Summary

Adam Coffey discusses the re-release of his book, Private Equity Playbook, and the importance of understanding private equity for entrepreneurs. He explains how private equity works, including the process of raising funds, buying and growing companies, and generating returns. Coffey emphasizes the potential for entrepreneurs to use private equity as a tool for wealth creation and multiple exits. He also discusses the concept of buy and build strategies and the role of platform companies in the private equity industry. Adam Coffey discusses his role as an equity plateau and the different ways he is involved in various companies. He explains that he invests in and coaches CEOs, helps with the transition to private capital, and works with private equity firms. Coffey also shares his interest in accounting firms and the reasons why he finds them attractive, such as recurring contracted revenue and low capital expenditure. He discusses the importance of EBITDA in private equity and shares his thoughts on the potential impact of taxing unrealized capital gains.

Takeaways

Private equity is a powerful tool for entrepreneurs to create wealth and achieve multiple exits.
Understanding how private equity works is crucial for entrepreneurs to navigate the industry and take advantage of opportunities.
Buy and build strategies, where smaller companies are acquired and integrated to create larger entities, are a common practice in private equity.
Platform companies play a significant role in the private equity industry, serving as the foundation for growth and acquisitions.
Selling a company is not the end, but the beginning of a wealth creation journey, with potential for multiple paydays. Adam Coffey plays multiple roles in various companies, including investing, coaching, and mentoring CEOs.
He is involved in the transition to private capital and works with private equity firms.
Coffey finds accounting firms attractive due to recurring contracted revenue and low capital expenditure.
EBITDA is an important metric in private equity as it provides a level playing field for valuing companies.
The potential taxation of unrealized capital gains may have an impact on private equity.

 

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Transcript

Jon (00:00.898)
Welcome to Top &A Entrepreneurs. Today, my guest and having back for the third time is Adam Coffey, author of these books. Do you have them? Private Equity Playbook, The Exit Private Equity, and The Empire Builder. You gotta have these books. And I'm having Adam on today to talk about the re -release of the 2019 book, Private Equity Playbook. Best seller.

Adam Coffey (00:27.042)
Yeah, know what, John, first of all, good to see you, good to be back three times, third time's a charm. I don't know if you had another third time guest, but we're gonna, I'm gonna have to bring it this time to make sure that if, book four comes out next time, the total new book next year, like you'll have me back again. So it's like, yep.

Jon (00:35.002)
You

Jon (00:47.446)
Yeah, Yeah, Holly tells me you do a lot of the writing on these books, which is I am thoroughly amazed about how well it is easily to understand and read these books. It's just fantastic.

Adam Coffey (00:58.254)
Yeah, well, you know, so Empire Builder, good classic example, you all of my books started as lectures. They started, you know, so whether it was a college lecture or it was a seminar, you Empire Builder was a was like a 500 slide PowerPoint deck, you know, two day seminar. And as soon as I said, I perfected the material, taught the seminar as soon as the seminar was done. You know, then it's like, OK.

time to write the book, Empire Builder. know, JT Fox, you know, friend, business partner, you know, he says, you're the only guy I know who goes from a seminar where you're charging like three grand per attendee and then converts it to a $15 book. And I'm like, but JT, a million people buy that book and only a thousand people come to the seminar. you know, it's, it's, you know, there, there is some, some rationale behind that, but you know,

Jon (01:50.466)
I was watching a comedy movie the other night where it goes to the president, the actual president goes, yeah, I'm going to go into movies. I don't think anybody's ever made that transition.

Adam Coffey (02:01.518)
I hear you. yeah, listen, it was it was time. So the whole story behind this was, you know, I I actually wrote the Private Equity Playbook in 2018, you know, and did the research, you know, mid year, kind of, you know, it finished the book by the end of the year. It came out in early 2019. But that's been that's been five years plus ago. And so much has happened in the world, including pandemics and things like that. And so

Jon (02:03.905)
Yeah.

Jon (02:26.283)
Yeah.

Adam Coffey (02:31.406)
It decided it was time. The Private Equity Playbook still hits number one. It's never fallen out of the top 10. It's been number one. It was number one a few days last week. It's like that book has just got a cult following.

Jon (02:44.822)
Yeah, it's crazy. Cause I, you post on LinkedIn, by the way, follow him on LinkedIn and you will see some posts like he'll have the top three books in that category pictured side by side on Amazon.

Adam Coffey (02:58.99)
Yeah, so it just it felt like I need to refresh this, you know, to keep this book fresh for another five years, you know. So the second edition, I mean, it's not an entirely new book, right? So I wanted to keep true to the original manuscript, but we did add, you know, expanded content, you know, updated all the numbers and what have you. But, you know, it just it felt like.

Jon (03:07.852)
Yeah.

Adam Coffey (03:24.8)
It was time. It's been kind of the go -to book for people to learn about private equity for five years. And I wanted to make sure that it stayed relevant and it stayed fresh. So, you know, that led to...

Jon (03:35.35)
Yeah. So let's talk about that. What's the big differences between the book that you wrote here that's still relevant today and what's in the new one? I've, your assistant sent me the manuscript, so I've got it. Yeah.

Adam Coffey (03:48.63)
Yeah, well, you know, imagine this. So I'm writing, you know, doing my research. I'm writing the book. You know, it's it's twenty eighteen, you know, when I wrote the first edition, there is two point eight three trillion dollars in assets under management in the world of private equity. And if I remember right, there's like five fifty three hundred firms or something like that. You know, roll tape forward five years, there's over six trillion dollars in assets under management and there's over eight thousand firms. So

The world of private equity has doubled in the last five years alone. And, you know, we had the pandemic and now we know what essential businesses are. And so, you know, it was fun to go back through that book. And it's like I felt like I had Marty McFly moment. So it was my first book. But now that I'm updating it, I'm mentioning things that happened in book two, three and four. And I'm like, well, wait a minute. It's like.

How can I possibly know about my future books while I'm rewriting the first book? And so I felt like I was in the movie, Back to the Future. I even wrote it in there. I'm like, having a Marty McFly moment because I'm, yeah.

