Expert Insights into Building an Empire through Strategic M&A (Part 1)

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LinkedIn and follow M and A Science. I'm your host Kisan Patel, CEO and Founder of M and A Science and today we're kicking off a two part episode on building your M and A Empire with Adam Coffey, founding partner at Chairman Group. The Chairman Group, founded by adam Coffey in 2021, is a business consulting firm specializing in private equity mergers and acquisitions and value creation planning. Adam's a three time CEO of PE backed companies, hovering over 58 acquisitions and over 2 billion in exits. This first episode we're going to break down how to choose the right businesses to buy, focusing on needs based businesses with reoccurring revenue and why fragmented industries are ripe for growth. Don't miss part two next week where we'll dig into structuring deals and maximizing value.

Adam, how you doing today?

I'm doing great man. It's good to see you. It's good to have you here in person in Texas, making it happen live. This is the first podcast I've recorded live in my office suite. So nice to have you here.

Hey, thanks for hosting. Excited to be out here in the area. Great sunny day. Can we kick things off a little bit about your background?

Those who don't know me, I think life is a set of experiences. And if I think back over my life, what brought me here, where I'm at today. I'm a veteran US army military taught me something about discipline, teamwork, leadership, engineering. Made me a meticulous planner. I'm a pilot. Pilots don't take off unless we know where we're going and then we deconstruct the trip. Such a useful skill for later in life. When I was working with PE and you have a five year hold period. So spent 10 years at GE during the Jack Welch era. Tech doesn't exist yet. GE is number one on the Fortune 500 list. Jack is the world's most admired CEO. What a great time to learn how to run a business. Then I spent 21 years building three different national companies for nine different private equity firms. The 58 acquisitions, the two and a half billion in exits and I really got bored. I had been teaching at the university level and wrote my first book, the Private Equity Playbook. And so as I was writing books, teaching, I'm like, yeah, I'm bored just running a company. I want to impact many. So I started the Chairman group, told the world I'm done being a CEO. Time to help multiple companies at a time. So today three different things I do. I work with private equity, work with about a dozen private equity firms. I do operating partner work. I help them evaluate investments, I sit on their boards, I coach and mentor their leadership teams. I also work with founders. I'm working with 71 founder led companies today, 38 of them are in the chairman group which is like a Vistage or a YPO. And the rest are one on one clients. And I'm helping them scale, do M and A and eventually prepare for exit. And then I still teach seminars and write books. I've had four number one bestsellers now and I'm having a blast. I work more hours today than I ever did when I was a CEO. So I can tell you it wasn't about semi retirement. A lot of CEOs who pivot out of the seat. For me it was. I just wanted to do something different. I just turned 60 and decided I'm going to spend the last 10 years of my career hoping as many entrepreneurs succeed as I can.

You got a lot going on. You don't take rests, they don't take breaks.

I work more hours today than I ever did as a CEO. I've got clients all over the globe. At night I'm talking to clients in Australia where it's tomorrow morning. I've got some clients I'm talking to. On weekends I'm working more hours than I've ever worked.

Hey, for a little extra context, those.

CE roles that you had, I met.

You when you're a CEO of Coolsys.

Yeah.

Which is very sizable consolidator in the H vac service industry. How about some of the other roles at ge?

I ran a medical service business. My first role as a CEO was running a PE backed medical service business that competed with ge. I was at GE and then competed with GE that was ultimately sold to Berkshire. I then went to Commercial Laundry because I thought medical wasn't sexy enough. And so I worked for the giant commercial. I built a billion dollar commercial laundry company which was family owned and operated. And so I ran it for five years on behalf of the family office and then I ran it for two different private equity firms. So 13 years in commercial laundry and then I went and did Coolsys five years. Two different PE firms at Coolsys. And so if you look at my whole career, it's guys trucks, broken stuff, guys trucks, building things, guys trucks, fixing things, engineering, light industrial manufacturing. And some of this stuff was home service, industrial service, commercial service. So kind of service businesses has been the majority of my work today. I'm touching like every industry under the planet. It's pretty incredible when I think about all the kinds of companies I'm working with today.

That's good. I picked up on the exits between PE firms which is something we'll have to pick up more on in this conversation. And then you published a book. The first book I got my hands on was the Private Equity Playbook, where you sort of run through private equity model, help anybody in business really understand how that model works and opportunities behind that. And then you went on and you did the exit side of it. How do you think? Through exiting a business.

Yep.

