Adam Coffey's 20 Year Journey Buying & Selling 100 Companies!

 Summary

In this conversation, Jon Stoddard interviews Adam Coffee, an accomplished entrepreneur and author, who shares insights from his extensive experience in mergers and acquisitions. Adam discusses his journey in the private equity space, the strategies behind his company's growth, and the importance of relationships in business. He emphasizes the potential for entrepreneurs to achieve multiple exits through rollover investing and highlights the various income streams available to them post-sale. In this conversation, Jon Stoddard discusses the various aspects of entrepreneurship, focusing on exit strategies, the importance of understanding EBITDA for business valuation, and the significance of cultural fit in acquisitions. He shares personal anecdotes about his family’s entrepreneurial journey and emphasizes the value of trades as a viable career path. Stoddard also reflects on how his military background shaped his leadership skills and approach to business.

Takeaways

Adam Coffee has purchased 18 companies and plans to acquire 50 in total.
The goal of his books is to provide a concise overview of private equity and exit strategies.
Private equity firms have evolved significantly, with thousands now operating globally.
CoolSys has expanded its services beyond grocery stores to include various sectors like pharmaceuticals and data centers.
Acquisitions are used to extend geographic reach, pivot to new markets, or build density in existing markets.
Relationships with former business owners are crucial for ongoing success and growth.
Entrepreneurs often face challenges in scaling their businesses due to micromanagement tendencies.
Rollover investing allows entrepreneurs to benefit from multiple exits over time.
It's important for entrepreneurs to diversify their assets while remaining involved in their businesses.
Various income streams can be created post-sale, including consulting and real estate leasing. He was able to collect 10% interest on his money.
Entrepreneurs need to figure out how to invest after an exit.
You can still generate income from your expertise.
The importance of understanding EBITDA in business valuation.
Cultural fit is crucial when acquiring companies.
Strategic acquisitions require thorough screening and filters.
The military instilled discipline and leadership in me.
There is a shortage of technicians in the trades.
Trades can lead to generational wealth.
Planning for the future is essential for entrepreneurs.

 Watch the Interview

Transcript

Jon Stoddard (00:00.11)
Today I've got a little bit of background noise, but. Welcome to the top &A entrepreneurs. I've got a really special guest. I got Adam Coffee. He's a army veteran. He runs a cool sis. And I got to tell, I just want to read this. He's purchased 18 smaller companies. This is the last, since he's running cool sis. Three more letters of intent over the next four years. He's going to purchase grand total of 50. Over his career, he's bought, sold, financed around a hundred companies in 20 years.

That's an impressive record. And welcome to the show, Adam. Well, thank you. Thank you for having me. Hello to your listeners. Very glad to be here. I think CoolSys today, it's 21, are now complete with more on the way. But yeah, buy and build is kind of my thing. Yeah, that's beautiful. After 20 years. to mention this. He's also the author of these two books, the Exit Strategy Playbook and the Private Equity Playbook.

I just want to start with the book, how simple you made the read. Well, that was kind of the goal and objective, just to be honest with you. I really had something in mind and that was for a person to be able to go on a cross-country flight, as an example, take off from New York, have a bad meal, have a drink, sit back in your chair and decide, am I going to do email for the next three and a half hours or am I going to read this book?

For those who chose to read that book, the goal and objective was to give you 20 years worth of CEO cliff notes from my own career, having worked with private equity, and try to just impart some general knowledge and wisdom. Not necessarily going too deep on any subject because it's a rabbit hole, but just giving a good broad overview of the topics that were being covered. First book was all about private equity, second book,

partially about private equity, but really just more for entrepreneurs who are exiting a business. What's that all about? What's that like? What are the options, et cetera? I think they're great rates. mean, if you don't have any experience in the industry, I'd start with these two. I keep these two on my desktop. Well, I appreciate that. got a few around. jeez, I turned and say I was going to say I got a few on my desktop, and they're not sitting there. Somebody just cleaned up my office. But they're back here on my mantle.

Jon Stoddard (02:27.352)
So do you use these books now to send out to prospective targets or do they? Not designed for that, but I do have to admit that my &A team, my in-house &A team does use the books all the time with prospective entrepreneurs. People who've spent careers building businesses have not necessarily spent a career selling businesses. so oftentimes for an entrepreneur, it's their first exit.

And it's daunting, you know, and trying to trying to figure out who's a good partner or how to navigate that experience. It can be really daunting for people. So my team likes to use our books or my books as kind of a primer on the whole subject. Well, definitely after reading, he hey, this guy's got credibility. He wrote a book and he wants to buy my company. And based upon what I read in it, he's going to be top value and he's going to tell me how to.

make more money by doing the rollovers and it just adds credibility for your case. You know what? It does. It wasn't why I wrote them, but it's a great side benefit. Don't tell anybody. So I want to get into this a little bit detailed. So you're backed by your first private equity group that backed you was AudEx Group, which is a middle market.

