Episode cover_Adam Coffey_Learn How PE Unlocks Explosive Growth

Learn How PE Unlocks Explosive Growth with Adam Coffey of CEO Advisory Guru

February 21, 2024

Diving into private equity investment can seem risky and complex, but it can benefit your company with the right knowledge and a strategic approach. Today, Adam Coffey joins A.J. to share his expertise on developing exit strategies, pinpointing the ideal private equity partners, and collaborating with them to unlock more than just financial gains for your business.

About Adam Coffey

Adam Coffey is a serial CEO, private equity expert, consultant, and bestselling author. An esteemed Army veteran, he is well-versed in executive coaching, mentorship, and keynote speaking. His acclaimed book, “The Private Equity Playbook,” showcases his deep understanding of company acquisitions and financing, reflecting on his experience with around a hundred companies over two decades.

Adam’s latest literary work, “The Exit Strategy Playbook,” offers invaluable advice to owners contemplating selling their businesses, covering buyer types, including strategic and financial, with a keen emphasis on SPACs. His reputation extends beyond writing as he has successfully steered companies into market-leading positions. Respected in academic and professional circles, Adam lectures at universities and provides mentorship, distilling his considerable wisdom into lessons of leadership and growth. 

Visit our curated collection of Business Books for more enriching reads.

Using private equity investment as a strategic tool 

Private equity investment helps businesses grow by providing them with a powerful combination of financial support and strategic advice. But we need to view it as more than just a funding source if we want to leverage it effectively. It’s actually a valuable strategic tool. PE (private equity) firms bring more than just funds to the table; they provide proven expertise and a wealth of knowledge that can facilitate decision-making and navigate complex market dynamics. 

A successful private equity partnership is a two-way street where each entity can contribute and extract value. Businesses can unlock avenues of growth that may have previously seemed unattainable by approaching PE with a collaborative mindset. This alliance helps to push boundaries and build empires, but only when wielded with knowledge and a vision for mutual success.

Key Insights:

  • Start with an exit in mind. Having a clear exit strategy from the get-go can shape your decision-making process to align with that goal. This is important because it helps prepare your company for sale in advance, identify the best course of action, and ease the transition when the time comes. (10:06)
  • Stay accountable with the help of private equity investors. If you opt for private equity, you can count on investors interested in your company’s growth and profitability to keep you accountable. This can help you remain committed to your plans, exceed your performance indicators, and continuously seek ways to add value or drive growth in your venture. (16:58)
  • Diversify your income. The future is unpredictable, and income diversification is your ultimate safety net. Cultivating various income sources can secure your business’ financial future against market volatility or unexpected events but also even out risks and provide a more stable and consistent earnings flow. (34:50)
  • Always keep growing. No matter what stage your business is at, investing time and effort into expanding your skill set can open doors to new opportunities and innovations. Constant education and self-improvement can give you a competitive edge, help you adapt to changes, and drive personal and professional development. (44:22)
  • Choose the right platform. Using the right marketing channels is key to scaling your business. For example, for B2B enterprises, LinkedIn could be a goldmine of professional connections, while consumer-focused brands may succeed more on visually-driven platforms like Instagram and TikTok. Choose the platform that aligns with your business goals and audience to maximize growth opportunities. (47:44)

Adam’s best advice for entrepreneurs:

“Think about private equity as a tool. […] They’re a tool. You use their capital. They use your knowledge, and it’s a marriage made in heaven.” (14:52)

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Affiliate Disclaimer: Some links in this episode are affiliate links. If you make a purchase through these links, we may earn a commission at no extra cost to you. Rest assured, we only promote products/services we believe will benefit your entrepreneurial journey. 


Adam Coffey:
Hey, thank you for having me. Hello to all your listeners out there. Let’s dive in and add some value to these folks.

A.J. Lawrence:
Well, look, you’ve done so much cool things, you’ve covered so many different things, and your books talk about so many good things, but before we get too far, I’ve been going through your background. You were in the army, out of school, out of high school. You worked in engineering. You got to GE. You got recruited out of GE into private equity. You ran a series of companies, each one bigger than the next, for private equity. And now you’re helping other CEOs of different companies grow and have successful exits, plus build their own empire builder, given that’s the title of your book, where are you on your own entrepreneurial journey these days?

Adam Coffey:
Yeah, it’s a really good question. I’m 59, right? So I’m not a spring chicken anymore, but I still got plenty of game left in me. We were talking off camera here before the show started and if I look at my own career, I just got done spending 20. So, ten years, Fortune 500 with Jack Welch, right? And learning how to run a business. At the time, I call it the Camelot era. GE is number one on the Fortune 500 list. Tech doesn’t exist.

The world’s largest company is growing so fast, it’s doubling in size every 2.8 years. I mean, the growth was phenomenal in Jack’s last 10 years. And so GE taught me how to run a business. Then I spent 21 years as a CEO, building three national empires for nine different private equity firms. I bought 58 companies doing buy and builds billions of dollars in successful exits. And I got bored. I was bored. Building one company at a time after 21 years, I needed a new challenge.

