The Wise Exit

Adam Coffey - Episode 37 of the Cashing Out (M&A) podcast

00:00:00:23 - 00:00:16:20
Adam Coffey
So many entrepreneurs do this, they wake up and say, “This is the day”. This is the day I start the sale. You know, the journey and this is the year I'm going to exit. Boy, we should be thinking about this two, three years in advance. We should bring in people to help us maximize the potential. Let's put the story together.

00:00:16:20 - 00:00:29:16
Adam Coffey
Now. Let's demonstrate to the buyer world that we are not selling hockey stick projections. We're selling a trajectory of growth and opportunity, and we're going to maximize our multiple potential.

00:00:29:19 - 00:00:50:18
Todd Sullivan
Welcome to the Cashing Out podcast, where our fellow founders share real stories and offer honest advice around selling their companies to some of the top acquirers in the world. My name is Todd Sullivan, CEO of Exitwise, where we help business owners create the exits they deserve. Adam admits his career as a PE backed operator has been a thrilling and highly lucrative journey.

00:00:50:23 - 00:01:16:06
Todd Sullivan
But today, he's more interested in sharing his knowledge with business owners on how to maximize their outcomes when selling their businesses. In our discussion, Adam offers his advice in three areas where business owners can improve their outcomes when selling to private equity sponsors. First, how to get smart about the sales process to private equity. Secondly, how business owners can leverage private equity buyers to create generational wealth.

00:01:16:15 - 00:01:41:18
Todd Sullivan
And third, how hiring experienced advisors at every stage of the exit process will yield your best results. I hope you enjoyed my conversation with Adam Coffey. Hello, everyone. I'd like to take a minute to highlight this week sponsor Doeren Mayhew, a top 60 national accounting tax and M&A advisory firm who we frequently recommend to conduct sell side QofE or quality of earnings for our clients.

00:01:42:05 - 00:02:06:02
Todd Sullivan
In 2023, there are a lot of things changing in the world of M&A, economic headwinds, failed banks and big bankruptcies. But with the credibility of a sell side. QofE from a top firm like Doeren Mayhew, more buyers will look at your deal. Buyer diligence will run faster and your investment banker will be armed with clean financial data to be able to address any buyer questions with well-conceived responses.

00:02:06:10 - 00:02:25:14
Todd Sullivan
What this really means is you're more likely to maximize your exit. Dawn Mayhew is one of Forbes best tax and accounting firms in the United States. Check out their quality of earnings offerings and everything else they can help you with at doeren.com.

00:02:28:04 - 00:02:49:20
Todd Sullivan
Adam, I am really fired up to have you here. Right. Obviously we've chatting a little bit and I think one of the reasons I'm so excited is that myself, right? I've built and sold businesses and when I looked at that life cycle of the entrepreneurial journey, the exit was the black box. And then I talked to my fellow founders about M&A and we were clueless.

00:02:50:03 - 00:03:10:05
Todd Sullivan
And when I looked back at the transactions that I was able to do with an investment banker or a broker or even on my own, the mistakes that I would make was from a lack of understanding of what M&A really entails. And so what I see with you is, is a kinship of how do we make the world of business owners, how do we make you smarter?

00:03:10:05 - 00:03:34:05
Todd Sullivan
How do we give you the advantage when it comes to selling your business? And you've written two books on the subject, basically uncovering what a private equity transaction could look like and putting in our mind what's the nomenclature, what are the structures? And then your guide to exit is it's amazing, like I've told you, right? It's concise. It is what every founder needs to have on their shelf and revisit.

00:03:34:14 - 00:03:55:08
Todd Sullivan
So although you have essentially bought and sold 100 companies, you're not our typical of like a guy that started in his garage and built something up to an exit. You've been on the buy side, the sell side. Right. I'm just excited because you are a wealth of knowledge and I feel very privileged to have you with us today, you know, educating our fellow founders.

00:03:55:08 - 00:03:57:09
Todd Sullivan
So really, you know, thank you for being here.