And then more recently you have the Empire Builder, which is, I think an interesting area I'd like to focus our conversation on today. But you didn't stop there. You published another book since then, so I can't keep up with you.

It's funny that you mentioned it. If you think of my books, I think of Star Wars. So Star wars had episode 4, 5, 6, and then 1, 2, 3. And when I think about my books and people ask me all the time, in what order should I read your books? What should I read first? My third book, which is Empire Builder, I think is the one people should read first. It's my favorite. But that's the roadmap. How to find a business, buy a business, or build a business and go from zero to a billion dollars. What's that journey look like at the different stages the Private Equity Playbook is, ooh, you're likely going to sell this company to. The exit strategy, of course, is maximizing the potential at exit. So the order to read them is Empire Builder, let's build it, then let's exit. And in the process of exiting, we better learn about private equity because there's a better than 50% chance that we're going to sell it to a private equity firm. And I recently did a second edition of the Private Equity Playbook. And I did it because the reason I wrote the first book five years ago, it still exists to this day. If I teach a seminar and I have a thousand business owners sitting in a room, and these are people who've heard the term private equity and they're successful, wealthy people. If I give them a basic 10 question quiz on private equity, 90% of the people in the room will fail. You know, they still don't get it. And I thought, boy, that book's five years old. It was number one this morning on Amazon. And so I wanted to do an updated edition, a second version of that with expanded content, updated numbers, because my thinking continues to evolve. The books have been great. Enjoy doing podcasts. I think this is the third time, fourth time, how many times we've been together.

That's the third, I think the third.

Third, first time in person.

So that's Good advocate of your books. I like your books because they're. You can actually understand them. I think some M and A books, they overcomplicate things and you're just make it way more complicated than needs to be.

You know where that comes from. I've held every job a person can hold on an organizational chart. I started my career after the military as a guy in a truck. As my career has evolved, I wasn't a Harvard MBA who started with a gold spoon in my mouth. I clawed and scratched my way up an organizational chart and I out hustled and outworked. Call it those who were born with a silver spoon in their mouth. As I climb the mountain, the basic person hasn't changed. People may think of me as a CEO today, but if you see me on a weekend, it's shorts, T shirt, flip flops, driving a pickup truck. My DNA hasn't changed. And I know the 58 companies that I bought were mostly founded by people with high school educations who maybe they built an H vac company or electrical contracting company or plumbing company. Whatever the case may be good people built great companies, but their level of sophistication and how they think is just different. And that's my background is that world. And so I write in a manner that, that reflects my own simple nature and I think it makes it understandable for the masses. Because you're right. Some PE guys told me once, when we have an incoming associate, this is the book we used to give them before yours. Now we give them the private equity playbook. It was like a 1700 page textbook that frankly I'd be brain dead by the time I read the thing. And my superpower is taking complex concepts and writing them in a manner so that the guy in a truck can understand what I'm talking about.

Let's do it. Let's break down building an empire. I know you have a framework behind this book. I'll be upfront. I read this book when he first came out with it about a year ago and we wanted to make a point of we got to do this podcast in person. We've already done the virtual one. Let's make a point.

And it took a while to get this.

We missed each other a couple Texas trips. Now here we are. Run me through it. What's the framework behind building an empire?

