From $10M to $1B: Scaling Success through Private Equity

Speaker 1 And so I don't chase every company. I only chase the companies that meet my criteria, that meet my filters.
And I find, Tommy,

Speaker 1 when you do a really good job up front of screening and knowing what good looks like, then you're, you know, I'll call it your batting average.

Speaker 1 You know, when you, you know, the best baseball player on the planet was Ty Cobb. He had the highest career batting average.
It was like 344. you know and he had some years where he batted over 400.

Speaker 1 well if you bat 400 in m ⁇ A, you know, six out of 10 deals are bad, you're sunk. You know, you got to bat 900 plus.

Speaker 1 You know, I'll call it in 20 deals, you can afford one bad one, but you better get 19 good ones.

Speaker 1 And if you spend the time up front developing that criteria by which you're going to focus on what good looks like, and then you stick to it and you be very disciplined on the buy side.

Speaker 1 it makes the integration so much easier. It makes hitting your goals and objectives that much easier.

Speaker 1 And so, you know, being disciplined on the buy side is probably the most important part of being effective at a buy-in build.

Speaker 2 Welcome to the Home Service Expert, where each week Tommy chats with world-class entrepreneurs and experts in various fields like marketing, sales, hiring, and leadership to find out what's really behind their success in business.

Speaker 2 Now, your host, the Home Service Millionaire, Tommy Mello.

Speaker 2 Before we get started, I wanted to share two important things with you. First, I want you to implement what you learned today.

Speaker 2 To do that, you'll have to take a lot of notes, but I also want you to fully concentrate on the interview. So I asked the team to take notes for you.
Just text notes, N-O-T-E-S to 888-526-1299.

Speaker 2 That's 888-526-1299, and you'll receive a link to download the notes from today's episode. Also, if you haven't got your copy of my newest book, Elevate, please go check it out.

Speaker 2 I'll share with you how I attracted and developed a winning team that helped me build a $200 million company in 22 states. Just go to elevateandwin.com forward slash podcast to get your copy.

Speaker 2 Now, let's go back into the interview. All right, guys, welcome back to the Home Service Expert.
Today, I got a good friend of mine. He's been on the podcast.
This is his third time.

Speaker 2 Adam Coffey wrote the private equity playbook, exit strategy, and his newest book is called Empire Builder.

Speaker 2 He's an expert in growth strategy, mergers, and acquisitions, new business development, and exits. His latest venture is CEO advisory guru, and he's the founding partner.

Speaker 2 He started that in October of 2021.

Speaker 2 Empire Builder, CEO, coach, in-demand speaker, and three-time number one best-selling author, Adam Coffey builds high-performance cultures that drives transformation, exponential growth.

Speaker 2 A CEO for more than two decades, he led three private equity-backed service companies for nine PE sponsors, completing 58 acquisitions and realizing billions of dollars in successful exits.

Speaker 2 Coffee is a founding partner of the CEO Advisory Guru, serving as a management consultant and independent director to PE portfolio companies, family offices, and elite executives.

Speaker 2 His specialties include growth, strategy, mergers, and acquisitions, new business development, and exits. A proud U.S.
Army veteran, Coffee lives in Texas with his family.

Speaker 2 Adam, it's always a pleasure to have you on, brother.

Speaker 1 Tommy, it is good to see you, brother. And congrats on all of the success that you've had since we were last together.

Speaker 1 It's good to be back. Hello to all your listeners out there.
I learned a lot from you.

Speaker 2 I will say, every book that you write is straight to the point. It's no fluff, and

Speaker 2 it's amazing. I'm kind of disappointed in myself that I haven't read Empire Builder, but that's going to be...
cut straight to the top of my next read. So

Speaker 2 tell us a little bit about why you wrote a third book and what you've been up to lately.

Speaker 3 Yeah, happy to.

Speaker 1 So, like all my books, they usually start as a college lecture or you know, a seminar. Empire Builder actually started as a seminar.
So, I had 350 people from 27 countries.

Speaker 1 They came to Dallas for a couple of days, and

Speaker 1 I gave them Empire Builder Live.

Speaker 1 And then, when I was done with that, kind of perfecting the pitch and the material, I then stopped the seminar, picked up the pen, proverbial pen, and started writing the book.

Speaker 1 And that led to Empire Builder, the book. And really, you know, the catalyst behind this was, you know, you're a guy who's beat the odds.
I'm a guy who's beat the odds.

Speaker 1 You know, it's like there's 33 million small businesses in the U.S.

Speaker 1 only of those 33 million, only 7% ever get to a million in revenue. And only 4% of the 7% ever get to 10 million.
in revenue. And only 40% are profitable and 50% will fail in the first five years.

Speaker 1 And so I just, it got me thinking about why the hell is it so difficult to be successful in business? And I wanted to think about, you know, my 35-year entrepreneurial journey that I have been on.

Speaker 1 And I wanted to write a book that would be kind of the roadmap to success for all these millions of small businesses that are out there to try to help change those odds and stack the deck more in the favor of Joe, or Jill Entrepreneur becoming successful and doing what you and I've done, you know, building businesses, scaling businesses, exiting them for big numbers.

Speaker 1 And

Speaker 1 really, Tommy, to be honest with you, it's like I've made a ton of money in my career. I was bored being a CEO.
I needed a different kind of challenge, and I wanted to give back.

Speaker 1 I wanted to impact as many people as I could. And I figure, you know, if I can make PE firms billions, wouldn't it be fun if I could teach the common entrepreneur how to to do buy and build?

Speaker 1 You know, what the different levers of growth are, you know, what are the activities that guarantee their success?

Speaker 1 And I thought, boy, wouldn't it be fun if I could spend the next 10 years, call it of my life, teaching other, other entrepreneurs how to be successful.

Speaker 1 And so the first book from that effort is Empire Builder. And I'm blessed it's been doing really well.
As always, I donate all my royalties to charity.

Speaker 1 And it helps fuel my philanthropic work. So it was never about money.
It was about helping people succeed.

Speaker 2 Yeah, that's fantastic. When I first read the private equity playbook, I sent you a picture.
I was on a plane.

Speaker 3 I still have that. You were the first person to be on an airplane reading my book.

Speaker 1 Yes.

Speaker 1 That was one of my milestones as an author was I want to walk on a plane and see somebody reading my book. And I wasn't on that plane, but you made that dream come true.
Yeah.

Speaker 2 There's these nightmare stories. I'd say nine out of 10 are nightmare stories a P.

Speaker 2 I was very, very lucky. I love Cortec.
They're great. They're very hands-on, which I needed.
This is my first rodeo, if you will.

Speaker 2 So they give me a lot of autonomy. They said, you know, Tommy, if you feel deeply about anything, and they only get behind founder-based companies.

Speaker 2 And they said, if you got a really strong will to do something, we're not going to get in your way. They're trying to drive the acquisitions.
They get behind that a little bit more.

Speaker 2 They evaluate that. But as far as organic growth and what we do within our four walls, they give me a lot of autonomy and I appreciate that.

Speaker 2 And I got a call from them right around Christmas saying that this was their best in the company's history, at least for home service.

Speaker 2 I don't know about every investment they've made, but we had the best first year of any company. So I'm enjoying it and I'm learning a lot.
And I will say that PE is not a bad thing.

Speaker 2 It gets a lot of people think PE is a four-letter word. They come, they disrupt, they change the industry, they ruin things.
I'm just curious, what's your take?

Speaker 2 Because you've been around the PE world for a long time.

Speaker 1 Yeah.

Speaker 2 I really want to talk about the book at the different stages, and then I want to zoom into where I think most of our listeners are at.

Speaker 3 Yeah. So, you know, I mean, just to answer that first question, look, there's more than 6,000 PE firms out there.

Speaker 1 I think, you know, last statistic I saw, we're pushing near 8,000 PE firms now. And, you know, when I first started my career running companies for PE, there was less than 2,000.

Speaker 1 God, I think there was like around 1,400 and some odd. And there was less than a trillion dollars in assets under management.
Now there's 6 trillion in assets under management.

Speaker 1 When I wrote the PE playbook, it was under three.

Speaker 1 That was four or five years ago. It's like it has just continued to explode.
And like any industry of size,

Speaker 1 there are good firms out there. There are bad firms out there.
There are horrible firms out there.

Speaker 1 And so like any industry, there's a mixture.

Speaker 1 And I think just the general entrepreneur, you know still to this day tommy i i really honestly believe does not have a good working understanding of what private equity is and how it works the reason i know this is because every time i teach a seminar you know or i give a lecture you know and i start with a basic 10 question quiz multiple choice on private equity basic stuff not trick questions all the answers in my first book you know and 90 of the room fails and these are people who own businesses they're millionaires some of them have businesses with with nine figure you know revenues and

Speaker 1 they just don't, they still don't have a basic understanding of what is now the largest economic force on the planet that really drives entrepreneurial success and behaviors.

Speaker 1 PE now buys more than 50% of the companies on the planet. And it's because of PE.