00:03:57:23 - 00:04:18:18
Adam Coffey
Hey, Todd, this is great. I appreciate it. Hello to all your listeners out there and everybody that's tuning in. You know, I think for me personally, so I personally was a CEO for 21 years. I built three national companies. I bought 58 companies. I put them together doing the classic buy and build. I have billions of dollars in exits.

00:04:19:00 - 00:04:44:08
Adam Coffey
And along the way, you know, I started teaching and I was lecturing at UCLA in the Anderson Business School. I really loved teaching and I was getting kind of bored running companies. And I'm like, How can I flip this around and learn how to monetize the teaching part and be helpful to others and be thoughtful about the journeys that they were going to go through.

00:04:44:08 - 00:05:03:18
Adam Coffey
And experience. And so as a result, those books started to come out. So there's been two I'm blessed. The first one did phenomenally well. Second one is doing great to third one coming later this year. So there will be a third one, I call it Empire Builder, and it will be out late this fall. So looking forward for that one.

00:05:03:18 - 00:05:23:16
Adam Coffey
But glad to be here. Glad to talk to your listeners because I think you and I are kindred spirits in that sense. You know, we built companies, we've exited companies. We have kind of lived that dream, and now we're trying to help our brothers and sisters out there who are building businesses and struggling with some of these concepts around growth, private equity and exits.

00:05:24:01 - 00:05:47:01
Todd Sullivan
Well, I'm really glad you described it that way, just because when you're building a company. Right. We're coming from a point of passion, right? This is our purpose. And it is so fun to come to work today knowing that we can be impactful in the fact that your books are doing so well. It means there is a real audience out there that is consuming this this type of education, and I think it's of enormous value.

00:05:47:05 - 00:05:55:09
Todd Sullivan
And one thing I don't you probably don't know, Mark Cuban had this spot booked. And when you agreed to take it, I bumped him and said, Nope, I've got out.

00:05:55:09 - 00:06:02:14
Adam Coffey
Oh, sorry, Mark, I'm in Dallas. I'll I'll make it up to you next time I go to a, you know, a Mavs game.

00:06:04:09 - 00:06:26:06
Todd Sullivan
It's well, always a good place to start is the beginning. But I think from my humble opinion, you're a military guy, right? And that probably framed a lot of the way you've run businesses and created this kind of successful path. But I don't want put words in your mouth. Take us back to where you started. That was kind of the beginning of your successful ride here.

00:06:26:15 - 00:06:45:02
Adam Coffey
Yeah, no, thanks for that. Listen, as I look back now on my life, I'm 58 years old today. But when I look back, boy, there's some distinct experiences that shaped who I am, my career, my thoughts, my beliefs. And so I tell people the first one is, is certainly my service in the military. Coming right out of high school.

00:06:45:02 - 00:07:05:01
Adam Coffey
Ronald Reagan's president, The Cold War is coming to a crescendo. And, you know, I had this higher sense of service. My dad served in the Navy during the Korean War, and Coffey’s have been fighting America's battles, going back to the Civil War. So I had this kind of calling. I already knew I would go in the service. I didn't want to go to college straight away.

00:07:05:05 - 00:07:26:13
Adam Coffey
So I started as a private in the United States Army. I was so low on the totem pole that when I looked up, I saw bubblegum on the bottom of people's shoes. So I started at the bottom, but that shaped me. And I had a good run in the military. You know, I was a noncommissioned officer and I learned about teamwork, discipline, leadership.

00:07:26:13 - 00:07:45:05
Adam Coffey
I learned about the business world today calls it servant leadership. Back then, there wasn't a title. It wasn't a name, you know, And but that's what the military has been cranking out for a couple of hundred years. Plus in the US is servant leader. So I learned to care about people. I learned to be one of those guys who says, Take the Hill, follow me.

00:07:45:11 - 00:08:07:01
Adam Coffey
You know, rattle the saber. I'm running up in front. And so servant leader, you know, military gave me a sense of discipline that served as a great foundation. Number two was engineering. Coming out of the service. Engineering made me a meticulous planner, you know, And so you've got servant leader learns how to become a meticulous planner. I go to General Electric first as an engineer.