I start with if a person doesn't own a business at all today, if they're starting from scratch, how do I decide what kind of a business to run? So I wrote, run them through an Exercise, I tell em. Take out a sheet of paper, make three columns on the left. What are you good at? What are your skills? And then in the middle, what are your passions? What are your loves? Where do you like to spend your time? And then on the right, try to think of what companies and what industries would benefit from your skills. Align with your passions. Because if you can get up every morning and be passionate about what you're doing, there's a much higher probability that you're going to enjoy it and find success. We start with that and then I take a second framework and say, let's look at those companies and look at those industries that you wrote down. Now let's apply some framework. So let's start with some statistics. 33 million small companies in the United States, but only 7% ever get to a million dollars in revenue. And only 4% of those ever get to 10 million in revenue. And guess what? 65% of those companies won't exist in 10 years and only 40% are profitable. So why is it so hard to find success? We can make money anywhere in a strong economy. But we have to think about how companies are going to perform in a bad economy or during a pandemic or a war or all these other things that are disrupting the world today. And so the framework goes something like this. You and I are sitting in my conference room. If it's raining outside and it's raining on our heads, we have a problem. We need to fix our roof needs versus wants. But I'm going out to dinner tomorrow night. Maybe I want a new sport coat because I have to wear a sport coat. I can't get by with my jeans and T shirt. But if I'm broke or unemployed, I just go to my closet and pick out an old sport coat. It's a want and I can. A want is discretionary and so I can avoid the expenditure. This is where a lot of companies get in trouble is when the economy cycles south and things are tougher. So I want a needs based business, not a wants based business. Next, I want a business that has recurrent revenue and that's contracted revenue, not project based. You can make money anywhere, so you can make money. I work with nine roofing companies today and we talked about roofing a second ago. Yeah, I can make money with roofing. It's a very popular space for private equity. But guess what? If you sell me a roof this month, you're not selling me a roof next month because I only buy one every 15 years. You need to Find a new customer every month to replace the old customer you had last month in order to just get to break even. Now, let's think about a company that has recurrent revenue. Let's use pest control, landscape maintenance, janitorial services, bookkeeping, payroll services. Pick any of these. All of them have a customer that signs a contract. So a pest control company. I sign a contract, they're going to hit my credit card every month. Once a quarter, they're going to come out to the house and they're going to spray the perimeter. And then they're going to call me and they're going to say, hey, Adam, you know what? This is Texas. We got giant mosquitoes here. That's a separate contract. Would you like mosquito service? Sure, yeah, go ahead. Okay. Should we bill the same credit card? Yeah, please, go ahead. Okay. Hey, Adam, there's termites in Texas. We do perimeter, but we're not treating for termites. Maybe we should treat for termites. Would you like to do that? Sure, why not? Go ahead. Okay. Should we use the same credit card? Yeah, sure, go ahead. Before you know it. Oh, hey, we got army worms. They eat your lawn in the summer from the roots. Your lawn will be dead in two weeks. It's. We need to spray. Spray for this every year. It's a problem here. Would you like us to add that service? Sure, go ahead. Before you know it, they're hitting my credit card four times a month. They're doing like four or five different services. My revenue doesn't go away when they find a new client. It's additive on top of the revenue I've got. So needs means I don't cancel during a bad economy. And recurrent means, very stable revenue for that company and the entrepreneur. And then next up from that, I look at low capital expenditure, high free cash flow. So what does that mean? If I was a manufacturer, I would have to have a plant and I'd have to have machines. If I'm a heavy construction company, I got to buy dump trucks or earth movers or. All of this equipment costs a ton of money. I want low capital expenditure. Think about that bookkeeping or accounting service company. I just mentioned their products in their head. They have a few computers sitting on a desk, but they don't have a plant. They don't even buy trucks. A pest control or a landscape maintenance company does. And so that leads to very high free cash flow conversion. And that's key because if you're going to buy a business, you want to use the cash flow. That's in the business to pay for the loan that's required to buy the business. And so this is also a key. And then finally, I want a fragmented industry because if there's a ton of them, the prices I have to pay to buy them are going to be low. I mentioned bookkeeping. There's 1.8 million bookkeeping and accounting firms in the U.S. there's not enough buyers to buy them all. So the multiple of earnings that they sell for is very low. With a fragmented industry, my entry point costs less. The nature of need versus want, contracted revenue, low capital expenditure. All these things conspire to set me up for success. And so many entrepreneurs just start a business because I want to own a restaurant or I'm going to own a clothing store or I want to do this or that. But they don't put the science. And since this is M and A science, we're talking about the science of stacking the deck in your favor so that the odds are so in your favor. You will be one of the 7% that gets to a million, one of the 4% that gets to 10 million. You'll build an empire, it'll be very profitable, very successful, and you'll be able to sell it for a ton of money.

Okay, let me make sure I got this right. Starting off with just passion, that's a good fundamental driver to keep you motivated every day. And then we look into the business and assess needs versus want. Things that you have to have. If something goes wrong, you're going to really have to have that service versus economy cycles and you may not need it. And then reoccurring revenue model, we talk through that and the importance on how it keeps a business really strong and eliminates those fluctuations. Then other fundamentals around the business are low capital expenditure, don't need a bunch of money to really operate the thing, or get it going to free cash flow because we're going to want that cash flow to pay off the debt and finance the business. The other is operating a fragmented business. There's a lot of opportunities to find these businesses and consolidate. Missing anything?

No. You got it. I think that's a good framework right there.

I want to have some fun with this. I'm going to use our company's example because I can pick on myself and nobody will try to sue me. I want to know how our business plays into this. And we'll keep using this example. Right now I sell software to manage M and A. Now I could say passion, definitely love M and A. Live for this stuff. Reoccurring revenue we have, we do multi year ARR contracts. Low capital expenditure is definitely there. It's a software thing except the engineers are expensive.