And then, I guess that grew too big for them or they got their three X or five X return or whatever it was. then the heiress management group bought them, which is a higher, much higher. You know, so private equity firms are 6,000 of them on the planet today, which is amazing. If you go back to the beginning of my career, there were a few hundred and, you've gone from hundreds of billions in assets under management.

to now trillions, four plus trillion in assets under management, seven trillion if you include debt funds. there are 6,000 firms out there, but they all tend to be specialists. They specialize in certain size companies, in certain verticals, in certain industries. And so it's very common. mean, when you're building a company as I am, the way that I look at it is,

Jon Stoddard (04:52.622)
I'm gonna take an asset with revenue at the start, call it CoolSys, 200 million plus. And then at the first flip, it's in the 400s. Then at the next flip, it's gonna be over a billion. And I'm building a company for the long haul. We have 3000 employees now, we've combined 21 different companies. And the process of doing that, private equity would see the company as a tool for their investors to earn a return.

And I, as the CEO of a company, can look at private equity and think of them as a tool to help fund our growth. And so when you're going to go, call it from 100, 200 million to over a billion in revenue, you're going to have multiple hold periods with different sized private equity groups. So you mentioned the Audax group, great guys, loved working with them. They typically are a very disciplined investor. All they do is buy and build.

And they typically buy companies in the lower middle market. So EBITDA in the teens, you know, generally, and then they typically sell when the companies get to about, you know, call it between 40 and 60, you know, so I'll call it 50 teens to 50. That's all they do. They do it every day. And when they get that business there, it's time to go. It's time to ring the bell. And so they're very disciplined Aries. My current sponsor, they're over 260 billion in assets under management.

They don't say it this way I do and I can't cause I don't work there. They're like the world's largest non-bank lender, private lender, Aries management. And so they came in, they partnered with me at a company that I ran a long time ago and they were on the debt side. They were providing the debt capital for Wash, multifamily laundry when I was building that company. So I first met them like 10 years ago.

15 years ago, whenever it was, way back when. And those relationships that I fostered there, they paid dividends today, much later. And so it was great to partner up with Aries. And they took a company that was worth hundreds of millions of dollars. And when we're done on their watch, it'll be worth billions. And so different private equity firms come in at different sizes, different points in time.

Jon Stoddard (07:14.754)
The constant is the company and the employees and the entrepreneurs who join CoolSys when they sell us their business. We're the constants going through time until eventually we hit, you know, so big that we ultimately wind up with a public exit somewhere, hard to stay private at a certain size. And there'll be different PE firms that come and go during that time period. It's a lot of fun. Yeah. How did you start with CoolSys? I mean, I know I read about the washers and how many

washers and dryers you own and sold that. And how did you start with CoolSits? Was it just one HVAC company? So, boy, that's a complicated story. Audax bought the platform, and the platform was known as Source Refrigeration. And Source was a company that was actually three companies that were put together by a public utility.

it was called Edison Source. So the Edison, you know, electric company or the public utility put together three HVAC companies way back when, and, you know, had this great concept, you know, the largest user of electricity is grocery stores. And they thought, geez, if we could own a service company that could keep a grocery store finely tuned, operating at optimal efficiency, instead of just selling power, we could sell

you know, call it the total solution. We'll maintain, we'll provide the power, we'll maintain the equipment that's using the power. And, you know, wouldn't this be a great, we can capitate your largest line item expense. And somewhere along the way, you know, regulators stepped in and said, that's a great idea, but you can't do that. So, Source Edison Source was spun out, you know, part of a management led buyout. And that kind of began its PE adventure, but this was still going back like, like to the year 2000.

Audax bought it in December of 2015. They held it for just over three years. It was about a four times multiple of invested capital return. I ran it for 27 months. We bought eight companies, the first eight companies and really kind of took the growth trajectory and went from something that was kind of sleepy to something that was more in the neighborhood of 30%. And that's what we're continuing to do today.

Jon Stoddard (09:41.032)
So the kind of the model of acquisition target was set in where, you know, you're looking for HVAC companies with contracts with large grocery stores, Fry's, Albertans, Whole Foods. Yeah. So I mean, literally you could pick a brand and in the United States, we service over 45,000 different customer locations. However, today we're not just, you know, call it grocery.

We build cold storage warehouses, we do blood banks, we do pharmaceutical research laboratories, drug storage facilities. We just recently re-outfitted the USS Comfort for the Navy to handle all the cold storage needs of the current vaccines. And so the company is many things to many people. We do cell phone towers by the thousands for cell carriers. So data centers, there's just a...

a whole myriad of new customer verticals that we've gone into. And that was a part of the strategy. So we've done 21 acquisitions now, eight on Audax's watch, the rest of them now on the Aries watch, but a lot of strategic pivots to get us into new markets, new customer verticals, places where a customer's core need is to do something.

But they have a mission critical need to keep it cold. I if you think about it in basic terms, a grocery store, you can't turn off the refrigeration in the frozen food section at night when everybody goes home. know, the food's got to be frozen 24 hours a day or kept cold 24 hours a day. And so there's a mission critical need to maintain that indoor environment at a certain temperature. And that's where we like to play. So it's beyond grocery now and it's taken us into a lot of different directions.

Yeah, I love that. mean, you could have one place in Tennessee, wherever you have a location and then go, Hey, they got, they're doing cell phone towers. They're doing refrigeration for blood banks. And then you just take those ideas to somewhere in Arizona and just say, that that's really the kicker. Right. So we use acquisitions to fulfill one of three strategies. Either I'm extending my geographic reach so that I can, can, can, you know, service a broader territory.