00:08:07:01 - 00:08:29:13
Adam Coffey
I crossover into business. I go to Crotonville. I'm there during the Camelot era. Jack Welch is at the helm. GE is the world's most admired company. It's the world's largest company. Stock is splitting every three years. I learned how to run a business from perhaps one of the best business leaders on the planet, certainly in my lifetime.

00:08:29:18 - 00:09:13:09
Adam Coffey
And so G.E. taught me how to run a business. And then fourth really came just experience. You know, I spent 21 years as a CEO running three national companies for nine different sponsors. Yeah. And, you know, doing buy in builds bought 58 companies, as I said, you know, And I made every mistake a guy can make right? You're 30 something running a company for the first time and it's so it's the collective wisdom of experience of actually doing it going through those different cycles, building it from this size to this size and selling it, and then new private equity sponsor and doing a second run and selling it again and doing a third run and selling

00:09:13:09 - 00:09:32:22
Adam Coffey
it again. And so it's like all those iterations. I saw some statistics recently. I actually have an article coming out in Forbes this this next month. You know, 73% of CEOs who start a five year hold period don't survive to the end. And there's a whole multitude of reasons why that happens. Some retire, some it was a plan, some don't make it.

00:09:32:22 - 00:09:53:03
Adam Coffey
But, you know, I have the battle scars of 21 years of having private equity sponsors, you know, and using and working with them and working with their capital. And all in all, what a great run. You know, it was a lot of fun. And so it was all these experiences that kind of shaped me into the person that I am today.

00:09:53:09 - 00:10:11:08
Adam Coffey
And I've held every job a person can hold on an org chart. And as a result of that, you know, I feel like I have the battle scars, the crow's feet on the eyes. I look out the eyes of a 20 year old, but it's it's almost a 60 year old now, Gomer, looking back at me. So I think experience is probably also in there.

00:10:11:15 - 00:10:28:14
Adam Coffey
And my goal and objective now at this point in my life is I want to help entrepreneurs and business owners get through that learning curve as painlessly as possible and scale faster and exit higher and just be more successful. And it's been fun.

00:10:29:11 - 00:10:50:19
Todd Sullivan
That's great. Thank you for giving me the background. I think for us, for our listeners, you know, many of them are going to engage with Exitwise. We're going to build their M&A dream team really specific, and those investment bankers are going to bring really high level relationships, buyer relationships to the table and, and a lot of them are going to be private equity.

00:10:51:06 - 00:11:06:21
Todd Sullivan
And I think that that can be intimidating for a lot of buyers. How do you think about selling to a private equity firm? And I feel like you've got kind of the inside playbook, right? You've built companies for private equity and you've bought a lot of companies as part of your growth strategy.

00:11:07:05 - 00:11:08:07
Adam Coffey
And from founders.

00:11:08:21 - 00:11:30:15
Todd Sullivan
Exactly right. From founders. And so maybe you could say, Hey, the wizard pull, pull the curtain back and say, Hey, founders, this is what you need to know. Right? And I've learned a lot of this from your books. But for today, what are some of the core things that you would give as advice when a founder is getting ready to entertain an offer from a private equity firm?

00:11:31:04 - 00:12:07:01
Adam Coffey
So great question. And if I could sum it up by saying the biggest mistake I see entrepreneurs make, I'm going to please don't take this wrong listeners. I'm going to call it the arrogance of success. People who have built successful businesses as entrepreneurs are absolutely experts in every facet of their business. They're experts at building their company. They know their company better than anyone, and somehow they think that that expertise translates and makes them an expert at selling their business.

00:12:07:11 - 00:12:27:00
Adam Coffey
And they're not. They're a novice. Just like the first day they started their company and they learn so much over the years as they built up the Empire. Boy, the first time you sell a business is when you learn how much you didn't know. And that's if if you're lucky enough to survive that experience and do it maybe a second time or a third time.