It's low capital expenditure and I'll call it maintenance capital expenditure. Once you've created the platform and the product, it's very high margin but there's high upfront capital expenditure. Not every business is perfect. So that would be your call it. Your little bit of a blemish is there's some high capital expenditure to create the software platform. But once I've got it. Boy, talk about profit.

Now need vs Want is a little bit of a question mark. I don't know if there's a sliding scale on that one because people go do M and A without it, it's just not going to be as efficient. But once we get them on there, it's pretty sticky. How do you assess that?

So when I think of needs versus wants, so I think of who is my target, client or customer. Your target is not an individ who owns a business, a really small business. You're probably looking at small to medium business, potentially private equity backed. Using M and A as a tool. Your target is a business that is going to use M and A as a tool. Not a one time event, but continuously be looking for opportunities to acquire companies. If I use my company as an example, my last one, I bought 23 companies in five years. It was one company in the first year. It was another seven companies in the next two years. It was 15 in the two years after that total of 23 over a five year period. That is really your customer. That's your wheelhouse.

Exactly.

Someone that's going to use M and A as a continuous tool for growth and expansion. That customer, because of the sheer volume of deals, really doesn't want to run that on spreadsheets and word documents. And needs a platform and needs. I'll call it the salesforce or the CRM of doing deals and managing integrations then is also a natural extension of that. Your target customer would see having software as a need. Your ability to usurp or sell yours versus another platform. I'm going to buy a platform because I'm going to use M and A as a tool and my team needs to work within a software environment that they can manage a high amount of deal flow. I might not do that if I was only buying one company, but if I'm going to do it M and A as a tool continuously, I was an H vac. There's 40, 50,000 commercial H vac companies just in the United States. I bought 23. There's still 39,700, 978, whatever. There's a ton of companies left. And I will never stop doing M and A. That business will be forever using M and A for decades.

That's true. And I was going to get. If we looked at our business as a specific example, it's not that fragmented. We looked at just all these little companies that offer some type of pick and shovel business to them. In industry, maybe there's a hundred or so. So the other question I was going to ask is do you.

But you're thinking singularly in your vein of what you do. Let me talk about the broader world of software and business software. So think of Salesforce who started as a replacement for Siebel. I was a CRM. That's where they came from. Think of Oracle who started with Financ. Think of Microsoft who started with desktop computers and consumers. And as all of these companies have been building bigger ERP systems and platforms, they are constantly out looking to buy other software companies that augment what they do. And so I would say that while your specific niche market is potentially not fragmented from a more strategic standpoint, you'll be very attractive to a buyer. And I engineer and build a company to sell. So as M and A becomes more prevalent, then more companies are looking for software alternatives to run their M and A platform and their engine on. So you have a growing market of businesses, more private equity firms, more private equity portfolio companies, massive amounts of capital that has to be put to work. M and A is the secret sauce that most PE firms use. As your business continues to grow, eventually some of these big software companies, first the PE will start calling and, and they'll be all about, join me, we'll take you to the next level, which you could do. But you're also going to get a lot of interest from strategics who are going to say you have a proven product. Boy, wouldn't that be a sexy bolt on capability to NetSuite or Dynamics or Salesforce or one of these other platforms. You are a need for the client that is your intended customer. You're a need, not a want. It's a recurrent need for them because they're never going to stop doing M and A. There is an attractiveness to strategics. You're fine. The only thing that was negative that we talked about with respect to a software company is overcome by the high multiple that gets paid for software companies when you're done. And that is just simply there is some startup cost and engineering to build that platform. So it's common to see a lot of companies that are in the software industry that are trying to develop, spending a lot of time, effort and money. Once they finally get a proof of concept, then valuations get crazy because people know that highly recurrent revenue stream is going to be there.

Let's come back to the deal room example. I like playing around with it. A lot of the book you describe is how do you do it from scratch? Yeah, but then there's also folks like me that hey, we've got some business going on. How do we adopt the same empire building mindset for a business? Maybe we already have. So if we're going back to the example from scratch and we go through this exercise, you find your passion, you find the want business, you model things out, reoccurring revenue and those attributes we describe and you maybe found a couple industries that really want to hone in on where do we go from there?

