What I've Learned From Private Equity Groups

Hey fastlaners. Ryan Daniel Moran here and in this episode I am going to talk to you about what I have learned from working with private equity groups, which up until just over a year ago was kind of a scary, mysterious word to me, a mysterious phrase. To me, the idea of working with private equity sounded super bigwig and super 1%. Yes. Which is the owner of capitalism.com, i am totally okay with and totally cool with. But it was a bit of a mysterious phrase that didn't quite understand. Now that I have worked with several private equity groups and also done some private equity deals myself, while also advising some private equity groups as a result of who I've met from selling one of my businesses, I wanted to come back and share with you what I've learned while working with them because it will directly impact how you run your business and how you think about your business. So I'm going to share a few things that I've learned, but most importantly, you're going to be able to use some of these insights in your existing business to help you grow faster, make more money, and sell a company someday for more money than you otherwise would. So first things first. I come from the context of being a scrappy entrepreneur. That's my background, right? Like I got in this game because I wanted to make money. Like I want to make money moves. So I wanted a better life, I wanted freedom. And then my goal later became to own the Cleveland Indians. When I was in my late teens, early 20s, you know, I started to see some success. I started to think like an entrepreneur. That was when I said, okay, I want to go all in on this and I want to buy the Cleveland Indians. And story behind that is a story for another day. But I've always wanted to be the guy who made trades for a major league baseball team. And I realized since I went to school to be a pastor, I probably wasn't going to get that job. So if you, if I wanted that job, I was gonna have to buy a team and give myself the job. And my favorite team is the Cleveland Indians. So my background again is in scrappy entrepreneurship. I got into this game cause I was going to school to be a pastor. I wanted to make money on the Internet because nobody else is gonna provide for me. I wanted to be investing in things like real estate and the stock market. And entrepreneurship was in my blood. As soon as I discovered that I had a knack for, for generating my own profits. And then I started to think a lot bigger years down the line when I realized that I didn't have a real business if I wasn't building something that I couldn't sell. That was a lot of negatives. So let me try to say that in a positive, you don't have a real business if you can't sell the business, if somebody else doesn't want the business, then you're always going to be stuck in your business. Now, full disclosure, like, I can't leave capitalism.com as it is. I can't leave the Ryan Daniel Moran Show, Freedom Fast Lane. I can't give up my podcast as it is right now because I am the brand, I am the business. So a few years ago I started what I called real businesses, physical products businesses. And I documented the journey of going from nothing and no experience to getting to that first million, all the way to 10 million and then selling the business for an eight figure payday to, to a private equity group. And that's from my experience. That's where my mind started to really be expanded as to how I could own the Cleveland Indians. And since that time I have networked with a handful of.

What does somebody who's worth a hundred million dollars called Deca millionaire would be? 10 million. What's a hundred? Let's call them a hundo millionaire. Hundo millionaires and billionaires who are involved in private equity, who are investors. And I want to share the model with you that I have learned because we've started to implement some of these things into our backroom mastermind, into some of my one on one consulting clients and in the businesses that I'm starting and that I'm investing in right now. It has completely changed my brain in terms of how I operate business. So first I want to go through the model, the private equity model as I have come to understand it. Now, full disclosure, every private equity group is going to have a little bit of a different model. They're going to have a variety of different things that they invest in. They're going to have a variety of different types of businesses that their expertise falls into. And they're going to have different structures in which they put together each deal. But what I have seen be common among multiple different private equity groups looks something like this. The private equity group is a business and usually a fairly small one, a handful of people, it's usually three to six people. And their job essentially is to evaluate deal flow and to invest in the entrepreneur that is behind that business. And it kind of looks like this. They're looking at deals that fall within their sweet spot. So I have a connection to a private equity group in New York City that only works with beauty brands. And the reason for that is because all their holdings are in beauty. So it would be a mistake for them to go out and buy a business in the pet space, right? So they're specializing in one specific vertical. In this case, it's beauty, because they have those systems, processes, contacts, and the ability to grow those businesses within that vertical, within that space. So they're buying specific companies looking for deal flow in specific verticals, and they have a set of criteria. That is their sweet spot. So the company that I sold my last business to, their sweet spot was small businesses doing over $2 million a year in profit, but under $10 million a year in profit. So we were in their sweet spot because we were about a $10 million a year company. And then the group in New York City that I have been chatting with for fun and entertainment, and we've been sharing ideas together, exploring ways to work together, is their specialty is in beauty brands, between three and five million dollars in revenue. So smaller, newer businesses and both of those private equity groups, even though they're in completely separate spaces, run similar models for growing their investment. And it looks like raising money from private investors and from debt financing, like banks and institutional money. And they are using that outside money to invest into growing that business. So they'll acquire the business, invest in the business by putting a more professional team in place, which might look like hiring a CEO, hiring a