Speaker 1 that we're able to sell companies for high multiples and generate the kind of shareholder returns for ourselves and for people that we work with.

Speaker 1 And it's because of that. During COVID,

Speaker 1 my sponsor was Aries Management at the time, one of the largest firms on the planet. They're the world's largest non-bank lender.

Speaker 1 And they helped me create a foundation and they funded it out of their own pockets so that I could help. And they did this with every portfolio company they had.

Speaker 1 Any of our employees who were impacted, I had 3,000 employees at the time.

Speaker 1 Anybody who was impacted negatively by COVID, death in the family, they got sick, they had to miss work for an extended period of time, you know, and they helped me create a foundation to take care of my employees.

Speaker 1 That's not the kind of news story you ever hear about private equity, but it does exist.

Speaker 1 And so I wrote the first original book was because the private equity I heard about on TV and the private equity I would hear about

Speaker 1 at the club when I'm having a drink at night with my buddies, very different than my own personal experience. And so that's why I wrote that first book.

Speaker 1 You know, my experience with PE has been very different. Like you said, if you you have the right partner, you get a lot of autonomy.
You know, culture is important to you. It's important to them.

Speaker 1 You know, it's important to their investors. And you can do two things simultaneously.

Speaker 1 You can create a great place for people to work, you know, where they can have a career and they can become wealthy. And you can generate the kind of returns that excite shareholders too.

Speaker 1 And you can do both of those things. And so, you know, my experience with PE has been very different.
And as you said, when you talk to people for the first time, it's hit or miss.

Speaker 1 I had a bad experience. I had a good experience.
Generally, it's because we didn't know how to pick our partners.

Speaker 2 I think when you're meeting with PE companies, I think there was about 90 companies that saw our opportunity, our SIP.

Speaker 1 Yeah.

Speaker 2 And 42 made an offer.

Speaker 2 And then five made it to

Speaker 2 the table. And it's tough, man.
I'll tell you, they promise the world. They all sound very similar, right?

Speaker 1 They give you their, this is our average return.

Speaker 2 Here's how we treat. And they're whining and dining you.

Speaker 2 And it's the first thing I think somebody should do is fly out and see their top companies in your space, like home service, and meet with those owners and see what they're like.

Speaker 2 You know, in my particular group, we meet once a month. We don't have a formal board meeting.

Speaker 2 It's a formal meeting and there's 200 pages on a PowerPoint, but it's not like your typical chairman of the board who's on the board. Like we technically have a board, but it's not, it's very loose.

Speaker 1 Yeah.

Speaker 2 And the one thing I'm hearing out there, I'm getting phone calls, probably less than you, but more than most, of all these guys calling me up saying they're going to do an HVAC roll-up or a pest control roll-up or a fencing roll-up.

Speaker 2 And I said, and these guys are really smart. Like they're number ninjas.
They're financially more literate than most.

Speaker 2 And I say, well,

Speaker 2 what are you going to do for operations? How's your integrations going to work? How's it going to walk and talk the same? Like, what do you mean?

Speaker 2 I'm like, well, you got to run HR. You want to have a national call center.

Speaker 2 You want to have economies of scale you want to have purchasing power you want to make sure you've got one cfo running everything so the reporting similar chart of accounts and a lot of people think you could just buy companies and if you grow ebita but no one wants to buy just a bunch of companies with a lot of ebita if it doesn't walk talk or act the same and i i'm hearing a lot of that and even the guys i talk to at service champions or wrench group I know the CEOs both very well.

Speaker 2 They've had to pause their growth because they're not walking and talking and acting the same in each market yeah and it's just one thing that i've warned people i i had a guy send a podcast to me about garage stores and this new company got in and they said we're not like pe we let the owner do their own thing we just support them

Speaker 2 and i'm like well how how do you do that like it's great to buy great companies get behind great ceos but if you're going to form kind of a conglomerate, there's got to be some type of symmetry.

Speaker 2 And I said, this sounds great and dandy. dandy a lot of owners would say sure i'll take your investment i'll keep running my way but it never lasts yeah

Speaker 1 so some more interesting statistics 73 of entrepreneurs who sell a business to private equity do not make it through the first five-year hold period that's a huge number of 70

Speaker 1 73

Speaker 1 73

Speaker 1 of ceos

Speaker 1 or of founders, you know, founder-led businesses, you know, where entrepreneurs sell the PE, 73% don't make it through the first five-year hole period. Why is that?

Speaker 1 Well, I mean, that statistic sounds daunting, but if you break it down, it's like, okay, so there is a percentage of people who are 70 years old and they plan to retire any damn way, right?

Speaker 1 So that's a percentage. And then you've got another percentage or a big group of people who's like, hey, I just got a wheelbarrow full of gold.
I don't feel like working too hard anymore.

Speaker 1 And your new PE sponsor says, well, I gave you that big wheelbarrow full of gold because I expect one that's four times bigger when I go.

Speaker 1 And I need you to work harder than you've ever worked before in your life. And I'm going to be the capital behind you.
But M ⁇ A, we're going to crank up.

Speaker 1 We're going to start, you know, really busting on growth, making things happen. It's like, and people, some group of people just, I don't have the game anymore.
You know, I just won the championship.

Speaker 1 I don't want to go back to spring training and start over on a new season. You know, and then you've got some people who just don't make the transition.

Speaker 1 But for those people like you who pick the right partner, who've got the right mindset and attitude, then working with a PE sponsor can be a glorious thing.

Speaker 1 And as I've said before, it's like, why sell a great company once when you can sell it twice? Or my personal record selling the same company five times in 13 years and four months.

Speaker 1 It's like, I like selling companies, getting paydays. I like seeing my shareholders do well.
And it enables me to be a good steward to kind of employees

Speaker 1 and build a great culture and help them develop their own careers. And so you just talked about buying and build.
So let me riff on that for a minute.

Speaker 1 You know, I think the single most popular tool in the toolbox of private equity that leads to the largest percentage of shareholder return is this thing called buy and build.

Speaker 1 So we buy a bunch of companies, we put them together, we do what you just mentioned, we create the operating leverage by integrating at some level the back office and all of these different functions of the companies that we're buying, and we become more profitable.

Speaker 1 But a lot of people just assume if I buy a bunch of companies and then I take them out to market, I'm going to make a bunch of money. And it's not quite that simple.
We have to have sound strategy.

Speaker 1 We have to pick the right type of

Speaker 1 partners, you know, and so I profile. I tell you, I teach private equity firms how to do buy and build at this stage of my career.

Speaker 1 And so many people get buy and build wrong because they fail in the beginning beginning because they don't have a sound strategy. What are we trying to accomplish?

Speaker 1 What's the strategy that we're pursuing? What is the profile of what good looks like? And how do I stay disciplined? I call it shiny penny syndrome in my book.

Speaker 1 And when everybody just wants to do deals for the sake of doing deals, we overlook the warts.

Speaker 1 And all we see are

Speaker 1 shiny pennies. Every deal looks good.
Every deal is going to add value. And when you're doing a buy and build, my last empire was in HVAC.
You know, I bought 23 companies in five years.

Speaker 1 And the one before that, I bought 34 companies. And, you know, it's like you can't buy a bunch of fixer-uppers and have a bunch of cowboys that you can't put saddles on.

Speaker 1 It's like you got to partner with good people who build good companies with good reputations. And you're aligned because you're all rollover investors in the same company.

Speaker 1 And then you harness the power of all of those entrepreneurs and you work on things like creating the operating leverage and developing the synergies.

Speaker 1 And just because you're growing through inorganic growth, that doesn't maximize value. You also have to be growing strong organically.

Speaker 1 You have to be creating an improvement in margins because you're demonstrating that I'm not just buying stuff, I'm integrating things.

Speaker 1 And a bigger company is operating more efficiently than a smaller company. And when you do it all well and you put it together, huge returns to be made.

Speaker 1 But I see a lot of small entrepreneurs getting it wrong. They're either not doing enough diligence, they don't have sound strategy, they're not focused on what good really looks like.

Speaker 1 And so doing a buy and build can go south really quick. And it takes a lot of discipline.
And if you apply a lot of discipline, then good things can happen.

Speaker 1 And sometimes you get lucky, you know, and sometimes you don't when you're just shooting from the hip and buying anything, you know, hey, it's a garage door company, therefore it must be good, you know, and I'll buy it because it's available.

Speaker 1 It's like, no, I only want to buy good companies run by good people who will add, you know, to my collective horsepower and talent pool. You know, so

Speaker 1 I tell you that it's a really powerful tool. But like any other tool, you know, if you give,

Speaker 1 if I have the world's best woodworking shop and I turn it over to a novice, the stuff that they crank out, first of all, they're probably going to get hurt, but the stuff that they crank out isn't going to look very good.

Speaker 1 You know, we need to have experience. We need to know how to use the tools that we're going to employ when we're building an empire.
And if we learn how to do that appropriately, we get great returns.

