors
The Private Equity Playbook - Part 2
Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today we are covering the second installment of our two part mini series on private equity from the legendary Adam Coffey himself, as mentioned in the first episode.
Adam is a three time 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, get a load of this $2.5 billion in private companies. He's recently updated and expanded his edition of The Private Equity Playbook that further outlines the 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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[THE GUEST]: Adam Coffey is a three time Best Selling Author of, Empire Builders: The Exit Strategy Playbook and The
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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.
With trillions of dollars of businesses that need to transfer hands, private equity as an industry, is coming up from behind as the Dark Horse of high finance. Join me in this second installment of our private equity mini series with my dear friend, Adam Coffey as we take you on the final stretch, on closing deals, raising capital and exiting for billions. All this and more coming right now. Here we go.
Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today we are covering the second installment of our two part mini series on private equity from the legendary Adam Coffey himself, as mentioned in the first episode. Adam is a three time 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, get a load of this $2.5 billion in private companies. He's recently updated and expanded his edition of The Private Equity Playbook that further outlines the 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 back to the show, brother.
Adam Coffey
Ryan, it's good to see you. It feels like, I don't know, like we haven't done this in a long, long time, like maybe a few days ago, or however long ago it's been. It's like it's good to see you brother.
Yeah, it's always good to see you man, every time we talk, I feel like I get a little bit smarter every time, so.
Adam Coffey
Hey, me too. Not a day or two goes by or people don't reach out, hey, I saw you on Ryan's Podcast. I'm like, you know what, it's like, there's something magical about you, about Making Billions. I mean, I think that just that, that that brings them in by the truckloads, right there.
Thank you for that, we've been fortunate to be in the top 2% and honestly, brother, I couldn't thank you enough for being part of that.
Adam Coffey
Yeah, I think we need to see you like on a TV you know version of this. I don't know, producers have been reaching out to me, I'm like, I'm gonna send them to you, I'm gonna get this guy on a TV.
All right, man, I smell something brewing together here, so that'll be fun. So for all of us who are just tuning in, I'd love to recap so far what we've covered. So in the first part, we covered how to begin and get your heading, get that locked in, how to know if you have a good idea or good deal, sitting on your desk, telling the story with numbers. You and I both understand that, and many people listening to the show, building a plan with no money, and how to prepare for the hunt. So today, on the second part that we're going to do for you guys today is we're going to cover contacting your potential sellers without scaring them away. Yes, you could do it, there's an art to this. Tips on just fulfilling your due diligence and really making sure that you understand what you're doing, you're doing it with your eyes wide open. How to get all the funding you're going to need to buy these companies right? You can have the best idea, but if you can't get the capital, we've got problems, so we're going to cover a lot of that, how to close and run those companies that you just bought, and then finally, how to plan for the almighty exit. So I'm excited to jump into that. So when reaching out to your prospect, maybe you can help us understand, when you're contacting your seller, where do you go from this point?
Adam Coffey
So I think we ended the last episode by talking about, you know, building our list. You know, how are we going to prospect? And we had some tools that we talked about that we could use, and a lot of those tools just kind of depended on price point. If we have money, we can accelerate the time, you know, if we don't have money, then we have to invest the time. But when we find these people, yeah, I think my first advice, Ryan is just simply that, look, when we're buying a company, this is a person to person transaction, this is done at the human level. We might be looking at numbers and talking about multiples of this or multiples of that, but we're establishing a connection with a person. This is their baby, this is something that they've spent a long time building and they're emotionally connected to that. And I say jokingly, it's like, we don't walk up to our future spouse and in the first 30 seconds ask them to marry us. I mean, there's a courting process, there's a dating process and when we're thinking about buying a company, you know, I get my best deals when I reach out to people that don't yet know they're a seller when I first meet them. And so that means, like, you have it like mentally prepared to sell, they haven't hired a broker, they haven't decided to list it on LoopNet or someplace, and, you know, and so it's like they're not focused in a seller's mindset. And so I'm doing cold outreach, and I find that I get my best, you know, my best deals, when I do that, certainly I will buy some from, you know, that are listed by brokers, you know. But, but again, it's like when we're hunting, we can't just rely on brokers. We can't just rely on listings on a website, you know, too much competition, too many people focused on just price, you know. I don't want to be the highest priced bidder. I want to buy a great company built by a great entrepreneur, and I want to pay fair market value, nothing more, you know, and be very disciplined in the process.
Adam Coffey
So when we think about starting this outreach, you know, if we're doing it ourselves, that says either we're just good, it's one of our skills and we enjoy doing it, or don't have the money to hire a buy side advisor, get someone else to do it for me, then you know, a typical buy side advisor would tell me, hey, Adam, I have to do outreach six to eight times, potentially, to elicit some kind of a response. And buy side advisors are so good at this, they they generally will get 80 to 90% response rate eventually, even if it's just the entrepreneur say, hey, quit bugging me. You know, it's like, get away from me. I'm not interested in selling, but they're gonna get some type of a response. So when we're doing outreach, you know, I go back to thinking about my avatar, my Buy Box. Who's that customer? How am I going to reach out to them? What are the, I'm going to make some kind of a brochure, you know, some kind of a little, a little pitch deck, you know, older people, I might be doing snail mail, like actually mailing it. I might have someone with a much better cursive writing than mine, you know, actually hand write out the envelopes. Because when an entrepreneur, you know, or a person receives up, and if it's got stickers on it or bar codes or reduced mail, it's like, for me, that thing never gets open, it's just ripped up, thrown out right away. But when it's handwritten, it's got stamps on it, I'm like, look, I don't know what the heck this is, curiosity killed the cap, cat, I gotta open it. And so we're doing outreach, potentially via email, via snail mail, we may be calling people on the phone, you know, but what we're trying to do, and I don't know about you, but certainly in my world, I don't answer a phone if a random number just pops up, I just let it go to voicemail. I only answer people that I know, you know, at too much, too many sales calls that are out there. So I might have to have a little script, you know, and but what I'm trying to do is follow some kind of a pre programmed, you know, not necessarily script, but just goals and objectives.
Adam Coffey
My goal number one, you know, if I can get somebody on a phone, I'm probably going to reiterate what I just sent them, hey, listen, my name is Adam Coffey. You don't know me, but, you know, I've been buying and selling companies for decades, and, you know, and I am focused right now on this particular industry, and I've been looking at companies, and I came across yours. And I'm so excited, you know, I love what I see, you know, and I'm wondering, and I have, have you ever thought about potentially doing something special in the industry, you know, that could be selling the business, growing it, buying other companies, putting together with it? You know, I'm on the hunt, I came across you and I like what I see. And all I'm trying to do, my goal, objective was my first conversation is kind of break the ice, you know, get to know them a little bit, let them see, you know, a little bit about who I am. You know, the background that I've got, you know, the dirt that I've chewed. But my only real goal I'm seeking to set up a lunch, you know, I'm not asking them, you know, what's the price, yeah, I'm paying five times this or that. It's like, hey, I'm looking, you know, to buy companies in this industry, in this space, I came across yours, and it looks fabulous. You know and, you know, I was poking around on your website, you know and really like what I see fits right with my goals, objectives. Wondering if you were ever curious about doing something special, you know. And if this resonates, you know, with you, can I come down to see it? Can I buy you lunch, you know? Can I, you know, depending on where they're at, and I use this strategy all the time. What's my goal?
Adam Coffey
My first outreach, I want to continue the conversation break the ice, but what I really want to do is get them to lunch. What do I do when I get them to lunch? My only goal and objective from that lunch, I might schedule 90 minutes to two hours in person, and, you know, frankly, my only goal is to just kind of lay out, you know, in a very brief little fashion, probably towards the end we've probably been chit chatting. Hey, I found out in the first call, you know, call, that, you know, the guy plays pickleball. He's a, he's a, he's an aspiring pickleball, you know, grand champion in the making here. It's like, you know, he was telling me about a tournament, you know, hey, you know, it's like, I had that tournament go, you know, whatever. It's like, there's a lot of chit chat. We're talking about family, we're talking about everything except selling the business. Somewhere is that conversation kind of is morphing around, you know, I might throw out there, he listened, you know. Thank you so much for meeting me, you know, want to hear your story. You know I want to hear how you got here, how you you know, how this thing kind of unfolded. You get them talking about the business, I'm learning things, you know, as they're as they're talking. I could throw out some questions that are can help steer the conversation a little bit. But my real, only goal, objective is to just kind of lay out, hey, listen, let me just explain how my process works. You know, happy to sign an NDA, you know something, you know, non disclosure agreement protect your information. You know, happy to do that, if you don't have one, I'm happy to offer one. And really, what I'm looking for is just some basic information about your business, you know. And and alternatively how the frameworks. Hey, look, you know, I'm looking for two to three years worth of financial statements, balance sheets. You know, if the business is doing accrual accounting, that it's like statements of cash flow, you know, looking for basic financial information, I've got some basic questions just about your customer base, who you serve, you know. And you know, it's a basic, basic, you know, questions that I might have depending on the industry, you know, and I'm gonna, I'm gonna, I'm gonna, you know, give this to you. And you know, if, if you're comfortable, and you share that information back with me, you know, if I've got any questions, I'll, you know, we'll, we'll set up a call to talk about it. But you know, other than that, you know, my goal, objective is take a look at the numbers and come back to you and give you a number and let you know what I'm thinking in terms of evaluation and and if you like that number, hey, we keep talking. And if you don't, that's, that's okay, you know, let's, let's stay in touch. My number might change, your number might change. But no, this is, this is kind of how it works.