Jon Stoddard (12:00.522)
or I'm making a pivot to service a new customer vertical or a new market, or I'm building density in the existing markets that we have. Going back to what your original question was, I hadn't answered yet. How did I find my way here? There was a search underway. So it was a recruiter that called me and said, hey, we have this company. It's Audax backed and they're looking for a new CEO. And if you look at my 20 year career,

The three companies that I built very different industries, but there was commonality. And this is not to sound sexist ladies, but a lot of guys, a lot of trucks, a lot of broken stuff. First one was a medical company fixing imaging equipment in hospitals, CAT scanners, MRIs all over the United States. Then the next one was commercial laundry machines all over North America in 70,000 locations. And now it's

guys in trucks going to grocery stores, blood banks, and all these myriad of places, 50,000 plus now, to keep something cold. And so a lot of guys, a lot of trucks, a lot of broken stuff. It's a service business. I'm a services expert. So if you're a private equity firm and you're looking to do, looking for a new CEO and maybe even it's a buy-in build or it's a services-based business,

My name is one that would pop up on the short list for a lot of people. So it was just happenstance that brought me to CoolSys. I mean, you're doing a great job. How does the, that you have your deal team in place and they're sourcing these deals and you're looking for the right size to make sense that moves the needle. And when you guys make that first call, now that they know about you, is it kind of like, Hey, CoolSys is calling. Let's get a higher multiple or what are.

Can they? No, you know, the interesting thing when you're in any industry, when you're doing a buy and build, the base requirement is highly fragmented industry. So in our particular case, based on our own research and the research of others, because we don't do it all in house by any stretch of the imagination. We have outsourced partners that help us what I call shake the trees. And then I have a deal team that

Jon Stoddard (14:22.75)
that can also field inbound inquiries, make outbound inquiries, et cetera. But we've identified over 4,500 companies in the United States that does what we do. Most of them are really small. Mom and Pop call it. So it's a person who started with a truck and over an extended period of time, they built an empire. They're wealthy guys. They built an empire.

but there's 4,500 of them in the US. And so it's so fragmented that really deals either are found by what I call our outsourced front end. They make calls and they, if you go to our website, you'll see I have a section for people to reach out directly to us and people do reach out to us. And now that we've bought 21 companies kind of all over the US and a lot of entrepreneurs know some of the entrepreneurs that have sold businesses to us.

And so there's kind of a networking thing that goes on. Hey, I respected that company. They sold the cool sis. I respected that company. They sold the cool sis. Maybe I know the founder, maybe I don't. but you know, that's someone I want to talk to. So we feel a lot of inbound calls now and we have so many testimonials from our former owners. call it my former owner's alumni club. So they sell the company, they get their jacket with their patches, the former owner's alumni club.

And, they become a rollover investor and cool sister or a shareholder in the, in the mothership. And then they, you know, the, run, go back to running their businesses as, as they have, but now they got friends. You know, I tell people, it's kind of like you go into a bar fight and now you got 3000 brothers with baseball bats behind you. got the muscle of this giant organization, but you're still that small company, you know, in your own region, in your own territory.

you're just now a part of the CoolSys family. And then we cross-pollinate all these different customer opportunities. They may have a relationship with someone locally, but because they're a local company, they can't grow out of state or grow in multiple states with that customer. Now they can introduce that relationship to the rest of the CoolSys empire. We can grow with their customers or...

Jon Stoddard (16:37.758)
when we go into a new geography, part of what we do is analyze the markets that we're entering to see where our existing customers have infrastructure and have locations. And then we'll do outreach to them, hey, we're now in new geography and we can bring different products and services to bear in this market. And so there's a lot of cross pollination that takes place, which means on average right now, when we acquire a company, they grow by about 20 % organically.

after we buy them. And so it's a great story. Yeah, I would just notice the deal size you go after in the high 20 to 30 high 125. And then most of the companies you see you run into kind of average two to 8 % growth and what you can do with those three to four levers is get it to 24 to 27. What typically happens in an entrepreneur founded company organic growth is the

primary driver of growth. So in early years, almost blinders. Yeah. In early years, you know, it's very high growth rates because one location becomes two is a hundred percent growth. But, you know, over time they build the empire to a certain size. And then it's like, okay, I'm comfortable managing this size empire. I'm good with the amount of trucks on the road, the income I'm generating. And so they never really go beyond, you know, a certain plateau.

And I've done a lot of research. And I'm a guest speaker at lot of colleges and universities. And so I really try to understand the entrepreneurial mind. And I would tell you, a lot of the same DNA that makes an entrepreneur successful going from 0 to 20, 30 million is the same thing that prevents them from going from 30 to 100. And it's almost like there has to be a reprogram or a shift internally.