cfo, hiring marketers, hiring retail brokers, hiring people that are dedicated to the business in order to, quote, professionalize it. Now, the interesting thing that I learned from seeing this process play out, and I've now worked with four or five different private equity groups that all kind of have similar theses, which is you acquire the business and you invest in the people who will grow the business, and you stay out of their way. Which is really. Which was. Which seems so simple. But it was a big braingasm for me at the time. And the reason why it had such an impact on me is because I had been operating my business is within, you know, being on the. Being in the business. Even when I thought I was working on the business, I now realized that I was working in the business. I was thinking about profit and loss statements, and I was thinking about every little detail. And there's something healthy about that. But it also prevented me from building the type of business that I could have. And these private equity groups have told me that's common among entrepreneurs who are. Who are founders who are starting from scratch. They reach a certain level, they get to a peak where they can no longer do it on their own. And it requires outside capital to go out and get that expensive executive talent that is going to grow that business. One of my colleagues and mentors, Perry Belcher, will say, the worst type of businesses that you can have are $5 million a year businesses, because at $5 million, in order to grow, you need professional executive help. You can't afford it because you're just making enough to keep the business going and to probably be paying yourself. And in order to get to 10 and up, you need expensive help. And so what equity groups will often do is they serve as that capital to come in and help grow that business from 5 million or from 10 million up until 20, 30 million. Now, I always understood that the model of most private equity groups was to invest in these businesses, to raise their sales, to bring up the network, to bring up the professionalism of the business, and then to sell it for much more in a few years time. And that, you know, that sounds really cool, sounds like a reasonable model. What I didn't understand and what was so interesting to me was that a lot of these equity groups don't have any of their own risk in the game. Now, some of them do. And in fact, multiple equity groups that I've worked with have some skin in the game, meaning their own money, money out of their pockets that they're putting into the business. But by and large, they are acquiring businesses with very little of their own money. They'll raise a fund or do a private syndication with their network of people that are investing into a company and they have private debt, like bank debt. So you've got these two forms of investment. You've got the majority being funded by a bank and you've got the rest being funded by private investors. And the equity group is keeping a sliver of it in between. So their only job is to create the relationships to really incubate these businesses. Now, what that taught me was that there was a different level of playing that I had not been thinking about this whole time. I had been thinking that I either had to a build a business from scratch and hustle my way to a billion dollars so I could buy the Cleveland Indians, or two, I would have to hustle my way to giving a lot of cash so that I could buy a business with my own money and improve it and sell it again so I could buy my Cleveland Indians. After working with multiple groups, what I realized is that there might be a more fast lane approach to do this. And that means managing the relationships. It means going and being in front of the investors who want to buy companies and it means being in front of the deal flow and it means connecting with the sources of institutional debt. And it just so happens that because of what I share on capitalism.com and here on the podcast and on the YouTube channel, and because of all the physical product owners that I teach and having had an impact in several hundred million dollar businesses, I'm in that position right now. I have all of those connections. I said at our last backroom Mastermind meeting, I said, I feel like something is baking here and there's like a private equity group being baked here in the group and I don't know what it looks like yet. And everything in me wants to force it because I can now see a little bit into the future. I can now see the potential and the value that exists because there's all this deal flow with entrepreneurs running multimillion dollar businesses outside capital that wants to fund these businesses and that there's opportunity, like hundred million dollar opportunity. That was much closer than I thought and that was a really exciting feeling. So the second thing that I learned from working with private equity groups was that there was this other level that was right in front of us as entrepreneurs that I hadn't seen because I had been stuck in my existing thought process. Now that leads me to the next thing that I learned, which is what you're building as an entrepreneur is way, way bigger than you realize. There's a quote from a friend of mine, Oren Cloth, he wrote the book Pitch Anything. He says that money can't do shit without you. Money can't do anything without your involvement. Money needs you, money chases you. And here's what, here's how that applies to this. If you, if you think about a private equity group that bought my business, wrote me a fact check and allowed me to invest in things like dividend paying stock and real estate syndications and a bunch of income producing websites and all the things that I invested the cash in so that I never have to work again. There's a private equity group here that bought my business, but over on this side there was a bank and there were private investors who funded that deal for the private equity group. These people, the investors, the banks want their rate of return and they're in the business of getting a rate of return. The equity group is in the business of finding entrepreneurs like you so that they can buy the business, grow it and flip it which means that all of this money, these tens of millions of dollars, need you to grow profitable businesses. You're the engine behind all of it. You're actually the source of the growth. You are the one producing sales, you are the one producing profit. And thus you are the thing that money chases. What a cool and freeing thought when you look at it that way. Because ultimately you are building the source for a much bigger piece of.