Adam Coffey
So the goal, first call, get to a meeting in person. Why do I want to be in person? Because this is a personal sale, this is a connection, I need to build a relationship with this person. We can't just rely on Zoom, I'm happy to have a phone call, I'm happy to do Zoom up front, but somewhere we got to get in front of them. So first call, I just want to get in front of them, and what I'm in front of them, all I'm looking to do is just get an NDA in place, get an information flow, you know, starting to happen. If I have clarifying questions, I'll ask them, you know, once I get some data. I take everything they give me at face value and assume it's accurate at this stage, you know. So I'll take based on their numbers, based on what they share. Got a few questions answered, know, a little bit more about, is this the kind of company I'm interested in? Remember, we had that Buy Box, you know, we describe the kind of perfect acquisition we're looking for. Does this fit, you know? If it does, I'm liking what I'm seeing, you know, it meets my basic rules, you know, I I'll bring them a number, you know. And I don't bring in a lie, I just bring it up, yeah, and I don't need to do that meeting in person, phone, Zoom, first meeting in person. Second, want to set up a meeting, want to get an NDA. I've got the information because we've been in front of each other now we've got a rapport that's been built up. And I don't just go right to businesses, we talk, we talk small talk, you know, tell me about your family. Tell me about you know, what's you know, what's going on in your world, stuff like that. Yeah and so now I'm bringing your number, and I might talk to them loosely about structure.
Adam Coffey
Again, I have to remember, in my case, in my situation today, I'm passive, I'm not looking to step into the business. People listening out there, they may be looking to step into the business, you know, as the CEO. You know, they're going to be the person doing the buy & build. My case, I'm passive, I'm going to provide governance, I'm going to be looking to build an empire. I'm looking to go buy other companies in the industry right now, what I'm looking for is, I'm looking for my platform. I'm looking for an entrepreneur that I can back, somebody that I can work with, partner with. You know, you'll share in the growth. You'll share in the financial upside that we create together, you know, it's on bringing them that note, that number is exciting to them. My next step then is going to be, I'm going to bring a letter of intent. When I say, bring them out at this point, I'm still sending it one in person, you know, I'm going to send them now. Call it the letter of intent. I'm not going to download a form off the internet, you know and say that I found this on Google, here's my letter of intent. Nope, I'm going to engage my counsel right now at this stage, letters of intent are non binding, but I want to be able to lay out, kind of, some of the salient deal points that I'm looking for. If I think something's controversial, I might punt it until up to the contracts and stay, stay silent on a specific provision, but I'll want to kind of flush out here's the value, values, kind of based on a certain set of numbers that were given to me. Here's the earnings, you know, that that I'm seeing, you know, etc, you know. And so, like my number, Letter of Intent comes next, lawyer engaged. My first legal cab meter just ran for a little while, not too bad. And so I get that in front, if we get it signed, you know, then we're, you know, we're off and running into diligence. But just to stay on this topic for a little bit, you know, yeah, I'm kind of doing this on the fly, which is, you know, it's like this needs to be a natural conversation between two human beings. We don't write down and read a script when we are reading how we write English, I'm an author, I can talk about this stuff. How we write is different than how we speak. And so the voice when we write bullets and say, if we try to write a script, it comes off sounding fake and foreign. And we don't want to, we don't want to be scripted like that. You know, I have a goal and objective, I'm breaking the ice, you know, I'm getting to know this person. I'm going to be learning without asking too many questions that feel intrusive or direct, and so everything, I'm a sponge, you know, I'm having a conversation, I'm learning about things, we're building that relationship.
Adam Coffey
You know and let me just say, on numbers, I'm a disciplined buyer, you know. And so if, if I'm expecting to pay five times, because that's what my research says a company this size is worth and, you know, they're looking for eight times, we're too far apart. This probably isn't, isn't going to work, you know. And so, you know, I want to kind of part ways, you know, because, again, I may have identified 1000 companies that are loaded up in my funnel at the top, and I do an outreach to 100-150 that I think are kind of priority one targets, and I'm having multiple conversations with people, and it's a numbers game, you know, and not everyone's going to be yes, and not everyone should be yes, and we need to be really disciplined. I'd rather not buy a company I should have rather than buy one I should not have, something to keep in mind and so, you know, it's a numbers game. You would be surprised during how many people that on that initial offer, we try to part ways. How many actually come back, you know and they might have a brochure that I did from the cold outreach. They have my number in their mind sitting in their inbox, they're 65 years old, and you know what, they just they had a bad day customer, you know, pissed them off and giving them a mouthful, maybe didn't feel good. There was a health scare, something happens. And they just like, you know, I'm getting tired, maybe I had a call Adam, you know, maybe that numbers, maybe that number's right, you know. And so maybe they've gotten two or three other calls. Maybe other people give them a number, you know, and the number is not much different than mine. And so they're, you know, they're like, they're motivated now starting to think about selling a little bit more actively. I'm the ace and the hole and six months after I parted ways, somebody calls me out of the blue. I got a deal going just like that right now, someone we met with six months ago, and the numbers originally didn't work, but we stayed in touch. You know, reached out once in a while, said hello and now, you know, deal aside, LOI aside, where a diligence, I expect to get this thing to the closing table soon. And you know, this is the person that started with cold outreach, and they weren't a seller, we built a relationship over time. We did these basic steps, you know and you know, had the call. I invited him to lunch, because they're local here, and so I brought him to my home court, you know, I live in a nice country club, and so brought them here, built that relationship, you know. And now the numbers work, and we're dealing the deal, so we have to be patient, we have to always be kind. We have to always be be genuine, be nice because, as I said, when the numbers are far apart, eventually these deals can come back. Yet our number might change if I find the perfect platform, you know, maybe I'm later stages, I'm smelling a 15 multiple on my exit. And so maybe, you know what I was buying at five, I'll stretch for seven for this guy, because I really like them, like this company, and it's going to help me bulk up right before I'm going to market. So I'll be a few extra turns, because I know I'm gonna sell for 15, you know, and I got plenty at five and so what the heck I'll do one at seven.
So here we are. We're in the moment of deal verbal, right? We're just saying, how is this gonna work? We're you're in this dance in the beginning, I've done it. You've definitely done it as well. This is a very crucial time. So first of all, for those who are listening and you followed it so far. Congratulations. Wow, you're actually talking to an entrepreneur or an owner about selling to you. This is huge, you've made it this far, but we are not done, this is the part where people can freak out. Either they're freaking out because they have some idea that came out of left field, they just have deal anxiety and they're starting to see that this is actually happening, or it's something that maybe you said, like, hey, I'm gonna buy your company, and I know your name's on the building, but I'm gonna change the brand and do all these other things. And you start, even though you wanna come in and you show hey, I got a plan, I'm gonna do this and you might freak them out. And so I'm just curious, from your perspective, this is the point of, we'll say one of those points of peak anxiety. Talk about some of the things that you definitely don't do, maybe one or two things that you definitely don't do at this point.