Jon (04:55.426)
that. By the way, I love that three episodes of Marty McFly.

Adam Coffey (04:59.534)
So, yeah, so really it was about, you know, just just updating, you know, the fact that private, you know, at this point now private equity, you know, buys and sells 50 % of all companies bought and sold on the planet. And that wasn't the case back in 2018. So we finally hit that that threshold where now half of all in a activity on the planet is private equity. So and I think for entrepreneurs, right, you know, it's because of that explosive growth.

Jon (05:23.328)
Yeah.

Adam Coffey (05:29.526)
And the underlying fact that capital must be invested, you know, that's inside a private equity fund that we've created a market where an entrepreneur can build a business and sell it and make a ton of money. You know, before private equity, you know, really it was, you know, there was a small market for people to sell a company, very small prices paid. And you were looking for an owner operator, someone who would kind of take over your business when it was time for you to retire, you know, or

you know, on a rare occasion, a strategic would gobble you up. And so it's because of private equity that this whole market's been created. But still to this day, believe it or not, you know, if I teach a seminar and I have a thousand entrepreneurs and business owners sitting in a room, these are smart people. They've grown up now in the world of private equity. And I give them a basic 10 question quiz. You know, that's multiple choice. 90 % of the room still fails. And so I feel like the original reason I wrote that book

was to try to educate a generation of entrepreneurs about what private equity is, how it operates, how it can become a tool for them as a part of their wealth creation journey. And I still feel to this day like it's just, it's unfinished business. And I've only had, I've had two people now, I've been doing this same 10 question quiz for years and I've only had two people on the planet in

thousands and thousands of people, probably tens of thousands of people that I've given the quiz to, only two people scored 10 out of 10. They both read my book, you know, like heading into the seminar and they had identic memories, you know, and all the answers were contained in the book, but still 90 % of the room will fail miserably, which means entrepreneurs have heard the word, but they still don't have a basic understanding of what private equity is.

and how it works. And we need to understand this in order to, don't tell any private equity firms I said this, in order to manipulate that capital as an entrepreneur to take from it what we want, which is growth capital and wealth. We have to feed it what it needs. But in order to understand kind of the nuances of how the game is played, we need to have a basic understanding of what the hell it is and how it works. And so.

Jon (07:48.29)
So, yeah, let's ask about that. What is private equity for nobody's ever seen this show? What is it? Why should we get into this arena?

Adam Coffey (07:59.894)
Well, so, you know, if you think about a mutual fund, a mutual fund, you know, a mutual fund manager, I can go on my Schwab account, I can buy a mutual fund, I can research, look up Morningstar ratings, what have you. A mutual fund aggregates money from a bunch of people and the manager then decides what stocks to buy, puts them in a basket. I have instant liquidity. I can buy it today, sell it tonight, sell it tomorrow. I can hold it for five years, whatever I want to do.

instant liquidity, it's publicly traded. A private equity firm raises a fund and on average, it's, I'm gonna leave family offices out right now and venture capital out. I'm just gonna talk about buyout funds, because that's where the majority of capital is in private equity invested today. So a 10 -year fund is created and limited partners or investors commit $5 million or more as an investor.

to this thing called a private equity fund. The fund exists for 10 years. It doesn't take your money upfront. And let me tell you the secret of why. Because if they took your money upfront, yes, they don't take the money from investors upfront. Because if they did, they'd have to start calculating returns based on the day they got the money. So they're very shrewd and smart about that. So you keep your money, you just commit. I'm going to give you five million.

Jon (09:08.332)
Take your money from investors upfront. Yeah, okay.

Jon (09:17.952)
Right, right.

Adam Coffey (09:26.04)
For the next five years, they're gonna look for companies to buy. And when they find one, they're gonna send you a message and they're gonna call capital, which is your percent of the fund that's required for them to purchase the company. So they'll call money from me for five years, up to five years. Once they own a company, that becomes a platform. And they have then, on average, most hold periods around five years. So for about five years, they'll work with that company. They'll grow it.

They'll grow it organically, they'll improve margins, they'll work and do an &A strategy, a buy and build strategy. Let's buy a bunch of companies in the industry that are small and they're cheap and put them together and build something big and special that trades for a much higher multiple. We'll create arbitrage, which is the one way private equity makes the majority of its returns. And so, I've got then by the end of the 10th year, I have to return.

all of the money back to my investors. So have to sell all the companies. have five years to buy money, to buy companies. And I hold them for on average about five years. But in that 10 year lifespan, I buy, I improve, I sell and return all capital back to the investors. so interestingly enough, let's talk for a minute about buy and build, because that's the one strategy that I've kind of dedicated the last 10 years of my career. So I just turned 60.

You know, and I told myself rather than build a fourth company for a bunch of private equity firms, I am going to teach as many entrepreneurs in this world how to succeed by emulating the activities of private equity, but do it on a smaller scale. And so in the United States, we got 34 million small companies just here in this country and and small.

I mean, talking now small to the government is different than what you and I think is small. Smaller government is 500 employees or less. And that represents 99 .9 % of all companies in the United States. it employs more than 50 % of the workers in the United States. So 34 million small companies. But globally, there's only 3000 companies on the planet that have a billion dollars in revenue. And so because there's 34 million small,

Adam Coffey (11:43.278)
There's not enough buyers, even in the world of private equity, there's not enough buyers to buy all those companies. So prices stay low. And so if we can buy a bunch of small companies and put them together, we become bigger. We get over the pack of the 34 million small companies. We are now rare and larger P .E. funds can now put a bigger chunk of money to work and they can buy us. But they have to pay a much higher price because there's not as many bigger companies that are out there. And so

This natural occurrence of small companies trading for small multiples being put together to grow bigger and then sell for a higher multiple creates the profit that private equity uses to generate. Right now, John, I'm working on 18 buy -in bills.

Jon (12:31.586)
18 buy and builds. You're... Yeah.