Now, since I bring that up, it's probably important here for me to talk about how a lot of these deals are structured, because this is going to see how what you are doing is much bigger than you might realize at this point. Because in most cases, the buyer, the equity group, will buy a majority stake, a controlling stake in your business. And this was the case with me. So we got a. You know, I got. I took some money off the table.

I sold a piece of the business, but I'm still an owner in the business. I still advise the team, I still work with the team, but I exited most of the operations, took my money, invested the money, and I'm still a minority owner in the business while it is being grown. So that pie is going to get bigger for everyone. It's going to produce a return for the investors who funded the deal. It's going to produce a return for the equity group who put the deal together and is bringing on the advisory board to help that business grow. It's going to produce a return for me because over the next several years, that business is growing without me being in the thick of growing that business. And it allows me to do things like share this so that more opportunities come out of nothing. The following that we've built here, and hopefully businesses that I will invest in because I have become convinced that this is my best opportunity to create the type of wealth that will be needed for me to achieve the goal of buying a major league baseball team and being as great an entrepreneur as I could possibly be. I've made enough money from my businesses to be able to just invest it and peace out. But if I want to be great, if I want to own a major league franchise, I think this is the model that will get me there. And so where I am in my career after learning some of this stuff is I'm realizing what assets are in front of us. Whether you are a physical product seller or you have software service or you run an agency, you're producing profit and cash flow and you have systems and processes that are valuable to a potential acquirer. And if someone wants to acquire You. There are people who want to fund it. So you're at the. You're at the bottom floor of all of this money and all of this movement. So what you are doing is way bigger than you realize. And I'm realizing that my biggest opportunity is to be on the ground floor of. Of helping facilitate all of this growth. And I think that that will take shape in the form of some sort of a private equity group that either invests in businesses or advises these businesses. And where I am in my career is I'm outlining what are those steps, what are those moves? And everything in me wants to force it. Everything in me wants to figure it out, go in my head, duplicate the model. But I'm not ready yet. I am not ready for that challenge until I learn a few more things yet. I have not earned the right to put together a private equity group on my own. So I'm courting partners, I'm courting mentors in this space I'm building. You know, I'm starting to outline what would be a completely new business. And I have done some acquisitions. My business partner Clement, and I have acquired a couple of businesses where we did raise some money. It was, you could call them almost practice runs of bigger acquisitions where we're figuring out our systems and we're open to making mistakes, and we're producing a return and we're learning the game so that we can play a bigger game when we're ready. And so some of this is already taking place. And I know that I'm going to, as Gary Vaynerchuk would call it, eat shit for a few years in order to figure out the process, in order to deploy all those resources and have a big payout that gets me a Major League Baseball team. Which leads me to my final point. And my final point is that after going through the private equity model, I now finally realize how Gary Vaynerchuk says he's going to buy the New York Jets. Now, Gary and I have met a few times, but I connected with him most intimately at one of our events, which is called the Capitalism Conference. We had him on stage, and I interviewed him for about an hour and a half. You can see the video. It's on YouTube. It's on this channel. And my conversation with Gary was all about how he plans to buy the New York jets, because my dream is to own the Indians. And then I, you know, see this guy on social media who wants to buy the jets, and I was like, all right, I want to pay attention to how you're going to do that because you're 10 years ahead of me. And we have similar goals. So that's how I discovered him and started following him. But it wasn't until I really started to understand private equity that I understood the model intimately. And I now understand why he has VaynerMedia and he calls it a proxy for going out and acquiring a business, flipping it and buying the