Adam Coffey
Yeah, well, you just touched on, I think one of the biggest ones, let's talk about renaming for a minute. Now, I'm a guy who's built three large companies, and I rebranded all three. Branding is, I think, probably the most sensitive issue for a seller, and it's one that we need to tread lightly on, because you will kill a deal and blow up a relationship that you've been building if you come out of the gates with, well, your name sucks, and I'm gonna change it, you know? And of course, we would never say it with that passion. But even if I said it in the most pleasant tone, in the best of ways, that is a potential deal killer, you know, it's like, hey, that's my dad's name. You know, that's on that building and dad passed away last year, and it means something to me, and it means something to our customers, and our customers value that name. Well, you know, I might think differently, that, you know, what you know, my experience has been, names aren't what drive, you know, the business, unless you're Coca Cola. You know, we want to talk about major branding in a consumer driven market, but you know, B to B service company, they don't care what the hell your name is. They really don't, but the owner does, and so we don't want to raise that as a ball of contention. So what I have found over the years that works wonders is I talk about my brand. If it's brought up, I don't ever bring it up, but if they bring up branding, hey, talk to me about branding, how would branding work? You know, then I launch right into it, you know. And why I have found that diffuses this, this potential, real bottom that could blow up, you know, an early conversation that could lead to a deal. You know, I lay on them, look, you know, I'm using what's called as an endorser brand strategy, the company that you've built, a company that your dad built, that granddad built. You know, whomever it is, you know, mom built. You know, whatever the story is, it's like you have brand equity, you know and over the years, you have a customer base that's loyal, that knows you by that name.
Adam Coffey
The golden rule of mergers and acquisitions is, don't do any harm, you know, I'm paying, you know, a fair market value for this beautiful business that you built, the last thing I want to do is destroy, you know, that brand equity that you built up. So I use what's known as an endorser brand strategy. So I just created, you know, I'll give you an example, I just created a company, you know, and my brand of the peers is called CoolSys. This is my whole HVAC company, my refrigeration service company, and so you're Sam's Refrigeration Service Company and the way it works is that name stays on the truck, it's Sam's Refrigeration and HVAC service a CoolSys Company. So we co brand with the parent brand, that's the endorsing it's called the endorser brand strategy, your name stays on the truck, your name continues to be marketed, we simply add the name CoolSys underneath. This unifies all of the companies that we're buying over time, you know and in my last run, I bought 23 companies and put them together. And so this is the strategy we adopted all 23 names of the companies that we bought continued to exist, and we co branded them, a CoolSys Company that's called the endorser brand strategy. I have yet to find any entrepreneur that when I explain this strategy, your name stays my endorser brand goes underneath. I found no objections whatsoever, everybody's very comfortable with that. Now, I told you, I already told you, I rebranded all three companies, you know, that I that I've built and run. What I like to do is, I don't want to make this part of contention early, because it can kill the deal. So what I do is, you know, I in my head, I got 10 years, you know, to kind of flip the brands at some point, the idea is, all of these endorsed brands eventually flip. They become a part of your history section on your website where you pay homage to dad and grandma and the dog or whoever you know the name of the company came from, and you tell their story, but I let them lead that charge.
Adam Coffey
So, you know, recently, you know, in that last buy bill that I did, we had bought a bunch of companies in a region, and there was brand confusion now in the marketplace, because there's all these different names and they're all owned by us. And so it's like trucks are going by like, oh, well, you know that the supply houses are getting confused because we're all part of this, this bigger company. And the entrepreneurs eventually come to me and say, hey, Adam, let's, let's flip, let's, let's just be known as CoolSys this, or CoolSys that, you know, like light commercial, or, you know, commercial industrial, or energy, you know, services, or whatever. It's like, you know, and it's like, they take care of it for me, what was a very contentious potential conversation early, a few years down the road, becomes something that they support, you know, illogically. So I let the brain part move at its own pace, because I truly have found that that is one area where, you know, they are, they're attached to their name, whether they should be or not, is irrelevant they are and so we need to be very careful treading around that.
Adam Coffey
Other than that, you know, there's not a lot that I have found in decades of doing this that is just so sensitive. There are a couple things that will pop up later in diligence. One of them is stock versus asset sale that'll usually rear its head. And then somewhere later on down the road comes the second, second guessing. Should I? Should I, as you said, I'm actually doing this. I spent years building a company, I'm getting ready to sell it. It's like, should I do this? I start getting sellers remorse, I get cold feet, you know and so there are some other places where I see some objections. But generally, at the LOI stage, you know, there may be some kind of conversation around, you know, rollover investing, and why would an entrepreneur want to continue to have financial stake in the game? Part of this is driven by a strategy. So, so let me just put out on the table, throughout diligence, throughout the process of buying and getting to know these people. What I'm doing is, I'm assessing risk, what is my risk? I'm paying a multiple of earnings to buy a company, what is the risk that that revenue could disappear if the founder disappears? If I have bulletproof contracts long term, can't be canceled, don't have to worry about it. Okay, entrepreneur can sail off into the sunset, I could potentially not make them a rollover investor. I could potentially just have them on a consulting agreement for a year and then let them bug out, you know, help, you know, help you with some transition stuff, and then you can be on your way.
Adam Coffey
But if I, if I assess that there's a risk, you know, a risk of losing the revenue, a risk of losing, you know, the multiple of what I'm buying, you know, then I need to somehow put some handcuffs on that entrepreneur to help them align with me, to make sure that we're both motivated to want to integrate, you know, and and keep that risk at an absolute minimum, generally, I do that through rollover investing. So one of my empires I built, I bought 34 companies. Only one entrepreneur stayed at 34 the rest of them just got a consulting agreement for a year, and they were gone. I kept one because it was a strategic pivot, it started a new division, and I needed someone to run that division, and that's why I bought his company, was to give me that expertise and they became they president of that division. The rest of them sailed away, because there was no risk to me losing the revenue that I was buying. At my last company, tremendous amount of risk. Although I had service contracts with the client base, industrial service contracts generally have a 30 day gasolation provision either party. So that's a ton of risk, I can't afford to lose everything I'm buying, you know, because I'm still going to have to pay for it, you know, even if the customers walk away. But if I could literally lose the revenue, lose the entire revenue stream in 30 days, that entrepreneur is not getting my money without me somehow getting them as a partial owner of that risk with me. I could do that with an earn out, you know, take a portion of the purchase and, say, based on retention, you earn additional consideration a little bit later on, I could do that with contract language.
Adam Coffey
Different ways to do it, I like to do it with rollover. I need you to stay, you can, you know, if you're 70 and you want to dial out, if we've got a number two, you know, I'll usually talk to the owners, and I'll say, you got at least give me a one year notice before you leave, so that together we can mitigate the risk. We can make sure that we've got either your number two running the show, or I've got, you know, someone from the rest of the empire who's moved in and is ready to take over, you know, the show, work with me on that transition. If you are ready to go, you know, decide to retire, happy to let you do that, you know, but I'm still going to need the economic interest in rollover. So sometimes I have to talk through those kind of objections. Well, you know, I want all my money at close, you know, well, there's risk here, you know. And so because there's risk, you know, let me talk to you about rollover investing second bites in the apple, you know and let me get you excited about the prospects of getting multiple paydays. What's better to sell your company once selling it twice? My personal record, five paydays and 13 years same company, you know. Let me talk to you about that. Let me show you how that works and so I can overcome that objection. It's not as much of an objection as the brain, you know, the branding potential name changes.
Adam Coffey
So, so there's, there are things that could pop up, you know, throughout but, but pre LOI, usually, for me, it's primarily brand, is the Time Bomb, you know, that could blow up in my face, and then the rest of it is just noise with a little conversation I can walk through. You know, need you to need you to stay, want you to stay. Need you to be a rollover investor, but, but something else, right, you we're gonna talk about a little bit later is when we're figuring out how to pay for this business, rollover, and how I structure the LOI. I may be thinking in advance about how I'm going to pay for this deal, and if I'm paying a multiple that requires, you know, let's say I have to pay seven times for a company, but I can only lever three or four times. I've got a gap. I either need to write an equity check to fill that gap, or I have to get creative. Let's do some seller financing, let's do some seller rollover. Let me bridge that gap so that I can get down to the leverage, or the amount of loan capacity that I'll have to buy that company based on the cash flow that's in it that I need to use to service, you know that that purchase. I should be thinking about the financing, you know, before the LOI, sizing up. How's this deal going to work? What's the price going to be? What are the things I'm going to need in the LOI in order to make sure I get it financed, you know, as I get into diligence and get on the backside, so all of this is interrelated. We talked about models and building models, you know, in the first episode, this is where I've already done my homework. I know what these companies are selling for, and I've already kind of figured out how I'm going to pay for them and so that method needs to be somewhat reflected into the LOI. If I'm going to ask the seller to take a note, you know, and or provide, uh, some some, some level of financing, if I'm going to need them to roll over and go for a second bite of the apple, I need to know all that up front. So as I'm breaking the ice and building the relationship, I can talk about some of these issues and weave them into our conversation.