And I had been teaching, helping some professors at UCLA, guest lecturing, whatever you want to call it, for 15 years. And I really enjoyed working with, call it the up and coming next generation of Fortune 500 leaders and entrepreneurs. And it led me to my first book and that was a huge success. Still a big success today, so much so we’re doing a second edition right now. I’m working on a second edition of that first book and I was enjoying doing that. I was bored building one company at a time and I wanted to impact multiple companies at a time. And so if you take away my responsibility for tactical execution, I could help multiple entrepreneurs with strategy and be an educator and a co-pilot, if you will, a coach, a mentor. And so my thesis was I’m going to stop being a CEO.

And my goal, impact multiple companies at a time rather than just run one and take tactical execution off my plate. Let me be more strategic and work with many companies. And so I started a consulting business. I’m working with 52 entrepreneurs right now and I work with about a dozen PE firms. I do operating partner work on their side, I help them evaluate risk with entrepreneurs, I help them scale, I help them with M&A, and I help them prepare for exit, predominantly to remove risk. So that when PE comes calling, they’re paying up because the company that they’re looking at looks very much like a successful private equity backed portfolio company. So I help entrepreneurs do that and I’m still teaching. So having a lot of fun and enjoying the ride.

So I would say I’m later stages of my own career. I’ve been blessed to make a lot of money in my career and I’m more focused now on giving back and helping multiple entrepreneurs. Whether I’m writing for Forbes, or writing a book, or teaching a seminar, or coaching or mentoring, it’s like I want to help people be more successful in their entrepreneurial pursuits. Because success seems to be so elusive for so many.

A.J. Lawrence:
It is. Entrepreneurial success in any straight, the numbers are horrible when you look at it. 90% failure within the first year, 90% failure in the first five years. So it’s like the 10% that live 90% is going to fail again within the next five years.

Adam Coffey:
And just some US statistics, 33 million small businesses in the US defined as 500 employees or less by the SBA, it’s 99.9% of companies in the country. They employ half the country’s workforce, but yet only 7% get to a million dollars in revenue and only 40% are profitable. And it’s like, why is success so hard? And that’s kind of what I’ve dedicated my next chapter to being, is making success easier.

A.J. Lawrence:
I mean, I got so lucky, I was able to sell my last company, just not quite ten years ago, mid sevens. But I got very lucky mid seven figures. But at the end of the day, I made every mistake where I could have had a more enduring, more structured company. When an entrepreneur is kind of growing into this phase, when they’re in that seven figures, you hit a million, you think everything in the world is going to be great. You get to three, and all of a sudden things start changing. How do you kind of talk to entrepreneurs about one, let’s first talk about private equity because I ran away from all private equity. Because I had seen too many CEOs get grinded down, it is just probably a great misperception, given the prevalence of it, that the companies get grinded down after private equity acquires them. Yet from your experience, your successes, I know it wasn’t a walk in the park but at the same time, you had some pretty strong success in doing this.

When and about how should they go about thinking about the value of working with private equity as they continue growing their company?

Adam Coffey:
Well, I’m going to go back and I’m going to answer your first question first and then I’ll get the private equity real quick. But the entrepreneurial shift, so what I find in studying these 33 million small businesses and the 7% who make it to a million, and keep in mind, I bought 58 companies. And in those 58 cases, kind of the average size I was buying was around 20 to 30 million, and around call it 2, 3, 4 million of EBITDA. And what I noticed with all of them typically was, in order to be successful, getting out of the gates, getting to that first million of revenue, getting to that first 10 million of revenue, in order to be the 7% that get to a million or the 4% of the seven that get to 10 million, they really had to be, I’ll call it anal retentive, strategic control freaks. And they had to micromanage the hell out of everything because success is so hard to do. And they had found a formula that works. And so to get to the first million or first 10 million, really had to be tight control freaks.

And you know what? I see that frequently as being the DNA that helps people kind of conquer that first million or 10 million. It’s very tactical and it’s replication of this is what works. We have to do it this way. Don’t monkey with the formula. It works. Everybody do it my way. I’m managing minutiae. But what happens is entrepreneurs get to a plateau and they get to this level where it’s like, okay, I can’t keep operating that way because I run out of bandwidth.

And I see the companies that I was buying, I saw a lot of people kind of top out around 20 to 30 million, was like it was max. Depending on industry, it may be lower for some. And it’s like, I got no more bandwidth. It’s like I’ve arrived. I kind of get a little bit, I call it the accidental arrogance of success. I am successful.

I’ve beat the odds, God bless you. But now I think I’ve arrived and I’m in cruise mode and I’m like, I’ve built companies with hundreds of millions of dollars in revenue and my last company was 700 million in revenue and billion dollar plus exits. And it’s a different game. And so I call it the entrepreneurial gear shift. And so when we’re getting out of the gates, building that first million, getting to that first 2, 3, 4, 5, 6, 8 million, we’re control freaks. When we run out of bandwidth, we have to learn how to go from being the first chair player in every section of the orchestra to becoming a conductor. And we have to learn how to manage process rather than manage minutiae. And we need to learn how to build a team, empower a team, articulate a vision, hold them accountable, but get out of the way.

