I’m Investing $100M and Buying 12 Companies in 2024 (here’s how I’ll do it)

Welcome to the Growth Stacking Podcast. This is Dan Martell. We're investing $100 million in 2024. And this is the exact strategy on how we'll buy 12 companies in 12 months. I'm literally bringing you behind the scenes, showing you the internal documents, the scorecard we use to evaluate businesses, the structure of how we put together an offer, what we do in the first hundred days after we buy a company. So that if you invest in companies, buy companies, you'll be able to follow our playbook to get incredible results. I've done this many, many other times. I've never shared this before. Here's the process we'll be using. Number one is vehicle. To get the vehicle right, we need to understand the four investing vehicles. The first one is angel investing. This means that you have a lot of money and you invest in companies to buy equity in those businesses. I've done over 125 angel investments myself. I really love this process because I get to coach and advise great entrepreneurs building innovation. But for what I'm doing with a hundred million dollars in capital, this process is going way too long. The other option that I evaluated is private equity. Private equity is buying companies, usually with a roll up strategy so that you buy a company and create a platform around it. Meaning that if it's a real estate software company, I buy one of them and then I might buy five or six or seven, bolt on. And that aggregated amount of companies is worth more than I sell it to the next person. The third option I evaluate is venture capital. Venture capital works in the concept like an angel investor, where you pull investors money, typically limited partners or LPs. And then you have a fund and you find companies that you want to write bigger checks to. The cool part about being a venture capitalist is you get 2%, typically management fees for just managing the capital. Like whether you get a return or not, you get 2% of the total fund size. So if it's a hundred million dollars, you get $2 million just to manage that pool of capital to invest in other companies. Now if you don't do well, no other investor is going to give you more money to invest in more companies. So each fund has to perform okay. I've already invested personally as a limited partner in about five other venture capital funds. The fourth option is holding company. And a holding company is essentially the opportunity to raise a bunch of capital and buy companies outright without a thesis, without a structure. So it gives you a lot more flexibility. So these are the four options that we evaluated and for us, angel investing just felt too small and too slow. Private equity had too many constraints around the timing and the sequencing and the, the structure of the deals of the companies we wanted to buy. Venture capital felt like a long time horizon. Typically These funds are seven to 10 years and you're on this continuous fundraising cycle. So we decided to go with a Holdco because it gives us a lot more freedom. There's no specific timeline, it allows us to recycle the capital. And a Holdco is the vehicle that we're using to invest $100 million in the next year. Number two is alignment. This is the Al creator. I use these three specific boxes to ensure that every time I decide to make an investment, I don't waste my money. The first thing is the market. I remember back in the day, I had a mentor of mine actually present me an investment, an opportunity to invest in a dating site. Now at the time, I was already engaged. I wasn't looking at doing any investments. I had my company that was growing and I should have stayed focused on what I was doing because honestly, I didn't know anything about dating, nor did I understand anything about investing or to have time to even look at the investment. But I trusted my mentor and I this company, in the next nine months, not only did they burn through all the capital, I eventually lost my whole investment. And that's when I realized for me, these three things are required for me to say yes to move forward, because if not, it's just not a good fit. I look for companies that are in industries that are boring. Why? Because I don't want to invest in a fast growing, super disruptive market. That might mean that my company that I buy becomes obsolete in 18 months because some new Y Combinator funded AI innovative business all of a sudden disrupts the whole thing I'm in. So it sounds crazy, but when I buy companies, I want durable businesses that have deep integrations in the markets they're in that other people find impressive because of the market share they've gotten. But they're not necessarily easily disrupted because it's hard for a customer to leave to another solution. Number two is trust. I'm always asking myself, do I trust the people involved in this business? Do I look at them in the eyes and go, this is somebody that has, you know, ethics and character. I always do background checks. I'm always asking. I'm talking to their team, I'm talking to their customers, I'm talking to. They have investors. I want to know how do they act when Times get tough because that's going to tell me how they're going to act as we move forward in this opportunity for us to partner and collaborate together. So trust is a big one, and number three is value. Do I feel like I can add value to the business? If I buy a company, I'm looking for one to three things where I feel they're unoptimized, where I know better than anybody else. It's why I only buy software companies, because I want to look at a company and see clearly where are the options for me to add value with my background expertise so I can take the revenue and the growth so far