Yeah, that's brilliant, and you know, when I was a young man, I was fortunate enough to hang out with Warren Buffett. He taught a lot of things, but one of the things he says, if it doesn't make sense, it doesn't make sense and so if it doesn't make sense, intuitively, it's not going to make money. And a lot of that really comes down to doing your due diligence, making sure that you research the deal, unpack this deal, really take a peek under the hood. And I know that's a big part of closing these deals. So we're at the point you've built, the relationship, you've built, we'll say status or some mutual respect between each other. You're navigating a little bit of the cold feet at this point, but now it's time to say, okay, I've talked to you. You have a business, we agree that you're going to sell, we got to meet a few things. I need to take a peek under the hood and do my due diligence on you. You request a lot of information. Talk about the due diligence phase that comes up, now that you're speaking, they're sending you all kinds of data, what do you look for,how do you do due diligence on these deals? Take us from there.
Adam Coffey
Yeah, so I'll say anyone who sold a business before to private equity would say that private equity does way too much diligence. I'll spend four to six months doing diligence. They'll ask you the same question 1000 different ways to Sunday, and it's like, and eventually you just get worn out. It's like, are you closing around? You know? It's like, let's get to a closet table, because I'm done. You know, it's like, I'm tired, you know, I give up. You know, white flags are going up, but I'll tell you, most entrepreneurs that buy companies don't do enough diligence. So I got the extreme of PE and the reason they're doing it is produce your responsibility to their investors and you know, and they want to make sure that they've uncovered every possible avenue of risk that could potentially exist, you know, and that they've accounted for that in the model and the purchase price in the contract, etc. but entrepreneurs get just too lackadaisical about this. So the way that I bring diligence down, I'm going to start by just saying numbers if the deal is going to fall apart once I've got a letter of intent in place. Remember pre LOI, I took everything at face value, whatever you told me, whatever you gave me, I take it as being real. Soon as that LOI is signed, now I've got some period of exclusivity, generally 60 days, you know, could be 90 days where, where it's a non binding letter of intent, but you agree not to market this to somebody else. I'm gonna start spending money to verify everything and put put the financing together, do everything I need to do and so the seller is agreeing to give me exclusivity. I start with quality of earnings, you know, quality of earnings is a process of looking at those financial statements and now starting to tick and tie everything together, you know. I want to check, you know, bank deposits against transactions. It's like, it's an accounting thing, you know and so I can, you know, I need to verify that everything they told me pre close is actually real and and it's not that they lie, but Ryan, sometimes we buy small companies for people who just don't have a sophisticated level of accounting. They're operators, they're plumbers, they're electricians, or whatever, you know, construction guys, you know, or pest control guys, or, you know, even bookkeeping accounting firms, you know, whatever they may be. You know, sometimes they don't keep their books, you know, in order, and they don't know what they don't know. I mean, a few years ago, during COVID, it would be common to see, you know, like PPP loans declared as revenue, or, you know, ERC tax credits, you know, as revenue. Well, it's not, it's a one time handout, you know, from the government, that's not revenues, you know. And and tax credits are earnings because they're not repeatable, and so common mistakes, books just are, are a mess, and so they don't know what they don't know, you know, and but we want to do a quality of financial earnings first. Why do we go there first? Because, in my experience, 90, 90 plus percent of all deals that die post LOI, die because the numbers weren't accurate. I'm paying you five times, you told me you have a million dollars in earnings. I'm looking under the hood now, and I see that a million dollars in earnings is really 350,000 you know, and that $650,000 delta, that's a material change, because instead of paying five times, now you're asking me to pay 12 times to get back to the same purchase price.
Adam Coffey
And so I have a framework that I use, you know, first of all, you know, if we don't know anything about quality of earnings, we could hire somebody that does. And if I go to an accounting firm, I'm looking for accounting for big enough on their website to have transaction services as one of their services. Underneath transaction services, I'm gonna find, you know, advisory services that deal with buying companies selling companies, and I'll usually see it just listed right there, quality of earnings. Now, when I call an accounting firm and tell them I need a quality of earnings done on an acquisition, accounting firms apply different levels of standard and so public company quality of earnings would tick and tie literally every single bank transaction and entry on a bank statement to every transaction. When he's like, you can get really, really detailed, it could cost a fortune. If I'm a small entrepreneur buying a small business, relatively small enterprise value purchase price. I'm like, okay, I don't need the public company scrutiny that costs $100,000 to look at a million dollars in earnings, I'm looking for the $10,000 quality of earnings to look at a million dollars of earnings. I want you to sample, I want you to use a reasonable level, but I'm not asking you to formulate an opinion or write me a letter or apply some kind of public company standard. So I have some firms that I work with, one of them is called Barnes & Dennig and on small transactions, I get them to do QE for very reasonable price and I send my clients to these guys all the time, and I can get it done relatively inexpensively. If I do have some sophistication, you know, in my own business, I might actually be able to have my CFO or, you know, or my deal person who is a CPA who came from a transaction services team might be able to do some of that QE work themselves, but I need to verify the earnings. That's number one, because 90% of deals fall apart right there.
Adam Coffey
So here's my framework, if the earnings as reported are within 10% of what they told me, I just move forward with the deal, I don't regress and it's fine, it's close enough. It's going to be around a year down the road when I put 10 of these together, 15 and end up selling it and I've got so much multiple arbitrage that little variations aren't going to matter. But if it's between 10 and 30% I'm going to reprice. So if you told me you had a million, and I find 925, and close enough, I'm going to honor my price. If you tell me you got a million, and I find that it's really 800 well, that 200,000 times the five multiples, a million dollars of purchase price, and it's starting to get material. And so I will, I will go back to them, and I will have a reprice discussion, and I'll, I'll generally, it's like, hey, want to tell you what we found, you know, and I'll point out where the error was between what they thought they had and what we actually find that they have. Because again, this is a consultative, friendly thing, you know. And it's two people doing business together, and we've got a relationship now. And in my case, I'm past it, I'm going to want this person to stay, you know, and I don't want to start my partnership with them by having bad conversations and hard negotiations like, I want to do this as friendly as possible, hey, listen, here's what we found based on this. Still love the company, still very interested in buying it, but I have to make a price adjustment because the earnings are actually a little bit different than what you've showed me. So within 10% move forward 10 to 30% I reprice, if it's 30% you know, I I, they told me they had a million, and I'm finding 600,000 why repricing would be so different than the original headline, letter of intent, price that I don't want, you know, I don't want to get into the argument. I just go to them, I said, here's what I found, here's the problem. Here's why you thought what was a million is actually 600,000 you can't count that, you know, whatever it was that you were doing, you know.
Adam Coffey
And so what I tell them, because here's what happens once they lay a number down on a letter of intent in their mind, that person is already paid taxes or not paid taxes. They bought a lake house, they've got a boat, you know, they're, they're, they're going fishing, you know, it's like they got the RV in their head. You know what their airplane, you know, whatever the case is, it's like they're already allocating that purchase price to stuff. And when I come back and then tell them, hey, the purchase price is actually going to be 40% lower, they start losing stuff. Okay, airplane's gone, no more boat, RV is gone, this isn't fun anymore, Adam, now you're pissing me off, you know, it's like, this is this? You're you just gamed me, you're just doing this, this is crap. So within 10% move forward 10 to 30, must reprice below 30%, yeah, I'm just gonna, I'm gonna pause the deal myself, show them what's wrong. Tell them it's still, still love the, you know, still interested in buying it, but my guess is you're going to want to get back to work and try to try to fix whatever was wrong, get the earnings up a little bit more, and then reach back out to me we'll have that conversation. I have had people come back and accept, hey, Adam, please. I get it. It's my bad, I made the mistake, tell me what that business is worth. I still want to do the deal, you know. So I've had it go that way, but I've also had to go the other way, where people like, okay, thank you, you know, I get it, and they go back to work, and then they reach out six months year later and say, hey, Adam, got my ears back up now where it's supposed to be, you know, let's, let's, let's, let's talk again. Okay, great. Let's do it, you know. So if the deal is going to die, it's going to deal quality of earnings, almost anything else I can contract around, you know, and and so, but a couple things I always, you know, if I look at diligence and all my list of 200 things I'm going to look at, you know, finance comes first, verify the numbers. If I get past that, I have a really, really, really high probability I'm going to a closing table. Now it's okay to start the cab meters running on legal, but legal is where I'm going to get multiple cab meters running, and that's where a lot of my expense is going to come in. And so I don't want to start that expense going until I know the numbers are accurate. So I start with Q of E. Once I verify the numbers, I kind of reaffirm the deal, you know, the deal price and all the mechanics. Now I'll engage all the rest of that, that, that expense.
