Expert Insights into Building an Empire through Strategic M&A (Part 2)

Today's episode is brought to you by SMP Global Market Intelligence. Find insight at every data point with enhanced SMP Capital IQ Pro Platform. It's the leading data solution for strategics and investors alike. Discover critical data sets, including coverage of over 54 million global private companies. Plus plus AI powered tools to streamline your workflow it's no wonder 85% of companies in the SMP100 are clients. Learn more at spglobal.comproinsights that's spglobal.comproinsights hey M& A Scientists, let's talk about one of the biggest time and cost sinks in deal making. Contract Review Every deal comes with a mountain of contracts. Employment agreements, customer contracts, vendor contracts, you name it. Buried within those hundreds of pages are crucial details like change of control provisions, consent clauses. Those are the things you need to get ahead of. Traditionally, combing through these contracts takes hours, sometimes hundreds of hours. But what if we could reduce that time by 80%? With Deal Room AI, you can. Our AI powered contract analysis tool scans and extracts key information from all your contracts in minutes. No more spending countless hours hunting for risks. Dealroom AI highlights critical clauses instantly. And here's the best part. It's incredibly easy to use. No special training, no steep learning curves. Just upload your contracts and let D Steel Room AI do the heavy lifting. Think about the legal fees you'll save and the efficiency you'll gain. Plus, computers tend to miss less than humans, so you can trust you're catching every important detail. If you're ready to revolutionize your contract review process, check out dealroom AI because in M and A time is money. We're here to save you both. Visit dealroom.net to learn more. Here's to the deal. I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M and A deals. Foreign A Scientist welcome to the M and A Science Podcast, where we learn from the best at M and A to uncover proven techniques for enterprise value creation. Interested in hearing more about how to optimize your M and A practice? Or want to get involved with our community of 4th thinking M&A practitioners? Visit mascience.com start off with subscribing to our free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M and A Science. Welcome back to the M and A Science Podcast. I'm Your host, Kisan Patel. Today we're diving back in with Adam Coffey, founding partner at Chairman Group, for part two of our episode on building your M and A empire. In part one, Adam laid out his foundational M and A strategies. You haven't listened. Check it out in the show notes. Today, Adam has taken us further with advanced strategies covering how to evaluate acquisitions, the importance of strategic alignment and cultural fit, and using financial instruments to structure deals effectively. Let's jump in. I got my next series of questions. You ready for it this year? This is when we turn it up and really get the valuable knowledge out of Adam. So you mentioned proprietary deals are pretty clutch. To all of this earlier. I want to learn from you. How do you go about doing proprietary deals, cultivating that relationship, getting that level of interest or getting somebody interested that may not have been thinking about the selling the business. Then we'll get into like negotiating and creating a structure to win.

Let's just first say for those listening out there, do you have time or do you have money? If you have money and don't have time, I hire what's called a buy side advisor and a buy side advisor. I give them my buy box or my avatar of what I'm looking for and it's their job to go out, build a funnel, find a bunch of companies, bring them in and do some early qualifying of the companies to this person's willing to have a conversation. It meets your avatar and then they bring it to me. They bring it to the company. So every time I go into a company, I hire a buy side advisor. I also hire a VP of business development in house to run the process with that buy side advisor. But that truncates time. So I pay to have this funnel built for me. But if I don't have money and I have time, I have to build a funnel. And so I need a tool. There's a lot of tools out there. Most of them are sales software tools. So I'm a salesperson and I need to know every company in my industry that's a potential client and I'll mine those kinds of software to build the top of my funnel. And so I might use like Dun and Bradstreet a tool that they've got called Hoovers D and B Hoovers. Or I could use Grata. Grotta is a good one for this. But grata costs 18 grand. Dun and Bradstreet Hoover's cost 600. But Dun and Bradstreet Hoovers. I still have a lot of manual legwork to peel through the onion to get to what I need. Grata kind of does it for me, but it costs more. So again, time versus money. If I've got time and no money.

So yeah, if you have no money, just use Google.