Here's a T shirt quote line, I would rather not buy a company I should have than buy one I shouldn't have. Now let's break that down real quick. I could build it from scratch or I could buy something that's preexisting. So if I use back some of my more common examples, software is not as common an example. But if I think of pest control or landscape maintenance or bookkeeping, accounting, pick a typical industry. If I'm a startup, I've got all that startup risk. Can I find clients? Can I build a model that works from a financial perspective? Right now there's the largest wealth transfer going on in human history. So baby boomers. I'm the youngest baby boomer, I just turned 60 and the oldest baby boomer 74. And so this whole generation of business owners is going to be retiring and transitioning their wealth. If I buy a business versus build it, if I buy something, it's already beat the odds. It has a track record of performance, success, customers, earnings. I can do diligence and I can buy something that's already proven to be successful. And if I've used my framework, I'm going to be able to afford it and I'm going to be able to use the cash flow in the business to buy it. I can set myself up for success that way. And then my focus turns to how do I grow this thing. If I'm starting from scratch, I have all of that startup risk. And the one thing as an entrepreneur that we can't buy is time Our careers have a finite length, especially when we get into the sweet spot. We're not kids anymore and we finally know what it is we want to do when we get older. We have a finite amount of time with which to pursue these opportunities. And so it can be so slow to grow organically. If I'm growing at 10% a year and I have a million in revenue, then it takes 7.2 years for me to get to 2 million in revenue. And it'll be 14.4 years before I get to 4 million in revenue. And it will be 21.6 years before I get to 8 million in revenue. I just told you, I'm 60. I now have walker and a drool bucket and I just got to 8 million in revenue. If we want to build an empire and we want to build it big, we got to grow faster than that. And so the key to growing fast, I got to get somewhere closer to 30% annual growth rate. Then if I look at a 20 year career, if I started with a million, I'm not even at 8 million in revenue in 20 years, but if I'm growing at 30%, I get to 190 million in revenue, which is pretty crazy. But that's the difference. If I had 15% earnings in both of those companies once got a million of EBITDA, it sells for 5 million. Here's your parting gifts. Thank you. For 20 years worth of growing a slow growth company, the other person has over 20 million in EBITDA they're going to sell for could be as high as 300, $400 million. And so which destination do we want? And then how do I reverse engineer the journey? So different ways that we could get into buying a business. But going back to, if I'm looking, I found the industry. Now what some people call it the buy box, I call it the avatar. I want to create the avatar of what the perfect acquisition looks like before I start looking. Who's the owner? How old are they? Where do they hang out on social media, if at all? If I'm buying a company from a baby boomer, I may not find them on LinkedIn. I'm sure not going to find them on TikTok or Instagram. If I'm thinking about outreach and building a funnel and trying to find somebody, I think about the profile of who owns the business, what are their needs? They're aging out, they're transitioning. They're not necessarily just looking for a pile of money. They might actually find an owner note, a seller note to be Attractive because they can clip a coupon secured by the stock in their own company and if you default, they just take their company back. A lot of different ways to think about that. But I also think about revenue, earnings, the type of customers that are served, the verticals that are being served, and some of the different aspects because some of these companies may be more attractive than others in a given industry. A lot of variables here. And if you'll notice, we're doing a lot of pre work before we ever bothered building a funnel and trying to go find a company. When we do finally go looking, I tell you that I do look at companies that brokers are offering for sale. Of course I do. But generally, here's my next T shirt slogan. My best deals come from sellers or entrepreneurs who don't know they're a seller when I first reach out to them. So once somebody is a seller and they've hired a broker, then they're simply focused on price. How do I get the highest price? I don't want to be a buyer of companies who's only focused on highest price. I want to partner with good companies run by good people. I want to provide them the kind of transition that they're looking for. They may or may not want to stick around. They may or may not want to be a continuing shareholder, minority shareholder. And so I want to think about their needs and if I develop them, I probably get a better company than just looking at what brokers have for sale.

Yeah, we touched on a few things. I want to make sure I got it right. You've got this overall strategy, but basically what you talk through is buy and build. You know, we're looking to buy a business and build it through continuing acquire business. And you have a strong business case around using acquisitions as a tool for the time side. Yes, because if we do it organic. Too slow, it's too slow. So if we leverage M and A now, all of a sudden, we can grow there and then use different mechanics of finances, which we'll talk a little bit more about, really structuring the deal and using those things to get the business and grow faster. You're almost thinking through ahead of what those growth goals are going to be in terms of revenue. I think there is a thing I'd be curious to know on how we triage the valuation multiplier here, because I think that's a big part of a fundamental buy and build. And all the P firms, that's probably all the P. Almost all the P firms out there really drive around this how do you think through that?