Speaker 2 You know, if you grow,

Speaker 2 I've done some math. If we grow 30% organically, 30% through acquisition, year compounded after year three, we forexed the business.
Yep.

Speaker 2 That's without really moving the percentage of EBITDA dramatically.

Speaker 1 That's just pure growth.

Speaker 2 And I'll tell you, I've learned, kind of got my ass handed to me this year. I've learned not all acquisitions are great.
We don't do commercial very good. We're not big in new construction.

Speaker 2 And unfortunately, most companies out there that are sizable, they do a little bit of everything, but they don't really know where their profit centers are. Yeah.

Speaker 2 So I'm sure a lot of industries are difficult.

Speaker 2 For our industry in particular, I'm like, what do you guys focus on? They're like, well, we wholesale and we do new construction. Oh, yeah.
And we do retrofit. Oh, yeah.
And we do 20% commercial.

Speaker 2 And I'm like, wait a minute, those are all different AR. They're all different truck setups, different insurance, different purchasing, different tools, different pay structures.
And,

Speaker 2 you know, I think they got into it for the right reasons because they said, we've got to, when you're small, you take on anything you can.

Speaker 3 Sure. Looking for growth.

Speaker 1 And you nailed it, by the way.

Speaker 1 And that comes down to strategy. You know, when I would do a buy and build, and I'd start with a buy and build, I'd start by creating the profile of my perfect acquisition.

Speaker 1 And so I'll give you an example in HVAC.

Speaker 3 My perfect acquisition had.

Speaker 1 a certain size EBITDA margin or higher. It was a certain size revenue, certain size EBITDA.

Speaker 1 It had a founder who was between a specific age group, a founder who was going to become a rollover investor, going to become a part of the business. Their financial profile, their customer mix,

Speaker 1 customer customer concentration was going to be below a certain level. Their verticals that they participated in, I'm looking for more services than I am project-based.

Speaker 1 I'm looking for more, if it is project-based, I'm looking for more remodel versus new construction. You know, and it's like I saw I would develop this very detailed profile.

Speaker 1 And there were like 40,000 companies in the U.S. that call it the top of my funnel.

Speaker 1 And as we're filtering through all of these and applying our filters, you know, we kind of came out with here's 1500 targets that meet our initial screens and filters. Now let's start.

Speaker 1 How do we going to do outreach with those 1500?

Speaker 1 How are, you know, it's like we probably had 100 deals that were active at any time in some level of conversation, always looking for that perfect match.

Speaker 1 And then we were also very disciplined in terms of price. We pay five times, period.
You know, and I bought 23 companies and I paid five times.

Speaker 1 And even when I would come across a company that was really good, you know, and that entrepreneur and everything fit my filters, but the entrepreneur says, I want eight times.

Speaker 1 Sorry, I'm a disciplined buyer. I pay five times.
Good luck to you.

Speaker 1 And I'm sure they probably went on and found a buyer at eight times. But I bought 23 companies at five times and then I sold the resultant company at 14 times.

Speaker 1 And so it's like my arbitrage or the difference between the next, you know, well, yep, I'm going to get nine turns. And it's like, and so I don't chase every company.

Speaker 1 I only chase the companies that meet my criteria, that meet my filters.

Speaker 1 And I find, Tommy, when you, when you do a really good job up front of screening and knowing what good looks like, then you're, you know, I'll call it your batting average.

Speaker 1 You know, when you, you know, the best baseball player on the planet was Ty Cobb. He had the highest career batting average.
It was like 344.

Speaker 1 you know, and he had some years where he batted over 400. Well, if you bat 400 in MA, you know, six out of 10 deals are bad, you're sunk.
You know, you got to bat 900 plus.

Speaker 1 You know, I'll call it in 20 deals, you can afford one bad one, but you better get 19 good ones.

Speaker 1 And if you spend the time up front developing that criteria by which you're going to focus on what good looks like, and then you stick to it and you be very disciplined on the buy side, it makes the integration so much easier.

Speaker 1 It makes hitting your goals and objectives that much easier. And so, you know, being disciplined on the buy side is probably the most important part of being effective at a buy-in build.

Speaker 2 I've learned that. And unfortunately, I mean, hey, we've all learned it the hard way, brother.

Speaker 2 Well, listen, you know, sourcing companies is not easy. I mean, what I look at, and I probably take a different viewpoint than you do on this, at least for my industry.

Speaker 2 I look at like I'm buying a marketing source. Yeah.
And I just overlap my KPIs. I say, what's your average ticket? What's your conversion rate? What's your booking rate?

Speaker 2 What does it cost you to acquire a customer? I love companies that are spending one or 2% on marketing that are slammed. Yeah.
Because that's initially, we're really good.

Speaker 1 We could add a lot of fire to that.

Speaker 2 We could literally triple that company in a year.

Speaker 2 And there's just, we haven't had a lot of opportunities because

Speaker 2 we needed to be very, very, very selective and only buy in markets we want to be in. and get very granular with the markets.

Speaker 1 But you're just touching on another really important part. I spent a lot of time with data

Speaker 1 analytics. And so I would do things like, here was a statistic for me.
On average, after we'd buy a company in HVAC, it would grow by about 25% organically in the first 12 months.

Speaker 1 How is that possible? So we use data science. So we'd say,

Speaker 1 who are the logos that we serve? We were a commercial company, not residential, so it's a different market. But who are the logos that we service? Are those logos national?

Speaker 1 If we're going into new geography, which geographies that we could potentially go in has the most overlap of existing relationships with existing clients and then we'd look the other way of the companies that we could potentially buy what relationships do they have within their little local territory that we could then transfer back to the mother ship and all the different markets that we had and then we would have sales on day one it's like we know who to call you know hey target we're now in this new region that we haven't been in before.

Speaker 1 And, you know, you've got 58 stores in this new territory of ours.

Speaker 1 And if you're not happy with your service provider, you know, we can take over those stores for you, you know, or whatever the example is. And it's like we set up this cross-sell capability.

Speaker 1 And, you know, it resulted in just high organic growth

Speaker 1 that resulted from M ⁇ A. And by applying data science to M ⁇ A, it's like, I don't want to go into markets that are declining.

Speaker 1 Tell me the markets that have tailwinds that, you know, that people are expanding in in my given industry.

Speaker 1 And it's like, so when you start using data science plus your filters and let that inform where you go next and, you know, and what targets you pursue, it's like you can actually optimize, you know, a better outcome than what you started with.

Speaker 2 You know, I had Ken Haynes on with the wrench group and he goes, they're doing billions of revenue and I think around 6 billion or something.

Speaker 2 And he said, Tommy, I like to buy companies where I can leave the owner and kind of give them the autonomy they need. And I said, well, and it was interesting.

Speaker 2 And this is the way I remember the podcast. This was like eight months ago or something.
He said, well, we had to bring health care into the mothership and kind of put it across the board.

Speaker 2 And I said, what about call center? He said, well, we're probably going to be moving that internally, more where we'll train each and every person so we get economies of scale.

Speaker 2 And I said, well, what about purchasing? He said, well, we're probably going to have to move that in-house if we're going to get the discounts we want as a company. And I said, What about training?

Speaker 2 And he said, Well, that's going to have to come in-house too. And you hear it's a great concept, buy a great company with great leadership, with great founders, and let them do their thing.

Speaker 2 Well, the problem is they don't get the economies of scale. They're buying from different vendors.
Yep.

Speaker 1 It's like that.

Speaker 1 So you're leaving money on the table, you know, and they're very, they're a very successful company, but that also means that there are further opportunities for subsequent owners down the road to start integrating, call it the operational side of the business.

Speaker 1 And

Speaker 1 so when they do that, there's more, you'll call it, there will be an uplift in EBITDA margin and profitability. And so I think all those things are important.

Speaker 1 You know, that's an important part of building an empire. And I've done it where I call integration light in some of my empires, and I've done it where it's integration full.

Speaker 1 And it kind of starts with, I need a scalable platform. So if the mothership can't take on all of

Speaker 1 functions because we're dysfunctional in the mothership, I have to build that.

Speaker 1 And so I may go integration light to start, but somewhere over time, as this empire is building, I've got to put in place a scalable platform that allows us to fully integrate all the businesses that we're buying.

Speaker 1 And if I see differentials, you know, that's where they accuse me into create a different division.

Speaker 1 And so you talked about just, you know, you're finding these companies that, well, they've got, you know, some commercial and some residential and some of this and some of that.

Speaker 1 And it's like, you know, quickly you might find yourself saying, okay, well, I need to have a commercial division and I need to have a residential division because they're different and how they operate is different and how they attract customers is different.

Speaker 1 So I need different leadership and different, you know, call it KPIs and different focus areas. And so that's what usually led me.

Speaker 1 to build multi-divisional companies, but I'm still going to have to have some level of integration.

Speaker 1 I might be integrating companies at the divisional level because what what they do is different division to division, but then finances is integrated at the corporate level all across the board.