Exactly. Hire some college kids on summer intern projects to build me a list of companies that meet this criteria within a certain geographic reach. I've got to build and qualify a funnel. But selling a company is a people. It means it's a personal. It's a personal transaction. It's not cold. We want to develop relationships with people. So I have to have some methodology of building a list of targets, of potentials. Then I have to have a methodology of outreach. And a buy side advisor would tell you I'm going to have to do outreach six to eight times to get somebody on a phone to talk to me. That's why I include the personal profile of who's my seller, how old are they and where would I find them on social media? If they're on LinkedIn, I'm going to reach out to them on LinkedIn. If they're 75 years old, they're not on any social media. I'm going to be mailing something, snail mail or calling them on the phone, maybe emailing. There's going to be different ways I attempt to penetrate. And then I'm going to have a campaign build just like I would for marketing to try to find clients. Hey, if I snail mail, it's going to be a one page cover with a one page slick. And the COVID is just a little letter that says, hey, I'm so and so. I'm in the industry and I'm looking for great companies to buy. I came across yours and I thought, boy, if you've ever considered doing something special, maybe I'm the one that you could do something with. And then I give a slick which is just a little bit more color around what I'm doing and what have you. And if I'm mailing it, I'm going to pay somebody to handwrite the envelope because if I use stickers, it's probably getting pitched. I don't know about you, but I get the mail and it's like I've thrown out 80% of the mail before I opened anything. And so if it's handwritten, curiosity killed the cat. Someone's going to have to open it. It's like, boy, that was handwritten. That's got stamps on it. Not a bulk mail thing. I can get envelopes open. And so I'm Doing outreach and I might need to do it a few times. And you'd be amazed that someone who gets a brochure from me today may not respond today, but they were thinking about selling and they put my little brochure in their inbox. And then six months later, when they had a bad day or they had a health scare or something happened in the world and they're just like, yeah, where was that folder? Or that. And then they call me out of the blue. The best deals I find I'm not talking price, we have to pay fair market value. I'm just talking I get better companies. Not ones where the earnings have been fluffed up and adjusted to a point of I can't even recognize the business. And a seller who's not focused on price, it's someone who's been thinking about it casually. Those proprietary deals, what that means, it doesn't mean I get it cheap. It means if I put in the effort and the work and build a relationship, I get the deal. A broker's not just talking to me. A broker may be talking to 10 buyers or 30 buyers. And again, it gets back to an auction pretty quick. But I may put time and effort into it and not get it. And so what people want that are buyers, especially PE firms. They want certainty. They want to know that if they put the time and effort in, they're going to get the deal. Assuming that they're paying the fair price and the diligence checks out. I would say that debt maturity in any of the companies that I built, we sourced. My team sourced probably one third of the deals ourselves. And about a third did come from brokers, but it came from lazy brokers who weren't really building, running a process. They just knew I was buying. And the faster they can find a buyer, the quicker they get paid. So it's Adam will pay fair market value. I'll just take this deal to Adam. So I got a semi proprietary deal and then literally a third of them came through my website. And if you go to my last company's website, there's a tab that says sell me your company. Literally. And for a while I had a pop up every time you went to the homepage. Cause my customers never really did web service work. They knew who we were and we had a salesforce. And so I literally, you go to my homepage and it would pop up, sell me your company. I led with it and put it right in people's face. And so about a third of the deals came to me once they knew I was a buyer and they knew some companies that had good reputations that sold to us or maybe they had a friend as boy. A third of the deals walked in my door, a third we sourced with a buy side advisor and about a third came from brokers, you know, who reached out. We have to build a funnel, just like getting a customer. I need probably a thousand companies in the top of my funnel to have a hundred that I'm working at some level to get to 15 or 20 that I'm actually in good conversations with NDAs and data flowing to get the one that I'm going to buy. So it's a process, it's an effort, it takes a lot of work. If you stay the course and you know what good looks like, you will find them.

Get the list really mine through, have your criteria, companies, outreach, then you can get to this first conversation.

First conversation. My goal is to get to lunch, in person meeting. The first Zoom I'll call it or phone call. I'm essentially regurgitating what I sent out to them. But I'm starting to build a human connection. I'm offering to come see them off site. Let's go have lunch together, let's talk about it. We get to lunch again. If it's a 90 minute lunch, I'm probably an hour chit chatting, getting to know them, learning about their life, learning about their interests, their passions. And then at the end it's like, hey, look, my goal here is to just kind of lay out how this process would work. I'm happy to sign an NDA. Once I do, I'm going to need some basic information, basic financial information. I've got some questions I need answered. You're going to send me that information. I may have a few follow up questions, but then I'm going to come back to you with a number. And if you like my number, we keep talking. And if you don't, hey, we part as friends. Because your number may change or my number may change down the road. And I'm going to be building in this industry. I'm going to be buying companies for a long time. Let's just stay in touch. Things may change. First meeting, get to lunch. Second meeting. I want to lay out the NDA and I'm going to need data. I get that Third meeting, I'm bringing the price. That one could be in person, that one could be via Zoom. Depends on the ease. Once I've been in person once, I don't necessarily have to go back in person again. The goal then of the number is to start to get to the framework for the loi, which would come next. I don't necessarily bring an LOI letter of intent. I bring the number based on everything you showed me. Here's what I think the business is worth. I'm still flexible at that point in terms of how I'm going to pay for it. Is there going to be a seller rollover stock component? Is there going to be a seller note? Is it going to be just financing? How am I going to do it? And I may talk about some of those things to get ready for the letter of intent which comes next once I do the letter of intent. Most important part of diligence is financial diligence to make sure that the books are accurate, the numbers are accurate, and most of the time, if they're not, it's not that the person is being disingenuous or committing fraud. It's they don't know what they don't know. They're not sophisticated. The books are crap. No, a PPP loan is not revenue, and no, an ERC tax credit is not revenue, is not repeated. People can make mistakes. Depending on the kind of business, they may be on a cash basis and they should be on an accrual basis and a percentage of completion accounting. And there's a lot of variables. And books are hard for entrepreneurs. There's many out there who aren't sophisticated and so there can be noise in the books. First part of diligence is make sure the numbers are there and they're real so that you can reaffirm price. 90% of my deals post LOI. If they're gonna die, they die because the numbers are wrong. My rule of thumb, plus or minus 10%. I just close. I don't reprice. Minus 10 to 30%. I'm gonna reprice if it's more than 30% off. I don't wanna insult the seller. And so all I do is I point out, look, we're gonna disengage. I wanna show you what we found in the books and the numbers. Here's the problem, here's the error. Let's stay in touch. And the reason for that is when I put a letter of intent in front of somebody and a number of they've already spent it, they've paid the taxes, they're thinking lake house, boat, retirement, whatever they're thinking. And if I come up and tell them they're going to get a 30% haircut, 40% haircut. Now, they can't buy the lake house. Now they can't do this and so they get frustrated. I don't want to create a bad situation so I just tell them look, here's what I found. Likewise, if it's grown 30% during diligence and they're pressing me for more money, I buy good companies, I pay fair market value. So if they're really growing, I don't mind paying more. But if it's plus or minus 10, I don't let them work me up and I don't work them down. It's the 10 to 30 where I have to be open to repricing down or allowing some reprice up, especially if diligence is dragged out. But ultimately that's kind of some of the steps in process. And I'll tell you entrepreneurs, the one thing entrepreneurs don't do enough of is diligence. They don't do enough diligence when they're buying companies. And that's how you get stuck with oh my God, I bought the company and now I need to dump a bunch of money into it because I didn't know about working capital and I shouldn't have let them pull out as much as they did.