And so to expound on that, a founder-owned company typically is a micromanager. And that's one of the things that makes them successful. I call it the happy meal effect. They want to make sure that anywhere you go in the United States, you know what a happy meal looks like. It's a red box, yellow handles, cardboard hamburger, and little apple slices, and little thing of fries. It's a very predictable. Entrepreneurs, in order to build the business,

Jon Stoddard (18:59.404)
you know, go down to the unit level economics and they make sure it's repetitive, the same thing. And they have to be able to keep their arms around it, which limits their successful growing. But at some point it has to become about we and not about me. And, you know, my best analogy, I'm not even a huge classical music fan, but I like to use the concept of an orchestra instead of being the first chair player in every section of that orchestra.

the entrepreneur has to truly learn how to be a conductor and it has to learn how to trust others to be first chair players in all these different sections. And that's the DNA shift that would allow people who are successful to a certain level to kind of amp it up and really blow out growth. And so it's been a lot of fun working with, call it 21 very successful multimillionaires who have sold businesses to us and

you know, keeping that DNA, keeping that entrepreneurial spirit alive while at the same time trying to harness it collectively as a group and drive it to new heights and new levels. Yeah, I had somebody explain that to me. It's like, you know, every level of coaching, let's say if you're going to swimming coaching, you you start out with your high school and if you've got any talent, then you'll go to college. You've got any talent, you go to the Olympics. But those are not going to be the same coach in each one because

every level is going to expand your training and your thoughts. Yeah, and that's a great analogy because people have different specialties. It's like I can take the raw talent, shape it, get it this far. Someone else takes it from there, gets it to here. And that's similar to that analogy we were using on the private equity, the size of firm, size of fund being a tool for us as we're growing through evolution and for us being a tool for their investors to get

get outsized returns along the way. But that's also why you typically don't see like a private equity firm go from startup to billion dollar company. mean, these are very different growth periods in the evolution of a company. Yeah, that's good. Way too much risk. So a million ways to die in the West than a startup. Yeah.

Jon Stoddard (21:16.43)
I got the chapter on rollovers. We always, everybody says, like, hey, you get a second bite of the apple. But the way you explained that and the definitely the extra little features you can give to a seller. mean, do you give that pitch to the seller of the organization? You know, I certainly do, but my team is very well versed on, you know, on rollover investing. And we have

you know, kind of a 50 page entrepreneurs guide, you know, that we also use, which kind of spells out some of those real life examples. And, you know, I think a lot of times entrepreneurs put their blood, sweat and tears into building their organization, but they think of exits as a singular event. And I have learned through 20 years of working in the private equity backed world of companies and building companies that really

It shouldn't be thought of as a singular event. If you play your cards right, you can get multiple paydays and each payday can be subsequently larger than the one before it. And I love to use that, the one example of the first company that sold the CoolSys for $16 million where they took 12 million home, rolled 4 million forward.

that entrepreneur, if he had been given the chance to kind of cash out his chips, he would have. was sure, I'm selling for 16 million, it's a number, I'm happy, I'm gone. But he took 12, rolled four, and then 27 months later, I sold for a four times multiple invested capital. So guess what? The 4 million rollover became another 16 million. He got paid twice for the same company. 32 million now. Yeah. And now is an investor in

The third flip that we're doing, so the first one being when they sold the company to us, second one being when I sold the entire company from Audax to Aries, third one whenever Aries does an exit. So rollover investing can be a really powerful tool. Many times when an entrepreneur sells, it's not always what you think. It's not always someone who's in their late 60s, early 70s, who's just wanting to retire.

Jon Stoddard (23:33.878)
Sometimes it's guys in their 40s and 50s and they're just starting to get a little nervous and they're, God, I want to diversify my assets. The world's going to hell in a hand basket. You know, I got to make sure I don't get stuck, you know, with nothing when it is time to retire, but I'm not ready to hang up my cleats. I want to keep on working and rollover investing and partnering with either a strategic company like the CoolSys.

that happens to be backed by private equity or becoming a platform company direct with private equity. And you get into that realm of additional bites of the apple and an ability to, you what I tell people, why sell your company once when you could sell it twice or three times. My personal record is selling the same company five times in 13 years and four months. And it's a very powerful way for entrepreneurs to stay involved.

constantly, you know, of a squirrel putting nuts in the tree for winter. You know, it's constantly you're storing up and diversifying, but you still have enough skin in the game to make life interesting to where the next exit is bigger than the last. And that exit was bigger than the last. And it can just find out even if you're involved in the business after some point, know, the sucker third year, is that, would that be true?

I'm sorry, say that again. If the seller sold out and he only worked for two more years, but you sold at three and he still gets another check for 12 million bucks. Yeah. So what I encourage with my entrepreneurs is I want to have a relationship with them forever. There is no time limit. So they can choose how active they want to be in the business. If they start out being a full-time employee, God bless them, know, need them, need to keep the relationships that they've built over 20, 30 years with their customers.

But then when it is time to slow down, love to see entrepreneurs then turn to part-time employees, consultants, whatever the case may be. I always want to have a relationship with them. These are people who built a business, they've developed relationships, they're thought highly of by their employees. And it's like, I'd never want them to go away. They can always be a rollover investor. They can always stay in some type of a relationship with CoolSys, which allows them then to continue to leverage.

Jon Stoddard (25:48.776)
all that experience and knowledge that they've built over a career and to continue to monetize it in some way, or form. mean, eventually, you know, have had a few entrepreneurs actually retire. They were in their seventies and they were like, that's what I wanted to do. I'm like, God bless you, go fishing, you know, and I'm going to keep you on some kind of a little retainer. Cause if I need you, I'm going to call you or send a boat out to find you. I'm going to drag you back for 15 minutes to help us with a relationship issue or problem.