Adam Coffey (12:34.222)
have 18 buy -in builds going on right now where we're buying small companies and fragmented industries. putting them together and we're creating a meal to throw up and serve up to the private equity firms that are looking for stuff to buy. Now we're only buying good companies and we're also growing them organically, improving their margins. We're building good companies. But what we're doing is we're emulating what private equity does on a large scale and we're doing it on a small scale.

to kind of feed companies up to the smaller echelons of private equity who are looking for platform companies to buy with their fund. And interestingly enough, all PE funds kind of act the same way. So regardless of whether it's a Blackstone fund that's 10 billion to 30 billion in size, know, or KKR, or it's a really small PE firm with less than a hundred million in their fund, they all invest about six to 8 % of their...

fund size into any one company. And they never invest more than 12%. They do this for asset diversification rules that they build into their charter or their prospectus. And so average PE funds going to own anywhere from 8 to 16 companies. And so if you're KKR and you got a $30 billion fund, 6 to 8 % of your fund to buy a company, that's a big number. And so they can't go down and buy.

companies in this pool of 34 million small companies because it would take them 100 years to put that 30 billion to work. So they buy bigger companies, bigger firms, bigger funds, buy bigger companies and it's created these different tiers. I call it the private equity pyramid. Now there's five layers. You can do that.

Jon (14:01.57)
They're buying in the 3000, yeah.

Jon (14:06.913)
Yeah.

Jon (14:17.868)
Can I show everybody this model? Because this is fantastic. I share this all the time and I give you attribution, but this is the private equity pyramid. Follow him, he's gonna share this. And I also share this too.

Adam Coffey (14:30.254)
So there's an example like in this book, in the new version of the private equity playbook, I hadn't like coalesced the private equity pyramid in my head back in 2018 when I was writing the first one. So, you you'll find now the explanation of the PE pyramid. It's a part of the story, you know, of private equity. Part of explaining private equity is explaining how a fund is put together, how long it lasts, how it invests its capital.

and how it generates its wealth and generates its returns. And then it teaches us as entrepreneurs how to kind of how that works so that we can kind of manipulate it to our, manipulate is a strong word, but manipulate it to our advantage to take what we need, which is capital to grow and then wealth. We want to create wealth for ourselves. And to do that, we have to make their investors, their limited partners, we have to generate returns.

So the private equity firms are capital. They're the checkbook, but they're not operators and companies. So they need us to be the company operator that grows the business and gets the returns for their shareholders. So it's the perfect marriage of entrepreneur with unlimited wallet can grow business much faster, both organically and inorganically by buying companies and putting them together.

Jon (15:50.914)
Let me ask you a question about, I wanna get something clear on something. So you create an investment thesis and say, I'm gonna roll up HVAC companies. This is my buy box. Simultaneously, you're knocking on the door to investors to get commitments. They're not depositing funds in the account, they will commit $5 million to this fund and they'll write you a term sheet. Where does it come in that if you...

Do you bring deals to them and they can veto them because not all deals are a royal flush. They're missing something and usually capital or traction or story or team, which you are, and that's capital that they have a say in what like, okay, we're going to sign and approve this term sheet with you.

Adam Coffey (16:39.054)
Well, you know what? There's multiple ways this can be done. You know, when starting out. I'm on the board of a company and it was two young guys, very smart young guys. You know, I can call anybody young because I'm 60 now. So, you these guys are in their 30s, right? But they had backgrounds in investment banking and in private equity in more junior roles, not senior roles. And they put together like a six month. You know, they did a six month research project, created an investment thesis.

You know, get some old guys like me who've got some experience around the hoop and then they go shop it. They go walk into a family office and they walk out with like a hundred million dollar commitment. So now we've got a road map. We've got capital. Now we go look for the platform, you know, and then we start buying companies to add on to that. So that's called thesis based investing. So as an entrepreneur, we can create that thesis and then we can shop the thesis looking for capital. That's one way to do it.

More frequently though, a private equity firm will be, they've done a thesis about an industry that they want to invest in and they'll go out looking for a platform company. And so the people who are out looking for a platform company, these are the phone calls that you're getting as an entrepreneur. It's like, I've built a business, I'm successful. And now it's like people are calling because they're interested in buying my company and having me partner with them. I'm going to be the platform.

and now they're going to work with me to accelerate the growth and start doing this &A process, this buy and build story. So a good example is my last company. The platform itself was bought by a PE firm and they paid around $125 million for it. And was like half of that was equity, half of that was debt. And once they buy the platform, that's like, need a CEO, we need somebody to come in and turn around this dog with fleas and fix this thing.

Hey, let's go get Adam. Adam comes in, I'm the CEO. so I start first by turning the company around that I've got. But then over the next five years, we buy 23 companies and we bolt those 23 companies on top of this thing and build a really big company. less than three years in after buying the first eight, we sold it the first time.

Adam Coffey (18:57.806)
And for investors, it was a four times multiple of invested capital. So for every dollar they invested, they got $4 back. It's a massive IRR when you pull that off in three years, you know, it's 50 plus percent IRR. So for all you real estate investors out there, you know, it's like, that's, that's a big number, big return. And, you know, this is how it's done. So as entrepreneurs of small businesses, we get a lot of calls from

Buy side advisors or people who are out looking for add -on acquisitions that strategic companies or bigger companies want to buy, maybe they're back by private equity and they're looking to do add -on acquisitions. And so like when I was running the HVAC company, I'm running a strategic platform. I'm running a couple hundred million dollar HVAC company. And then I buy 23 smaller companies and I add it on top of the pot.

You know, so I'm a strategic backed by private equity out looking for add on acquisitions. And so my buy side advisors, my &A teams, they're calling all these people that own small HVAC companies, you know, and, and small business owners, you know, small and medium business size business owners. We're getting calls all the time, you know, every day, most of your listeners to this podcast, if they're a business owner, their phone rings all the time. You know, I'm a buy side advisor. I'm working on behalf of a private equity firm that's looking to buy.

you know, want to make you a platform. Boy, you're a sexy looking company. We'll pay you more money than you've ever seen before. Talk to me. You know, and then when you hang up that call, the next call, you know, comes in. I'm representing another private equity firm and I'm to be the best partner ever. I'm going to pay you more money than you've ever seen. You know, it's like there's so many calls going on right now. And so it because they're buying more than 50 percent of the companies on the planet because they've created the market.