Adam Coffey
But I'm going to look at every department in the company. You could literally just start by just listing, list every department in the company, you know, I got finance, I've got HR, you know, I've got operations, you know, and insurances, and, like, blah, blah, blah. And literally, you know, I have a little template that I start with, it's over 200 line items and what I'm doing during diligence is I'm looking for risk. I'm also looking at and identifying differences in the way the company I'm acquiring operates to how my company operates if I already have a company, you know, if I have a company, I'm buying another company. Because during diligence, I'm also mapping out integration, and I'm identifying all of the different things that are different about the companies. And I'm trying to identify, you know, the priority with which I'm going to need to address them. You know, some things will have to be done at close if I'm doing an asset deal on day one, I don't have any employees, because I can't buy employees. I wouldn't have to have offer letters for every employee in that company, because they're now going to become employees of my new holding company where I'm putting all the assets into and so I'm going to have to rehire all of the employees, and that has to happen on day one. If payday is on Friday and I'm closing on Monday, I better have bank accounts in place in my new company, I got to get them hired, you know, and so we'll also have a thing called the transition services agreement, in addition to a purchase agreement, where I'm going to I'm going to solicit the help of the current owner. You and I are going to agree that some stuff is going to fall through the cracks, and we're not going to let it. We're going to make sure the employee experience going from you to me as seamless as possible. We'll work together. If there's any cost involved, it'll get reimbursed, you know, depending on who's making the expense and who owns the expense, and we'll work together to make sure that happens, I'm flushing all of this out very diligent. If you don't mind, I want to talk about a couple of the common problems that we need to look at. Okay?
Yeah, let's hear it.
Adam Coffey
Okay, HR, this happened to me last week. A dental service organization that I'm working with is buying another dental service organization. That dental service organization has all of their dentists as 1099, employees, subcontractors clearly don't meet the IRS test, and what it does mean too is if I'm buying them, I'm not going to continue that bad habit. Those dentists are gonna come out of my payroll as W2 employees. You know, I can't keep that charade going, because it's not right, it's not legal, and there's penalties associated if I get caught. So their bad habit dies when they sell me the company, I'm going to make them W2 employees, but because of that, I am now going to pay 15% on that payroll as my self employment, call it the employers tax, you know, for having employees, I have to contribute. I have to do the Medicare, Medicaid, you know, all of the taxes that go with having employees. And so I now need to go back and adjust down the earnings that they reported to me that I'm paying a multiple of and maybe my Q of E didn't catch this, maybe they did to make sure that coordinating so Q of E may have passed. But I'm finding bad habits that I can't continue, and there was a cost impact to that bad habit. And you know what geez, I know because I work around DSOs all the time that dentists, who are working for other dentists, like to have it be 1099, so they can run a bunch of lifestyle expenses through and try to minimize their tax. And so someone says, hey, Adam, if you make them W2 points, you're going to lose 50% of the dentists within the first year. Great, well, I'm going to have recruiting costs then associated with hiring these replacement dentists. Now, I'm not going to reduce their earnings, but I might reduce my enterprise value, which is earnings times multiple equals headline price. And I might say, well, I got a hedge, because I may have, you know, at 50,000 per dentist times five dentists, I mean, up to our $50,000 expense in the first year, you know, recruiting new dentists. And so as a hedge, you know, I can contract around this. I can create a bucket of indemnification in the contract where, if that happens, and buy dentist lead, I'm going to take 250,000 from a whole back, which is a part of the purchase price, which is held in escrow for a period of time. Post close, in case I have any expenses that we've identified in the contract, and I might need to recover some of the money, some of the purchase price, you know. So, so there's, there's a lot of, there's a lot going on here. I might look and say, geez, you know, they have 100 employees in the field. This is landscape maintenance company, and they have no ID eyes. They don't know if these employees of theirs are US citizens and legal to work, and so I can't repeat that. I'm going to have to, you know, so I'm identified. I'm looking at the employee experience. What's their benefits look like? What do my benefits look like if I own a company and, you know, I don't want the first experience with me to be negative. What if their benefits are Better than mine? Am I going to get to keep their better benefits and give all my current employees the better benefits? Am I going to make the people with better benefits go to my lesser benefits? You know and piss them off, it's like, oh, you're going to find all this stuff, figure it out, you know. I've got things then, like, you know, I've got to look at, hey, look today. I gotta investigate if it's a service business, all the contracts they have with customers. Are they assignable if I do an asset sale, you know, are they not assignable and I need to do a stock sale, you know? And so there's a lot going on in diligence. And you know, in this short a time frame, we can't cover all those nuances.
Adam Coffey
What I want to tell you, really is for the people out there, if you've never bought a company before, and you've never done diligence, you need to work with somebody who this is second nature, they've been down this road before. I bought 58 companies, and I've sold the companies I've built multiple times. It's like we need an expert at the table with us to help educate us, guide us so that we don't make mistakes, because making mistakes and diligence could cost you millions down the road in trailing liabilities or things that you missed and so most PE firms do extensive diligence, you know, almost, I'd say too much. Most founders or entrepreneurs buying other companies tell you anywhere near enough diligence, and we need that, we need to make sure we're checking the boxes, that we're making sure that we're making a safe purchase, because if we don't, we may have stretched to buy the company, and there's not enough, barely enough, cash flow to cover the debt in the notes. And now we found out that after the fact, there wasn't sufficient working capital in the business, and now I gotta come out of pocket with a couple $100,000 more within the first 30 days just to fund ongoing, you know, continuing operations. And I didn't see that because I didn't do diligence, I didn't negotiate for it, the seller took all the money out of the business, and now I gotta come out of pocket and I don't have it now, you know, do I go bankrupt? You know, it's like, and so there's, there's a lot to do in diligence. You know, my checklist literally is 200 plus items. It covers every department in a company, and I use it both for diligence and to inform my thinking that about integration, it has Gantt charts tied into it. So as I find stuff I can plan for does it need to be done in the first 30 days, the first 60-90 days, can it be done six months down the road? So much to do diligence, we would need 10 episodes to cover just diligence. So short, short answer, read about diligence, get some coaching consultants around the table that know what they're doing if you've never done it before.
That's right and you know also, legal advice. Get good lawyers, good accountants, like you said, the ones that do the quality of earnings report, that's fantastic. But we're not done there and so once you start getting the professionals involved, and you bring in the armies on both sides, and we're ready to do a deal, and we sign and we like what we see. Now the next phase is we got to get money. So sometimes when we're looking for deals, we got to pay for these things. And so debt equity, we need to find investors. Sometimes, if you don't have your own capital, you got to go out and find it, whether it's credit and we want to do a lever buyout or whatever it might be, but somebody's got to transact. Somebody has to invest and so talk about some of the intricacies that are involved in private equity when it comes time to start getting the money to close the deal?
Adam Coffey
Yeah, so if I've done my whole work, if I've bought the right kind of companies and the right kind of industries with the right kind of recurrent revenue, you know, so on and so forth that we talked about in episode one, that in a highly fragmented industry that keeps the purchase prices low, you know, too many companies in an industry, not enough buyers. You know, if I don't all of my work, right, then, you know, it should be relatively easy to get the financing put in place, and so I've got different components. So, so let me just throw something out on the table, let's talk about debt service coverage ratio. So I'm buying a business that's got a million dollars a free cash flow, if I'm buying a great business in one of my great industries, and it trades at low multiples, like maybe it trades at four times, you know, and it's got a million dollars in earnings and because it's low capital expenditure, it has high free cash flow conversion. And so maybe out of that million dollars in EBITDA, 950 is actually free cash flow. So I'll just say it's a 1,000,000, 1,050,000 down to a 1,000,000 just round numbers. So I paid four times, so I need 4 million to buy this company, how am I going to get that?