00:12:27:07 - 00:12:51:18
Adam Coffey
But you don't know. What you don't know is part of the problem. So we don't know if we're maximizing the potential of our business. And to prove that point, since I wrote the private equity playbook, I have conducted God, I can't even think of how many seminars or college lectures where I have given a simple ten question quiz based with all the answers are in my book and they're multiple choice.

00:12:51:18 - 00:13:18:19
Adam Coffey
And I've given this same ten question quiz to probably a thousand different founders who were successful people, many multimillionaires, Decamillionaire, and 90 plus percent of everyone in the room fails miserably. And those who do pass usually get a six out of ten, and so they pass with a D, And I start my lectures on private equity by just showing the audience how much they don't really know.

00:13:18:23 - 00:13:43:22
Adam Coffey
We're talking basic questions. Who's the general partner? Who's the limited partner? What's the average life of a private equity fund? And it's things like that that even wealthy founders fail. And so I think the biggest mistake I see to make is, is that so what I would tell anyone who's building a business thinking about an exit first, let's get educated.

00:13:43:22 - 00:14:06:08
Adam Coffey
Let's never stop learning. My books are simple in nature. They were designed that way on purpose. You know, if someone spends on Kindle six bucks less than the cost of a grande, soy vanilla latte at Starbucks, you know, you read my two books and spend an afternoon. And I promise you your level of expertise will increase exponentially.

00:14:06:14 - 00:14:36:12
Adam Coffey
So we have to think about selling our business ideally 2 to 3 years in advance. We want to be preparing for sale. We want to be looking like that company that is really going to resonate strongly with our probable buyer, which is either a financial buyer or a private equity firm, and we're going to become a platform or it's a strategic, potentially a strategic backed by private equity at this point with 5 trillion in capital, in assets under management and more than 50% of all deals involving private equity on the planet.

00:14:36:19 - 00:14:56:05
Adam Coffey
You know, there's a high probability we're going to be selling to a private equity firm or a private equity backed investment. And so we need to learn about this capital and how it works, how to manipulate it to our advantage as founders and people exiting so that we give it what it needs, which is growth for its shareholders and profit.

00:14:56:05 - 00:15:13:23
Adam Coffey
But we take from it what we need, which is wealth, the wealth generation process that we're going to go through. So I think getting educated is probably my number one piece of advice. We don't know what we don't know. Let's go into this eyes wide open. Let's recognize that the first time we swing a golf club, we aren't Tiger Woods.

00:15:14:11 - 00:15:15:20
Adam Coffey
It doesn't happen that way.

00:15:15:20 - 00:15:36:05
Todd Sullivan
You know, it's great advice and I lived it. But as founders, right, we are tackling the impossible. We're doing very, very difficult things. And like you said, when you have success, you've built up a level of confidence and you think you might do this yourself. We actually have a blog post because we have so many founders saying, Hey, can I do this myself?

00:15:36:17 - 00:16:00:12
Todd Sullivan
And the reality is, if you've never done it before and there's an entire industry of professionals that can walk you through how to get this done and make fewer mistakes, you really need to be able to take advantage of that and be open to that. And so what you're talking about that 2 to 3 years of preparation, there really is a positioning of a company to maximize value and that can't be done overnight.

00:16:00:12 - 00:16:20:06
Todd Sullivan
So we have many clients right now where we are really looking at their financials with accounting firms to say, okay, where are the red flags before we actually go to market? What can we do to maybe increase the growth rate or profitability? Are there things you can absolutely do from a team perspective have right people, you know, on the bus, sitting in the right seats?

00:16:20:11 - 00:16:24:03
Todd Sullivan
So many things that prepare your business are basic concepts.

00:16:24:03 - 00:16:53:00
Adam Coffey
And I think you and I are right. It seems so basic. But to founders, I mean, it's the difference between maximizing your potential at exit and and really doing well versus a mediocre exit that you think is well because you don't know what you don't know. And this is the biggest transaction for most people's lives. Yeah. And when I think about that, it's like, boy, isn't it worth spending just a little bit of time, effort and money to make sure that we are completely prepared.