Or we're going to come back to that. I got some questions around that I want to. Let's use our example here. So Deal Room. A lot of people don't know we actually own a data room product called Firm Room. Yeah, I do have been cultivating an investment thesis, 100 of them. There's a lot of small ones that have been around for 15, 20 years that may fit that customer profile of a. I'm looking to just retire. This is one where we've optimized our business to operate like 85% profit margin. Hey, we could migrate customers sunset product or there's a lot of things we could do.

So these are add ons. Yeah.

So now I want to go back and said okay, we made the list and I've actually used Grada to do this. Shout out to Grada. They're actually great and they've helped build a list of about a hundred of these companies. I did the outreach. Walk me through what should my message be on this outreach using this example because you're pretty forward and direct. Is it hey, I'm looking to grow through acquisitions like but probably email people.

Yeah, I'm going to accentuate the positives. So the When I'm private equity backed then I'm going to be proud I'm private equity backed. But when I'm an independent I lead with that. Hey, so and so fights Grata. I know their name, I know their address. I've gotten good information and so I'm reaching out to them. Wanted to introduce myself. I'm so and so. I am the owner, an operator of an independent company in the space. This is my company. Here's the links. And then my slick might be. Here's some stuff about me and my company and I am seeking to accelerate my growth by finding great companies to help diversify my product offering, whatever the story is going to be. But it's like, but I'm pretty. I am. But I'm blowing smoke up their skirt too because I'm saying, hey, I came across your company and it really interests me. Now you've built a great business and I think there's a potential here to do something special with you. I'm going to state a few things that I think are pluses. I'm in the business. So you're going to be talking owner to owner, business owner to business owner. I'm independently owned. I don't have institutional money behind me. Maybe they're getting calls every day from a private equity firm or a buy side advisor and they're not happy with that and so they're not turned on to that. So I'm working the fact that I'm not for now, because I'm not owned by pe. I'm in the industry, I'm an owner, I own a business. Here's my business. I'm looking to expand my product offering, I'm looking to expand my geographic reach depending on what my goals and objectives are. I came across your company. It looks really interesting, it's special. I'm thinking that there might be some opportunity here. If you agree, just reach out and thank you for your time. And I put a personal touch. It's handwritten, it's not bulk mailed with stickers. Because then I'm thinking form letter. If I did open the darn thing, I read it and then I'm like, you're full of crap. You're sending out a thousand of these. So it's personal touch, trying to make establish a personal connection. And that's one attempt. And so I might have one variant that I email, I might have one variant that I snail mail. And I don't do them all at once. I send one, wait a few weeks, send another, reach out on social media, reach out on LinkedIn, maybe mail it to the office, personal and confidential, maybe mail it to their house, maybe email. Maybe I reach out to them on a social media platform. I come up with what are gonna be my four or five outreach attempts that I'm going to make. I'm tracking it all on your software. Here's my funnel, here's my list, here's the people, here's the attempts that I've made. And it's a process, it's a numbers game.

That core message is why you? Why now? Your business seems to be a great fit that's doing great things on the little air in the skirt. And then why now? It's like I'm looking to grow, you know, we're looking at bringing products like yours. And here's a sort of the business case or a high level of that business case.

To give you an example, a buy side advisor typically will develop a quick one to four page handout that gets mailed or emailed. They'll also develop a long deck, a 20 page deck that really gets into the story. This is who I am, this is what I'm building, this is what I'm looking for. And this is why I think you're a potential fit for that. And so then depending on how you know, snail mail, the first time might be one page slick with a cover. An email might be both of those. But no one likes to click on email link. So I might also just tell them my website, here is my website address and maybe I build a website too that has similar information on the website. They can connect with my website, they can look at the brochure different ways that kind of mix up the messaging. But I'm consistent. Every few weeks if I haven't heard from them, the typical buy side advisor will tell you that they'll do six to eight outreaches, but they get 80, 85% response. It may just be quit, leave me alone you jerk. But it may also eventually it's yeah, okay, I've been thinking about doing this. Let's Talk. And so 80, 85% of the time they're going to get a response.