So love having ongoing relationships with the people that we partner with. Yeah, and when you talk about monetizing, there's three other features that you offer. The residual income stream, seller financing, can make extra money on the interest rate, being a landlord and being a consultant. I mean, you've got this mapped out where. You know what? If it's worth doing, it's worth being paid for. And so when an entrepreneur partners with me,

I want to make sure that they're treated fairly and that they have multiple avenues of or ways or abilities to generate an income stream. as I've talked about in the books, it's most entrepreneurs on real estate, the universe of buyers doesn't want to buy that real estate. It's a different asset class. The diligence requirements are very intense.

And so I always encourage entrepreneurs take all your real estate, you two, three years before the sale, spin it out, separate, separate entity, put in place a fair market lease with the company. When the company is sold, as long as you have a reasonable fair market rent and duration, you can continue to generate income from the business you sold by being the landlord to the business. And, you know, that's very, very common in today's world. And so that's one income stream.

you know, maintaining either an employee, employer relationship or a consulting relationship, also another great way to do it. And then you, touched on owner financing. I don't often talk about that much, but my brother and I bought an insurance agency from a founder who was in his seventies. He was retiring and he held back 25 % of the capital that we needed. So 25 % was equity that we put in, 25 % was a seller note.

Jon Stoddard (28:08.59)
And then 20 or 50 % was other, you know, bank financing. The business itself financed all the debt, but here's this former owner and he was able to charge us, you know, a 10 % interest rate on a note. We paid more. It was like mezzanine financing. It's not secured. You know, the bank debt's in front of him. And so he's second fiddle from a debt perspective, but it was above market interest rate.

but he made it easy for us. And so he was able to collect 10 % interest on his money that he rolled over as a debt provider for a five-year period. So he gets the payday when he leaves, holds some of the debt, keeps getting paydays every month as we're making interest payments, rents us the building, is getting money that way, and we let him keep an office until literally the day he died.

a lot of different ways for entrepreneurs to continue to make money. Because let's face it, when someone works their whole life and they build a company, and then they finally do that exit, what do they do with a pile of money? The first thing they have to do is figure out how to invest it or what to do with it. And through doing some of the things I talk about, you can diversify those assets and make some outside investments or get a money manager for someone to help you.

but you can also still stay invested and generate income in that thing that you know, where you're an expert, where you spent 20, 30 years building the business. Why walk away? Why not continue to monetize? Charge a gob full of money for two hours worth of work. Yeah, pretty much. Yeah, you, hey, you speak glowingly, your brother in both books. Does he involve with Cool CIS or? He's not. And so in,

But he was the perfect example. My first book, I had the two avatars, Josh and Rose. I'm the original Rose. I'm the Fortune 500 executive who transitioned to become a private equity-backed CEO. And Rose is my daughter. She's my eight-year-old daughter. So I used her name. She thought that was cool to see it in the book. But the avatar was really my experience going from GE to becoming a CEO of a business.

Jon Stoddard (30:29.984)
And then Josh is my son, who by the way, just got his first payday when his business was sold for a few billion dollars in a private equity backed adventure of his own. He represented the entrepreneurial spirit. So my brother Mike is both characters. was originally Rose. He worked in the insurance industry for a large company, worked his way up through the ranks. He left to buy an agency.

and became Josh, became an entrepreneur. I helped him with the financing, helped him from I was a board member of the business. And then he ran that company for a long time. I think we owned it for 15 years. And then as he's approaching retirement age, it's like, well, I'm not quite ready to hang up my cleats, but the world has gone crazy. Let's need to monetize, need to diversify the asset base.

but want to keep working. And so he just was the perfect character to use as an example in the new book, the exit strategy playbook, because he lived this, spent 30 years or more working in the insurance industry, not only for the fortune 500 world, then as his own entrepreneur, as his own business owner. But then when it's time to exit, hey, this is the first time he's going to exit.

It's daunting, you and it requires some guidance. so it just so happened happenstance that he's the perfect, he was the perfect character to keep referencing in the book because the parallels were there. Yeah, you come from an entrepreneurial family, your son, you, your brother. mean, was this taught by the parents or did you just, you know, born aid?

You know, my dad was a Notre Dame grad Navy ROTC officer served during kind of late in the Korean War era. And he, he was a corporate guy. So I would say that he was more conservative and a little less entrepreneurial, but his kids all have some type of a creative flair and

Jon Stoddard (32:44.966)
I have a brother who's a cartoonist in San Francisco who does movies and cartoons. And I have a sister who built businesses and has run multiple businesses, kind of a smaller entrepreneurial type spirit. She was quite successful. My brother and I were the corporate guys. And then it seems like everybody in my family fit in one camp or the other, either you're creative or brain or left brain. Yeah, right brain, left brain kind of thing. Yeah.

know, my brother and I were probably the two who were guilty of following in dad's footsteps to corporate America. We just then had a second incarnation as entrepreneurs. Yeah, I have to ask you, and you talked about even in both books and, you know, the way Warren Buffett and Charlie Munger talk about it, even though they hate even just because it doesn't account for, you know, manufacturing or inventory. What?

When you guys go into an LOI, and this is another veteran asked me to ask that, what kind of landlines do you see in the due diligence with EBITDA that once you start uncovering this? I can understand why some, especially public companies, they talk about cash profit, but when you're buying a private company, cash profit is very misleading. It's misleading because you could be a business that's not investing for your future.

that's not investing in growth, growth is expensive. And so you could have high cash profit, but be a business that doesn't grow and has no intrinsic value to get an increased multiple or purchase price. Another entrepreneur may be building a business and they're investing heavily. They're buying companies like somebody I know, or they're investing in technology and they're driving, they're opening up new offices and new cities and new markets.

all of this stuff costs a tremendous amount of money. And so they would show no cash profit. Well, which business would you rather own? Would you rather own the company that's making cash but not growing or the business that's growing and investing in its future and not generating as much free cash? And so there can be a disconnect when you're trying to value companies. And so how do you level that playing field?