Speaker 1 And so you have to pick your level of integration that you can successfully do. But it'll make a difference in your profitability.

Speaker 1 And as the company gets bigger and you start talking about enterprise values in the billions, then the buyers at those levels, these are the things that they're looking for to maximize their potential.

Speaker 1 You know, is the company doing this? That'll have an impact on the valuation. It'll have an impact on the plan that they put in place, you know, call it for their five-year hold period.
Now,

Speaker 2 tell me this. This is a personal question.
I was told that once a company reaches north of about 125 million of EBITDA, the buyer pull goes down dramatically into

Speaker 2 one or two handfuls, not a lot of companies, which the number I heard was 125 million.

Speaker 2 So once you go to like 150 million, you're probably going to get three or four turns less because it's not as competitive.

Speaker 2 Well, you'll still have about 20 companies at the 125 when you start going north of that smaller pool of companies. And although they're not supposed to talk, Blackstone, KKR, like

Speaker 2 somehow a little birdie kind of tells them where they need to be to get a deal.

Speaker 2 What are your thoughts on that?

Speaker 1 You know, it's interesting.

Speaker 1 I have a slide that I put up in seminars. It's actually in the book.
I call it the PE Pyramid. And, you know, so imagine a pyramid, if you will.

Speaker 1 And then imagine that the pyramid itself, you know, is capital. There's $6 trillion in capital that make up this pyramid.
And so there's 6,000 PE firms up one side of the pyramid.

Speaker 1 And at the top of the pyramid, where it's the smallest, you've got KKR, Blackstone, Apollo, Carlisle. And their fund sizes are 10 to 30 billion in size.

Speaker 1 And then you got 6,000 firms down the side of the pyramid, and the smallest PE firms are at the bottom. And their funds may be, you know, $80 million in size, $50 million in size, really small guys.

Speaker 1 And they're everywhere up and in between. Interestingly enough, they all do the same exact two things.

Speaker 1 Number one, they all invest 6 to 8% of their capital from a fund in any one company. They don't do more than that.
They don't do more than about 12% because of asset diversification.

Speaker 1 They can't be overweighted in any one company in the fund.

Speaker 1 So it's kind of they all all invest six to eight percent, which means if I'm Apollo or Carlisle and I've got a 15, 20 billion dollar fund, six to eight percent is a really big number.

Speaker 1 And I can't buy small companies, I've only got 10 years of fund life with which to buy stuff, improve it, and sell it.

Speaker 1 It would take me 100 years to put that much money to work if I bought small companies. And so the end result is big PE firms buy big companies, small PE firms buy small companies.

Speaker 1 And there are five swim lanes, I call them, of capital. You could have five hold periods if you were starting at zero and work your way up the PE pyramid.

Speaker 1 And so, buyers, the real world of PE starts at about 4 million of EBITDA. There are firms below that.
They generally aren't what I would call a traditional PE firm.

Speaker 1 But at about 4 million, those people take it to about 15. 15 goes to 50, 50 goes to 100, 100 goes to 200, 200 goes to public.

Speaker 1 And as you're climbing up the PE pyramid, on the left side, I've got a tab, like a Velcrove tab. And it is the what I call the valuation multiple for given sizes of companies.

Speaker 1 And so at the bottom, there's a lot of small companies. And so the multiples are lower.
And as I'm getting bigger and climbing the PE pyramid, the

Speaker 1 multiples are going up because I'm becoming rarer. So let me give you two statistics.
I told you already there's 33 million small companies in the USA.

Speaker 1 Those are all in the bottom two runs of the five-level PE pyramid. At the top of the pyramid, there's only 3,000 companies on the planet that have a billion dollars in revenue.

Speaker 1 2,000 are publicly traded, 1,000 are private. And so as a company gets bigger, it becomes rarer.
The reason companies do buy-in builds and put companies together, you know, I told you I'm buying.

Speaker 1 you know, 23 small HVAC companies. I pay on average five times for each.
By putting them together, I've climbed the pyramid. I sold it for 14 times.

Speaker 1 And so I've gotten the the arbitrage because the bigger company is rarer. Bigger PE funds have fewer opportunities to buy companies.

Speaker 1 And so what they wind up doing is they wind up actually paying more for these companies because there's fewer opportunities to put money to work.

Speaker 1 And so I've built companies that had, call it from 17 million of EBITDA to about 125.

Speaker 1 Once you get up to kind of the KKR, Apollo, Carlisle level, their real exit is public markets. You know, there really is, there's not enough competitive tension to build a private company.

Speaker 1 You also then, from a capital perspective, the companies are so big and the loan syndications are so big that staying private is virtually impossible.

Speaker 1 You know, even in the companies that I've built, when you're halfway up the pyramid, you've got syndicated loan structures or debt structures and you've got a bunch of banks that own your debt.

Speaker 1 They're publicly traded. So I got to go to the rating agencies and get my debt rated every year in order for those companies to trade my paper.
So small companies, as they get bigger, become rare.

Speaker 1 They trade for higher multiples. Once you get to the top of the pyramid, there's not enough buyers to keep the competitive tension.
And so their real exit potential is the public markets.

Speaker 1 And as you go up, they all also are modeling, call it a 3x multiple of invested capital as their base level of return.

Speaker 1 Smaller firms tend to get a little bit higher multiples and bigger firms tend to get less when they're selling because, as you mentioned, there's not enough buyers and there's a limit to how fast you can grow a giant company.

Speaker 1 So my specialty was always call it middle market, the bottom of the pyramid up to about two-thirds up the pyramid.

Speaker 1 If you're a CEO and you got 100 million of EBITDA, and you got to get to 200 million of EBITDA, the amount of work that takes place to get a 3x multiple of invested capital is just exponentially harder than if you're a $17 million EBITDA company going to 40.

Speaker 1 And I can do that very quickly for the same 3X multiple of invested capital returns.

Speaker 1 So I usually would take a company up through two or three flips of private equity, cycle back down, pick up another company, carry it up two or three flips, cycle back down.

Speaker 1 It's like that was the sweet spot of where the majority of wealth was easy to create was kind of those those companies that are first-time institutional capital, going from 4 million of EBITDA to 15, 15 to 50, you know, 50 to 100.

Speaker 1 Those three levels of the pyramid, that is where, you know, all of

Speaker 1 what I would call the action is. Some people get hung up on, hey, you know, I've got this big name on my business card, you know, back when we used to carry business cards that everybody recognizes.

Speaker 1 I'm hung up on where can I make the most money the fastest and how can I engineer that kind of an outcome and build a cool cool company that takes care of employees that everybody loves to work at?

Speaker 1 And that happens in the bottom three runs of the pyramid.

Speaker 2 So, why don't more PE companies? I know there's not a lot of them that know how to do an IPO. It's like most companies are like, we're not your company to do an IPO.
It's like Cortec did it with Yeti,

Speaker 2 and

Speaker 2 it's not that they wouldn't do it again, but they're not very excited to do an IPO. What is it?

Speaker 1 It's interesting because there's very little public company exit activity.

Speaker 1 And so, first of all, you've got Sarbanes-Oxley, and you've got all of these regulatory pressures. There's a complexity to going public.
And so, you've heard of SPACs as an example.

Speaker 1 Special Pacific. Yeah, that kind of went away.
It was hot for a few years. Well, so let me just explain the whys behind this.
So, it takes over a year to go public. And in that year, a lot can happen.

Speaker 1 You know, pandemics happen, wars happen, interest rates can climb. And so there's always a lot of risk when you're going public.
Will the markets hold? Will the values hold?

Speaker 1 Will the debt markets hold?

Speaker 1 Will the economy be strong?

Speaker 1 And will I get the best value bang for my buck when I finally get to the day where I ring the bell and I go public? And so people started taking money public rather than companies.

Speaker 1 That's what a SPAC was. And they'd say, hey, Mr.
Mrs. Investor, I don't own anything.
And therefore, it's very easy to take money public.

Speaker 1 And I don't have all this complexity of compliance issues. I'm just taking money public.
Once I go public and I've got a pool of capital because you bought my stock, now I'm going to buy something.

Speaker 1 And I'm already public now. And so I'm using my public funds to buy a private company.

Speaker 1 And so they would take the money public before they took the company public as a kinds kinds of a means of accelerating the issue of going public. And so, you know, why is it difficult?

Speaker 1 Why is it hard? There's just a ton of risk. You know, there's a ton of risk going public.
It takes so long. It adds millions of dollars of cost to a company's structure.
And so I think

Speaker 1 one of the problems that I do see is a lot of times companies go public too small. And for whatever reason, you know,

Speaker 1 Wall Street would tell you or books would tell you, you got to be at least 100 million in size. Boy, I tell people, I want to be a billion in size before I go public.

Speaker 1 It's like, I'm going to add millions of dollars of cost. I'm going to have a ton of complexity.
If I'm too small, my stock will be very, very thinly traded.