Okay, this is a great example, the theme of having some real strong will of persistence behind all of this. Because if you just send one or two and don't get to respond, you're not trying hard enough. We're going to push to get this first conversation going and that conversation you mentioned, I'm going to rehash what I just sent along that. Hey, I see a fit here. Here's what I see you doing something really cool. Here's where I see it fits together. Is it more of a bigger together story?

Yeah. And it's the flexibility point. You probably already know what their age is. You've probably figured it out. You might have been on their website, you may have seen a picture of them in about us or research their social media. You can decide whether they're young and potentially going to stick around or they're older and where retirement may be more on their mind or their horizon. I'm tailoring a message, but the key is flexibility. If I'm seeing someone that may be close to retirement age, I might be thinking to myself, I'm going to tailor my message a little bit towards have you thought about your future? Have you thought about when's the right time to sell the business? And I can be flexible in how that's structured. You could potentially stay on. You could potentially roll over a portion of your proceeds into my company and get a second payday. My brother and I sold our insurance agency. He ran for 15 years. He was 63 at the time. And when we sold it, it was 2020, January of 2020, right before COVID hit, we sold it. But my brother was like, I'm not ready to retire. I want to keep working three or four years. Great, let's sell to a strategic who's going to keep the lights on and keep you employed, potentially let you roll over and get a second bite of the apple. And so yeah, great, great story. So we did that. So my brother sold the business. I got paid and cashed out because I was passive. But he got to roll over and he sold to a really big company called Acrisure who's buying 100 insurance agencies a year and they're going public next year. And so his rollover now is going to be a second bite of the apple during an IPO. But he's now five years down the road or four years down the road. And so he's now 67. So he's announced to them his retirement. He's going to retire next May. Guess what? He still got another four years, five years of income after selling. Got the first bite at the sale, got the rollover, they're going public, he gets the second bite. I think about that person and what the story might be and what might be helpful to them. Some say I want to cash and go. Others say I don't need a bunch of money. Clipping a coupon might be nice. So some seller financing might be a piece of this. Cash it close, give me a lump sum, give me a five year note, a ten year note at a 6, 7% interest rate, whatever it is on A certain portion. Some would say, let me roll over and get a bite with you when you sell. I wasn't ready to sell. A younger person might say, I'm not going anywhere, I want to keep going. Great. Join me, join me, become a shareholder in my company.

We are really pushing to learn their goals, what are their drivers. That's the key thing we want to learn. And then we get that level of interest of hey, I have a process, I'm happy to sign an NDA. I get some financials from you. I'm going to put a number in front of you and if you like.

My number, we keep talking.

Exactly. So if we go through that, we go through those steps. I'm curious about the structure part because some of these deals, I think there's a big variable of what drivers are. But I feel like as an investor acquirer, you're trying to keep cash and you want to be able to preserve your cash because you can do things with it. And then you have these different tools. There's debt, you can get through a third party. And now we have these cash based lenders funds out there. Then there's owner, you can have them hold a note and saying, hey, I got not all the money, I got to give you some money now, but hold some of this. There's rollover equity. You can say, hey, I'd like you to roll over which gets a second bite of the apple and then there's just some earn outs.

Yep.

I'd love to just get your philosophy and how do you think through that? How do you sort of goal is.

So I've got all these levers that you just mentioned and I'm open to using a combination of all of them to get the deal financed. But what I'm really looking to use is other people's money whenever possible. So that's debt or that's rollover equity or that's seller note. And what I'm trying to design for is a 2 to 1 debt coverage ratio. So what the hell does that mean? Let's say I'm buying a company that has 500,000 in earnings and that's cash earnings, low capital expenditure. We followed my model then. I want to use no more than 250,000 of the cash to service the debt. If the multiple the company trades for is higher than what 250,000 can service, I have a gap to bridge. Why do I want 2 to 1 debt coverage? First of all, that's 50% equity in the deal. Doesn't matter if it's Equity from him or her, the seller, or it's rollover, it's equity if the company cycles down, if it loses 20% of its revenue, 30%. I'm not scrambling to find cash to pay the loan payment. I've got two times the debt coverage that I need. So I take the total cash flow, divide it by the amount of money I need to service the debt. I'm seeking a 2 to 1 ratio. SBA will let me finance a deal at 1.2 to 1 with only 20 cent cushion. That's not enough. And although they'll finance it, I'm looking for 2 to 1. What I'm really looking at is how much debt can I put on the company at a 2 to 1 debt coverage as interest rates are ticking down, that's a little bit more leverage now because interest rates are lower, that money will service a higher debt. And then whatever the gap is, I want to close that gap. Using seller note, using seller rollover if possible. And generally I can generally most of the kind of companies that I'm talking about buying. So again, remember I said fragmented industry because there's not enough buyers, it keeps the multiple I pay low when I'm buying the companies. And so generally between seller rollover or seller finance, seller note. And there's a thing called on standby. So a seller note on standby might be a 10 year note, but it's on standby for two years, the first two years. So there's no payment due during the first two years. An SBA lender will look at that and call it equity. It's not debt and or rollover equity. Their equity becomes my equity. If I don't have enough money for a down payment, I've got equity because it's their equity now joining my company. And so combination of those plus the debt service coverage ratio sets me up for success in financing. And I know a lot of entrepreneurs out there think your problem is money. And that's because you don't understand money. You know plumbing or you know roofing or you know software, but you don't know money. And so there's trillions of dollars out there looking for stuff to invest in. You just have to treat money well. I have to structure it. I'm trying to solve for money. There's a lot of people I can go to if you don't have this expertise that we can work with. One buy side advisor that I work with works with small business owners that do this and his specialty power is he not only helps you get the company and get it under loi and help you get through diligence. But he wants to get paid, which means he's got to help you get financed. And so he has a bunch of lenders that he works with, knows the creative ways that we can get a company financed. And he charges more of a success fee, but he earns it. Money is not your problem. Finding a good company and paying fair market value is what the problem is. But if you're trying to buy a company that trades in an industry that's 10 times.