Adam Coffey
Well, first thing I'm going to do is I'm going to look at what's the free cash flow, and I'm going to take 50% of the free cash flow and say this is the amount of cash flow that I can use to service alone. I try to build everything around a two to one debt coverage ratio. Why? Well, first of all, if I go to the SBA, you know, I could get it down as low as 1.2 to one, which means I have $1.20 in cash flow to service $1 of debt, but for me, that's too tight. Economy cycle south, you know, I don't, you know, I lose a little bit of business, all of a sudden I'm coming out of pocket, and I don't want to come out of pocket, I don't want you to come out of pocket. So I go with a two to one net coverage ratio. So I got a million dollars in free cash flow, I want to use no more than $500,000 to service debt. So let's take a look at this. I need 4 million, well, if by chance I used 100% leverage, forget down payment for a second. Let's just say, you know, sellers leaving, I'm stepping in, I'm going to be the CEO, whatever their seller discretionary earnings was going to become my seller's discretionary earnings. You know, it's like I'm going to pay myself a salary, was already burned in the numbers. I got a million dollars in three cash flow, I paid 4 million for the business buyers exiting stage left. Well, to service 4 million in debt. I'm probably gonna need about 700,000 and I'm just going off the top my head, 10% interest, $4 million that's 400,000 a year. Probably gonna need about another 300 for principal over a 10 year fully amortized SBA loan and so I need 700. I've got a million in free cash flow. Well, guess what? That's not a two to one debt coverage ratio. That's too high and so I'm not liking my deal yet.
Adam Coffey
So maybe I'm going to borrow 3 million and at 3 million, I'm going to need less than 500,000 to service net 3 million, and I've got a million dollars in free cash flow with which to do it. That's my two to one big coverage ratio, I can borrow 3 million on this deal. So I still need a million, where am I going to get that million? Well, if I do an SBA, and SBA will do loads up to 5.5 million. So this would fit right in the wheelhouse of SBA, you know, maybe I look at that and I say, Mr. Mrs. Seller, you know, how about you roll over 15% of the sale price into equity, and you'll still own a piece of the company. You may be retired, but I'm going to let you get a second payday when I exit your business five, six years down the road after I bought some more come along for the ride. Because it's under 19% the SBA isn't going to make him sign a loan guarantee. At 15% they can just ride, ride my coattails, I have to give the SBA a personal guarantee with the lender, so they do 15%. So on that 4 million, I now have 600,000 in seller finance, call it free seller financing. Their equity just became my equity, they're now a minority shareholder in the business they used to be a majority shareholder in. So I got 3 million I can service with my own cash, I now have 600,000 of equity coming from the seller, which they'll get a second payday down the road. They'll get some of my earnings call it down the road, because I didn't have the capital to put into the deal, this is how I had to do it and so now I still got a gap. I got 3.6 million, I need 4 million. So I got $400,000 gap. The bank may say, well, Adam, I'd like to see you do a 10% down payment, a 15 percentile payment, 20% out payment and I'm thinking to myself, I don't have that money, right?
Adam Coffey
So first I'll tell you not all SBA lenders have the same requirements, they operate under the same government program, but somebody you walk into Wells Fargo, and they're gonna say, I don't care how much you got, roll over, right? I want 25% down period, and store it. I may go to another lender. Another lender says you got 15% from them, you give me 5% cash, you know, and I'll let you, I'll let you go. Or just give me a check out of I don't care, just give me something, give me 50 grand. I gotta see you bleed a little, you know, inside a guarantee and, you know, I'll finance that deal. So although they're lending under the same program, there are literally 1000s of lenders who participate in the SBA program. I can download a list of them off of the SBA website, you know, once I go on there and register and so I got to call around, because they're all created equal. But, you know, I could also do something else, which one of my clients does all the time, and that is, yeah, hey, hey, seller, you're gonna loan me that $400,000 on a side note, you know. So it's going to be seller financing, and I'm going to put it on full standby for two years, which means I don't have to make any payments, and then it's going to accrue interest, and somewhere down the road I'm going to start servicing it, I got to pay it off within a certain time window. So you're gonna get money up front, nice job, you know and then a few years down the road, you start getting interest payments from me, you know. And eventually, when I sell the business, I'll pay off the note, or I'll use the earnings to pay off the note. SBA looks at that two, two years of standby, and says, this is, this is, this is as good as equity. And so I now have filled my gap, I got 100,000 seller financing, I got 600,000 seller rollover. I borrowed 3 million from the bank, and I haven't put a dime in. And I do see deals that are no equity happen. Some of my clients do these deals, you know, I've got other clients, you know, who write a small check, you know, or they go get friends and family money. If you're working with someone, it's your first deal, they're saying, you know, dude, I need to sell to see 10% down cash this is 4 million, you need 400 grand. Well, now I'm on the friends and family plan, you know, I'm looking for friends. I'm looking for relatives, mom and dad, somebody. It's like, who wants to throw in with me in this adventure? And, you know, I'm going to Ryan, I'm like, Ryan. I need to raise capital. Yeah and maybe I go to a family office. In the family office, you know, I go to a mezzanine lender. Somebody charges high interest rate because they're willing to subordinate to the banks. Banks will have first tier, you know, they'll come in second, banks charging 10% these guys charge 14% it's expensive money, you know. But they're not secured, you know, you know, the banks are secured in front of them.
Adam Coffey
You know, so there's so many different ways, I think for most entrepreneurs, they think money is their problem, but what it is is they, they haven't done this before, and so it's an unknown area and so for them, it seems to be the big mystery. Everybody does this all the time, there's plenty of money out there in the world. We just have to know where it is, and we know how to have to know how to treat it. You want to treat money well, if we don't have money, we pay, you know, if someone wants 10% and it's a private lender, it's a person, you know, it's a it's a someone who's making a speculative loan to me, you know, hey, maybe I give them a couple points extra. Maybe I give them some equity on top of that. You know, if it's a mezzanine lender, they lender, they want some warrants, or they want some, some almost works like an option. They want some piece of the upside that you're going to create using their money and so I just go to them, I give them more than they ask for, and I make it sweet so that it's easy for them to tell me yes and tell someone else no. Because when we're both if I got two parties who are paying the same costs, well, then the lender is focused on who's the better risk, and if I've never done this before, I need to change the dynamic, and so maybe I tell that private lender, I'll pay you more and I'll give you some equity, and I'm sweetening the deal. Why are you doing that? Because you're helping me achieve my goals and objectives, and I know that you could lend that money to multiple parties, and I want you to take that risk with me, and so I'm going to do my best to take care of you. I'll never forget when I was in the army, you know, and I bought my first new car, and I remember the lender, because I couldn't get bank financing, so I'm like, a kind of one of these loan houses, you know. And I remember that this lady, and she's like, Coffey, don't make me come looking for you Coffey, you better make that payment, you know. And it's like, know where money is, know how to treat it, treat it well, and you'll get, yes.
Adam Coffey
I'm on the board of a company right now, Ryan, where a couple guys who were not senior partners in the world of finance. They were more junior guys, you know, analysts, you know, PE investment banking, they got some background. They got some, you know, education, but I watched them walk into a family office and walk in with 100 million in financing, you know, to do roll ups and, you know, they threw me on the board of it, you know, to help them and help them mitigate risk. You know, someone who's been there, done it number of times, you know, makes money feel comfortable that there's an old guy around who's a veteran of doing this, you know. So there's so many different ways to get the money, but I try to, I try to buy the right company. And you know what, I'm just gonna flat out tell you, if you're buying a software company that trades it 10 times and it has no real cash earnings. I'm sorry, but you're going to need equity, I can't, I don't have a fix for for the math doesn't work. That's why I'm focused on certain industries that have low capital expenditure, high free cash flow conversion, and trade for low multiples, because these unsexy businesses that trade at low multiples, that's where I can make a killer and that's where I can use the money in the business to pay for the loans to buy the business. And that's where I have a higher probability of getting money down type deals done and and so, you know, I know you're, you're an expert at this, you know, but for a new guy starting out, or new lady who's buying their first company, and they're gonna, they're gonna step into it, I know this is a real scary area, and a lot of people freak out over personal guarantees.
Adam Coffey
Well, if you don't got any money, you know, and you don't have if you're a big hat no cattle, then risk and reward go hand in hand. It's like, if you're not willing to take the risk that you're going to lose what you don't have to get somebody else's money, I can't help that mentality. You know, you need to be willing to assume some level of risk when you're buying a business and you're asking somebody else to fund it for you.
Yeah.
Adam Coffey
And so with the risk goes to reward.