I call myself a very disciplined buyer. I want to buy good companies that were built by good people, not fixer uppers. Only buy good companies. Why? If I'm using buy and build as a strategy, I'm going to be able to accelerate growth and I'm going to be able to accelerate my size very quickly. Arbitrage or multiple expansion, and I'll explain that in just a second, is naturally occurring. I don't have to do anything. It happens naturally. So what is it? Just for people who don't understand those concepts real quick, there's 34 million small companies in the US because there's so many small companies, there's not enough buyers. So the price that a small company sells for as a multiple of earnings is low. As a company gets big, it gets rare. There's only 3,000 companies in the entire planet that have a billion dollars in revenue. And so as I get bigger, I'm becoming rare because private equity firms, big PE firms buy big companies. Small PE firms buy small companies. Their average hold period is about five years. And then they have to return capital to their investors. There's a limitation to how far each one can grow a business before it turns around and has to sell it. The example from my career would be H vac. So I bought 23 companies on average. I paid 5 times earnings, 5 times EBITDA for each of the companies I bought. But when I sold the company, I sold it for 14 times. And so for every dollar of earnings that I bought and paid $5 for, I turned around and sold it for 14. And so 14 minus 5 equals 9. So every dollar of earnings that I bought and paid for, I got. $9 of naturally occurring arbitrage was my reward. So why would I want to waste time focused on trying to fix somebody else's crappy company when I could just buy a good company? Because there's fragmentation. There's so many of them. I don't need to buy the bad ones. I'll let somebody else buy the bad ones. I buy the good ones. I pay fair market value, not more. So a lot of H Vac companies came to me and said, adam, they meet all my criteria. Adam, I want eight times. God bless you. There's some idiot out there that's going to pay that, but it's not going to be me because I can look at databases and see what companies are in a given industry are selling for. And I can tell you that I can buy good companies for five times. So I stick to My knitting and I buy at 5. Other people might pay higher multiples for a given size, but I let the naturally occurring arbitrage work for me and that's going to generate all my profit. Let me finish the math just to shock people with how much it could actually be. If I buy 23 companies, each one on average 2 million in EBITDA, each one I pay five times for. I'm essentially paying $10 million for 23 companies, that's 230 million. The cash flow in the business will service the debt. I didn't use any equity on those purchases. The company that I was running. And when we sell for 14 times, 14 times that same amount of earnings, which is $46 million in earnings, that's 23 companies times 2 million in EBITDA each. 46 million. We paid 230 for them at 14, that's 644 million in sale price. Pay off the 230 million in debt and put 414 million in your shareholders pockets. That's arbitrage. It's naturally occurring. It's hard enough to buy 23 companies. And in my case I wanted the entrepreneurs to stay. So I got 23 former owners who never had a boss. Now they're rich because we just gave them a wheelbarrow full of gold. And I want them all to sing Kumbaya around my fire and go in the direction that I want to go so I can build this big company. That's hard enough. I don't need to make it harder by buying bad companies.

That's just purely building our strategy on making the numbers make sense.

That in five years, mind you, again, if I go back to organic, if I build $1 of organic earnings, I would have got 14 for it once I got to that size instead of 9. The difference between what I bought it at and what I sold it at as the arbitrage. But it would have taken a thousand years to get to the size that I got in five years. And so the reason I talk so much about this is because this tool is the number one way that private equity creates shareholder value. Not all companies, especially old mature ones in non sexy industries, can grow at 30, 40% a year. Your young software company potentially can. And so we have to engineer growth at a faster pace because they're only going to own it for five years and they have to return that money back to their shareholders. And so M and A has become the tool. And so I talk about it on podcasts like this one because I believe that entrepreneurs of small companies can use this tool too. And although the arbitrage might be on a slightly smaller scale, we can use this tool to create wealth for ourselves as well. So imagine now I buy four companies, each one with a million in Ebitda, and in a given industry I pay five times. So I buy 4 million, I pay five times, that's $20 million. Okay, but now I put those four companies together, I harness some synergies, I get some organic growth going and I create 5 million in EBITDA. So I bought four, I added one organically, now I have five. I sell that for eight times and that's 40 million. What I get 40 million for cost me 20 million to build and I make 20 million profit. And that could be done in a matter of 18 months if I know how to hunt and I know how to put them together. Remember my last company, I bought one company year one, seven more in two years and then 15 in the last two years. As you learn how to do this, as you get better at it, when you're using your software to help guide and save time, then you can do this in a fairly quick and efficient manner.