Speaker 1 Analysts won't follow me, won't cover me. And so now all of a sudden I've got all the cost and complexity.
And I don't have the liquidity that's provided by the active turning of my stock daily.

Speaker 1 And it's like, I get the worst of everything. So it's not that people don't want to go public.

Speaker 1 It's that through the laws, over the last few decades, the government's made it very difficult to go public in a timely fashion. And there's a lot of risk because of volatility in the economy.

Speaker 1 And so that's why there's not a lot of public activity. Matter of fact, there's the opposite.
Big PE firms look for public companies to take private.

Speaker 1 and to eliminate all of that cost and all of that risk and then go back to being private where they can be a little bit more maneuverable and fix something that's probably stalled or not working properly, and maybe even potentially take it a big conglomerate, break it up into different divisions, different size companies, and then dump them back into the public markets as their exit.

Speaker 1 So it's a complexity thing.

Speaker 2 So

Speaker 1 there's a Terminix

Speaker 2 went public, and they were trading at 30x. And they're really the only company I know of size and stature that have gone public.
And I know they were buying companies for three, four, five X revenue.

Speaker 2 And pest control, the way that it works is a little bit different. They still look at EBITDA,

Speaker 2 but you know, there's not been a lot of use cases for public companies in the home service space that I know of.

Speaker 2 There's solar and there's obviously alarm companies and whatnot, but what are your thoughts on that?

Speaker 1 So I love home services for a number of reasons, but I love it smaller and lower down the pyramid.

Speaker 1 And, you know, when you've got heavy fragmentation, pick an industry, any industry, and there's 40,000, 50,000 small companies.

Speaker 1 And right now we're going through in this time period in our history, the largest transfer of wealth in the history of mankind. You've got the baby boomers retiring.
You've got this mass need to exit.

Speaker 1 thousands of companies. Here's another scary statistic for you.
80% of companies that would like to sell never find a buyer. There are so many small companies.

Speaker 1 A lot of them are lifestyle companies that if the entrepreneur goes away, so does the revenue, so does the customer base. And so it's like, I love it down there,

Speaker 1 you know, and

Speaker 1 I think that, you know, from a goal and objective perspective, you know, once upon a time, my goal was the same as yours. I wanted to ring the bell.

Speaker 1 I wanted to build a company big enough, take it public, ring the bell. That was kind of like, it just seemed like that was like the right thing to do or to aspire to do.

Speaker 1 I never got to ring the bell, you know, and it's call it, it's a piece of unfinished business.

Speaker 1 And, you know, I had an opportunity not too long ago to be a CEO in a company that was then going to ring the bell. And I'm like, I really pulled on my heartstrings.

Speaker 1 It's like, that was the one thing I wanted to do that I hadn't done. And I overcame that draw.

Speaker 3 And I was like, nah, screw it.

Speaker 1 I'm having fun. You know, I like it better in the world of small business rolling up.

Speaker 1 And I think it just exponentially gets so much harder to continue as you you get to 100 million, 150 million, 200 million of EBITDA. How do you find 30, 40% growth?

Speaker 1 I mean, it gets really, really difficult. Growth starts to slow down, you know, and now you get into what I call maintenance mode.
Now we're in annuity mode. We've got good cash flow, good earnings.

Speaker 1 And now we're, you know, we're talking about price to earnings ratio. We're a great public company.
But kind of the magic in the

Speaker 1 wild, wild west era is now done. And, you know, you're a builder, Tommy.

Speaker 1 You're a guy like me who loves chaos. There's a chaos in putting stuff together and building it.
And we love and we thrive in that chaos. When you get to a certain size,

Speaker 1 that growth trajectory goes away. And now it's maintenance mode.
And it's time for somebody else to come in here and be bored and talk about, it's like, I grew earnings by 7% this year.

Speaker 1 It's like, well, I want to grow it by 30 or 40 or 50. And

Speaker 1 I want to create jobs by the the thousands. And so at some point, I think as you get bigger and you climb the pyramid, it's just not as fun anymore for guys like us who like building things.

Speaker 2 Yeah, I agree. I know what you're talking about.
I'm still writing the

Speaker 2 point that you love to get into. When you said you had discipline to only say 5X, and let's say there was somebody offering 8X,

Speaker 2 but your...

Speaker 2 Your offer was a little bit different. You roll, what would you allow them to roll? You usually, I believe you always say 35% is the magic number.
So you probably tell an owner 35%.

Speaker 2 What would be, for me as an owner, why would I sell to you if I'm going to get a larger amount up front? Like, what are, what would be your way of saying this is a better investment?

Speaker 1 Usually I'm not competing with another buyer because that was another thing. You know, when I'm buying companies, there's 40,000 of them in my industry.
There's so many of them.

Speaker 1 Even when there's a lot of PE activity, it's like a PE firm can't buy every company that's for sale. So most of my deals were what I would call proprietary.

Speaker 1 So they were either developed by us internally, they weren't a seller. Majority of the companies that I bought, they were not a seller before they talked to me.

Speaker 1 Yes, they were getting calls from PE. Yes, maybe they were somewhat interested,

Speaker 1 but they never really pursued it. It's like I was a proprietary deal.
I developed it. Or, you know, a buy-side advisor that's working for me brought it to me.
Very few were processes.

Speaker 1 Some of them were,

Speaker 1 you know, you know they may have had a broker or they may have had some kind of seller representation but it wasn't a broad process so these are smaller companies you know i'll call it my average size company was anywhere from 10 to 30 million dollars in revenue you know call it two three million dollars in in ebit and i'm paying five times and so so what would i do i usually would build a spreadsheet and i'd say here's your current size revenue and earnings roll tape forward at your current growth rate out five years now what are you worth?

Speaker 1 What's your revenue? What's your earnings? And if you sell it, what would you get? Roll it out five more years.

Speaker 1 How big are you now? You know, what are your earnings? What would you sell? What would you get? Now let's look at an alternative 10-year path.

Speaker 1 You sell to me today, you know, a new column now, you know, new column going across or new row. You know, say, okay, you sell to me.
You take 70 cents home.

Speaker 1 You diversify your asset base, you know, your net worth. You know, you protect your family.
You you get some chips off the table, you're diversifying.

Speaker 1 Those are, you're going to have to pay taxes on, and now you're going to get growth return. So let's not forget about that growth return.
And now you roll 30% forward.

Speaker 1 Now you're a minority shareholder, and you're getting a piece of the arbitrage on the next 10 companies that I buy or 15 companies that I buy during this whole period.

Speaker 1 You know, my last run, five years, 23 companies. And so you're getting a piece of the action on that arbitrage on all those companies I buy.
Now I sell it.

Speaker 1 And I sell a much bigger company at a much higher multiple. You get a piece of that nine-turn arbitrage on every company I bought.
And now you get another pile of gold. You take 70 cents home.

Speaker 1 Your second check was bigger than your first check. You roll 30 cents forward, you know, and now we do it again.

Speaker 1 When I get to the end of that 10-year period, this person's got probably an initial purchase, an earn out one flip two flips you know it's like they've gotten four paydays you know over a 10-year period versus one you know if they just held it and kept doing what they're doing every time i built that spreadsheet using an entrepreneur's assumptions about what was going to happen to their business every time i built that spreadsheet they made more money by partnering with me and joining my band of Mary Brothers, you know, who've sold their companies, you know, as well, and joining our buy and build adventure.

Speaker 1 They always come out better by joining us rather than staying autonomous. So normally I would talk to them about asset diversifications, number one.
And I really believe this, Tommy.

Speaker 1 You know, it's like I could talk to you about a company, you know, early before the pandemic.

Speaker 2 Yep, yep, the movie theater company.

Speaker 1 Yeah. Yes.
You know, it's like, brother, I can tell you that bad things can happen and entrepreneurs never assume bad things could ever happen to their business.

Speaker 1 They'll always be the same size they are. Planes fly in a building, economies falter, governments tell you to shut your damn doors.
You know, it's like bad things can happen.

Speaker 1 And so I wrote an article for Forbes, you know, about when's the right time to sell. And I coined the rule of 130.

Speaker 1 You take your age as a two-digit number, you add to it the percent of your net worth that's tied up. in this illiquid thing known as your company.

Speaker 1 And if those two numbers combined equal more than 130, chances are it's time for you to sell at least a part of your business to get asset asset diversification.

Speaker 1 Because if something bad happens, you're probably too old to have a full recovery before call it.

Speaker 2 Let's just do this. I'm 40 and let's pretend, okay, just pick an arbitrary number.
So you times it by two, so that would be 80.

Speaker 1 You're 40 years old. Before you sold, how much of your net worth was tied up in the business? Oh, 80%.

Speaker 2 Okay.

Speaker 1 80 plus 40 equals 120. So I tell you, you're still okay.
You're getting close. But once you get over 130, so if you were 50 and

Speaker 2 that's at 130.

Speaker 1 What starts to happen, Tommy, is when we're young, we're aggressive. We make good business decisions.
Maybe we're too aggressive sometimes, but we're aggressive. We're building our business.