Brilliant, yeah and you know, you brought up a good point. So I run fundraisecapital.co and in there, fundraisecapital.co actually a guy just joined, he raised four and a half million bucks first raise, four and a half million bucks in 45 days, the guy's the man. You know, that's obviously a shameless plug, but however you do it, it's really important in raising capital, understanding who to talk to, because Adam, I believe, you know, I've coached over 2000 people to launch their own funds, and many of them are private equity. But the one thing, no matter what your asset class is, the one thing that would make all deals fall apart was this phase that we're talking about, they could not raise capital beyond friends and family. So what Adam's talking about is this debt financing where you can get, you know, have them roll over 15 or so percent of their company do that. Take a course, pitch family office, get partners, there's many ways to do it, but you got to do it. And so understanding how raise capital, I think is one of the most important things, because you could know everything about private equity, but if you can't get the money, all of that bright intelligence and spirit and passion, you're going to find yourself in a little bit of trouble, and you're just going to be this perpetual big hat no cattle guy, would you agree?
Adam Coffey
I do and again, it's scary if you've never done it, but there's so many people out there who have done it that you can get again coaching, guidance, mentorship, and you can find ways to get this done. You know when 15-20 years ago, I remember I helped my brother buy we bought an insurance agency that we paid 4 million for, and we literally got the seller to do a million dollar note, 10% interest, and we went to a family office, brought in a family office, got $2 million worth of financing from them at 10% back at the back in the day. And the cash flow within the business service that 3 million in debt at 10% no problem. We had about 1.7 million in free cash flow. You know, we had $3 million in debt, and then we made a million equity. And so a million was equity, because we could afford the million. If we couldn't have afforded the million, we could have made equity $10 and we could have borrowed more money. You know, in the family office, we also gave ownership to so they not only got the interest and got their money back that they loaned us, but then when we sold the business, you know, 15 years later, after we had been distributing, you know, million, 2 million a year for like, 15 years. We then sold it for 12 million, you know, and they got another chunk of money based on that. And so they got, they clipped the coupon on the 10% then every time we did a distribution, they took money off the table, and then at the end, they got another bite. When you add up all the paydays over a 15, you know, 15 year period, that family office was thrilled with the returns that they saw on this little insurance agency that my brother and I bought for 4 million, you know. And for my brother, it was his, his way of earning a living. For, you know, the majority of you know, the later years of his career, for 15 years, he's still there running it today, we sold it to Sure, a big insurance, you know, Corporation buys 100 you know, agencies a year, and he got to roll over. Second bite of the apple. They go public next year. He gets another bite, I was passive, so they didn't let me roll over. I had to walk out the door with my party gifts. But, you know, but it accomplished everything that we wanted to accomplish, and we didn't actually use a bank loan for any of it and we were debt free. Within about four years, we had paid off the debt and then it was just distribute money like an ATM machine for the next 1011, years after that, until we sold it. So, you know, as you said, people can come to you. They can take your course in how to raise money. Is a great example. But this is something we need to do and think about before we ever even start looking. You know, this is a part of the program where will the capital code for him, based on my research and thesis on the industry, before I ever started it. You know, back, way back when, first episode in the beginning, when I was laying all this out, I should have been able to build a model and say, here's what I should have to pay, according to my research. These are what this company sells, these companies sell for and this is kind of how I'm thinking about putting my capital structure together. So I'm doing one right now in bookkeeping, accounting, and I'm gonna, I'm gonna use about 1.5 million of capital, which for me is a very small amount of capital, but my returns, you know, to build a business in like a three year period, by four or five and put them together and just kind of move it out down the road. You know, I'm looking at like 27 odd million in return on a $1.2 million equity investment. You know, the rest of it is borrowed money, it's rollover capital, it's seller financing. I service all of that. Put this together, walk out. It's like, use 1.2 million. Walk out with 21 you know, it's kind of, that's good, math. You know, if I didn't have the 1.2, well, I wouldn't walk out with 21 maybe I walk out with 15 because I'm going to have to give some of that return to get the rest of the capital that I need or I'm going to have to bring on a partner. But so many ways to engineer this and pull this off, that money should not be the reason you fail to pursue this kind of an entrepreneurial dream. You'll never become wealthy as a W2 employee working for somebody else. Right now, as baby boomers are retiring, we've got the greatest wealth transfer in human history and it's your time. It's your time to get out there and do this based on everything we've been talking about. You know, across these two episodes, we kind of laid out the framework on how to do this. You know, obviously we can't cover everything in detail in a couple hours, you know, in two podcasts, but there's books out there. You've got a course on raising capital, I've got books like Empire Builder to teach people how to do this, you know, this process and and you can do this, that's the point. You know, people doing it every day. Why not You? You know, it's kind of, get off your duff, get out there and live the dream rather than just thinking about it for the next 20 years.
Yeah, you're spot on, man and that's the mission of the show. Like I said, two fold mission, which is to redefine the value of the human spirit, and the second one is to activate the rise of the rest, meaning there are a lot of people with just. little nudge from Adam and I, and you're going to be well on your way. Now you mentioned before, when you did that insurance deal, that your brother was active and you were passive, so that implies there's a phase that after you get the money, you close the deal, everything's signed. Now you got to run this company and run it to profit town, all the way to the finish line. Talk about a little bit about being active and being passive now that you're at this phase of running the company.
Adam Coffey
Well, whether I'm active in it or passive, and providing governance and guidance to it, once I'm once I'm in it, and I own it, you know, I'm responsible for it. I'm seeking, you have to generate alpha, I'm looking for my return. And so, you know, I have a playbook, you know, that I actually lay out in The Private Equity Playbook. You know, it's like, I want to accelerate the growth of earnings, you know, I want to get this company growing. It's one thing to buy a bunch of companies and put them together, and you do get multiple expansion, bigger companies sell for higher multiples than smaller companies. I can collect a bunch of companies pay small multiples, and by putting them together, create something bigger that will trade for higher multiple. But a PE buyer, or any buyer, doesn't want to see a collection of companies. They want to see an integrated empire, and they also want to see consistent growth organically improvement in margins as we're getting bigger, we should be getting more efficient. So our profit margin should be accelerating our margins at the gross profit level should be, should be increasing. So like, you know, more clay on the wheel, we've got more to work with.
Adam Coffey
You know, if I was buying pest control companies and I had, you know, five trucks on the road, and I bought one new truck, I don't get the same price as if I have 500 trucks on the road, and I gotta buy 50 this year, you know, I'm going to get better pricing. So my pricing, you know, my ability to to hit my suppliers for more effective pricing, my ability to be more efficient as I'm getting bigger, I've got to be able to demonstrate that. So I always tell people I'm doing a mini roll up, and I buy in essentially 4 million in EBITDA, because that's my exit point. I also want to get to five, 6 million, I want to do that organically, you know and so, you know, we have to be really focused on growth. What is our growth story? We have to have a good story to tell, so that when a buyer walks in to buy it from us, it's like they know where this business is headed. There's a trajectory that we've established. Yes, we bought multiple companies, put them together. But now look at our organic growth rates. Look at how fast we're growing organically, look at our margin improvement. You know that we're getting and we're seeking, you know, and with your capital, in the next phase, I can really accelerate my growth plans. You know, I'm bootstrapping. I'm doing the best I can, I'm doing everything you know, in my own little wheelhouse, but with your capital, and you know your you know, your assistance, coupled with the leadership team in this business, we can really rocket ship to a different, different place. So we have to be cognizant of the story.
Adam Coffey
You know, oftentimes, when I walk into a business, you know, I immediately start attacking and I have a standard playbook, price, volume, pivot, you know, and tiering products and services. So price. I've never found a company yet that has price optimized. Matter of fact, most companies tend to look at what's my cost of my product or service and what's the margin I want to make, and I add that on top, and that's how I price, and that does not take into account what a consumer is willing to pay. So I have to find additional price. You know, in the last three and a half years, you know that we've been living through this inflationary period of our trying to be cumulative, price increases have totaled around 30% everything we do today is 30% more than it was three and a half years ago. I bet you there's not many companies out there that have raised their prices 30 plus percent, you know. And so right now we have this great period of air cover where everything we buy is more expensive. And we should have an ability to pass these costs to customers, you know, and consumers, you know, I get emails every day, hey, Netflix, we're raising our price on January 1. It's like, you know, and, and, hey, apples raising the price of this, and Adobe's raising the price of that, and QuickBooks is going to jack up my rate. You know, January 1st, like, everything is getting more expensive, great time for you to also be raising prices. I do a lot of work around optimizing price. And, you know, every penny I can get price immediately falls to profit. So price is important, volume. Can I, you know, what is the strategy for sales and marketing in this company? A lot of small companies really don't have a good, cohesive strategy and so I've always focused on, you know, how do I sell more stuff? How do I sell more stuff at a higher price, you know, and then, you know. So price volume pivot, hardest thing for us to do is get a customer. Once I get that customer, what are the strategic pivots I can make to now sell that same customer additional products and services.