jets. And my understanding now is he is basically building the systems and the processes that he will apply to whatever business. Whatever old brand he buys acquires it using a private equity model, uses the systems that have built all of the clients businesses at VaynerMedia. And as a result, he'll be able to raise the valuation of that business and have a big payday that gets him the New York Jets. So he's following a similar model that I've discovered as a result of working with certain private equity groups. I've learned that you can play a much bigger game because you can have a healthy relationship with risk when other people are fronting most of the money. Now, of course, you must be a good steward of the money that you raise, but when people invest in a project and they invest in you, you all put on your big boy pants and you're all in that together. And that's a really interesting thought and mind expansion that I had when I realized I don't have to build all of this from scratch. I can go a lot faster just by finding the right deals, the right people, and the right structure to put all of it together. My mentor Travis, calls it the producer mindset of, rather than being the builder and the doer of everything. Can you be like a Hollywood producer where the Hollywood producer doesn't write the script, they don't act in the play or the play, they don't act in the movie. They're simply bringing all of those pieces together. They get someone to fund it, and then they stand up at the end of the day and they hold up their award. That's the producer mindset. And in business, it's the same thing. If you look at an equity group, they're not the ones starting the business, they're not the ones funding the business, they're not the ones operating the business. They're simply bringing the deals and the structure together, which is really interesting to me because it means that it's duplicable. I always struggle with that word. Duplicatable. Duplicable. You can do it more than once and you can put together a portfolio of businesses that are all in cahoots together, all going towards a similar goal. And that's how these companies are run. I mean, if you look at the companies that I'm fascinated with, like a Procter and Gamble. Procter and Gamble, multibillion dollar company. Also like one of my favorite stocks to buy because of their, their dividend history. They're a private equity group where they buy up businesses, they add in those systems into their existing infrastructure and they become a multi billion dollar company as a result. I'm fascinated by this right now and I wish I had learned this sooner, but I'm 30, so I got time. But this is the focus of where I expect to be going next. I'm in no hurry. I have learning to do. I need to put in some work and some time in order to be, I think, ready for the ideal partners and the ideal opportunities. So I'm learning about this as fast as I can and as much as I can. And my business partner Clement has turned me onto some books about the company, 3G Capital, which is an equity group that follows a really, really interesting structure and a really interesting model that we're starting to follow as we put together some of our plans to take over the world. One final bonus point that I took away from this is sometimes you are just as good as people who are way ahead of you. They're just following a better strategy. And that's what I learned from this. That's what I've really come to learn, is that there are areas of business that I'm way better at than all of the groups that I've been in contact with. But they're following a much smarter strategy, they have much better contacts than me, and as a result, they're in the position of leverage and they're going to be wealthier from the deal than I will be. I'm better at certain areas of the business. I started the business, it was my idea. But they had the contacts, they had the strategy, and ultimately they'll get the big win and I'll get to share in the big win of that bigger pie. You're just as good as the richest people on the planet. Sometimes it's down to who you know, how you execute and the strategy you follow rather than who you are or what your background is, or even what your skill set or your knowledge is. Right now, you're just as good as anybody else. It's a matter of strategy execution. Hope you found this valuable. Let me know. You can zip me a message on Twitter. Ryan Moran or on Instagram ryandaniel Moran would love to hear your thoughts on today's episode. If you know somebody who is struggling to think bigger and is looking for a new model or you're connected in private equity and you know somebody that I would need to meet, please send this video and this podcast to them because this is the next focus of my career. Thanks for watching. I'll chat with you guys on the next episode.