Jon (20:17.726)
You

Adam Coffey (20:42.932)
Even if we intend to continue to stay independent, we need to understand how private equity works. But we definitely need to understand how it works so that we can understand the conversation that we're about to get into as a business owner. We could be sold as an add -on to a bigger company. We could be sold as a platform to a smaller PE firm who decides to take us, make it an anchor holding of the fund, and now we're going to seek to grow that business over the next five years.

Cool part is, is because the average hold period is five years in private equity, if we're an entrepreneur, that means we're gonna get a payday about every five years. So I sell my company to private equity, I get a payday. I roll over some money, most entrepreneurs think I sell my company, I'm done. An exit is the end. And boy, I bought 58 companies and let me tell you, the exit's the beginning, it's not the end. If you think it's the end, then a guy like me swoops in and.

then I get three more paydays, you know, that you could have participated in, you know, and so rollover investing in multiple whites of the Apple is a big part of understanding how private equity works. Because what's better than selling your company once, selling it two, three, four, or my personal record five times, you know, and we can get paid along the way. And because private equity on average holds every five years, you know, if I'm talking a 10 year period,

I could sell my company payday number one, five years later, sell it payday number two, and then five years later, sell it again and three paydays in 10 years. Each payday, if I played my cards right, bigger than the one previous, where I thought it was a one and done exit event, I get like three checks and each one's bigger than the last. And I'm making massive amounts of money. I'm creating true generational wealth for my family. So I tell entrepreneurs.

Don't think of selling your company like it's the end of the road or one and done unless you're in your 70s and you're just wanting to go fishing the rest of your life. You can actually use private equity as a tool and you could be in your 30s or 40s. I have a new client. What are my clients that I, the kid is 33 years old. He's built a company that literally has gone from zero to almost a hundred million dollars in size in five years. He's got

Jon (23:02.273)
That's impressive.

Adam Coffey (23:03.47)
Got 25 million of EBITDA and I'm like, you know, and he wants to monetize it. And I'm like, dude, we are going to have a lot of fun. You are going to be wealthy beyond all, you know, all of your.

Jon (23:15.178)
And your recommendation to him is this is the platform company. Let's go buy other.

Adam Coffey (23:21.198)
This is a platform company, let's de -risk and get some of your chips off the table. So let's say this company sells for 250. Let's take 30%, 75 million, roll it forward and you keep on, you're only 33, where the hell you going? Keep running this thing that you built, but now using other people's money as the fuel, the jet fuel.

So we'll roll over 75 million, we'll take the rest home. So 175 million home, you'll pay your taxes, you'll diversify, you'll invest elsewhere. Now, roll tape forward, if we can do that typical P -E return, my career average is better than 4X. If we get 4X on that 75 million, well, that's now what? 290 million, well, that's bigger than the original 250 million.

And we're talking like in a five year period, this dude's now worth half a billion. You know, and so, you know, we can do great things. And I know for, for entrepreneurs, you know, a lot of people get stressed, you know, Hey, look, you know, I've never had a boss before. I don't know if I can handle that. And I, not only that, but if I'm not the controlling shareholder, I don't know that why I want to be involved. You know, it's like, I'm God's gift. Why the hell would I want to have a boss and be a minority shareholder?

And I usually answer that, you know, by mentioning two names. I say Elon Musk and Jeff Bezos, two of the richest guys on the planet who both collectively own less than 13 percent of their companies. It's like you can be a minority shareholder. You can make a lot of money, you know, along the way, too. So don't think of selling a company as one and done. Think about it as this wealth creation, wealth generation tool that you've.

You've developed and you've grown and why not get that thing to pay off multiple times rather than once.

Jon (25:19.49)
Yeah, this 30th year old guy, he's the platform company. Does it make any sense? Cause I'm kind of helping with a deal flow with a company there. It's a brand new private equity company, but they're helping in unrelated industries. Hey, we're working, looking for e -commerce and 2 million. But if I buy something in mobility scooters, or then go over here to food, you know, blog or something like that, those are completely unrelated.

Part of that seems like it doesn't make sense because you're not going to grow the wealth as a fund.

Adam Coffey (25:55.434)
Yeah, so, well, but you have funds. So first of all, if we're talking about a company bolting on these weird things that don't really fit together, to me, that spells disaster. If I'm a PE firm, some firms are called generalists and some are specialists. so bigger firms will have multiple silos. They'll say, hey, I'm the services silo.

You know, the group of professionals that work in this area are focused on, you know, kind of industrial services, residential services, and we do services. And then there's another division, you know, kind of of the PE firm. Well, we have a health care fund and we're investing in health care and health care technologies. And then, you know, so it's like there's there's different subsets, but some firms, you know, generate funds and those funds are generalist funds. And so they invest all across the map. And so by buying

you know, call it on average, you know, six to 16 companies with one fund, you know, they may own in several different industries. And so they've got broad diversification. And that's not necessarily a bad thing. Think of it like this. You could have an S &P 500 fund, you know, stock market fund, you know, mutual fund that does the whole diversified basket. Or you could do

Jon (27:06.59)
Yeah, it's diversified.

Adam Coffey (27:11.47)
know, S &P 500, but it's only high dividend paying or it's only growth stocks or mature or tech stocks or whatever. It's like, so some firms specialize, some are generalists and it's proven that there's room for all.

Jon (27:31.074)
Yeah. These 18, let me go back to your 30th year old guy with $100 million or 25 EBITDA. You're going to start adding on acquisitions to get it to what? Where is it like your...