And entrepreneurs who can make that shift will find going from, let’s say, 1 million to 10 million up to 30 million, the first hundred million much, much easier to accomplish. And so we have to recognize when we’re hitting that ceiling and recognize it’s time to make a shift in how we’re managing and leading, manage process instead of minutiae. And if we can do that, we’ll be successful. But now to get to your second part of the question, which is kind of private equity just in general. So I always tell entrepreneurs that when we start something, we need to start with an exit in mind. I’m a pilot. You look up here, here’s me flying a World War II P-51 Mustang, doing an aileron roll over Orange County, California at that time.

I tell people, look, private equity is a tool pilots never take off unless we know where we’re going. We start with a destination in mind and then we deconstruct the trip. How much fuel do I need? What are the winds aloft? If I get in trouble, what are my alternate airports? When we’re entrepreneurs, we need to start with an exit in mind, and the two logical exit points are 4 million in EBITDA and 10 million in EBITDA. Those are the first two levels, depending on the industry, the kind of company I’m building. At 4 million, I’m looking at a $20 to $35 million exit, depending on industry. At 10 million of EBITDA, I’m looking at 100 to 120. And it’s like I tell entrepreneurs, you should never, ever build a business that’s worth more than 100 to 120,000,000 without ringing the bell, without diversifying your own personal asset base and starting to work with other people’s money as an accelerator for growth.

And so let me unpack that, if you don’t mind, for just a second. Okay, so, typical entrepreneur thinks of an exit as a one and done event. I’ve built a company. I’ve found success. I’m going to monetize that asset, and then I’m going to walk away. So, if I give you a wheelbarrow full of gold for your company and you walk away, the first thing you have to do is figure out, the hell do I do with this wheelbarrow full of gold? Because I just signed a non compete. I can’t go back to that industry. I got to start something new.

So I tell people, don’t think of an exit as a one and done event. Think of an exit as the first rest stop on your own personal wealth creation highway. And if I look back at my own career, my own life, I think the largest company I sold for over a billion. I ran it for 13 years, four months, a couple of days for three different sets of shareholders, and I had five multimillion dollar paydays. As an entrepreneur, the business at the last time sold for a billion, I didn’t own the whole thing. I owned a piece, right? So we need to reprogram our thinking to recognize that if we have just built something successful, if we truly understand it, why go start something new? I can keep on building what I know using other people’s money, scale it faster, and I can get multiple paydays.

And that’s where true wealth creation happens, is when I get a chance to take multiple bites of the apple, I’m getting asset diversification at the same time. And when I work with entrepreneurs and I show them the path, here’s the business you own, the growth rate you’re on, and if we roll tape forward five years, ten years, you pick the multiple, what do we sell it for? And then we go up top and say, okay, let’s monetize the company now. Let’s take seventy cents of every dollar we sell it for off the table. Let’s roll $0.30 forward. Now I’m working with private equity, now I’m a minority shareholder, and now I’m accelerating my growth rate using other people’s money.

And in, call it three to five years, this is how big I can get in that first hold period. Here’s how big I can get in the second hold period. Typical PE multiple of invested capital is somewhere between three and four times. My career average is five times. And if we go with four, if I roll over thirty cents on a dollar of what I sold the company for the first time, well, then I get $1.20 at the second exit. The second bite is bigger than the first. The third is bigger than the second. I can engineer exits.

I’m with a partner that has to sell about every five years, and I get multiple bites of the apple rather than one. I’m still in the company I know. And then I get the responses, typically, well, Adam, I’m God’s gift to this company. And if I don’t have control, the world’s going to stop. And I tell them, think about the world’s richest man, depending on stock valuation today. Let’s talk about

A.J. Lawrence:
13% of the company.

Adam Coffey:
Yeah. Jeff Bezos.

A.J. Lawrence:
Yeah. Elon and Jeff go back and forth.

Adam Coffey:
So, whomever, pick your pick, either way, you already nailed it. So Jeff Bezos owns 10.9% of Amazon. Elon Musk owns 13% of Tesla, or whatever it is. It’s like, at the end of the day, as a minority shareholder, where the majority of stock is owned by somebody else, the world’s richest people are okay being minority shareholders. So, small time entrepreneurs who think you’ve arrived, it’s okay to not be in control. It’s okay. And think about private equity as a tool. They have limited partners who invest.

What do they need? They need returns. They need Alpha. They need growth. They need to monetize, and they want to put money to work to help you grow. What do you want? You want multiple paydays? You want wealth creation? They’re a tool. You use their capital, they use your knowledge, and it’s a marriage made in heaven, or can be if we pick the right partner and recognize how to pick the right partner. And so, as we said off camera, it’s like a lot of entrepreneurs that just stumble into private equity, some have good outcomes, some don’t. And some tell horror stories and some say, hey, it worked for me. It’s a crapshoot.

That’s why we as entrepreneurs, have to get educated about what it is, how it works, what it needs, so we can learn how to feed it and then take from it what we want, which is capital and wealth creation for ourselves. So it can be a tool, a valuable tool as a part of our empire building. And I tell entrepreneurs, never go with an asset. And a lot of people would ring the bell earlier but never go build something that’s worth 100 million or more without getting the lion’s share of that wealth out because we need asset diversification. Bad things happen in the world.