Speaker 1 We get to a certain age and we're mindful that we've got a lot of money tied up in this company and we start making bad business decisions. We start being conservative with our money.

Speaker 1 We're not investing like we should. We're not growing like we should because we know our runway is coming to a slower end, you know, at somewhere.

Speaker 1 It's like, we don't want to mess with the magic that we built and screw it up.

Speaker 1 And so it's, it's, it's, it's at that point where, first of all, if I bring in somebody else's capital, I get the asset diversification that I need, but I'm not done yet.

Speaker 1 I still roll forward as a minority investor. We were talking off camera about Jeff Bezos.
You know, the world's world's richest man only owns 10.9% of Amazon.

Speaker 1 And if he can be a minority shareholder, so can you. You don't need to own 90%.

Speaker 2 You know, when he got a divorce, is he still the richest man? Because he had to give no.

Speaker 1 Yeah. And Amazon stock fell a little bit recently.
So I'm going back a little bit. I'm morphing history.
I think he's the third richest man on the list.

Speaker 2 Yeah, no,

Speaker 2 it's interesting because, like, Parker and Son's five turns. And, you know,

Speaker 2 I love the concept of this. I recently had an event, about a thousand people, and I said, who here stand up if you plan on selling your business within the next five years? Yeah.

Speaker 2 Could have been more than 30% of the people. Yeah.

Speaker 2 And then I said, 10 years, and about half the people stood up. And I said, why? There's so much unknown.

Speaker 1 Yeah.

Speaker 2 Like, what are you going to do? Obviously, all of your money is tied up into this asset for the most part. You might own a couple houses.

Speaker 2 You might own a couple of cars of depreciating assets. You might have some in the stock market, maybe some bonds or whatnot.

Speaker 2 But ultimately, I tell everybody, I would never get involved with a business as I have a five-year plan or less.

Speaker 2 And three years is where I like to live.

Speaker 3 Yeah, I got to tell you, too.

Speaker 1 So I think you're touching on it as well. It's like most entrepreneurs see that exit as a one-and-done event.
I'm going to sell my company right off into the sunset with a wheelbarrow full of gold.

Speaker 1 And I tell people, I see that first exit, it's the first rest stop on the wealth creation highway. It doesn't have to be the end of your journey.

Speaker 1 I would come in, you know, and scoop up where you think it's time to leave and be done.

Speaker 1 And then I'm going to carry it forward, you know, three or four more ownership periods and growing it exponentially.

Speaker 1 And I tell people, you know, if I give you a wheelbarrow full of gold, the first thing you have to do is figure out what the hell to do with it.

Speaker 1 Why not keep invested in the company that you know, get the diversification to protect your family against an uncertain economy but roll over something significant that yields a lot what age at what age would you say would be where you're not thinking much about rollover so i i would say when you're young in your 20s 30s 40s you know you're you're you're aggressive you're still but as you get into your 40s and you're getting up into your higher 40s and and and into your 50s it's like you know normally that's where the rule of 130 is going to is going to add up over 130.

Speaker 1 is like it's time to diversify assets but i also think about it in terms of revenue size, Tommy.

Speaker 1 So if I've gotten a home service business to 4 million of EBITDA and I can sell it for 30, you know, eight times 32, call it 30 to 40 million.

Speaker 1 And if I can get to 10, 12 million of EBITDA and I can sell that thing for now, call it 120 to 150 million. I want to lock in some of that profit.

Speaker 1 I think of it like a stop loss when I'm buying or investing in stock.

Speaker 1 It's like when you got an asset that's worth 150 million and you're only worth 7 million, 8 million outside of that asset, you're imbalanced.

Speaker 1 And so if I can do, if I get to 30 years old and I got an asset that's worth 100 million plus, it's time to ring the bell,

Speaker 1 ring the bell, put 70% in the bank,

Speaker 2 so if you were 60, 62, you're 59, if you were 62 and you had a $10 million EBITDA company, would you still roll 30%?

Speaker 1 So as I get older, yes.

Speaker 1 So because it's typical five-year hold period right so i'm going to get that money back to you pick your retirement time because here's another trick i'll teach you you know never walk out the door as an entrepreneur let's say you're you're you're two bites in you're you're my age you're 60 you're coming up on the third bite you know instead of leaving there re-up roll over and then leave halfway through the hold period you engineer that with your your sponsor your partner now I'm out of the business, but I still have money invested in it.

Speaker 1 And when they sell it next time, even though I'm not there, I'm going to get that last bite of the apple. And so, like, that's where I'm at with Cool Sys right now.

Speaker 1 You know, I was the investor, you know, I get the bite, I diversify. Now I'm out, but I still got a significant millions of dollars invested there.

Speaker 1 And I'm not there, but when that business sells, you know, I'm going to get that last payday call it. And so, you know, I believe in multiple bites of the apple because I can diversify risk.

Speaker 1 I can invest elsewhere and that gives me good, you know, call it diversification of my net worth.

Speaker 1 But now I can still be aggressive in growing a business and I'm using somebody else's checkbook to fuel the growth. And so I can be aggressive.

Speaker 1 And I can still make, you know, good, sound business decisions.

Speaker 1 And I've got a partner to ride shotgun and help me with, but I'm using their capital and they've got the biggest checkbooks in the world. And so I can deploy an unlimited amount of capital.

Speaker 1 Really, what we're talking about is debt relationships. We don't pay equity for companies.
We leverage debt, you know, but they bring those relationships to the table.

Speaker 1 And so I can get much more aggressive now while I have the protection of asset diversification. So, you know,

Speaker 1 I think of it in terms of size and or age.

Speaker 1 So if there was a second part to the rule of 130, you know, it would be if I got an asset that's worth 100 million plus, you know, I probably should ring the bell rather than take a risk of something bad happening to that company, you know, get the diversification and keep going.

Speaker 1 You know, don't walk away, keep going. When it's finally time to get off the merry-go-round, get off in the middle of the whole period, not at the end of a whole period.

Speaker 1 And then you get one last bite of the apple, even though you're no longer there.

Speaker 2 So with Cole Sis, did you guys reevaluate the company share price every year?

Speaker 1 Every time we bought somebody, usually it's about once a quarter, you know, but they may formally do it once a year. But keep in mind, they've got limited partners.

Speaker 1 And so limited partners have made investments in a fund.

Speaker 1 The fund has to be able to report back to those limited investors, you know, what the current value of that fund is, both realized assets and unrealized assets. You know, that's a part of the game.

Speaker 1 Now, notoriously, PE firms undervalue companies during the hold period, which actually is a benefit to someone who's selling selling a company to a PE firm.

Speaker 2 Yeah, because their equity counts as a higher value.

Speaker 1 Yeah, you know, and so we don't want lawsuits if we're a PE firm.

Speaker 1 And so we're not aggressively overvaluing and then telling an entrepreneur, well, sorry, it wasn't worth as much as when you bought it. We tend to sandbag during a hold period.

Speaker 1 And so we hold the valuations low, but we still have to have some semblance of what fair market value is because we got to report that to limited partners.

Speaker 1 And so people who roll over, classic example,

Speaker 1 the last company I bought before a sale was literally, it closed two weeks before I sold the bigger company. How much do you think they got in two weeks? Well, I'll tell you, they got 20 plus percent.

Speaker 1 You know, not a bad return for a rollover for two weeks. So, you know,

Speaker 1 they tend to sandbag, but the companies are revalued every time you buy a company, especially if there's rollover equity involved.

Speaker 1 We have to establish what is the value of the company in order to know what the value of that rollover stock is.

Speaker 1 And then we typically are doing it quarterly to report to limited partners, you know, at the fund level. For if you're a PE firm, you got to, you got to keep, I'm an LP in several PE firms.

Speaker 1 And so every quarter, I get statements: here's the current value of this fund and your investment. You know, and so they have to be able to report that.
You know, it's a part of compliance.

Speaker 2 Do you have a few more minutes?

Speaker 1 I do, sure.

Speaker 2 So, right now, everybody's calling me: Cowen, every single broker, PE companies, like it's crazy because deal flow is really stagnant. It's like everybody's looking.

Speaker 2 And because month over month is down for a lot of companies, the economy is weird. Interest rates are weird.
Inflation is weird. Most of the sizable companies are just like,

Speaker 1 we're not ready because we're not going to get the multiple we're shooting for.

Speaker 2 And I mean, you go to buy a company in the last minute. Sometimes they like during the hot part of the market, they'd add that you still use that EBITDA.

Speaker 2 But now they're like, no, if it's not perfectly integrated, we're not counting it. And I know a lot of deals that kind of didn't go through in this last year.

Speaker 2 And where do you think, I mean, unemployment's, I think, at 3.2%.

Speaker 2 I mean, inflation is at 3.2%. It's come down from eight.

Speaker 2 We're going into an election year. Interest rates, the Fed said, is going to.

Speaker 2 stay where it is or come down next year a few few times. Where do you predict the market over the next year or two?