Adam Coffey (27:43.65)
We're going to sell him. He's done all of this organically. We're going to prepare this company for sale. And I'll tell you that, you know, from an entrepreneurial perspective, just because someone calls you up doesn't mean that they're the right buyer. Just because someone calls you up, you don't push print on your financial statements and assume that they're prepared for a buyer scrutiny. There's a lot of pre -work to do, you know, in getting a company ready to go to market. But what we're going to do in this case is

We're going to take the company to market in six months. So within a year, know, young man gets first payday. We're now going to be a platform for a large PE firm because it, the size we're at, you know, we're going to attract some very large PE firms and it's a services business, a lot of recurrent revenue. It's like, it's going to, going to do really well. And then, so he's got a first payday still there, still running it, but now owned by a PE firm. Now the PE firm looks at that really strong organic growth rate and says, okay, keep on doing that guys.

But let's now also start an and A engine going within this business so that we can amplify growth even faster because. Yeah.

Jon (28:47.703)
Yeah.

way that is written out in this book right here Empire Builder.

Adam Coffey (28:55.36)
Yeah. You know what, to be honest with you, it's like Empire Builder was my favorite book. You know, this is my favorite rewrite because it's the only rewrite, but Empire Builder was my favorite first book. You know, third one, you start to get better. I, know, these other ones have been kind of subject matter, expert books. Empire Builder is the roadmap. You know, if you want it, if you want the modern equivalent of a treasure map, you know, for me, that's Empire Builder. You're a young entrepreneur just starting out. It's like Empire Builder is the roadmap.

Jon (29:00.055)
Yeah.

Jon (29:14.423)
Yeah.

Adam Coffey (29:24.334)
to making and creating wealth for you and your family. this guy will become a platform. They'll add an &A component to it. We'll look to make some strategic pivots because we've got a great customer base. What else can we sell them? So we'll be looking for strategic pivots. We'll be buying companies that are in his industry and we'll keep on growing this thing even faster so that when we sell it, we get a really high multiple and a great exit.

Call it

Jon (29:53.898)
And you go along for the ride, right? Not only just a consultant, but an equity plateau.

Adam Coffey (29:59.16)
So it depends on, I have all permeations. I'm invested in several. I coach and mentor the CEOs and help them with the transition to private capital. I'm hired by private equity firms to then sit and help and continue to coach and help them kind of through the PE journey. So yeah, I kind of ride shotgun on a lot of these adventures and where I like the company, I like the industry.

Jon (30:02.817)
Yeah.

Adam Coffey (30:29.219)
I'll make co -investments alongside as well. And it's fun.

Jon (30:35.49)
What about that? Let me tell you, ask about the 18 different. Are they all different or are they some like, hey, I got two or three in the landscape in different sections of the country. got...

Adam Coffey (30:45.558)
No, there's some repetition in there. So when I like an industry, you know, I'm not afraid to invest in two or three platforms within a given industry. You know, generally geographically spread apart. So I'm not, you know, I'm not in competition with myself, you know. So when I'm when I'm doing this with smaller entrepreneurs, they're generally, you know, a localized company in a state or a region. So if I've got somebody going in the southeast, you know, and in a given industry.

know, bookkeeping, accounting, know, in the Southeast, well, I can do one of those in the Northeast, I can do one of those in the West kind of thing. So when I...

Jon (31:23.574)
Yeah. I want to ask you about that. Brad Jacobs got a book out that billion book and he's got a chapter on there. He passed on accounting firms. So my little bird tells me that you're working on an accounting firm roll up with maybe JT Fox and why do you like accounting firms? Why did Brad Jacobs just like, no, we think AI is going to be destructive in that industry.

Adam Coffey (31:48.502)
Yeah, well, good for him. So that's the beauty of this world is that we can all have our different opinions. So from Empire Builder, you know, if you read Empire Builder, you know, why do I like accounting and bookkeeping? Well, number one, it's a need, not a want. Number two, it's recurrent contracted revenue. So I'm not talking about firms that specialize only in tax or have massive revenue tax. I'm talking about, you know, your

You're bookkeeping and accounting and payroll firm that helps small business keep their books in order. So I've got a monthly recurrent revenue stream because I am doing the books, you know, that leads me to payroll because I'm doing books and payroll that leads to doing the company's tax work because I'm doing the company's tax work that leads me doing the entrepreneurs tax work. So these are all interrelated kind of specialties and and there's no capital expenditure to speak of. So I don't have any plants, trucks, equipment, got nothing.

Jon (32:42.21)
Well, the EBITDA net income is amazing. It's just 50%. Yeah.

Adam Coffey (32:45.454)
So, right now in the United States, there's 1 .8 million bookkeeping, accounting, and payroll service companies in the US. So it's highly fragmented. I can buy a bookkeeping company that's got three million in revenue and almost a million in free cashflow and pay three times for it. And that business is just a cash generating machine. So I've got not only enough cash in the business,

to service the debt that's required to buy it, but I'm also distributing money to myself along the adventure. I buy some of these and put them together and I start to get that arbitrage effect.

Jon (33:27.436)
Where's the arbitrage of the county firm? does EBITDA need to be for that?

Adam Coffey (33:32.076)
Well, so your two natural exit points, you know, I call it my first window to exit a business is about four to seven million in EBITDA. And so if I buy four accounting firms, you know, and I pay three times and let's say I bought four accounting firms, you know, around a million dollars each in EBITDA and I'm paying three, three and a half times for these, you know, and, know, I'm going to, I'm going to get the synergies out of them. I'm going to increase organic growth.

And so what I'm actually going to sell is five million worth of EBITDA and I'm probably going to get around seven, eight, nine times depending on the makeup of the firm, where it's at the clientele, you know, there's, there's variations, but let's just say I get eight times. So I paid three times to buy them. So for every dollar of EBITDA I buy and pay $3 .00 for, I then turn around sell it for eight, you know, pay back the $3 .00 I borrowed and put $5 .00 in my pocket. And so every time I build a model,

you know, on an accounting firm. So I'm doing one where we're headed for kind of four to seven million exit. I've got another where we're going to 10 million, you know, in EBITDA. Then the numbers get even more compelling. Just takes a little longer to get there. But so I like them because it's recurrent revenue, contracted revenue. It's a need not want. It's a professional services company, very high margin, almost no capital expenditure. I got to buy a few Dell computers. Right. And most of these companies.

have back offices in India. so the cost, you know, cost structures are very low, you know, and so, you know, very, very attractive. So all I could say is maybe what he didn't like, you know, we don't buy firms that do audit work because audit work, you know, and yeah. And so I, you know, that firm must be owned by a CPA. And if I'm selling to private equity, they're not a CPA. There's functional workarounds, but it's clunky. So, you know, it's a

Jon (34:59.244)
Yeah, yeah. Gap accounting can be done anywhere, yeah.