A.J. Lawrence:
Well, one of the things in hindsight I learned was not having structure was a painful thing. And part of why I had to restructure and all that was because I did not have appropriate structure. If I had even put a little bit more when small problems built up, I would have been better able to handle them instead of getting tidal waved and not being in a position to deal with. But you said that we kind of use force of personality to kind of cover that lack of structure. Hey, I have to be the person in charge because I’m not quite sure how to build the structure that I need to keep running, so it’s me. It sounds, and I’m going to make an assumption here from it, that a lot of the success of working with private equity is that transition from relying, overrely. Force of personality is a wonderful great tool until it no longer is. It’s like everything in life.

Adam Coffey:
Think about something for a second. When I’m an entrepreneur and I put my goals and objectives in place, I’ve got my measuring systems. I’ve got my budget, this is my projections for the year. Who holds us accountable when we miss our numbers? Typically, it’s no one. If we have a marginal year, we’re okay with it. There’s nobody to kick us in the pants. Well, you know what? If I’m building a large company using institutional capital, I’ve got a board. If I don’t hit my numbers, I get fired. Entrepreneurs need to understand and develop a sense of urgency and a sense of, I must accomplish this.

If I don’t, the world ends. I was working with a roofing company recently and the problem with a lot of project based businesses is they lose money in the off season. So first four months of the year, we earn nothing. We lose money the next three or four months of the year. We dig out of the hole that we created in the first three or four months of the year. And I got like a 3-month window to make money with this business. And I’m like, look what happens when you lose money in the first quarter? Nothing.

If I lose money in the first quarter, I get fired. So let’s adopt a new mentality. If we lose money in the first quarter, you die. And in order to live, you have got to figure out how to not lose money in the first quarter. With that as a backdrop, what are we going to do differently? And let’s get tactical. Let’s not say what we should do. Let’s just talk about what we could do and let’s start spitballing and coming up, well, here’s all the crazy ideas we’ve got that could keep us from losing money in the first quarter.

And you know what? If we, as entrepreneurs, push ourselves and identify our own weaknesses and our acceptance of mediocrity, we would achieve more as entrepreneurs. Well, in the private equity world, you don’t get the luxury of accepting mediocrity. It’s like these are people who just gave you a wheelbarrow full of gold. And you’ve done well, but they’ve not done anything yet. And they’re expecting you to dig in and work 4x harder because they need their return for their shareholders, of which 30% of your sale was rolled over. So we’re aligned. You’re going to get a nice big payday too. And so they force us. They kick us in the pants.

And sometimes entrepreneurs who get a payday decide, oh, I’ve arrived. I just won the Super Bowl. I don’t need to go back to training camp. I don’t need to work hard. But for the PE guys, it’s a new season. And we are at the training camp status and we haven’t won a championship yet. So it’s time to double down, dig back in, and let’s get busy. And so I think a lot of times, I’m not saying that working with PE is a joy, a privilege, or easy to do. It is business at the highest level and it can be a grind.

But the paydays, generally speaking, when I’m successful and I build a business and I exit that business, the paydays very quickly make me forget about the grind and the grueling season that I just went through to get to that championship. And so I liked kind of that forced accountability. At times it can actually be helpful.

A.J. Lawrence:
Let me ask, do you suggest a cadence? There’s a lot of talk about the value of EOS scaling up OKRs, and there’s ongoing types of processes, flows, et cetera. But from the sound of it is, it’s not so much that private equity is anything unique. It is just this extra layer of accountability with extra capital to do more things and just someone on your shoulder to keep that accountability.

Adam Coffey:
My last company that I built, nothing sexy, HVAC commercial refrigeration and HVAC repair in grocery stores. We built grocery stores and I made strategic pivots to widen our addressable market. But if I look at my PE sponsors in that one, I bought eight companies in the first three years and sold the business. I then bought 15 companies in the next two years. I bought 23 companies, all around 20, $30 million in revenue in size, 2 to 4 million in EBITDA. Typical. And I did it with 100% debt. And because I had a partner with an unlimited checkbook, the world’s largest non-bank lender, one of the top PE firms on the planet, it’s like I’ve got an unlimited checkbook and so I have no limitation.

And so I can execute, execute, execute. And if I know what I’m doing, then in a buy and build strategy, I can build a machine. And once I get that pump primed, it’s like, boy, I’m going gangbusters. And I am building an empire. And the acceleration that the company goes through is just so much faster than what I could have done on my own as an entrepreneur. So I see them as a tool, they see me as a tool. I’m the tool to shareholder returns. They’re my unlimited checkbook capital that I need and my partner to help me execute on a broader growth strategy.

And when it works, it works really well. And there are times where it doesn’t work. But in my complete career, my worst return multiple on invested capital was 2x. My best return on capital was 11x. And so on a bad day, I doubled equal to the S&P 500 index fund over a 30 year period. On my best day, I’m like, call it five, six times what an investor could do in the stock market. And it’s because of those successes that private equity continues to grow. And frankly, entrepreneurs, the only reason you have a market to sell your business for a nice multiple is because it was created by private equity’s incessant need to buy companies. And so although they only buy 50% of all companies on the planet, that means 50% they don’t, they are the ones who prop up and create the market for us to have good exits. Period.