Yeah, that's what we're going to deal with, our software business here, then you're.

Going to need equity. I can't not create it. Or you're going to need a large rollover. So if you're a big company and they're a small software company, you may give them the 10 multiple, but they're rolling over eight turns.

Yeah, you're going to get a lot less debt on it.

That has to do with the free cash flow. It has to be high free cash flow conversion. Because I need cash to service debt.

If I buy the cash flow, the better.

The more debt you can service better.

You can do that deal. That helps a lot of how you think of those levers and how to use them. And it sounds like it varies industry by industry depending on what your multiplier is.

It does. And so that's why I was saying in the beginning is if we haven't picked an industry yet, use my framework and you'll be fine. Because you'll be dealing with companies and industries that trade at low enough multiples to where you can engineer this stuff. But there are industries out there that are high multiples. Software is a good example. Multiples can be really high because a software company may have no earnings, but they have great software and it's a good potential. And that's why you see these deals and you shake your head and scratch your head and you say, why did Google pay a billion dollars for that? That made no money. And those are the software unicorns that are out there. Some industries have higher valuations than others.

But the 2 to 1 debt ratios are.

That's my key. That's what I'm trying to design for.

So you've done a lot of deals. How have you seen the process evolve? Everything that we're talking about is buyer led. At the end of the day, we're not waiting for a shiny deal to pop up and you jump on it. You've got a strategy. We thought out what we're doing or approaching it. Now, when we talk about actually you mentioned one of the flaws that new acquirers do is they don't do enough diligence. How do you see this process evolve as you do more deals? What I've seen is you become more buyer led. You really start putting more effort to how you're going to integrate the company. How are you going to capture those synergies? What's your view on it?

We can't just buy stuff, we have to be able to integrate it. Remember, we have to be able to demonstrate that we get more profitable as we get bigger. And so a piece of that is I acquire a company during diligence, I'm mapping out the differences between how they do something and I do something. And I literally could start with two income statements side by side, line by line, going through and saying what do they spend on advertising, what do I spend on advertising, what do they spend on this, what do I spend on this and what do I think is the art of the possible between them? And that creates the third column which is either a positive synergy, a negative synergy or no synergy. And I'm now mapping out what the differences are which will drive my integration. But I need to get good at integration because buying a good company is only half the battle. Integrating it and making it a productive part of your ecosystem is the back half. And if you're good at buying but not good at integrating, you're going to stall out and have nothing but chaos. If you're good at integrating but not buying, you're going to have chaos because you bought the wrong companies. You have to get good on both sides of this. And if your volume is low, I tell you, if you're going to do a low volume of M and A, I can outsource this or I can hire a project manager. Someone has got integration experience and I can bring them in either part time or full time or contract basis to help me do a one off integration. But if it's going to become a strategic part of your growth story, then I want to own the ip. I want to have a team of people that learn how to do M and A. I want them to learn and create muscle memory for my organization because I'll be able to leverage that over time to do more M and A and get better at it. And so I build my team over time. I may start. I told you, I hire a buy side advisor. I start with an in house business development person. A second resource I typically hire is a junior business Development resource, call it a spreadsheet jockey to work with my senior person, it's a two person team. Third person is probably my first integration manager. Everybody's got a day job. I need someone whose sole job is to make sure companies I buy it's seamlessly integrated and that things don't fall through the cracks. So there's a process. And after four or five years, I may go from no professionals in my company that do M and A to having six to eight people in my business that do nothing but M and A. And don't think you have to be big to do this. My first client when I left being a CEO had less than 2 million in EBITDA. Three short years later, we hired a VP of business development. We had buy side advisors. We went out and got capital. I think they finished six acquisitions so far. Maybe one more, one less. He's now 15 million in EBITDA. We've now hired a banker. This company that was worth 14 million three years ago is worth 250 today. You can do this in a relatively short period of time. If he was growing organically, it'd take him 30 years to go from where he was to where he is. This is an acceleration of the story entrepreneurs. It starts with you believing in yourself and then recognizing that, hey, you know what? I don't know about you, but I have a lot of billionaire friends and I like them. And they're smart people, but they're not God's gift to anything. So why were they so damn successful and we're not? Millionaires know how to make money. Billionaires went all in somewhere along the way and stayed all in until they found a higher level of success. You look at Elon Musk as an example. And I love Elon. He's my hero. Because he's a guy, no matter what industry he starts, he finds massive success. You take up Bill Gates or somebody also brilliant and successful. But one trick. Ponies are different than someone who's a serial entrepreneur. Successful billionaire. Everything he starts turns into billions. So different animal. But when you talk to him, he doesn't come off as being the smartest guy on the planet. This is about working hard, understanding, having a vision and digging in and making it happen. You can make great things happen in your business. You just have to start by believing in yourself. Surround yourself with people who know a little bit about what you're trying to accomplish. Don't go alone and step in every pothole that's out there. Build a team of people, use a process and Then go for it. Stop talking, start doing business.