and really amp it up. So if I don't feel like I can add value, I don't do the deal. So these are the three filters. The market. Do I trust the team and can I create value? That needs to be true for me to decide to move to the next step. Number three is pipeline. We need to look at some deals. This is called the pipeline calculator. See, it doesn't matter if you want to buy one company or 10 companies or 12 companies like me. You need to understand what are the activities that you start with that eventually over time, go smaller and smaller so that you finally end up with your number. Then we usually have to look at 900 companies as prospects. These are conversations, initial conversations. They get whittled down into 300 snapshots that the team puts together. So we evaluate each one through the same lens. And of Those, maybe only 100 offers ever get made to those companies. And just because, you know, there's so many different emotions going on in details, and once we look under the hood, we may only eventually end up with 10 companies. So what I want to walk you through is the three areas. When we're looking at pipeline, that needs to be true for us to hit our numbers at the end of the year. The first one is prospects. These are the companies that are in market that are looking to sell. Now, there could be three thousands of these different opportunities. What I'm always looking for is the quality of the deal and make sure that I have enough of them so that I hit my final number. I'm going to share with you how I do that in a second. The second area is snapshot. Once I have the prospects, I've talked to them, then I want to put together a snapshot of what the deal looks like. This is actually right here what a snapshot deal looks like when we're evaluating a company to purchase. These are the metrics These are the source of the deal, the reason for buying it. Do all of the numbers add up? I mean there's a thousand reasons why people sell their companies and the price is just one. So we look at all the different data points to make sure that we have alignment and what we're looking for. The third is the offer. Once we find companies that we like in the snapshot, then we put together an offer that talks about the structure so that everybody understands what the deal is going to look like. Now there's two other steps to get a great deal done. And this is the letter of intent creator framework. See the end of the day everybody wants one thing, they want a signed deal. Now for us to do that, we need to make sure that there's certain areas covered in this L O I letter of intent. Because I've done deals in the past where it wasn't clear that there was expectations that maybe the seller was going to hold back some capital and help finance the deal or maybe that the terms of the deal should have been structured a certain way. So there was an asset sale, they thought it was going to be an equity sale. But regardless, we want to go through this process, put everything down on a simple English speaking letter of intent so that everybody understands it, so it gets everybody comfortable with moving forward. So there's three key areas that make a great letter of intent. First one is a summary. And this is usually the upper part of the document that talks about, you know, the overview of the deal. Is this going to be an asset or an equity sale? How much money is going to be paid for the company and how is it going to get financed? It's just high level summary of the deal. The next one is the deal structure because there could be different components. If they have investors or partners or they want to stay in the deal, some of them want to own equity in the new entity after you purchase it. So this is everything from the timing of things, things to the non compete agreement. It's all aspects of the deal structure. The final one is next steps. Once we've got agreement on that, we need to let people know what is the agenda, what's the timeline of putting this deal together, what are the meetings that are going to happen, what are the different steps, how's the due diligence checklist and the timeline. All this comes together with next steps. If we have a clear summary the deal structure in the next steps, then we have a very simple loi that gets the deal moving forward. Here's an example of an loi template that I use with one of my investment partners to do 42 deals. Just check this out. Out. This is the due diligence checklist and it's all about getting the offer done. See, there's four key areas that if you don't follow, the whole thing will fall apart. I learned this the hard way when I bought one of my first companies. We were looking through the agreements that all the different employees had signed and we realized there was missing a clause called the IP assignment agreement. And that means that there were people working on the code base of the software that technically the company didn't own the intellectual property of the code. All these contractors and employees, they owned their portion of the code, they contributed. And without that IP assignment re signed by every contractor that ever touched the code over the last seven years, the deal couldn't get done. So there's four areas we have to look at to make sure that we cover in due diligence to actually get to the next step. The first one is financials. And unfortunately, this is one where most companies looking to sell, they don't have their numbers put together in place. This sometimes comes together when we're doing a data room or if they're lucky enough to have a great CPA that's working with the business to put together all the different financial models so that a buyer like me buying the company can easily run the numbers, test different assumptions