A.J. Lawrence:
I’ve been spending the past year and a half a little over trying to buy a company, and I’m looking at the upper range, one and a half to 2 million in EBITDA. And I’m finding small private equity along with strategic buyers coming into that range. So it is that fun thing where it’s like they’re coming down. Five years ago, they wouldn’t come down. Now, they’re like-

Adam Coffey:
Here’s something else that I’ll just mention. So my first book, the private equity playbook, it came out in 2019. It’s been a cult classic ever since. And the sales of that book are amazing. It still hits number one all the time. But I think the average entrepreneur, while we have heard the term private equity, very few people do I encounter that truly understand private equity to a level that I would say is the right level for an entrepreneur building an empire. Anytime I teach a seminar and the topic of private equity is included, I always start with a ten question, multiple choice, easy quiz, easy questions for someone who knows the industry. And I got to tell you, 90% of the people in the room, regardless of net worth, bomb that test.

We all have heard the term. We all have an opinion. We hear something on the news. It’s always going to be negative, never positive. We hear at mixers or cocktail parties, good experience, bad experience, horrible experience, okay, experience. It’s like we’ve developed an opinion, but our working understanding of how this capital, the 6 trillion in assets under management now, how it works, we as entrepreneurs tend to have a very low level understanding of it. We need to get educated because if we truly want to generate wealth for ourselves, generational wealth, if you want to be a seven figure, eight figure, nine figure net worth person, you need to understand how capital works.

And once you do and have a good working knowledge of it, you learn how to manipulate its needs to your advantage so that you can maximize the potential and the return for your own benefit, of which they get their benefit too. You’re doing it simultaneously. But it’s like, I find so many entrepreneurs understand the word but have a very low level understanding of how it works.

A.J. Lawrence:
You’re right, because I know people, but generally, all right, the partner associate level. But, okay, who are the LPs? What are the investments going into them? And it’s like a lot of that extra bit is sort of like, yeah, I know, it happens. There’s a complexity layer.

Adam Coffey:
Let me just take a stab at a few minute explanations. So there’s $6 trillion in assets under management. Think of the world of private equity shaped as a pyramid. And on the right side of this pyramid, going up and down, I’ve got 6000 to 8000 private equity firms and they all own multiple funds. At the small part of the pyramid at the top, I’ve got KKR, Carlyle, Apollo, Blackstone, all these companies you’ve heard of before and their fund sizes are 10 to 30 billion in size. And then as I go down the pyramid, I find smaller firms, smaller funds, all the way down to the smallest firms at the bottom. But they all do the same exact things. They all invest about 6 to 8% of their current fund in any one company and they never invest more than 12% in any one company because they all build in asset diversification rules inside their own charters for the fund.

And so what happens is you’ve got big firms with big funds buying big companies. Small firms with small funds buy small companies because they all model the same returns and they all model the same investment as a percent of their fund. And as the result it creates five swim lanes of capital, five layers to that PE pyramid as you’re climbing it. So there are natural exit points. And then since a hold period is around five years, there’s kind of, well, for this size fund, this is my entry point and this would be my exit point which is how far I can take a company in five years. Those define the swim lanes. And so I’ve got five different levels on this pyramid and I’ve got 33 million small companies in the US.

Just in the US at the bottom, two layers of the pyramid and at the very top of the pyramid there’s only 3000 companies on the whole planet that have a billion in revenue. So as I get bigger, I’m climbing the pyramid and I get rarer. And when I’m rarer, I trade for a higher multiple. So the other side of the pyramid now I have a tab, a Velcro tab and a box based on industry I’ll pick out. Here’s the industry Velcro tab, I’ll pop it on the pyramid. Here’s what a small company trades for. Here’s what a big company trades for. Here’s the natural arbitrage that is created.

The difference between the multiple I sell a bigger company at versus buy a smaller company at, and here’s the different five layers of the pyramid. So I can manipulate if I understand how this capital system works. I know the right time to sell, the right time to bring in a partner where I’m going to get the most value added benefit because I’m at the right inflection point. If I’m in the middle of the swim lane, I’m too big for the person who normally buys at the bottom of the swim lane, and I’m too small for the people who are up above who would normally come down to the end of the next swim lane. I’m in the middle. I can actually hurt my value and get a suboptimal outcome by being the wrong size when I sell. I’ll find a buyer for anything but maximizing that multiple arbitrage or multiple expansion requires me to understand the pyramid.

Boy, when I do, man, can I just, as an entrepreneur, really, I don’t want it. Manipulate is a bad word. I can take advantage of the natural inflection points and these five steps of the pyramid, and I can really hone in on generating maximum value for myself or my employees, my family, whatever the case may be. So we need to know how this capital stack works. Even if we hate it and we never want to partner with it, it does prop up valuations for us. It creates the market and we need to understand how it works in order to maximize our potential.

A.J. Lawrence:
I mean, it is fascinating because it’s like with my last company I ad hocly acqui-hired, bolted on a couple of small companies that ended up being 60% of my growth. And I never really even knew that was a strategic growth initiative. It was just like, oh, yeah, this was cool. We got new things. We got to cross sell our things. We got new clients. Oh, this is great. We have new things to talk to existing clients. Kind of gave us that nice shot and that became a big value prop for when we did end up selling.