Valuation arbitrage key factor in the strategy. Operational efficiency has to be there, has to be there. But it sounds more like the icing on the cake than the real fundamental driver of our strategy here.

Funny you should mention cakes. So I think of growth as I'm a cook in a kitchen. I'm trying to grow a company at 30 plus percent in earnings. So I want to grow earnings by 30% a year. That'll give me the scale I need to make a really nice return in a short period of time. And so what are my three ingredients? Organic growth, price, volume, pivot, tiering, products and services. These are my tools. And then I've got margin improvement. As I'm getting bigger, I should be getting more profitable. My costs, like if I'm buying pest control companies, I go from having one company worth of trucks to four or five companies worth of trucks or H vac 23 companies worth of trucks. If I'm buying a bunch of trucks, I get a better price than if I only buy one because I'm a small company. And so I'm leveraging my size to get better pricing from my vendors. I'm learning how to be more efficient. I don't need four or five accounting firms, I need one. I don't need four or five HR departments. I need one. I may need more people in the one, but I don't need the totality of the spend that's going on in all these companies. I probably don't need all the marketing spend, especially if I'm buying them in a tight geographic cluster. I don't need to spend advertising for five times to saturate the same market. I can spend less. I'm creating synergies between these companies as I'm building them. And I'm also then amplifying through organic growth and the things that I do. I'm starting to grow the top line, I'm improving the bottom line cause I'm reducing expense that is accelerating the growth of profit that goes on top of so my three ingredients to bake my cake. Organic growth, margin improvement, buy and build. Between those three, I'm looking for a 30 plus percent growth in earnings on a combined basis every year. If I can do that, I promise you you'll have a good exit. And so Wall street rewards any kind of growth. But we can't be a one trick pony. We can't just be an M and a buy and build. We also have to show that we can grow organically. We improve margins as we're scaling and we know how to do M and A. We can be a platform, we can bolt on other companies to our company. And if we can do these three things, we're going to get rewarded with a high valuation by a private equity firm who is looking for a platform for growth. And we will have just built one.

This is a good part to have that as part of your strategy of really pushing to get your operating margins up. Deal room example again, I know our company. Let's just. We're making up numbers here. Don't criticize me too hard. We're going to close this year out 8 million revenue. We'll say it's 5,6x small tech company but I know if we get past 20 million ARR evaluation goes up, I know I can get there two, three years. Organically we're growing well. But where we're building a case for is and there's probably another threshold. 100 million is probably going to be another big lift threshold where you're starting getting in this IPO territory which you higher multiplier. Using that same example, is it fair for me to broaden the scope? Because I can say hey, fundamentally if I Look at finance, B2B software, legal software, maybe collaboration, we have some little elements of those that we reach into. I broaden my scope and then start building that approach of I want to buy companies in these broader segments because now I can hit that level of fragmentation.

Some of my growth levers, I talk about price. Can I sell the products I have at a higher price? And then there's volume, can I sell more of the product to more people? Then there's what I call pivot. And so what you're talking about is a strategic pivot. And often I accomplish a strategic pivot with an acquisition. So I think about my customer who I've worked so hard to get, and I think about what else can I sell that client, what else do they need? And oftentimes I'll look to the left and to the right of what my product does to say what are they buying before me and what are they buying after me? And how do I add new capabilities so that once I have a customer, I can get more wallet share. I'm being hypothetical as well. Let's say that your software is simply managing the M and A process. Does it have a Gantt chart integration template? Does it have a diligence template within it? Does it have a financing capability or capacity or a cash flow generation or a modeling software within it? I think about what else do these people need to do? So I think of your company, which is an M and A process software. I might think about another company like Grada. And Grada is like a phone book, a zoom info. If I'm going to buy companies, Grada is a tool that helps me hunt, helps me find companies. So I might be managing my M and A process and loading all my targets in your software, but I'm using somebody else's software like Agrata to hunt. Or I'm using business valuation resources, deal stats to find value. What's the typical price a company at a certain size should be selling for? And so I may be combining multiple softwares in order to accomplish my M and A mission. And so if I'm you, I'm thinking, what are the steps to M and A? What do they include? Which ones am I checking the box on and which ones am I not? And if you watch some of the big boys, Salesforce or Netsuite, and you see what they're buying and you see how they're trying to make a more robust erp. Salesforce was a great sales CRM, wasn't really known for its financial business acumen or its operational capabilities. So they've been buying companies to shore up those kinds of capabilities. Likewise, the Oracles of the world were very strong in finance, but not necessarily in sales or in operations. And so everybody is racing to the middle to create this holistic environment where I can bring somebody in and they don't need to buy an extra piece of software to bolt on. I've got it in my ecosystem and for you it's how do I create the ecosystem around the M and a.