Adam Coffey
I've got a landscape maintenance company, I signed a contract with you. It's recurrent, you know, and it's to blow and go, it's to mow, blow go. You know, I'm cutting your grass, you know, every week, yeah, and, and then I'm blowing off the sidewalks, right? Well, now I come back to you and say, hey, you know what I also do, bed mulching, you know, can I re mulch your beds? And, hey, while I'm here, you know, I can also plant flowers twice a year to help your yard look beautiful. Hey, by the way, I also can do Pest Control on your lawn to keep your law and I can do fertilizer on your lawn and hey, I do exterior landscape lighting and hey, it's holiday season. You want lights on your house, you know, boy, I can, I can hook you up with lights. I've got all these different products and services that I'm going back to my core customer base, constantly hitting them with new things that I can do for that, maybe a different person in a different truck.
Adam Coffey
These are the strategic pivots and then I tier my products and services, good, better, best. Never give one quote to a customer. What I can give three? Why give three? I don't know, because marketing research says three is the right number, 60% of consumers will buy whatever the middle product is. I don't need the best. I don't need the worst. So whatever your one product was, put it in the middle. Now find extra things that you can add to it, because some subset of your customer base is willing to spend more. They're willing to buy the best, you know and then I could also create a def, featured product which will let more customers say yes to my proposals that I'm putting out the door that I otherwise wouldn't grab If so, by by raising price, by increasing volume, sales, marketing, by creating strategic pivots, by offering good, better, best type packaging of services, or multiple services with features. What I'm doing is I'm learning how to accelerate the growth of this business that I just bought, and then I get the cost side, my leverage for cost, you know, margin improvement, high value work. Low value work. Every person, I don't care if you're a janitor or plainer or a president, everybody does some things that add value and some things that need to get done, but they don't add value. If I'm a technician and I've got a skill to fix I don't know your TV in your house. High Value work is me being in your house, fixing your TV. Low value work is driving it's filling out paperwork, it's ordering parts. And so when I think about all my employees, and I think about high value work, low value work, I look at the low value stuff, and I say, can I eliminate it? Can I outsource it, you know, or can I find an investment in technology that will automate it or make it more efficient? And so I'm constantly attacking optimizing my service delivery, product, service, whatever kind of company it is, you know. So I'm also focused on margin, because when my goal is to grow earnings, which is what I'm selling, a multiple of all of these levers come into play. I've got price volume pivot that pushes up the top line, and then I've got margin improvement to lower my cost, and everything is now additive to my earnings. So we need a growth story. We need to focus on running a better business, on if we're buying multiple companies, on integrating those companies to maximize the potential. Now I gotta memorialize that with a story, with a multi year plan, you know, and at some point down the road, three years, five years, whatever that time period is, I'm ready to take it out to market. I'm ready to sell it. I'm ready to reap the rewards of what we've been talking about for the last two episodes.
Brilliant. So now once, once you sell it, and you're ready to, like you said, take it to market, and once you're ready to do all of those things, now it's time to scale up. You mentioned earlier in this conversation. It helps you to bulk up, and so you're adding these portfolio companies, or port cos, as we like to call them, as well as planning for your exit. So especially if you have investors, there is that hard expectation, usually, that you're going to create an exit, or sometimes we use a fancy word called liquidity event, so we'll have a liquidity event and sound smart and make our mother proud and use big words. But either way, we got to create that liquidity event, and investors like it, and it puts a little bit of cash in your genes. So now here we are, we're building our portfolio. Talk about what is that now we're at the rinse and repeats phase. Talk about what is required to build your Portco and then plan for your exit.
Adam Coffey
Yep. So let's just talk about, I start with the end in mind. So I'm a pilot, I don't take off unless I know where I'm going, and I deconstruct the trip. So when I'm building, if I'm buying small companies, I've got two logical exit points that I can hit in a relatively short period of time, or efficient period of time, you know, I can get to about 4 million to 7 million of EBITDA. That's kind of my first window where real legit PE firms that have funds with limited partners and real investors and capability, I can find some really good firms in that size range. And so if I get four to 7 million in the kinds of companies we're talking about, I might have been buying them at four or five times, and I'm going to sell them at eight times. So I buy 4 million, I grew organically. I get to five, five and a half, six, you know, and sell it for eight times. I got $48 million, if I bought 4 million of it at five times, it cost me 20, I'm selling it for 48 you know, there's $28 million Delta in there, and that's going to be, it's going to all my investors, you know, everybody that was around the table, the former owners of the companies I bought, they rolled over, you know. And so I can go there, I can go push a little bit farther. Maybe I buy the first company, it's got two and a half, 3 million in earnings, you know. And then I'm bolting out smaller companies on top and I'm going for it, I'll call it 10, you know, as the start of the next window where I get really good buyers, you know. And you know, and so 10 is about 17, you know, different class of buyers, you know, now that company that was selling for eight times down in the lower four to seven range. Now maybe it's solid for 12 times, times 10 equals $120 million potential exit. And literally, if I bought all 10 million of EBITDA, you know, just for illustrative purposes, and I paid five times for each, that's 50 million. But I just sold it for 120 you know and so I made 70 million profit for me and my my owners, you know, I'm gonna have to buy more companies to get up to that size. It's gonna take a little bit longer, but the returns are bigger.
Adam Coffey
So I'm designing to build from scratch, get either four to 7 million of EBITDA, or kind of 10 to 17 million of EBITDA from there. The next real great exit point kind of gets way up in the stratosphere, you're talking about 40 million in EBITDA. So I don't plan for that one. I'm going to have a partner, you know, because I never want to see an entrepreneur have more than 100 million in equity in their company that they haven't tapped and cashed out and gotten some asset diversification. But I think you can hit singles all day long, you know, and do these mini roll ups where you're going. I'm going to buy 4 million, and then organically, I'm going to get it to five, six, and then exit. And it's going to take me probably three years, four years tops, to do that. And I'm going to take these singles, maybe I do multiple of these simultaneously, multiple industries. I'm a home services guy. I focus on a couple different verticals. When I get these things going, I'm the passive guy, I've got someone running my business. They're going to share in the wealth creation event with me. You know, I'm arranging the capital, doing the hunting, doing the outreach. I'm focused on the finding and acquiring. They're focused on running the business that we're a team and I could do a few of these and get these things going and I'm working with a family office now, who are going to check the biz where going to get four of these going, because they want to create about $100 million in profit in a relatively short period of time. Rather than just build one, we're going to build three and get them going three or four, and then take them as far as they want to go, and maybe we do a couple of them at four or 5 million, then we do one up to 10. It's like, well, multiple exits planned for, you know, and you know, the family office is seeking to do this and get three four companies going at a time when they start exiting. It's boom, boom, boom, boom, multiple liquidity events that are going on, and now they're kind of, you know, stocking up, you know, the family office treasure chest with, you know, the goal was, want to make 100 million in five years. Like, great,this is how I would arrange to do that.
Perfect. So as we wrap things up, any closing remarks, or anything else you'd like our fans around the world to know?
Adam Coffey
So I would just tell you, you know that you and I are kind of, I don't know, you know, seasoned disciples of the game and you know, we've spent a couple hours now talking about how to do this stuff. Obviously, we can't fill in all the blanks, there's a lot of learning that has to be had from there. So take this as a primer with something to stimulate your creativity, your thinking, and you're listening to us, that means you're interested in doing this stuff. Let's plan to get you off of the sidelines and actually get into the game and start doing this and so we can read books. We can listen to podcasts like this, we can get coaching or mentoring. We can take courses like yours on how to raise capital. Can read books like mine. It's like, you know, let's start building this ecosystem, and let's focus on getting you into this game and instead of being a dreamer, let's make you a doer. You know, as we as we head into close out this year and head into 2025, let's get you in the game and make you a person that's doing, not dreaming.
I love that. So just to round everything out, and just to summarize everything we talked about, get your heading make sure you know where you're going before you even begin. Tell your story with numbers, build your plan to buy a company with little to no money down. Build that hit list of companies and make sure you understand who it is you're talking to, and heck, even do that with investors. Then contact those sellers, build the relationships, and above all, don't do anything to freak them out. Get the money so you can do this, and there's many ways to do it, either you know people, or you need to learn, like a place like I teach at fundraisecapital.co or read Adams books. And finally, plan your exit as a function of EBITDA. You do these things, and you too will be well on your way in your pursuit of Making Billions.
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.