From the approach you’re talking about, yes, you need to have the foundation. You need to have the right type of business structure in place. You have to have the right ego to go forward. But private equity wants to have the package put together. As you’re going up, you need to find ways to add to your business to create that profile you were just talking about that maximizes it. So that’s what I think is so fascinating. Because as a business owner, you can look at something maybe is not strategic to someone larger or private equity, but if you add it to yours, plus some healthy growth, good, strong foundation, all of a sudden, one plus one equals three, can’t go too far down.

Adam Coffey:
And that happens all the time in my world. And the more we understand that world, the more we can engineer that type of an outcome. Let me give you an example. Let me just give you a brief example. So when I was doing my last buy and build, I was buying companies. But I’m not just buying companies. I’m buying only good companies. Life is too short to buy fixer uppers and put them together.

It takes too much management time and I’ve only got five years to maximize the potential outcome. So I buy nothing but good companies. I pay fair market prices for a bunch of small companies, I put them together, I climb the pyramid, and I get multiple arbitrage. The difference between the multiple I’ll sell at because I’m rare, I’m bigger, I’ve climbed the pyramid, there’s fewer of us up here, we’re over the 33 million now. And a bigger buyer is attracted to us and they pay up, they pay more for it. I can let all that stuff happen naturally, and it can occur.

But let me just give you some data science because you talked on something that’s really important, and for a lot of us, it’s accidental. And that’s an increased organic growth rate that results from doing strategic M&A. So, an example., if I’m a regional company, a multi-regional company, I actually went to UCLA and I hired an MBA team to do their capstone project for their executive MBA come work in my company. Here’s the challenge. I want you to use strategy, and so ultimately they built a software tool for us, and I wanted them to look at, okay, take all my existing logos.

Target, Walmart, Costco, H-E-B, all the brands I do business with. Lay out all of their logos across the United States. Tell me which MSAs, or markets that I’m not in, has the highest overlap and concentration of my existing customers, whom I’ve got on average a 20-year relationship with. And I want to be able to have my same sales team go back to my same customer base and say, I just landed here and you have 35 stores Target or 52 stores Walmart, and if you’re not happy with your service provider, we can now provide service. And then as a part of diligence, we would look at the logos that were being serviced by the companies we were acquiring and maybe they were on a small scale, servicing big logos, but only a really small part of their footprint. And then we would run the math back the other way. What across my mother’s ship are all the logo opportunities from these little targets?

And what would happen when we would buy something, we would develop a strategy around increasing organic growth. And you touched on the hardest thing for us to do is get a customer. Once I have a customer, what else can I talk to them about? And so I’m leveraging a relationship. And on average, we would get a 25% increase in organic growth within about twelve months of buying company. Because we applied science to understanding what were the best markets to go into only by good companies that take good care of customers. And now, where are the customer cross pollinization opportunities or product cross pollinization opportunities making strategic pivots to add new capabilities, to go back and keep constantly reselling the same customer. And so when you apply science and a methodology and a strategy, you can really enhance the organic growth of a business through inorganic or M&A activities.

A.J. Lawrence:
Well, let’s talk about the type of entrepreneurs who should be looking at your program. Maybe the type of questions they should be asking of themselves, of you, and how do they prepare? Or how do they know it’s time to start looking to work with you in your different programs?

Adam Coffey:
Yeah, good questions, all of them. So let’s start with one. I wrote an article for Forbes, and I think the title of it was, when’s the right time to sell? Because I think I get that question a lot with entrepreneurs. When’s the right time to sell? And I created this thing I call the rule of 130. Take your age as a two digit number and then add to it the percent of your net worth that is tied up in this illiquid thing known as your company. And if you add those two two digit numbers together and they equal more than 130, chances are that you have too much risk in your business. And one of two things are probably happening that I can predict. Number one, you’re probably in your mid-fifties or later.

You’ve got 80, 90% of your net worth tied up in your company. And I can tell you you’re now making bad business decisions because subconsciously you know I’ve got too much risk here. You may not think of it in those terms, but it’s like, I’m getting older. At some point, I got to monetize this. I got to be careful.

A.J. Lawrence:
And prevent defense.

Adam Coffey:
Yeah, exactly. As a guy who just went to the Lions game over the weekend, I flew to Michigan to see my brother and I went to the game. It’s like, prevent defense in business kills you. And so you stop aggressively investing in your company. You’re making bad business decisions and/or you’re just assuming too much risk. And if something bad happens in the world, like a pandemic as a good example, planes flying into buildings, or wars, and so many ways that value can be destroyed in our business without us doing anything wrong beyond our control. And so it’s like we need to diversify against an uncertain future. We need to make sure we don’t have too much asset diversification. And so I use the rule of 130 to teach entrepreneurs about when to sell.

Then, I hate to say it, but too many entrepreneurs wake up and today I’m 65. Time to go. Time to sell my company. It’s like, ideally you built the company with an exit in mind. However, if you didn’t, probably in about six months, we can get you whipped into shape good enough to where we can get good value. But ideally, you’d focus on starting to think about ringing the bell and exiting two to three years before you actually do. And there’s a lot of activity that we have to go through if we’re going to get a windfall of capital. How are we going to treat that? What’s our tax strategy? What’s our wealth creation or wealth management strategy? And geez, I’ve got a business in California and I live in California and it’s California, Nevada and Arizona, and I’m living in the most expensive tax jurisdiction on the planet.