Jon (35:12.62)
There's a wall, yes, there's a separate -

Adam Coffey (35:24.066)
You know, there are, you know, I'm focused on bookkeeping, payroll, tax, you know, and tax is not the primary driver. It's ancillary because of the businesses and the work that we're doing. Yeah. Yeah.

Jon (35:35.094)
Has to be done. Yeah. And there's really not a lot of requirements as far as training to be a EA agent. Yeah.

Adam Coffey (35:41.782)
Yeah, so I'm currently participating in three roll ups in that space. Yeah, three roll ups in that space. And I love professional services. I love blue collar services. I love services kind of periods like services is my bag because they're all low capital expenditure for the most part. They're all you know, and then you can.

Jon (35:45.964)
Three roll -ups in that space, yeah.

Adam Coffey (36:05.546)
They have different attributes to them. know, like the last company I built was a large HVAC and commercial refrigeration service company. And so it's a need, not a want, but you know, it's not necessarily contracted revenue. There's a lot of product, a lot of project -based work. Yeah. But it's cyclical. So yeah. And so, the, your listeners out there, it's like, let's say I own an HVAC company that's doing residential HVAC.

Jon (36:19.874)
Yeah, like plumbing, it's a need, but you still got to get a new customer all the time.

Adam Coffey (36:32.748)
You you buy a new system for me this month. You're not buying a new one for me next month. So that means that every month I start with zero revenue and I'm looking for enough customers to replace the revenue that I created last month. And then I have to have one extra system sold in order to show growth. So it's it's not as recurrent as I'd like, you know, so recurrent. I like pest control. I like landscape maintenance. You know, I like businesses where I sign a contract.

And every month I am hitting that, that customer's credit card. And now when I find a new customer, it's adding on top of the pile of old customers I had. So this could be janitorial services. could be, you know, it could be. Yeah. Yeah. I'm involved with seven roofing companies. Roofing is really hot right now in, the private equity space, but here again, it's.

Jon (37:15.788)
Not not roofing.

Jon (37:27.266)
But that's not reoccurring though. It's like every 14 years or 15, yeah.

Adam Coffey (37:30.542)
Well, so here's what they'll tell you. It's not recurrent, it's not contracted, but there is a recurring nature. So here's the nature. If I'm in a town with a million homes, then a certain percentage of homes every year is gonna need a roof replace. Yeah, and so if an average roof lasts for 15 years, then what is that? That's 8%, whatever the number is.

Jon (37:46.934)
Gotcha, a long -term view.

Adam Coffey (37:57.548)
You know, there's a certain percentage of roofs in a metropolitan area that will get replaced every year. So there's a there's an opportunity to serve, you know, every year. And I just have to go get my portion of it. So companies that are like that, that are that have banker representation that are big, they're selling to from one private equity firm up to another or founder led to a PE firm. We're we're calling that recurring. You know, there is a recurring aspect. There's a need and the need will always be there.

But it's not like a pest control company where it's just a contract. And so on HVAC, we did a lot of service work, but the service work is pretty much time and materials. So I would start the first of the month and not know where 80 % of my revenue is gonna come from for the month, which means I can have a lot of sick. Yes, it does, it does. And so I'm getting old, I don't want stress.

Jon (38:47.522)
It's a big nut to cover that stresses you out.

Adam Coffey (38:54.998)
I focus on companies that have contracted revenue streams now almost exclusively. But I am doing roofing because roofing is hot and just like HVAC, I can get in, I can get the job done, I can make money and do well. so I'm working with...

Jon (39:09.89)
Let me ask you about how, when you get a client and you say, okay, you're the platform company, let's go start building. And how you buy those. What do you use the cap stack or recommendation? And I'll give you an example. I did a podcast with Brian Pierce. He started out with four Midas shops. Now he's got, I think over 35 doing $40 million. And he uses a hundred percent seller financing because his balance sheet now he's the bank.

Adam Coffey (39:40.108)
Yeah.

Jon (39:40.63)
That's, he's so much stronger and can have that negotiating leverage.

Adam Coffey (39:44.014)
So, you're you're I love where we're going with this. So I call them avatars. So if I'm to go into an industry and I'm looking to do a roll up, you know, and I'm looking for that first company, the platform company, I'm going to create an avatar. The avatar is what does my perfect business look like? What's the revenue? What's the earnings? What's the age of the person that owns it? So if I'm passive and I'm an investor.

and I'm going to help from a board perspective, I need a stud or stud, know, studette. I need a rock star that has enough runway left so that when I want to get out and sell it, you know, that the PE firm, you know, sees the future potential of that leadership team. So, you know, my first platform, my first company, which is going to serve as my platform, I need a leader that has a future, that has legs, that can stay with the business for at least a good 10 years.

So my profile is different for that person. I'm to let them roll over, you know, probably 30 % of their sale price because I want them to have an opportunity to make a ton of money alongside me. I have a model on my desk, you know, that, you know, my first platform company person rolls over about 300 grand. make, they make 5 million, you know, in when I get out and

I don't show them what I'm making. I'm the bank, you but I do show them what they're going to make and it's significant. So, but then my profile changes, the avatar changes. So now I've got my leader. I've got a little bit bigger company that's got good process, good procedure. That's my anchor. That's my platform. Now my avatar changes. Now I'm looking for 60 to 70 year olds who want to retire. And those people aren't necessarily, first of all, I probably don't have to pay

high end of fair market value and they don't really need the big chunk of money. So now I focus, they want to clip a coupon. And so now I turn to heavy seller financing. So I'll come back to how I pay for the first one, but the heavy seller financing on the next one, my avatar is now 60, 70 wants to retire looking for the exit path. I pay them fair market value, maybe even low fair market value.