00:16:53:06 - 00:17:17:08
Adam Coffey
You know, even when you just think about, you know, I talk about in my books, you know, we need tax advice, we need professional accounting advice. You know, we're in the business of creating EBITDA. How do we maximize our EBITDA by changing our spending habits and or where things are hitting our our financial statement? And let's not do things that are reckless, that detract from even when we can simply be be smarter about how we structure our finances, our costs.

00:17:17:12 - 00:17:33:23
Adam Coffey
I think about the taxation, you know, jeez, if you lived in California and your business is do in California and Nevada work know, boy, if you lived in if you sell something for 100 million, you're going to pay 13 and a half million in tax in California and pay zero in Nevada. It's like so many entrepreneurs do this.

00:17:33:23 - 00:17:55:02
Adam Coffey
They wake up and say, this is the day, this is the day I start the sale, you know, the journey, and this is the year I'm going to exit. Boy, we should be thinking about this to three years in advance. We should bring in people to help us maximize the potential. Let's put the story together. Now, let's demonstrate to the buyer world, you know, that we are not selling hockey stick projections.

00:17:55:12 - 00:18:15:00
Adam Coffey
We're selling a trajectory of growth and opportunity, and we're going to maximize our multiple potential. So many little nuance things that we need to do. But why is it that people seem to skimp here? And I use another medical analogy a lot. I tell people, look, if you needed brain surgery, would you go to your dentist because you could save a few bucks?

00:18:15:08 - 00:18:32:03
Adam Coffey
You know, what would you would you go to the veterinarian and say, Hey, doc, you know, you fixed my dog, You know, how about fixing my head? Go in there and do brain surgery because I'm a cheap, you know, I want to save a few bucks. Of course not. We want the best doctor we can get, you know, to do brain surgery on our heads.

00:18:32:03 - 00:18:42:23
Adam Coffey
Well, guess what? When you're exiting your business, you need a team of professionals around you who can provide that level of expertise and advice so that you can maximize this exit.

00:18:43:05 - 00:19:00:07
Todd Sullivan
Yeah, this is why I think we were brothers in another life, right? That is literally on our web site that if you have a brain surgery. Right. Do you go to your family doctor? Absolutely not. Right. You ask around, you interview, you do everything to get the best possible talent that you can afford to get the best possible outcome.

00:19:00:07 - 00:19:20:05
Todd Sullivan
And this is exactly the same thing. You know, I want to tell maybe two quick stories that are very relevant to that tax situation. We just sold a business for a woman. It was recycling technology. She was in Tahoe on the California side. Right. And it was, oh, should I move to Nevada? No, you can't do that. Right.

00:19:20:05 - 00:19:39:16
Todd Sullivan
That would have been two or three years planning that and establishing residency. And a lot of things go into that. You can't make that move just last second. And now we have a client where we're recommending they're actually in Michigan and moving to Florida because they know the tax consequences so substantially in their favor if they go to sell in a couple of years.

00:19:39:21 - 00:20:09:23
Todd Sullivan
And so we're coaching through that and we see that, you know, absolutely every day. So I want to stay on track with your advice right along along the lines of selling to a private equity firm. Right. And we've got we're getting preparation from business positioning, but also, you know, expert team. What else do you see and maybe maybe examples of companies that you've bought where it was like, wow, they could have got more value and then maybe, wow, they really maximized because they did these three things or did.

00:20:10:00 - 00:20:24:20
Adam Coffey
Yeah, well, so let's start with the proverbial my telephone rings and I answer it and it's a private equity firm and boy, we love your company. We've been tracking your company. And we we just think that that you would be a great fit for us.

00:20:25:03 - 00:20:25:09
Todd Sullivan
Yeah.

00:20:25:18 - 00:20:50:11
Adam Coffey
You know, the chances of someone cold calling you and that's your right buyer are about zip. Yeah, but I can tell you that tons of companies actually sell to the person who makes the first phone call, you know, And it's like, I don't create that competitive tension by hiring a bank or being thoughtful about who is the best buyer for this particular business and and what that might look like.