Fundamentals don't get away. You still got to work with the best people you can find. And then I think the other takeaway on the execution of all this is continuously get better at integrating. Being able to capture value, increase margins.

Free cash flow and then your company builds muscle memory. And so M and A is a process. That's why I kept pointing out in the last five, my last five year run as a CEO, one company in the first year, seven companies in the next two years, 15 in the next two years after that. It's like a pump on a farm in a well. And this is Texas. So wells are 800ft down and you're pumping that arm and you're pumping till your arm falls off and then the water starts coming. It's a process. It takes a while to build up deal flow. But once deal flow starts coming, once you learn how to do M and A and learn how to do diligence and integration, you get better at it. And as you're getting better at it now, all of a sudden you can do more of it. It's like a snowball rolling downhill. You'll be prepared for a slow start.

That's like in any business as well. Yeah, I want to talk to you about exits in my mind of this conversation we're having. I'm thinking of the cartoon where the little fish then the big fish bite eats the little fish and the bigger fish eats the little fish. And when we do these deals using rollover equity is a part of it. But that hey, after the five year term we're gonna sell this business to the bigger fish and then we get a good payout. I'd hire multiplier and get a good success story there. And then they run that same story again. Talk me through anything I can learn from you on that because I feel like that's an area where I still have some reservations using the deal room story. But you built the business and get a lot of private equity firms about every month. I get about 5 to 7 that are inquiring. But I'm get to 20 million ARR valuations to be a lot higher. Maybe we just wait till then. That's going to be a two to three year path. When I challenge myself to change the thinking on this a little bit Adam of hey, maybe there's a different story. You don't have to sell your whole business or you just are left with a minority. Maybe you sell a minority piece and then later on you sell majority. Walk me through how you think of exits.

Couple things to unpack. Number one, you already said if I get to a certain level, I get additional value where we exit. The size we are, when we exit matters. And it's not just this continuum where I pick a spot and say it could be any number and it's gonna be a upward trend. What I'm trying to say is there are natural exit points where you'll find a great deal of PE buyers. And if you understand the world of pe, you'll know that not all funds are the same size. And people focus on lower middle market, upper middle market, et cetera. And so based on fund size, all funds last for 10 years. All funds must deploy their capital within the first six years. They must average hold periods five years. But they all invest 6 to 8% of their capital in one company, no more than 12. Which means big funds don't buy small companies. Big funds buy big companies, little funds by little companies. And it's created with these dynamics, natural exit points. And so I'm going to lay out a few for you. Typical exit window really starts to open at 4 million of EBITDA and it runs up to about 7. That's where your lower level middle market PE firms start to buy. And look for platform companies below that. People may call themselves a PE firm and they may be registered as a PE firm, but they don't have traditional funds as two guys who made a lot of money at KKR and then the friends and family and they got 50 million they're playing with and they call themselves a PE fund. If your company is below 4 million in earnings, you're selling to either a strategic as an add on or you're going to sell as a platform to a sub PE firm that is below kind of the threshold of where the first real firms that have funds with limited partners and raise traditional capital in a traditional manner. So 4 to 7 is the first exit. Next exit used to be 15, but it's come down, there's not enough good stuff to buy. And so every level's been flexing down a bit. People used to buy at 15, exit at 50. People used to buy it for exit at 15. The people who buy at 15, not enough good companies to buy, they're now looking down at 10. And so I've got a pack of buyers between 4 million and 7 million of EBITDA, another pack of buyers at about 10 million to 17 million of EBITDA. And then it jumps up, it jumps up to about 40 million in EBITDA people that buy at 4 go to 15 exit. That's about how much they can grow a company. In their typical five year hold period, when they start at 4 million of EBITDA, they get up to about 15, they sell. People who buy at 15 go to 50. People who go to 50 then sell to someone who goes to a hundred. And then someone at 100 goes to 200 and then they go public. So there's these natural exit windows that exist. And you as an entrepreneur should have your eyes set at I'm going to four, I'm at one, I'm going to four, I'm at two and a half, three. I'm going to go to 10, I'm at 10, I'm going to 40. Is a long journey. You're going to find pools of capital looking for stuff to buy at these natural exit points. That's where I really see the multiple arbitrage happen. I get rewarded with larger multiples being paid by people. So knowing where I'm building to is important. But then there's who am I gonna sell to? I have to learn how to pick a good partner from a bad partner. And no short way to say it, you're gonna have to do diligence. You're gonna have to talk to people who've been CEOs who've sold companies. I wanna talk to people they fired, I wanna talk to people that are still there. And I wanna learn what it's like to work with this PE firm. Cause they're all gonna tell you how great they're gonna be as a partner. And like any industry with 8,000 players in it, there's some good, some bad, some God awful, and some that are great. So I'm gonna have to do diligence. But you mentioned something I want to touch on. Minority versus majority. The majority of private equity capital is in what's known as a buyout fund. And a buyout fund, by its very charter must buy a 51% controlling stake. They've told their limited partners, their investors, I'm going to control every company I invest in. And if you say I want to sell a minority stake, you have just eliminated the largest pile of private equity capital on the planet. There's fewer minority investors and therefore there's also less money being paid. There's less competition, there's not as many of them and they're not giving you the same multiple to buy a minority stake. There's a trade off. I would tell you get comfortable thinking about life as a minority shareholder. This is Capital. They're not bringing a management team. You're engaged if you're working hard, if you pick the right partner, you're not going to notice a lot of negative aspects of working with private equity. They'll be a good partner. You'll actually enjoy having this capital and these people who can think through sophisticated financing. You'll never worry about capital again because they'll bring the capital and the debt relationships that you need to grow. Your focus will be solely on growth. When I think of minority investing, it can be done, and I know some minority firms that are out there. But you're going to get typically lower valuations. It's somewhat limiting. So for those of you out there who are concerned about being a minority shareholder, I say Elon Musk and Jeff Bezos, before the divorce, two richest people on the planet, both own less than 13% of their companies. It's okay to be a minority shareholder. If you have the right partner. Your focus is still on growing and running your business. They won't be as intrusive as you think. When we pick bad partners or we pick the wrong partner, that's where it can go sideways. Or when we check out. I'm an entrepreneur, just sold my company, I got a ton of money and I'm not working very hard anymore. They want to win the championship this year. You just won a championship, but what, you didn't do anything for them. They need you to work hard, harder than you've ever worked before, using their capital, partnering with them, and you'll get a second bite of the apple. So if you want to do a minority sale, you can. Those people are out there. You'll give up some equity, and it'll almost be like a mezzanine lender will give you debt, lets you do a kind of a little dividend recap, take some money out, some chips off, and they'll get a percentage of ownership and your company will service the debt. If you can't service the debt, lending has to be more equity. But there are people who will do minority. Don't get me wrong. I just think if I'm a seller, be a seller.