Jon (41:42.946)
don't have any more gas in the tank, yeah.

Adam Coffey (42:04.718)
And they'll get some cash at close for sure. But now they're going to get, you know, call it a 10 year income stream at a decent interest rate with a decent amount of their money. And so for them, it's like, okay, I'm 70. I want to retire. This person's going to let me clip a coupon, you know, for the next 10 years. And if they default, I take my company back, you know, so it's like, it's low risk and I'll sell it again, you know, but it's, it's, it's, now have an ability to generate income over time while they're in retirement.

Jon (42:23.778)
Yeah.

Adam Coffey (42:32.84)
which is what a lot of people are looking for. Sure, so I think people can do this differently, but when I look at a company that meets my criteria from Empire Builder, then essentially what I've got is a lot of free cash flow. So let's say for example, I buy that bookkeeping company and it's three million and I'm paying three million for it. It's three million revenue, million in earnings, and I'm paying three million for it. So three times.

Jon (42:34.178)
I think there's more tax advantages that way too. First is the capital go.

Adam Coffey (43:01.518)
Okay, if I fully amortized and I bought 100 % of that business and just wanted to finance it at 10 % interest, three million is gonna cost me $300 ,000 a year. If I'm going to also fully amortize it and start paying principal and what have you over a 10 year period, I need about $475 ,000, somewhere around that neighborhood to make those payments.

I've got a million bucks in free cashflow. I've got a two to one debt service coverage ratio. So in the world of SBA, you know, we could have the owner roll over 19 % and they don't have to sign on a loan. You know, they can, they can be a rollover investor up to 19 % without signing on a loan. And so I now have 19 % equity because I'm buying a hundred percent of the company. have a holding company. I'm putting the assets up into my holding company and

They're now the person who owns it becomes my rollover co -investor, but as a minority shareholder, and they're bringing 19 % equity and maybe they're giving me 30 % seller financing because they're also going to clip a coupon. And so now I've already got half the deals paid for. And so now I have to swoop in and you know, the banks, banks want to see something from me, you know? And so generally speaking, when I'm engineering this,

If I'm gonna put equity in, the equity is gonna come in in the first company, maybe the first couple of companies. But if I buy seven, my checkbook's been put away after the second or third company. And the amount of money I put in goes down very quickly. Because now I have equity, now I have a business, now when I buy it, buying the second business and third business and fourth business is so much easier than buying the first. Especially if you're passive, especially if you don't have a track record. mean, finding the unicorn.

Jon (44:43.616)
Yeah.

Adam Coffey (44:50.574)
If you're passive, don't have any money. I need a business with high free cashflow so it can service the debt. And even with a great debt service coverage ratio and enough cashflow in the business to more than double cover the debt, know, the banks still want to see some kind of, know, can you give me 50 grand? Can you put a hundred grand into it? You know, I would tell you that I don't believe you, you you have to come up with 20%. I already got 20%. That's the rollover equity of the

the seller who's now my partner. having some money certainly helps makes it easier, but I'm involved in deals. Hey, I bought 23 HVAC companies. I didn't use a penny of equity. know, 100 %

Jon (45:32.29)
Yeah. Well, you're talking about service companies where it's, the EBIT is 20, 25 % and then all the way up to accounting where it's 50. And I had a friend that just sold her accounting firm to a private equity. She had a 75 % earnings. She was amazing. She put systems and, processes in place just to in charge more. Yeah.

Adam Coffey (45:47.116)
Yeah. Yeah. So when you and that's why I an empire builder, when I'm when I'm talking about what kind of companies to buy, what I'm really doing is I'm trying to stack the deck in your favor as an entrepreneur so that you have a higher likelihood of success. And so the kinds of companies that I'm focusing on are generating enough cash to cover the debt that's required to buy them.

so that while I'm collecting companies, I can use the cash flow that I bought to service all that debt. And I have a high enough coverage ratio to where even if the economy went down, you know, if I've got a two to one debt coverage ratio, I've got a million in cash and I need half a million to service the debt. I could lose customers and revenue and I've got to lose quite a bit before I'm coming out of pocket to cover the debt. And so that's different than

I buy a company that has high, that's project based, it's cyclical, and it's got high capex, and I got no real cash flow. That's where I can get into trouble.

Jon (46:54.562)
Yeah, and I may bring that. know that buying a business SMB and then using SBA, but if when you only have a 1 .25 debt service coverage ratio, there's just not enough left over to do any of that expansion or new equipment or.

Adam Coffey (47:08.129)
Yeah.

And so, you know, that's why I happen to, you know, we were talking about bookkeeping. Why would one person say no and another person say yes? Well, the reason I say yes is because it meets all of my criteria and it's very high free cashflow conversion. And they're selling for very low multiples because there's so many of them and they're mostly owned by older people, you know, who want to retire, you know, so I can collect them fairly cheap, put them together and

And again, the odd part is there might be 1 .8 million of them, but there's not a lot of big ones. You know, there's mostly, I got the super -sized ones, right? Like the Deloitte's of the world, but there's a ton of small ones. And there's not a lot of little medium -sized ones for smaller PE firms to come swoop in and take. Because for them, the arbitrage would be fabulous. If they could find a platform at 10 million EBITDA, the arbitrage would be fabulous because they can buy all day long, you know, at three times the small ones.

and bolt them on. The problem is, is they only have five years to work and they need to find something that's got critical mass and there's a gap. So I've got big ones and we've got really small ones. We don't have a lot of medium sized ones. So I saw opportunity, you know, in that space and I love the multiples that they're trading for and when they're bigger, the multiples they're trading for when they're bigger. And, know, the arbitrage is great. The risk is low. The cash flow is really high.

You know, so it's, to me, wasn't an attractive space, but I get people, you know,

Jon (48:40.398)
Yeah, it's a different opinion. Let me ask you just about the supply and demand. There's a good conversation on X about SMB. Some guy put his HVAC business on the market, doing well in Florida, taking off, and he had over 500 offers. I mean, and I'm seeing this with PO advertising because I still, I'm on their email list and they'll cut it off to the number of buyers wanting to see the SIM. It's just like.