What’s going to be my strategy to try to maximize the windfall that’s going to come to me versus if I just moved to Nevada and ran the empire from Nevada. But I actually did it. I didn’t fake it, I actually did it. Sold everything in California, moved to Nevada, who has a 0% income tax. If I’m selling something for 50 million and I’m looking at 13-14% cap gains rate versus zero, that’s a huge difference. So we need to think about our future and think about exits not the day we want to go, but hopefully before we got there. We need to engineer that path.

I told you off camera, I was working with an entrepreneur. I’ve been working with him for two years. When I started with him, he was less than 2 million of EBITDA. Today he’s over 12 million of EBITDA. He’s over 10 but we have enough in the pipeline he’ll be at twelve by the time we sell. We just hired a banker and we’re expecting $160 million exit.

So 2 million to 12 million in two years and $160,000,000 exit. And we engineered that whole thing in a very short period of time, including the capital that was required to make the acquisitions, including the team that was required to find them and to integrate them and do all these things. It’s like we need to put a lot of thinking, thought and strategy, into the businesses that we’re building in order to maximize the potential. And when we don’t think and don’t plan and have no strategy, we’re going to get, I’ll call it a lackadaisical kind of return for the business when we sell it. When we put in the effort and we’re very strategic, we can maximize the potential. And really, it’s a beautiful thing when it works.

A.J. Lawrence:
Like I said, part of my acquisition strategy and long term strategy is very much reliant. But I think I need to buy some books around empire building on this subject to get a little bit more specific and a little bit deeper because it’s nothing is turnkey. But the end of the day, there are better ways.

Adam Coffey:
There’s a way to stack the deck in your favor. So I had lunch today with an entrepreneur, fortune 500 guy, who’s going to buy his first company. And so we went through the framework. What’s the framework for raising the odds of success? When you don’t have a company today, you don’t know what industry to invest in. So I walked him through the framework. Look, if I’m doing this, I’m going to invest in needs, not wants. Why? Because when the economy cycles down, if I have a company that I just bought that focuses on wants not needs, everybody turns off their spend on wants, and lo and behold, I get a steep impact from a downturn. So focus on needs, not wants.

When there’s a hole in my roof and it’s raining outside and there’s water pouring on my head, I need my roof fixed, period. Bottom line. But I got a 700 HP monster truck out in the driveway and I want new wheels for it. But if I don’t have any money and I got laid off, well, I just don’t get the new wheels. And I can prevent that spend for a very long period of time if I want to. So it’s needs versus want. It’s contracted revenue versus project based revenue. Ideally, in my perfect world, I want recurrent revenue streams. We’ve been talking about customer acquisition and what to sell them.

And, boy, that’s the toughest thing for us to do, is get a customer. So I own a pest control company. If I’ve got a pest control company, I sign a contract with a homeowner, I get their credit card, and on the first of the month, I bill them. And then once every three months, my truck comes and we spray the property, the perimeter of the building, and we’re helping them keep pests out of their home. But for them, it’s a contract I signed, it’s a one and done, and I forget about it. And then two years, three years later, I’m still hitting their credit card every month. And once a quarter, I let them know I’m coming. And unless their credit card goes out of debt, the dates expire, or unless they move, chances are they’re not even going to revisit that choice that they made.

I have a recurrent revenue stream now. When I’m looking for new customers, they’re additive to my revenue stream. Not just replacing a project that was just completed, now I’ve got no revenue and I need a new project. So I think about needs versus wants, recurrent revenue versus project based. I apply this thing I call the 30-20-10 rule so I have to have at least 30% gross profit. So I focus on unit level economics before I scale. I want to build a great small business.

So in a service company, my unit level economics usually revolve around one truck. I’ve got one truck, one crew. What’s the revenue that trucker crew can bring in? What’s the cost of the crew, of the operating the truck, the tools, whatever they need. It’s like, how much gross profit can I generate? It better be at least 30% or more. And if it is, I want to spend less than 20% on SGNA. I need a minimum of a dime of profit at the bottom. And if I can get my unit level economics working well small, what I’ve got now is a healthy business that I can scale at will all the way to a billion dollar empire if I want to. And the fundamentals of the business are sound.

And a lot of entrepreneurs tell me, Adam, I’ll figure out how to make money once I get bigger. And I’ve got more revenue, then I’ll figure out how to make profit. It’s like, that’s the wrong answer. So there are ways an entrepreneur can stack the deck when they’re starting out to make sure that they are one of the 7% that get to a million in revenue, one of the 4% of those that get to 10 million. And then I build formulas. Okay, I know the unit level economics for one truck, how many trucks do I need on the road to get to a million? How many trucks at 10 million? What’s the capital expenditure plan for 1 million? For 10 million? It’s like success can be formulatic. We just have to understand how the business works.

A.J. Lawrence:
Look, I focus more in service. But just that same math works with then some consideration of what’s the noise level as you one plus one, there’s at some point where all of a sudden at three, overhead is not one, it is 1.1 or whatever. Understanding of noise.