00:20:50:11 - 00:21:11:03
Adam Coffey
If, you know, if I put some thought and effort into it. You know, I can tell you right now when your phone rings and it's a private equity firm, it's not the right firm. Just trust me. But trust me, it's a lightning strike. If it is, it's rarer than a lightning strike if it is. So when I think about the companies that that I, you know, have bought 50 to 60 different companies in 58 was the last number.

00:21:11:08 - 00:21:35:05
Adam Coffey
As a direct as a CEO if I think about you know all the transactions I've been involved in, it's hundreds literally as an executive coach or mentor or board member of companies that I'm working with on a lot of these. I help with the M&A effort. I'm helping them by working with founders. And when I think about a lot of these people, I can just honestly tell you that most of them, only a few.

00:21:35:05 - 00:21:55:04
Adam Coffey
There's been a few out there who were a second time seller that were fairly astute, but most of them are just they're first time novices. It shows. And as a result of that, they can make rookie mistakes. And when you think about your life, you know, I talk in my books, you know, there's different kinds of private equity firms.

00:21:55:05 - 00:22:17:03
Adam Coffey
There's 6000 of them, 8000 of them, depending on how you want to identify private equity. And there's different styles, right? There's good, there's bad, there's big, there's small, there's hands on, there's hands off, There's people who will crawl in your shorts and make your life a living hell for the next five years. There are those who truly are partners.

00:22:17:10 - 00:22:37:12
Adam Coffey
I've been great and fortunate to work with some really good firms over the years who who did care about people and did care about industries. And and they really wanted to be thoughtful about how they worked with companies. And, you know, I remember working for Ares, you know, and during COVID, they had a start, a foundation to take care of our employees who were impacted negatively by COVID.

00:22:37:12 - 00:23:03:18
Adam Coffey
You know, that was unique. But when entrepreneurs are engaging with private equity, they have to think about what they want their future to look like. So as an example, let's say I'm 70 years old and I really do want to retire. Well, rolling over and being a minority investor and thinking that, you know, I just got my wheelbarrow full of gold and now they're going to want me to work harder than I've ever worked before because this is no longer the championship.

00:23:03:18 - 00:23:24:01
Adam Coffey
This is now the beginning of spring training. And I really wanted to leave. Well, if that's the case, then I better have a number two in place. You know, who who can take this business forward so I can position myself as an executive chairman. Is not really active in the business and I can walk out. And so I think oftentimes what I'm seeing entrepreneurs is they're not thinking ahead.

00:23:24:08 - 00:23:40:20
Adam Coffey
What is the outcome I'm looking for? They're just chasing the dollar, you know? And oftentimes, too, you know, invariably, if I am if I'm talking or if I'm with private equity people and we're talking to founders, at some point, the tables turn and we say, Hey, do you have any questions for us? Crickets.

00:23:41:00 - 00:23:41:19
Todd Sullivan
Yeah, yeah.

00:23:42:04 - 00:23:56:13
Adam Coffey
I don't know what to ask. I have no clue what to ask. You know, I'm chasing hard dollars, you know, and I'm not asking anything because I don't know what to ask. And so I hate to go back to education, but it's like we really need to just become astute people.

00:23:57:15 - 00:24:24:10
Todd Sullivan
I would say that our job is really to surround you with the expert investment banker that has the relationship with those private equity firms and can tell you how they behave now. So when a process starts, it is describe your happiest outcome. What exactly do you want? And when you understand that and it is maybe not consistent with the buyer pool that we're looking at, then you need to adjust.

00:24:24:16 - 00:24:40:00
Todd Sullivan
And so I think one of those adjustments, like you just said, I mean, I had a conversation today with the founder and that was about how do I put, you know, my number two in place, because I know there's a lot of growth in this business, but I don't want to achieve it. And I want to sell and roll equity.