Adam Coffey (48:57.346)
Yeah.

Jon (49:09.579)
It's amazing.

Adam Coffey (49:10.734)
Yeah. Broad processes are pretty rare in today's world. know, when we're selling a company, know, typically, you know, it's like it's 30, 30 buyers are kind of led into a process and that's it. At some level, 500 is just too much to manage, but yeah. Yeah.

Jon (49:25.708)
Too much. It's just waste of time. Well, tell me a little bit about the EBITDA, that is so, you know, everything you read from Warren Buffett, Charlie Munger, rest in peace is that, you know, they hate the EBITDA. Why is that so big and important into private equity?

Adam Coffey (49:42.722)
Well, so we need some kind of a level playing field where we can value a company. so EBITDA is an arbitrary line. Matter of fact, QuickBooks doesn't even have it. So if you're a QuickBooks company and you're looking for your EBITDA line, it's kind of like looking for a cable stretcher, you know, when I was in the military or you're on a snipe hunt, you know, out in the woods looking for snipes, you know, it's...

Jon (49:58.69)
It's not, it's net income. It's net income. Yeah.

Adam Coffey (50:08.874)
It's a nebulous place, but it's a place that levels a playing field. So let me give you two profiles. Let's say I have two companies and they each have four million in revenue and one million in EBITDA. And one company has not been investing for its future.

And so they have deferred maintenance. They got a bunch of trucks out there and their average age of their trucks is 10 years. And so they've got deferred maintenance, but they're showing a million dollars in EBITDA. know, another company might have a million dollars in EBITDA, but they're investing for the future. So they've got a young fleet. They're opening up new offices every year. If I looked at cash profits, I'd have two very different. I might have the company that's deferring its capital expenditures would be thrown off a lot of cash. The guy's milking it for money.

but he's not reinvesting in the company. And so he shows a high cash profit. And you would think that the high cash profit business is worth more than one that's investing all of its money into the future. It's the same size, but it's got no cash at all. And so it's like, is the, just because they each have 4 million in revenue and 1 million in EBITDA, one has high cash flow.

and it's not reinvesting. The other one has no cash flow because it's investing for growth. Well, we need a way to kind of neutralize, you know, the way we can run a company that's generated to throw off cash to service our lifestyle, or we can be investing for the future to grow something that's big. And maybe I've got a lot of debt. Maybe I don't have a lot of debt. know, so cash profit does not tell the profit story of a company. you know, cash profits are highly derivative. It's by

How much debt do I have on it? Am I investing for the future? Am I growing or not? And so cash profit doesn't tell the story. And so we get up above the investment noise and we get to this place called EBITDA. And at the EBITDA line, then that's a place where I can level the playing field because when I buy the company, it's debt free. When I buy the company, it doesn't have to grow. Growth is always optional.

Adam Coffey (52:19.702)
And so I can just look at kind of like take revenue minus direct operating costs equals gross profit. And then I take out the SG &A costs and I start to hone in on my EBITDA line. And so this is a level playing field because anytime I buy a company, it's going to be debt free. And anytime I buy a company, I can engineer how it's going to run, whether I want to be a company that I'm milking for cash, it's my ATM.

or it's a company I believe in this future and I'm really going to be investing to grow it. And so I'm not going to have a lot of cash profit. I'm going to keep constantly reinvesting cash. I need to find some kind of a level playing field to analyze companies that are being run differently because how they're being run today doesn't necessarily dictate how I could run them in the future once I buy them. So EBITDA is like a level playing field.

Jon (53:07.17)
Yeah.

Jon (53:10.54)
That's a great answer. Hey, I don't have a lot more time. So I mean, I just want to get a little bit of current events. We got a couple of political candidates out here. One of them says, they're to tax unrealized capital gains, which may affect private equity. Do you think that there's a trouble brewing with that? Or do you think it will always turn out like it has in the past, which is to powerful create a car valid or a loophole and not affect?

Adam Coffey (53:37.846)
Well, you would certainly like to think that in this country, the rich and powerful will always continue to find a way to get what they want out of their politicians. They always do, right? They always do. I'm a capitalist. I believe in free markets. I don't believe in socialism. I don't believe in trying to control markets. so, you know, I tend to be, you know, call it a conservative Republican. I'm a lifetime member of the NRA.

Jon (53:44.962)
They always do man, they wrote options. Remember when...

Adam Coffey (54:06.318)
I'm a Republican, you know, it's like, think politics has become so polarized in the country. I wish we could get back to the days. I thought we used to be a divided country. Give me Ronald Reagan with Tip O 'Neill or give me Bill Clinton, you know, with Newt Gingrich. Give me those combinations any day of the week when both sides used to be able to work together. I don't believe we can continue to let 20 million people, you know, every four years into our country, you know, and I...

I don't believe that we can sustain the type of spending that the federal government is, they're drunk with spending. Somewhere there needs to be fiscal control. Hey, you and I have to balance our checkbooks every month and the government can spend and print and do whatever the hell it pleases. And I think we've become a society of free stuff. Whoever gives me the most free stuff, that's who I'll vote for.

Jon (54:44.898)
$35 trillion.

Adam Coffey (55:05.386)
And that's a dangerous place. So I hope for the good of our country that we find the center again, you know, because we seem to be off on the ends and we manage best when we manage in the center.

Jon (55:12.599)
Yeah.

Jon (55:19.776)
Adam, I'm almost out of time and I wanna say thank you for being on my show again. Everybody, this is a new release of the Private Equity Playbook. It's a different head, because I don't have it from Amazon yet, but all of these books, the Exit Strategy Playbook and the Empire Builder, I do like this one the best. Thank you.

Adam Coffey (55:39.414)
Yeah, that's my favorite too. But hey, thank you for having me on John and hello to all your listeners again. Good luck to you and your own empire builds and hey, I'll see you again soon.

Jon (55:50.818)
I hope so. Thank you.