Speaker 1 So all my friends on Wall Street, everybody that I talk to, whether they're wealth management people, PE people, Fed, you know, people that I know, it's like everything the market says Fed interest rates will probably come down around half a point to a point in 2024, continue in 2025, barring something unforeseen.

Speaker 1 Interest rates will normalize with a Fed funds rate of around 2.5%.

Speaker 1 So, you're going to have downward pressure on interest rates over the next two years, barring something unforeseen

Speaker 1 that happens.

Speaker 1 I do want to mention that there is one cardinal sin in the world of private equity that a firm and a fund just absolutely cannot, cannot violate. And that sin is do not put money to work.

Speaker 1 So if I've raised a fund, my limited partners have reserved capital, and they're going to send that capital when the capital calls come.

Speaker 1 So the PE firms buying companies are saying, send me money, limited partner. For the first five years of that fund's life, they're asking me to write checks as an investor.

Speaker 1 Then they're returning them to me in the later years of the fund. Here's the problem.
I'm reserving that capital, waiting for them to buy something for me to send them the money.

Speaker 1 If they don't buy anything,

Speaker 1 I've lost the opportunity to invest that money elsewhere, like in the stock market, and get my 8% return over an extended 30-year period.

Speaker 1 You know, I get, I not only don't get my 8%, I get zero, you know, or I get whatever the the money market rate is, maybe 4% or 5% right now. But in the last few years, it was really, really low.

Speaker 1 And so I, you know, if I'm a PE firm and I don't put your money to work as an investor, I'm pissed off. And when you say, I'm going to raise a new fund, Mr.

Speaker 1 Investor, please send me some more money for my new fund. I'm going to say, kiss my ass.
You didn't put my old money to work. I lost out.
I was looking for a double the stock market return.

Speaker 1 I'm looking for 16 to 20%.

Speaker 1 I couldn't get eight in the market because you didn't put my money to work. You know, it's like I'm mad at you.
So I'll tell you what happened early in 23. I call it a game of chicken took place.

Speaker 1 So I've got sellers who had inflated expectations of what multiples they should sell for.

Speaker 1 And I had buyers who were looking at the math and saying, with high interest rates, I can't lever as much debt.

Speaker 1 If I pay you what you think you're worth, I'm going to have to have a 75 plus percent equity check.

Speaker 2 Yep.

Speaker 1 I don't have enough debt leverage. And so I'm going to play chicken and I'm not going to buy nothing.
And so the whole PE world just kind of grinded to a halt for the first six months.

Speaker 1 But by the back half of the year, deal volume started to return somewhat. And at the end of the day, doesn't matter, brother, whether they got to write a 50% equity check or a 90% equity check.

Speaker 1 They got to put the money to work. So what ultimately happens is I'll tell it that founders, you won the battle.
Now, deals, prices have come down some. The crazy terms have come down.

Speaker 1 So it's like we've kind of got back to a more normalized market. But the entrepreneurs who are sellers, they kind of won the deal.

Speaker 1 And so now the money's got to get put to work. And where it ultimately gets moderated is PE firms and their funds are rated by the year they make their first investment.

Speaker 1 They last for 10 years, but the first year they make an investment in a new fund, that's called the vintage year of the fund.

Speaker 1 And so we're going to compare all 2023 funds against each other, and they have the same 10-year economic cycle.

Speaker 1 And so if what really happens is PE firms who are investing at high multiples with high interest rates are going to have moderated lower returns.

Speaker 1 But since they're rated according to their vintage year, it's a level playing field. All people, all funds will have had the same circumstances.
Think of it like wine.

Speaker 1 You know, I could have one venture and in 2015, the grapes were great because the growing conditions were good.

Speaker 1 And then two years later, you know, the same venter is putting out a wine that's not as highly rated because the weather wasn't as good. So the weather is the economy.
The vinter are the PE firms.

Speaker 1 And so, you know, it's like it's all going to come out in a wash 10 years down the road from now. Everyone, you know, will it's, it was the anomaly.
It's what happened.

Speaker 1 It's the same thing that happened during the Great Recession in 08 or 09, or when planes flew into buildings, you know, in 01, or when, you know, a war breaks out somewhere.

Speaker 1 It's like eventually it all moderates. So my prediction for you and your listeners is is that

Speaker 1 PE fund deal flow will start returning. It's already started to return.
I'm expecting at some point the money has to be put to work. Can't violate the cardinal sin.

Speaker 1 Deals and prices are not as crazy as they used to be. That's a fact.
And interest rates, the pressure is going to be negative. We'll normalize at about 2.5%.

Speaker 1 And so barring unforeseen circumstances, I'd say deal flow slowly gets better in 24.

Speaker 1 It improves even more in 25.

Speaker 1 And for those people who had a little bit of extra runway in time, yeah, they ride out the period waiting for lower interest rates so that people can lever more debt and they can sell for that extra half a turn or extra turn.

Speaker 1 But at some point, the fund runs out, the life spans up, the asset has to be sold, the money has to be put to work on the buy side. And so it will not stay a crappy market forever.

Speaker 1 If it does, there's going to be a whole lot of PE firms going out of business, not being able to raise their next fund.

Speaker 2 Well, that's what I've heard recently was there's a lot of arms coming due in these unsophisticated PE companies where they're like literally going to lose everything.

Speaker 2 They're literally, the debt is so high because it's 12, 13% that literally their arms coming due and they're going, we don't have the money to do this.

Speaker 2 We got 7 million of EBITDA or whatever it might be. but they can't afford to keep it because the new interest rates are going to kill them.

Speaker 1 And so, you know, I tell all kinds of PE firms and, you know, and call it smaller family offices, it's like, this is the time to build what I call as an opportunity fund because there are, you know, there are certain assets that were over-levered that don't have the same value.

Speaker 1 And there's going to be some fire sales. You know, there's going to be some great value, you know, that values available for those who have capital and are ready to put it to work.

Speaker 3 I love that.

Speaker 2 Melissa, I want to end with just a little bit more about the book, The Empire Builder. If I'm going to read that book, obviously it's for anybody and everybody in business,

Speaker 2 every walk of life.

Speaker 2 Where do you think the best value, like, I guess I'll find out what rung I'm on on the pyramid, where I'm at, and then the book will actually tell me the next level.

Speaker 1 So,

Speaker 1 I'll tell you, if I look for just the basic lessons of the book, you know, certain things, you know, tenants, if I'm starting something from scratch, I want to focus on a service that's that provides, you know, takes care of needs, not wants.

Speaker 1 Wants are discretionary. During a downturn in an economy, I can forego spending on wants forever, but I can't stop spending on needs.

Speaker 1 You know, so if my roof has got a hole in it and it's raining outside and the water's coming in on my head, you know, no matter what the economy is doing, I got to fix my roof.

Speaker 1 You know, it's a demand-driven. Yeah.
And so, needs, not wants. Then I think about recurrent revenue versus project-based.
In my perfect business, I'm looking for recurring revenue.

Speaker 1 You talked about pest control. I sign a contract.
When I acquire a customer, I don't get a one-and-done project.

Speaker 1 I get an ongoing revenue stream that I'm hitting their credit card every month, first of the month, you know, and I'm only chasing people whose credit cards have expired.

Speaker 1 You know, and most people sign a pest control contract, they forget about it. You know, it's like they come, you know, they come once a quarter, they bill me every month.

Speaker 1 You know, so it's like focus on needs, not wants, Focus on contracted recurrent revenue versus project-based. If you can, if you're a project-based company, try to create a recurrent revenue stream.

Speaker 1 You know, I'm an HVAC company and I sell preventative maintenance contracts. I'll come out once a year in the spring, before the air conditioning season.
I'll come out in the fall, before winter.

Speaker 1 You know, I'll tune up your system. You'll get a discount if there's anything broken or wrong.
You know, it's like, I got to create recurrent revenue if I want to hold the maximum value.

Speaker 1 Most, you know, a lot of entrepreneurs, Tommy, talk to me about, hey, Adam, look, I'll figure out how to get profitable when I get bigger. You know, and I need more, more stuff and I'll figure it out.

Speaker 1 And I'm like, nope, you know, the perfect small business, you know, the perfect business works small, you know, and it's profitable small.

Speaker 1 So I teach entrepreneurs about what I call the 30, 20, 10 rule. I got to have at least 30% gross profit at the operating level.
I need my SGNA to be below, you know, 20%.

Speaker 1 I need a minimum of 10% net profit at the bottom. And if I don't have the company right, you know, in passing the 30-20-10 rule, don't scale.

Speaker 1 Go back to if I'm low on gross profit, I got to work price. I got to work my operating cost.

Speaker 1 If I'm at 30% gross profit, but I'm under 10% net profit, my SGA is too high. I got to work on my customer acquisition costs.
I got to work on lowering my back office costs.

Speaker 1 Once I get it passing the 30-2010 rule, now I'm scalable. And so then I teach people how to make the mathematical, simple formula for getting to a million of revenue and 10 million of revenue.