00:24:40:03 - 00:24:58:02
Todd Sullivan
Right. And I want to touch on that kind of idea of rolling equity because we get that question quite a bit and it's how much should I roll? And I think you have an awesome answer in your books, the math that you run. I want to go through that. But you know, it's one thing for a founder to try to get really educated with the questions they would ask.

00:24:58:11 - 00:25:19:00
Todd Sullivan
And it's another for your representatives to be teeing up. Here are the questions you want to ask to this particular group, because they behave in this particular way. And this is a group we would allow into the process and could be a good suitor for you, a good buyer for you, right. So you don't have to be alone in that set of questions and who you're asking them to.

00:25:19:08 - 00:25:20:10
Adam Coffey
I completely agree.

00:25:21:02 - 00:25:40:01
Todd Sullivan
So could we I don't want to jump too far ahead, but I took so much from your books in essentially the math, that idea of the second bite of the apple. Right. And maybe you could describe that because what we get our listeners come to us and say what they love is when they hear an acronym or a new phrase that we define it right?

00:25:40:01 - 00:25:50:00
Todd Sullivan
Even if we think that this is a simple phrase, people need to know exactly what it is. So maybe could we talk about the second bite of the apple in your formula, your recommendation to founders around it?

00:25:50:00 - 00:26:16:01
Adam Coffey
Yeah, absolutely. So let me start by saying most founders, if given left to their own devices, would say, I would love to have 100% of my equity or the enterprise value. I want it paid. Now. I want it out of the business. There's some kind of arrogance about I must have control in order to have this success. And this is the world's most successful asset class of investors.

00:26:16:14 - 00:26:37:11
Adam Coffey
They have not grown from a few hundred firms. Back when I started to more than 6000 today and from a few hundred billion in assets under management to now more than 5 trillion by sucking at what they do. And so we can actually ride their coattails.

00:26:37:11 - 00:26:37:21
Todd Sullivan
Yes.

00:26:37:22 - 00:26:57:17
Adam Coffey
Have further success. And so when I'm talking to entrepreneurs, I talk to them about risk. You'll hear me use the word risk a lot. Why would I even want to sell my company? I'm in my forties is to diversify against an uncertain future and risk, you know, entrepreneurs. Most people think that nothing bad can ever happen to my business.

00:26:58:05 - 00:27:20:12
Adam Coffey
Well, let's assume you owned a movie theater before COVID hit. What happened when COVID hit? Well, you were closed. You were out of business overnight through nothing of your own control. Yeah, they're back open now. But businesses, you know, planes fly into buildings, wars happen, financial markets melt down. And so I coined for Forbes the Law of 130.

00:27:20:12 - 00:27:44:18
Adam Coffey
If you add your age plus you're percent of net worth tied up in this illiquid thing known as your company. If it's over 130, chances are it's time for you to at least diversify your asset base. So I believe that and I can prove this on spreadsheets. This isn't the forum for that. But if you stay alone growing at the rate you are for the next five years and then sell your business, you will make less than if you sell today.

00:27:45:10 - 00:28:03:16
Adam Coffey
Work with private equity for five years and then sell again. So how do we do this thing called roll over investing? Well, the way I like to think of it is, you know, the typical return that they're going to model is a three times multiple of invested capital. And, you know, it's kind of 3x to 4x multiple of invested capital.

00:28:03:16 - 00:28:26:23
Adam Coffey
So for every dollar they invest, they're looking for $3 to $4 back. Okay. Using that math, then if I'm selling my business, what happens if I take 30% of my profit and I roll it forward, rolled forward in a tax deferred way? I don't have to pay taxes on that 30%. It's efficient. I now become a minority shareholder in my own business.

00:28:27:04 - 00:28:51:21
Adam Coffey
I take the 70% out. You know, of course, Todd and his people have given me all the best tax strategies. I'm living in the right place. I've got all the right people who advised me I maximizing that potential. But now I am able to diversify my asset base and I'm investing someplace else. But why leave your business? If you're an entrepreneur and you sell, you get a wheelbarrow full of cash and what's the first thing you have to do is figure out how to put that money back to work.