Jon Stoddard (35:08.366)
And the way that private equity levels that playing field is to focus on the EBITDA line. That doesn't mean it's solely about EBITDA, but it is a place where you can level out, call it those who are investing versus those who are not, and get to some kind of a level playing field to then dig deeper into a business and to try to determine what the value to you is.

in making it an investment, whether it's a platform or an add-on to a company you already own. So I guess it depends on the angle in which you're looking at it. And it was funny, I had a large strategic looking at my company last time I was in the market. And I remember a senior executive making, you don't make very much cash profit. I'm like, yeah, I don't make any. Did you read my book? It's all about EBITDA and the private equity backed world.

I'm investing for my future. I've bought eight companies. When you bought eight companies and buy the kind of, and spend and invest the kind of capital that we're talking about, you are guaranteed not to be generating cash profit. Because I'm building a multi-billion dollar company, you just don't know it yet, because I'm not done. But it's a journey and you have to invest heavily in order to grow. Growth is expensive.

I understand how some people look at it and say, nah, that's not a fair representation. Exactly. Neither is cash. So you have to use some kind of a combination of factors. And I talk a lot about EBITDA strictly because entrepreneurs, most of them don't know what it is or what its value is to them in an exit.

I'll leave Warren Buffett to argue with the senior PE guys at a cocktail mixer at a university endowment or something, or at some charity function. They can argue about whether or not it should be used. The reality is it is used. And so I'm educating the entrepreneurs, what is it? Why is it important? Why you should understand it and how you should manage and manipulate it? Because at the end of the day,

Jon Stoddard (37:20.174)
It's all about generating for that entrepreneur who's monetizing their asset. How do you get maximum value? And so you need to understand how someone's evaluating that business and EBITDA is the way it's done today. Would you say when you go look at a territory like Tucson, Arizona, there's a $25 million business that there, you there you could tell that they're growing, you know, putting, you know,

investments into growth versus, hey, man, these guys are tapped out. He's fine with the $25 million family-owned business and the income. you can give them a multiple based upon that? Most industries have some kind of a trading range. And so there is kind of an envelope of price value from left to right. Maybe it's four times

EBITDA to six times EBITDA. And that's a pretty typical range. Where a company falls in that range can then be dictated by what's the market they serve, the size of that market, are they tapped out, what's their organic growth story, is there a way to continue the growth of the business? And then, you know, what's the strategic value to me as the buyer? So from my perspective, we put a lot of work. I'll tell you that it's not as simple as someone's for sale and I'm a buyer.

We put a whole lot of work into what I call filters. So upfront, I lay out what is my perfect acquisition. And we're very active. So my deal team has some proprietary tools that they've developed where we take our universe of customers. We lay out all their locations in the United States. We also look at population factors and we break them down into MSAs, you and so it's kind of city markets.

And let's find MSAs that are growing. So people are moving to them, know, their growth areas just in general. And then they happen to have a large footprint of our existing customers in a new market that we're not currently servicing, which means not only do I inherit the customers we're buying, but I also then get to cross-pollinate customers that I have. Then let's look at the actual business. What percent of it is service? What percent of it is construction?

Jon Stoddard (39:45.602)
What is the EBITDA margin of the business? Is it union, non-union, et cetera, so on and so forth. So I have all these filters that help us identify a good acquisition because buying someone for the sake of buying someone can lead to a lot of problems and a lot of headaches. Buying a bad company for cheap can zap so much energy out of a leadership team trying to turn it around or trying to fix it. I'd rather buy

world-class assets, best in class assets and add those to the team, because they're very easy to integrate, don't require as much management effort to continue to operate. And then the conversations are all about growth. How do we grow faster? What are the limitations that you have today to grow? And how can I, as the parent and the larger entity, how can I help you solve those problems? And so instead of focusing on

How do I fix what's broken? I focus on how do I grow what's already good and make it much larger and a more important piece of the empire. And that's more higher value added work. So we put a lot of effort into screening upfront. And when we find that asset that fits the profiles that we're looking for, then that's an asset I wanna own and it's an asset I'm willing to pay a premium price to get.

and it's going to be an important valuable piece of our future. some companies in smaller markets help us strategically build density in a market that's not very dense. So I can stop, you know, you use Tucson, so I can stop driving guys from Phoenix over to Tucson. If I buy that small company in Tucson that now gives me a hub, you know, in Tucson, it could be much more cost effective to service.

call it the greater Tucson area from a Tucson based hub than it is to drive people over from Phoenix and they spend half the day driving back and forth. Nobody likes that a hundred mile drive. I've talked to a lot of service companies. So there are different strategic reasons to make acquisitions. I think what's important is if you're going to be an acquirer, if you're going to have an acquisitive nature, you need to understand good versus bad and what good means to you could be different than what it means to someone else.