Speaker 1 Why those two levels? Because only 7% of entrepreneurs get there and only 4% of those get to 10 million.

Speaker 1 And then I start teaching them what are the tools to scale from 10 million to 100 million and 100 million to a billion. And how do you as an entrepreneur change your mindset and your gears?

Speaker 1 at these different size points and how should your behavior change because the 58 companies that I bought, entrepreneurs were all around 20 to 30 million in size, and they kind of tapped out.

Speaker 1 It's like, I don't got any more bandwidth. The magic that got me successful only worked to about this size.
Now I got no more bandwidth. I can't get any bigger.
I'm stuck.

Speaker 1 And I got to teach them how to shift. entrepreneurial gears and go from being the first chair chair player of every section of the orchestra to learning how to be a conductor.

Speaker 1 Instead of managing minutiae, manage process, learn how to hire good people, learn how to articulate a vision, empower them, put the KPIs in place that will drive

Speaker 1 the behavior.

Speaker 1 MA starts becoming a tool. Now I've got my first two exit points are coming up.
As I roll through 30 million

Speaker 1 of revenue at about a 15% margin, I'm at that 4 million magical mark where I could take my first exit if I want to. And I would sell it for between 30 and 40 million.

Speaker 1 But if I keep on going, I get up to about 60, 70 million of revenue. Now I'm crossing the $10 million EBITDA threshold.
Now I got something that's worth 100 to 150 million.

Speaker 1 And I'm telling entrepreneurs, take the first bite right there. Diversify asset, bring in PE.

Speaker 1 Now I teach you about MA and how to really accelerate the growth from, you know, call it that 60, 70 million in revenue. up over the 100 million and on your way to a billion.

Speaker 1 And then what are the behaviors? You know, I can build a $10 million business in one local market if I'm a service business.

Speaker 1 But if I'm going to go to 100 million, I need multiple markets. And so, how do I do that? So, I really try to put together in what is a five-hour read

Speaker 1 the basic DNA.

Speaker 1 This is the workbook.

Speaker 1 You're going to get to a billion dollars, but let's focus on all these different stages and how your behaviors change. And if we can do that, then

Speaker 1 your odds of success are are just exponentially higher as an entrepreneur.

Speaker 2 These are the workbooks you told me to read

Speaker 1 back in the day.

Speaker 2 That's been years.

Speaker 2 So

Speaker 2 I love the concept of it.

Speaker 2 It all makes sense. I think the listeners are going to love this because I love the 130 rule, the 30, 20, 10 rule.

Speaker 2 I love that

Speaker 2 when you roll, there's so many opportunities to roll.

Speaker 2 It's like, and I love building like a pivot table to just show them because one thing I never thought about was the growth return and actually adding that on the money, the 70 cents you took out of each dollar.

Speaker 1 Yeah.

Speaker 2 And you add that up. That's got to be a line item on the

Speaker 1 sales sheet. Yep.
And that plus the roll, plus the second bite being bigger than the first bite. You know, it's like all of that in totality.

Speaker 1 exceeds the value of staying alone, being your own, you know, call it master of the universe at your growth rate.

Speaker 1 You're missing out on all that arbitrage from all the companies that are being bought, you know, in that buy and build adventure.

Speaker 1 And that's kind of the formula that I use, Tommy, to convince entrepreneurs that it was actually in their best interest to sell and join me rather than stay independent.

Speaker 2 I think that's phenomenal. I learned a lot on this podcast.
I love when we do this.

Speaker 1 We need to do this. I got to write more books or we just got to like get together once in a while.

Speaker 2 Hey, i'd rather visit dallas than anywhere in california personally

Speaker 1 well i'm here brother i'm 15 minutes from dfw come visit me i'll take you i'll take you to dinner here at my country club i love that you golf uh not very well but i but i but i live in one of the most exclusive golf clubs in in texas

Speaker 2 So if they want to, if we want to get your book, where's the best place to go? Obviously, probably Amazon.

Speaker 1 Yeah, Amazon's easiest. It's available in any format, Kindle, softcover, hardcover, audible, you know, Adam Coffee, you know, you'll find all my books and Empire Builder's the name.

Speaker 1 And again, I donate my royalties to charity. This was never about money for me.
This was about helping you, you know, the entrepreneur, be more successful. And that's it, brother.

Speaker 1 So I'll let you close this out.

Speaker 2 Just one, we talked about a lot of stuff. I've got notes and notes and notes.
It's crazy the stats you threw out there. Just crazy thinking about it.
But

Speaker 2 maybe there's something we didn't hit on that I'll just let you take the floor and close us out.

Speaker 3 Well, you know, in life, there are dreamers and there are doers.

Speaker 1 You know, there are people out there who think about building an empire. You know, maybe they're stuck in the Fortune 500 world.

Speaker 1 They're listening to your podcast and they're thinking, God, I'm so comfortable. Do I really want to start over? Do I really want to get into something new?

Speaker 1 Maybe I'm a small business owner and I'm struggling. I'm struggling to make it.

Speaker 1 I don't understand unit level economics. We didn't get into that, but I talk about how to perfect a perfect small business.

Speaker 1 Recently, a billionaire asked me to come run a household name company that everybody in the country knows. And I thought about doing it because the exit's probably public.

Speaker 1 And I ultimately turned it down. But he was trying to fix World Hunger.
And I'm like, how do you fix a 6,000 truck service company? You don't. You fix one truck at a time.

Speaker 1 And if I can fix one truck roll, one service incident, you know, and if I can get that working, I can replicate that across 6,000. I don't need to fix World Hunger.

Speaker 1 I just need to fix one truck, one service call. You know, that's how you attack this problem.
And so I would tell people,

Speaker 1 don't be dreamers. Get off your duffs and be doers.
You know, the majority of wealth in this country is created through small business owners that build an empire and monetize it along the way.

Speaker 1 So you're never going to make yourself wealthy working for somebody else. Get out there, be an entrepreneur.

Speaker 1 I'm seeing a resurgence in just general entrepreneurism, you know, in the country, which I think is great. And I'm trying to help people be successful.
So, so be a doer, not a dreamer.

Speaker 1 You get knocked down, you get back up, you try again, and have faith. You know, you can be successful.

Speaker 1 I've met a lot of billionaires in my life, and there's one thing, you know, when I get in front of them, I think about is essentially I go, huh? You know, it's like, really?

Speaker 1 You know, there's nothing special there. There's no difference between Tommy, you and I, and a dude in a truck.

Speaker 1 You know, because we used to be the dudes in the truck, you know, and so it's like in this country, still,

Speaker 1 you can be a guy in a truck, truck. You can build an empire.
So get off your duffs and get out there and do it in 2024.

Speaker 2 Yeah, how do you beat an elephant one bite at a time? I agree. I think, Adam, I will say that what I tried to create here, day one, was that entrepreneurial spirit.

Speaker 2 They could come run their own business under our wing and they could get equity in the company as a technician, as an installer.

Speaker 2 And hopefully that changes their life because there's going to be a lot of turns and the turns only become bigger and that money becomes more.

Speaker 1 You know, every company gives 10 or 15 percent equity units equity incentive profit units whatever you want to call them so why not share that with with the front line other guys out there doing the hard work absolutely and you know you mentioned like some of the big pe firms kkr apollo some of those yeah i think it was kkr recently you know that they started a model where they were giving equity to every employee in the company you know so the equity pools were going to everybody you know and it's like boy in today's generation you know the hardest thing for us to do as employers is to find workers and you know that they they want to know what we believe and they want to be a part of something.

Speaker 1 It doesn't have to be sexy, garage doors, HVAC, that's not sexy, but they want to know what we believe and they want to be a part of something special.

Speaker 1 And they want to have, you know, call it participation. And so I think companies with strong cultures do really, really well in today's world.

Speaker 1 And if you're a great company, you're a magnet that attracts talent. you don't have to worry about finding people people come looking for you so

Speaker 2 my top thing this year is talent to be able to find more talent. Adam, thank you so much for doing this, brother.
I know we went over. This was amazing.

Speaker 1 That's okay, Tommy. Anytime, brother.
Happy, you know, good, happy for your success. Glad to see you.

Speaker 2 You too, buddy.

Speaker 1 All right. Take care now.

Speaker 2 Hey there, thanks for tuning into the podcast today. Before I let you go, I want to let everybody know that Elevate is out and ready to buy.

Speaker 2 I can share with you how I attracted a winning team of over 700 employees in over 20 states. The insights in this book are powerful and can be applied to any business or organization.

Speaker 2 It's a real game changer for anyone looking to build and develop a high-performing team like over here at A1 Garage Door Service.

Speaker 2 So if you want to learn the secrets to help me transfer my team from stealing the toilet paper to a group of 700 plus employees rowing in the same direction, head over to elevateandwin.com forward slash podcast and grab a copy of the book.

Speaker 2 Thanks again for listening and we'll catch up with you next time on the podcast.