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

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1:57I'm Kisan Patel and you're listening to M &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 &A deals.

2:21Hello, M &A scientists. Welcome to the M &A Science podcast, where we learn from the best at M &A to uncover proven techniques for enterprise value creation. If you're interested in hearing more about how to optimize your M &A practice or want to get involved with our community of forth-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 &A Science. I'm your host, Kisan Patel, CEO and founder of M &A Science. And today we're kicking off a two-part episode on building your M &A empire with Adam Coffey.

2:58founding 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.

3:35Adam, how are 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.

4:05Engineering 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 I spent 10 years at GE during the Jack Welsh 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.

4:40And 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.

5:14I'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 &A, and eventually prepare for exit. And then I still teach seminars and write books. I've had four number one best sellers 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 seed. 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.

5:53Yeah, a lot going on. You don't take rest. 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 were CEO of CoolSys, which is a very sizable consolidator in the HVAC 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.

6:33I 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.

7:16And 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. You sort of run through private equity model, help anybody in business really understand how that model works and opportunities behind that.

7:50And then you went on and you did the exit side of it. How do you think through exiting a business? And then more recently, you have the Empire Builder, which 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 four, five, six, and then one, two, three. 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?

8:21My 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 who 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.

8:55And 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. 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.

9:35The books have been great. Enjoy doing podcasts. I think this is the third time, fourth time? How many times we've been together? I think it's the third. Third, first time in person. So that's good. Advocate of your books. I like your books because you can actually understand them. I think some M &A books, they overcomplicate things and you just make it way more complicated than it 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.

10:09I clawed and scratched my way up an organizational chart. And I out-hustled and out-worked, 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 HVAC 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.

10:52And that's my background is that world. And so I write in a manner 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.

11:30I 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 our... We missed each other. A couple of 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 run them through an exercise.

11:56I tell them, 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.

12:32Now let's apply some frameworks. 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.

13:12You 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 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.

13:50Next, 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.

14:24Let'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 gonna hit my credit card every month. Once a quarter, they're gonna come out to the house and they're gonna spray the perimeter. And then they're gonna call me and they're gonna 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 build the same credit card?

14:52Yeah, 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. We need to 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.

15:19My 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.

16:01Their product's 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.

16:35There's 1.8 million bookkeeping and accounting firms in the US. 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 &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.

17:23You'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 talked through that and the importance on how it keeps a business really strong and eliminates those fluctuations.

17:51Then 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. So 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.

18:20And we'll keep using this example. Right now, I sell software to manage M &A. Now, I could say passion, definitely. Love M &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 little bit of a blemish is there's some high capital expenditure to create the software platform.

18:54But once I've got it, But boy, talk about profit. Now, need versus 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 &A without it. It's just not going to be as efficient. But once we get them on there, then it's pretty sticky. How do you assess that? So when I think of needs versus want, so I think of who is my target client or customer. Your target is not an individual who owns a business, a really small business. you're probably looking at small to medium business, potentially private equity backed, using M &A as a tool. Your target is a business that is going to use M &A as a tool, not a one-time event, but continuously be looking for opportunities to acquire companies.

19:37If 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. Someone that's going to use M &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.

20:25Your 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 &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 &A as a tool continuously, I was an HVAC. There's 40, 50 ,000 commercial HVAC companies just in the United States. I bought 23. There's still 39 ,778, whatever. There's a ton of companies left and I will never stop doing M &A.

21:05That business will be forever using M &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 the M &A 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.

21:38Think of Oracle, who started with finance. 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 &A becomes more prevalent, then more companies are looking for software alternatives to run their M &A platform and their engine on.

22:21So 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 &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 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.

23:00You 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 &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.

23:36Once 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 described 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 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 described.