Jon Stoddard (42:04.694)
Yeah, I just finished Steve Schwartzman's book from Blackstone and he talks about that one deal where he basically was a loser, was a $300 million deal and you know, don't lose money. But then he created this new process where, you know, it had inputs from everybody in the team, the yes or no, B2O up or down. Do you guys have that in the role? In our particular case, we do, but it's informal. So he's putting to work

know, billions and billions of dollars. And so they're making very big decisions for, know, and their life's blood comes from the limited partners that, you know, invest large sums of money. So what he does is a different universe, different world from what Adam Coffee does. But, you know, we essentially are following, call it a similar profile. It's just less formal, you know. So in our world, we have to like the business

you know, as a company. And then I involve my private equity partner and present to them, I call it a white paper, but it's kind of a diagnostic deck. Here's why we like this company. Here's the strategic, you know, gaps that it fills for us. And here's what we think the growth profile is for that business, you know, over the coming years. And then we certainly get buy-in. have to have board approval to do an acquisition. So we do have a process and there are plenty of people who could veto.

veto that acquisition. Have you seen anything peculiar just says, this guy's got, I can't think of the exact like, well, too much debt or he's got a coke problem or whatever. Have you seen anything like that? to make the deal? Most of the times what kills the deal from my perspective, there's really two things. One is they tell us that they're making X and they're really making X minus about 90%. So they're

their numbers just aren't accurate. How does that happen? I know that everybody's embarrassed by their numbers. But you're only going to get paid on actually value. How does somebody get in a position you wanted to say, we're doing this? Well, I would say it's rarely malicious. Oftentimes, it's just poor accounting practices or simplified accounting practices and a lack of understanding of

Jon Stoddard (44:27.053)
call it corporate finance and not truly understanding EBITDA, going back to that term again. So I think, the second reason and the real reason why we walk away from most of the companies that we walk away from is personality fit of the entrepreneur. In this particular case, I'm building an empire will ultimately acquire, as I said, 50 companies or more. And the reality is,

I would like to have a relationship with 50 entrepreneurs. Well, if I have 50 cowboys that you can't put a saddle on and they're not going to play well with others and they're going to be, you know, head cases, then I guess what? I've got an empire that I can't manage. So for me, it's all about cultural fit. Do they think like we think? Do they value people as we do? Are their core beliefs and values similar to ours? And I got to tell you, I look at companies all the time.

where the arrogance or egotisticalness of the entrepreneurs is so off the charts that it's just like, know what, I'm better served going somewhere else because I want people to stay associated with our company and I wanna have a relationship with these people. And I've got a great crew of entrepreneurs. And if you don't fit into that mix, then you're gonna be odd man out. And so we just don't wanna go there. So I'd say,

Most of the times for us, we pass probably first because of personality of the entrepreneur, too strong, not a good fit for what we're building. And then, know, two, just a total lack of understanding of what their numbers really are. So they report to us something and then in diligence, it's like, you know, we find that it's not accurate. And so if there's inaccuracies, I mean, we've had some big swings where

you know, potentially you have, you know, 50 % reduction in earnings because they're just doing accounting wrong. And so, you know, I've had deals fall apart for those reasons too. But generally speaking, we focus on buying good companies with good people. They kind of go hand in hand and, know, great market rep, you know, and they fill, you know, some of our strategic needs. They check all my filters. And so when we find that company, it's easy to really put your arms around it.

Jon Stoddard (46:52.001)
dive in and make it work. Yeah, you're on a different level of motivated reasons to sell. A lot of people buy these companies, 10 reasons like divorce or death or something else. You're on the other level. like, hey, do you want to be turn off the lights or be joined the team? I like the way you explain that. Yeah. Yeah. And I mean, that's important. So you go back to my brother again, great example. He

He was an entrepreneur who was approaching retirement. He wanted to keep working for at least another three or four years. And so in his world, in understanding the universe of buyers, it either needed to be a financial buyer who would make him a platform and keep him around, or it had to be a strategic buyer who wasn't gonna just suck the, integrate the entire company and then lay everybody off and get rid of everybody, because that wouldn't accomplish my brother's goal and objective.

needed to either be a strategic buyer where he could join the team and still keep going forward only now no longer the sole shareholder of his company. Now he's an employee of the bigger firm with some rollover stock. And ultimately that's what we wound up doing. And we were too small with not enough growth trajectory to be a platform for a private equity firm. So his best exit path.

was either gonna be an owner operator, someone who would come in stage left, the business and then keep running it while my brother eventually rides out stage right, or that large strategic who would make him part of a bigger company and afford him an opportunity to diversify his assets, but yet still be a rollover investor. Kind of like how Coolsys does it. In this case, it was a large insurance corporation called Acresure. And so my brother got to cash out his chips, make a rollover,

And that company is growing like a weed. It'll have an IPO down the road, multi-billion dollar exit in its future. And my brother probably makes a three to five times return on his rollover investment in about a three, four year period. And so he's happy and it was the right fit. So I think a lot of times for entrepreneurs, they're focused on price. I want to get max value. But they don't know necessarily if max value is also the