Adam Coffey:
Yeah, sure. But once I build a successful small business, as I scale it, it will actually improve because I’ll be creating operating leverage. Buying 52 trucks is cheaper than buying seven, which is cheaper than buying one. Meaning, I get better discounts as I’m buying more volume of stuff. If I can make it work small, it’ll work big. I recently had a well known multi-billionaire call me and say, Adam, I got a company everybody would know the name of and it’s lost its way. It’s gone through four CEOs in five years. We can’t get our mojo back. I need help.

How do you fix world hunger? Well, everybody else have been trying to fix it from the top down. And I’m like, I don’t need to fix 6000 truck rolls. I need to fix one. Give me one truck. Let’s focus on one truck only and let’s make that work. And if we can make the unit level economics work for one truck, I can apply the learnings to 6000. I don’t start with 6000 and work my way down. I go, well, peel the onion all the way back to one truck. Fix one truck, I fix it all.

And that’s how I like to think about building a business. Sometimes when we buy companies, I get hired a lot for turnarounds. I had been a turnaround guy. So usually there’s an element of I’ve got to do surgery and fix. I’ve got to fix the patient, stabilize the patient, and then I need to grow the company exponentially. And it probably hasn’t grown in decades to the level that would excite investors. And so I have my work cut out for me usually when I stepped into a company as a CEO. But the good news is this can all be done.

These are tools. It’s not magic. I know a lot of billionaires and when I’m with them, you look at them and you look them up and down and you look at their house and their environment and you’re like, there’s nothing special about these people. They’re just like us. They had a tenacity. They had a drive. Sometimes they’re one hit wonders. They were in the right place at the right time. They started something and they made a fortune.

Then you’ve got some people, you know. If I think of Elon Musk, I admire Elon Musk quite a bit. Leave X behind. Here’s a guy who started not one, not two, but three companies, three entirely different industries and had multi-billion dollar outcomes in all three. That’s a process. I understand process, I can apply it to any industry. So I think as entrepreneurs, we always need to be learning. Never should we stop learning. We have to keep learning. We have to be inquisitive. When we stop learning, we stop growing. We stop growing, we plateau.

A.J. Lawrence:
I think that’s been a big drive for me to kind of go back. Consulting is nice fractional stuff on a couple of boards, but working in a company, being in the company and then working on the company, that’s been the most growth I’ve ever had in my life. Forget grad school, forget university, all that. I used to joke, it’s like I learned how to work some of the most advanced coffee machines because, of course, I had to hire the most fancy coffee things for my team back in the day. And of course, it would break regularly. Who had to fix it? Me. But then the bigger questions and the ways of not just making clients happy with choosing you to work but providing a system so you can do that, plus create value enough that your own employees can grow. And at the end of the day, you can do well.

Adam Coffey:
I’m 59. I’ve had billions of dollars in successful exits. I’m learning every day. And I learn sometimes from other entrepreneurs who are just starting their journey. I’m like, I didn’t never thought of it in that way. And I immediately adopt that. So be open to best practices. And whether that’s through coaching or peer groups or just reading or listening to books on tape, whatever the case may be, it’s like we have to keep on growing. Otherwise we’re going to plateau. And as long as we keep challenging ourselves and we do keep growing, then we can reach new levels and new heights.

A.J. Lawrence:
Well, Adam, on that message, if people in the audience want to continue growing themselves and they want to learn more about you, your books, your programs, the coaching programs, the different groups, what’s the best way for them to learn about you?

Adam Coffey:
So my website is adamecoffey.com, but you can also just reach out to me on LinkedIn. Follow me on LinkedI, I’m very active. LinkedIn. So you won’t find me on Facebook. If you do, it’s a fake profile. I’m not on Instagram. I am on Twitter or X, and I’m on LinkedIn. Hey, there’s 900 million business people on LinkedIn. That’s my platform.

A.J. Lawrence:
Your audience.

Adam Coffey:
That’s where you’ll find me. And I engage with them daily, and so reach out to me on LinkedIn. I always love hearing from people. If I look at all my clients and all the people that I work with today, it’s like, how did you hear about me? I heard you on a podcast. I read your book. That led me to LinkedIn. That led me to engagement. And all of us need to do a really good job of leveraging that platform because every customer you ever wanted is there and they’re on there. Unless you’re just purely consumer driven, in which case you’re on Instagram and TikTok. But aside from that, it’s like if you’re a business to business or you’re interconnecting with businesses, then I’d say LinkedIn is the world’s platform.

A.J. Lawrence:
Well, everyone, we’ll make sure we have Adam’s link in the show notes when we send the email out for the show, and of course, on our socials. Adam, thank you so much for coming on the show. There was so much I learned personally, and I know the audience will take out of this. Thank you so much for coming on the show today.

Adam Coffey:
A.J., thanks for having me. Good luck to all your listeners. Be doers, not dreamers. Get off your duffs and make it happen. Life is short.

A.J. Lawrence:
I agree. It is short. So take action. Hey, everyone. Thank you so much for listening to today’s episode. Look, if you found some interest in something you could learn from Adam and you think you know someone, another entrepreneur who could also learn from it, send them an episode, tell them they have to listen, and make sure they subscribe on their podcast listening platform of choice. But please, the more people subscribe, the more cool entrepreneurs like Adam we can bring on the show. So thank you again for listening today. I can’t wait to talk to you again. Bye-bye.

Adam Coffey:
Thanks everybody.

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