and ensure I have clarity around how the business is functioning today. Number two is the technology. When I buy a software company, one of the biggest risk is technical debt. If the product was not built properly with the right technology in a modern framework, then what I end up buying is a rat's nest of code that the whole thing is buggy and could just fall apart the next day after I buy the company. The third area is the team. I want to look current structure of the team, how the compensation model is set up. Some people outsource all their development to different parts of the world and there's no cohesion on the team and there's no leaders. There might be a lot of people doing stuff, but nobody owns anything. If I buy the company and there's nobody that knows how the whole thing works, then I might get myself in trouble. And then the fourth one is legal. Making sure that every contract is signed, all the customer contracts, all the vendors. Like I said, the IP assignment agreements with team members and subcontractors. Every legal document that's ever been produced needs to be reviewed, ensure there's no clauses that might Cause us issues downstream. The fifth step is build. And this is my favorite step. Once we've got the letter of intent signed, we do the due diligence now we take the company and we build. And this is probably the most important because we got to get it to produce. This is the first hundred days. When I buy a company, the first hundred days is where we try to increase the value of the business as fast as possible. I remember one of my clients, he was buying a business and he hadn't mapped out any of the first hundred days. So post acquisition, the new company and the old team comes over on board on their team and they're like, what do you want us to do? The challenge with that is that if you have a bunch of people that don't know what to do and they're leaderless and you don't have a plan for the first hundred days, then unfortunately the numbers can start to slide downwards. And if you've gone out of your way to buy this massive company, you finance a deal and you're paying every month, then it doesn't take a long time for the whole thing to get upside down really quick. When you buy that company, you want a plan to execute to get the revenue and the production and the value as high as possible. So everybody wants R O I return on investment. At the center of the first hundred days model, we want to focus on generating as much value, profit, revenue as possible. To do that right, we got to focus on these three things. First off is the people. We look at the team. We got to understand who's doing what, what is the talent we're dealing with right now. So we might want to evaluate and get everybody to do profile, assess. Then we're going to focus on the meeting rhythms for strategy and execution and make sure that everybody's got a scorecard that they understand what's the one number that they're individually responsible for to move forward. Second is pricing. Probably one of the most important things you can do in your business. You know, there's this old saying that says if somebody knows your industry bought your business tomorrow, what's the first thing they would change? And then the follow up question to that is, why haven't you made that decision yet? And for most companies, once they get bought, the first thing they're going to change is the pricing. Because most people haven't updated their pricing in years. And the truth is the whole world and your product has changed. So we always look at opportunities to increase the expansion revenue, which means the ability to sell More things our existing customers. We want to look at our free cash flow to ensure that our pricing supports the ability to acquire more customers. And also what is the retention look like of our existing customers? Because if we're losing a bunch of customers out the back door as we put them in, then it doesn't allow us to stack revenue as fast as possible. So those areas will get us the biggest ROI more than anything else we could do in the business. And the third one is pipeline. Pipeline is overall production of the revenue. What is our current volume for lead generation? Are we scoring those leads so we can be more efficient in our activities? And how are those conversions of those leads into opportunities, into customers looking today? We want to map that out in our CRM typically so that we can really focus on increasing what's called our sales velocity to convert leads into dollars. Now if we do those things, then we get these three primary outcomes. Number one is we increase our margins. The higher the margins of the business, the more we have to invest in the business. The second is consistency. What I love about software is that it creates repeatable, predictable, what I like to call durable revenue consistency. And the final area of value we get is expansion. We have expansions on all levels. We get expansion on the revenue side and we get expansion on the sales velocity side. When we focus on these three areas, that's how we maximize the ROI in the companies that we buy to make sure that we're building with the right focus. So that's how we'll be investing $100 million in 2024. And if you want to learn the four CEO skills to get to 10 million a year, click the link and I'll see you on the other side. If you like this week's episode, be sure to visit itunes, leave a review that'll help us get in front of other founders just like you. And if you're looking for more resources and video trainings, be sure to check out Dan Martell. Two L's to Martell.com to subscribe. Keep up the hustle, keep stacking your growth and I'll see you in next Monday's episode. Peace. Grow Peace. Bye bye.