The control freak inside of me. Still got a counter argument for you, but I'll continue that over some drinks with you sometime because I think that could be a good long conversation and be a fun, challenging one. I like how you explain that spectrum. I think you're absolutely right that the majority of the market are buyout funds, and that's who's going to pay the highest multiplier the minority, you got to really find the right one wisely and go from there.

And they'll have a minority rights agreement. You're not getting off scot free, you're not making every decision and they're going to have some control. So you've got the same thing you just switched to the majority shareholder was, but the dynamic is pretty similar.

The options are options, you gotta weigh them. I think the big thing I've been putting a lot of consideration in is the partners. I've heard of like a marriage, right? You get a bad marriage, things could be awful. You get a great marriage, things are great. And that private equity partnership seems to be pretty symbolic of that. Your experience. I'm sure they all haven't been pretty. Maybe on record we all say they will be, but I know they haven't. Off record, what do you look for in really getting a good sense of what's going to be the good partner?

Well, there's hands on, hands off. So let's say you're a transitioning Fortune 500 executive that's been recruited to go run a PE backed company. In the Fortune 500 world, you lived in a hands on environment. You had bosses who were crawling up your shorts every day. And so you're used to being micromanaged. And for you, you might actually be more comfortable in a hands on environment. If you've been an entrepreneur calling your own shots, you're a cowboy and you can't put a saddle on. No one's putting a saddle on you. You don't want a hands on partner micromanager. And this is going to go south quickly. You're looking for a firm that's more hands off. I've worked with some firms that are hands on and frustrated the living hell out of me. And there were times where we were cussing at each other and you're wondering, this divorce is imminent. And then we turn around and sell the company for a record payday and they give me a gold watch and we're the best buddies ever because we won. So there's the battle and then there's the war stories that come later. And you know what? It's intense no matter how you slice and dice it. And then I've had other PE firms where I'm looking over my shoulder, hello, is anybody home? Do I have an owner? Is somebody back there for me to talk to? Because they're so hands off and disconnected. So there's this spectrum and this is called governance. How do they provide governance on their investments? What's the process, is it going to be weekly calls? Am I going to have a framework that says every time I want to spend 50 bucks I'm going to need some snot nose punk associate to sign off on it? Or am I going to be able to run my company as I have been within parameters? And I understand if I'm going to sell off major assets or buy something big, I'm going to need there's ordinary course and there's unusual and extraordinary course. And so I'm going to have different kind of rules. And so governance is something that an entrepreneur should spend time talking to the firm about. And again, this is like dating and everybody's on their best behavior. And so I also tell people, if you're an entrepreneur, be on the lookout. Because while you're negotiating a deal, this is a four to six month process to get through diligence and get all the paperwork done. And there's going to be some stress on the way. Somewhere during that time period, the real owner is going to peek out from behind the mask in the fake arranged marriage mask. And you're going to see the ass. You're going to see the real person inside. And if the real person inside looks just like the one in the mask, you're fine. But if you see a personality that's, well, that was a red flag. You probably just got a glimpse of what life in a stressful situation with your new partner might look like. Be on the lookout. Likewise, they're looking at you. How are you going to act when the negotiation gets tough or they're trying to reprice you?