Jon Stoddard (49:10.561)
best outcome for their situation. So part of the exit strategy playbook is really to get someone to look in the mirror and kind of start thinking about these, here's the different buyers. Here's, here's what's going to happen to you. If these people are your buyers, and then you can start to think about, what do you really want for the future? What do you want for your employees? You know, do you want to see them all lose their jobs because you sold to a strategic who's just literally taking your contracts and your

your customers and then they're going to turn off the lights on all the offices and all those people are out of work. know, I mean, well, you know, there is no right or wrong, but what do you want as an entrepreneur? And so I get them to think about all this stuff in advance so that when they head into a sale process, they know what kind of buyer universe they're really interested in finding. And yes, they want maximum value. You always want maximum value, but you also want the best exit for your situation.

that accomplishes your goals and objectives. And so often I think people put very little thought into either preparing the company for sale or in who the right buyer is. They just wake up one day and say, by God, I'm gone. Let's sell this puppy, top dollar, whoever the hell pays it. That's who I'm riding out of town. And they're leaving money on the table by not preparing. And they're potentially setting themselves up for some trouble if they haven't thought about

who that buyer is and what's gonna happen after the deal's closed to them and their employees and their empire. Yeah. So you're an Army veteran and why did you join the Army? And are you still in contact with people from that? that's been... Yeah. It's like the stone ages, right? No, I'm like 79 to 83, I was in the Air Force. So that's so long ago. Yeah.

Yeah, I'm an 82 to 86er, know, and, you know, so for me, you know, I grew up in an affluent area of Detroit, Michigan, called Birmingham and, you know, upper middle class. And everybody on my block, you know, raised the American flag, you know, every day, most of them fought World War Two fought in Korea. I probably watched too many war movies as a kid growing up playing army, you know, in the fields, you know, around the neighborhood with

Jon Stoddard (51:34.605)
my friends and you know, it was, so there was a little bit of, I played with GI Joe's as a kid, you know, I can show you a picture of me when I'm 12 years old wearing an army uniform and carrying a, you know, a little, little crossman, you know, BB gun. And I'm running around playing soldier. And it's like, I just always knew that the path for me coming out of high school was not going to be a traditional high school to college.

And of course, back then that wasn't necessarily just the traditional path. There was trade school, there were other things. And so for me, was, I always knew as a 12 year old kid that I'd get out of high school and I'd go into service. And so for me, the military really gave me discipline. It taught me about leadership and teamwork, how to work in a diverse world with a diverse set of people and how to accomplish something bigger than just one person could.

could do on their own. So I give the military, I tell people all the time, if not for my service there, way back then, I'm never a CEO, I'm not here today at this level. And so the military gave me a great foundation to build upon, but I also knew I wasn't gonna do a career in the military. I knew that I would get out, but I wanted to go really to learn a trade. I was into electronics, I wanted schooling.

you know, goal and objective eventually was, was, you know, engineering and technical, you know, Avenue military afforded me that education gave me those opportunities, gave me discipline and leadership and teamwork, you know, kind of a foundation. And then, you know, that was the start of the adventure. So for me, it was just like the commercial used to say back in our era, the military, you know, the army was a great place to start. And so for me, you know, it really was. And

You know, I looked at the Air Force too. I think the reason I chose the Army was the Army at the time would guarantee you your specific school or military occupation specialty MOS and your first duty assignment. And so the Air Force, when I went in, would guarantee me a field, but not necessarily the job or the school or the duty station. And so I took the longest technical training.

Jon Stoddard (53:52.555)
that the military had and it wound up being, you know, air defense radar systems, you know, repair and missile systems repair. So, you know, it gave me kind of my technical school, kicked me off on the road towards engineering and straightened me out. You know, I was a young kid that needed to be slapped around and put into shape. Yeah. And I bet that a lot of the people, guys, you hire now.

military too for each other. They're one of our three. We really have three feeders for employees. There's a huge shortage of technicians in our industry. There's a huge shortage of tradespeople in every trade in the United States. You 35 years ago, I blamed Nancy Reagan and I also blame Hillary Clinton. That way I pick one of each and you can't put me in a corner.

You know, very laudable goal and objective. Everybody needs to go to college and they kind of turned off trade school somewhere back just after I got out of high school and everyone started going to college and we hadn't been creating enough plumbers and electricians and HVAC. Yeah, the dirty jobs guy. He talks about that. Some people are just not right for college and then they'll make more money in a trade. You know what? I've bought 21 companies in this industry and.

those 21 gentlemen all started out as guys in trucks fixing stuff and they are all multimillionaires today. So you can't tell me, and the first thing people say is, well, trades, well, how much are they earning in 10 years? Well, if you talk to the 21 guys I bought companies from, they're worth a hell of a lot more than most of those folks who did go to college.

The trades were always a good way for someone to earn a living. And for those who were entrepreneurs and also started businesses, they created generational wealth by being plumbers and electricians and builders and all those different trades that we've got. So I have 250 job openings today for refrigeration tax. There's not enough women in the trades. There's not enough people in the trades in general, let alone

Jon Stoddard (56:02.347)
You know, there's a very low representation by women in the trades. It's like, boy, you know, for everybody out there wondering what could I do? And in a matter of eight months to a year, be earning a lucrative living, you know, come to the trades, tons of opportunities. Adam, it's already an hour up and I want to thank you for the time and being on the podcast for everybody out there. Doesn't know him, get these two books. He's on LinkedIn. Adam, thank you so much.

I appreciate it. Very glad to be here. Thank you for having me. Good luck to all your listeners out there. I hope they enjoyed it. Yeah. Great show. Thanks, Adam. Thank you.