Process, then the sounder that strategy is, the more we tie it to that, the better chance we have of cost synergies and revenue synergies.

Correct.

Question is if we look at these different products, they may have different market valuation. How do you start thinking of that when. If you're at the big picture of.

It, you're a lucky man because you're working in software and software just has high valuations. I don't know about anything else, but.

Now there's a lot of transactional software. Like data rooms is a good example.

Sure.

Data rooms limit on how much they actually trade for, not anywhere close to.

So I'm being facetious anyway because a lot of our listeners aren't in software businesses. But if I think about different valuations, there's different ways that this is done. And I have a great real life example. So last year I helped an entrepreneur sell their company and when we sold it, the industry that they were in traded at a very defined multiple range. And so there were PE firms that were interested in buying it and turning it into a platform. There were some strategics they were interested in combining with it, but the resultant business was going to trade at kind of 12x. That was the number for the size. And so when that person was looking at it, it made a lot of sense. But the rollover was going to probably grow and and be around a 12x12 to 15x the next time it exited. I got him to sell to a strategic as a division in a can and that strategic was in financial services and they traded a 20 to 25 multiple. And I was talking to him about rollover investing and it's like, dude, if you roll over 30% of this big nine figure exit that you've got, but you're rolling it over into something that's got a potential to trade it 20, 23 times and now you think about they're doing a roll up, think about all the other companies that they're going to buy that you now own a piece of and now your rollover investment is going to see probably a 23 times exit. The upside on your second bite is going to far outweigh the upside on the second bite if you stay in the wheelhouse. And so he took off on that dream and it's coming through to fruition. And why am I bringing this up? Because that company, at its core is financial services. This was a big company, big relative to it was its biggest acquisition. But in terms of the totality of the size of the company, it was still a small piece of the overall company. And so the buyer isn't going to discount that company because a piece of it was trading at a lower multiple. Its focus is now, this is a financial services company, it's going to trade 20, 23 times. And so as long as you don't change the molecular DNA of what the company is, bolting something on that trades at a slightly lower multiple will not hurt you. If it's deemed to be too much, you bought something too big. Then what a buyer usually does is they take how much revenue and earnings is coming from the one product at a certain multiple, how much is coming from the other product at a lower multiple. And now I'll blend those two valuations together to create the one. But you can get away with it a little bit as long as you don't buy something too big.

Overall, I wanna stay in that category. Yes, broadly get categorized and valued at.

So an example for me and some companies that I've built in a blue collar trades or construction, there's a construction element and there's a service element. And Wall street discounts construction elements because it's very cyclical and it's volatile. And so a construction business that does new construction, a trades business that does new construction is valued much lower than a trades business which has the same revenue and earnings, but it gets it from service. And so I was very mindful as I was building the company, instead of being 50, 50, when I walked in the front door, I wanted to walk out the door as a seller at 75 service, 25 construction. I wanted to change the dynamic, to change the way the company would be valued. You can be very strategic and shrewd about how you design the exit. And when we started, and I told you as a pilot, I deconstruct the trip, I think about the exit and I think about what the buyer is going to see and what the buyer is going to value. And then I reverse engineer it, where am I and how do I get there to that exit? And then what's allowable or how do I need to change the mix of what I'm doing to get the ultimate valuation at exit?

That's a good way to look at it. In this example, we want to get to the 20, 25 million arrow that gives us the next bump up in valuation. Then from there we want to get to 100 million. We'll say that's our five year plan is 100 million ARR.

And I'd probably say that's on someone else's watch.

It is. We'd probably at that 2025 monetize, you'd have some partial exit and I want to talk about that. I got my next series of questions. You ready for it?

Here we go.

Shoot. This is when we turn it up and really get the valuable knowledge out of Adam.

That's a wrap for part one of our conversation with Adam Coffey. We covered some essential strategies for building a successful business found in our next episode we'll dive deeper into M and A strategies and discuss the buy and build approach, exit strategies and advice for entrepreneurs considering a sale. Make sure to tune in for part two and don't forget to check out mascience.com and subscribe to our newsletter for more insights on mastering M and A. If you're not following us on LinkedIn, head over to stay up to date with all things M and A. See you next time on M and A Science. Thank you for taking the time to explore the world of MA with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.