How do I do my diligence? Should I be talking to other CEOs in their portfolio? What's the best way to do diligence?

I would ask them for references, I would ask them for references of portfolio companies that they've sold. So I'll talk to someone who went a full five year flip with them and had an outcome, full five year flip. And then I'll say, I want to talk to some current founders who've sold to you. And I might even say I want to talk to a founder that sold to you and you fired. And they'll be like, well, why would you want to do that? Because when there's a divorce, I want to understand how the divorce went.

Yeah, right.

Divorces happen. I don't care the why, but I want to understand when we negotiate contracts and employment agreements and shareholder agreements, these are really prenups, These govern the divorce. And I want to know how people were treated when there was a divorce. And you know what I could tell you, some people could call me and say, hey, Adam, you know what? I've been a long time in this game, and I've made a lot of money for a lot of people. But I've also been let go because we had a difference of opinion and I moved from one company onto another. I made the first two buyers a crapload of money. And then the third one was frustrated. They paid too much. Not my problem. That's their problem. But you know what? I can tell that there are firms out there who, if there's a divorce, they treat people fairly. It's like, hey, you know, we were good people heading into it, and we're good people coming out of it. And so talking to people who went the full trip, talking to people who sold and were let go, talking to people who are there now, you'd be surprised. These people don't just sell a company line. An entrepreneur will tell an entrepreneur what they think.

What point in time do you do that level of diligence after loi.

Before the close?

Okay, between all line and close?

Yeah, if you're the seller, you're the seller. Now, if you've built a company and you've hired an investment bank and you have 30 probable buyers in a process, you can't do that level of diligence on 30 buyers. But you can start looking at the kinds of companies they own or start trying to figure out if you can gather some intelligence just about what kind of buyers are out there. But very quickly, you'll see as bids are coming in or refresh bids are coming in, it's 30 becomes 5. I can start doing a little bit more homework on five. I might look at companies that they bought. I might know somebody who ran one or built one or. But at any rate, it's somewhere before the close. I need to figure out that this is a partner that I can work with. Because you'll never have more control than you have in the first sale. The first sale, you can say yes or no. And it's not just about money. We want market clearing price. But you can also be choosy on buyer. But once you're sold in that ecosystem, the PE firm is likely going with the high buyer next time. And you can guide that as the CEO somewhat and still have the ability to pick a partner because you can decide not to stay or to stay. There's always some ability to control, but there's multiple parties at the table. We need to due diligence.

We can keep going. I've just looked down and realized we have not been using our outline well.

That's why we keep getting back together. So I have to do another one of these because I unfortunately am 25 minutes late for my next meeting.

Hey, before we wrap up, all, I got to ask you, what's the craziest thing you've seen in M and A?

The craziest thing I've seen in M and A. There's been times where I have seen just crazy valuations. And I'm talking, you know, like I'd say you're in the software world. My son's in the software world. He's a CTO of a software company owned by a large PE firm. And I look at the multiples that get paid and it's crazy. It's crazy. The math sometimes gets crazy. And you think, how can this even possibly be be. It's funny though, because Mitt Romney is quoted as saying, I don't know if it's true or just a wives tale, but he's quoted as saying, in the 1980s, there's a bubble coming in the world of private equity and someday it's going to burst. And. But yet, 40 years, 50 years later, instead of hundreds of billions in assets under management, I just read something yesterday. McKinsey put something out yesterday that said that there's over 7 trillion in assets under management right now in private equity. 7 trillion. When I wrote the first PE playbook, it was 2.83. When I wrote the second PE playbook, it was 6. And now it's 7 less a year from the time it hit 6. It's the money just keeps on pouring in. The money has to be put to work. I don't know what to tell you. Craziest thing I've ever seen. Some people pay crazy multiples for company. And you wonder, how could they ever make this pencil? How do they ever grow it? And sometimes they do and sometimes they don't.

I have to agree with you. I think from my career, in the days I did M and A till now, it was EBITDA as a standard, not top line revenue.

Yeah, and the multiples being paid seem to keep creeping up. They poked down a little bit here with the high interest rate environment, but now interest rates are ticking down and multiples are starting to creep back up. So I don't know, it's a great time to be an entrepreneur with a company to sell. That's all I have to say.

Valuations are crazy.

They are.

Adam, thank you so much for taking the time to have this conversation. You've helped me become a better M and A scientist. Those of you still listening, hello M and A Scientists. I commend you. Yes, Adam and I both will personally congratulate you. Reach out to both of us on LinkedIn. I know you're pretty active networker as well. Yep, I always welcome ideas criticism so I can continue getting better at doing this and create more value for you. Till next time. Here's to the deal. 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 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.