00:28:52:04 - 00:29:17:06
Adam Coffey
Why not stay in the business? You know, you love, you've been building, but now be a minority shareholder with a private equity backed partner. So I put $0.70 of every dollar. You throw it into the tree like a squirrel saving nuts for winter, and then the 30% rolls forward. I'm now working with private equity. I'm accelerating my growth strategies and most importantly, I'm using their capital and I'm using their debt relationships.

00:29:17:06 - 00:29:38:13
Adam Coffey
And so my checkbook is permanently put away. I've got 30% rolling forward. If they get a four times multiple of invested capital, my career batting average is actually a five times multiple of invested capital. But if they get a four bagger, we call it in the industry, then for every dollar I rolled forward, I get four times.

00:29:38:20 - 00:30:01:12
Adam Coffey
Well, if I roll forward 30% and I get a four times return, then I get $1.20 for every dollar I rolled over. My second bite of the apple is bigger than the first. I put the two bites together and in a very short period of time, if I took all that money back and said, What was the original business, I sold again, take those two buckets of money, two wheelbarrows full.

00:30:01:19 - 00:30:21:08
Adam Coffey
Now let's see how that math worked out. What did I actually receive? Less my rollover amount, What was my total? And so I've earned a living. I tell people, Why sell your company once when you can sell it twice? My personal record is selling the same company five times in 13 years and four months. And so my actual formula from the book was to roll.

00:30:21:15 - 00:30:40:22
Adam Coffey
You know, I use different examples when it's a 30% rollover, you know, if I'm using a 3x multiple of invested capital, then it's like I want to roll over $0.31. You know or $0.36 is what I want the math to work out is such that when the second bite happens, the second check is bigger than the first. Yeah.

00:30:41:01 - 00:31:02:10
Adam Coffey
And lately, the middle market size companies that I've been working with extensively, we're getting better than a 3x multiple. We're getting about a 4x multiple. So I tell people roll forward $0.26 on a dollar and $0.26 times four is a buck four for every dollar that you rolled over your second bite, it's bigger than you're going to get, you know, four times the money back.

00:31:02:18 - 00:31:25:13
Adam Coffey
So multiple bites of the apple, I think, are how wealth is created. I'll call it generational wealth. The first time you sell your business, you get a really nice payday, depending on how big it was. You know, it's life changing when you sell the company the second time or the third time or the fourth time or the fifth time, this money is now piling up.

00:31:26:08 - 00:31:47:06
Adam Coffey
And as a result of piling up, you actually create generational wealth. And you're doing it by riding the coattails of the world's most sophisticated asset class, and you're giving them what they need, which is the leadership and stewardship of the company, using their capital to grow it faster, to get to new heights. And you invested alongside of them.

00:31:47:06 - 00:31:53:13
Adam Coffey
You're perfectly aligned. They make money, you make money. And it's a beautiful thing when it works. Well.

00:31:54:02 - 00:32:21:20
Todd Sullivan
Thank you, Adam. That's a great, great story. There's so much to unpack there. But this is a decision, right, that a lot of founders are going to have the ability to make when they go to sell their business. And what I come back to is who is that partner that you would be rolling equity into and in many cases, that 30% let's just take that as a standard recommended number that's very enticing to the private equity firm.

00:32:21:20 - 00:32:50:23
Todd Sullivan
It means that they believe you believe in this partnership and the growth opportunity and for you, like I'm reiterating, what you're saying is that these are the best investors in the world and you now get to leverage them. But it is really important that you're choosing your partner correctly. I think the other thing that maybe I didn't hear, I think you’d agree with is that now you're not just riding on the growth of your own company, you're typically a bolt on if you're not the original platform, right, you're a bolt on.

00:32:51:02 - 00:33:04:14
Todd Sullivan
And now you're diversified into the other businesses that they have that are typically going to be a bit larger right? So there's potentially less risk there may that may even shorten your time period for, you know, seeing that return.

00:33:05:01 - 00:33:31:23
Adam Coffey
So I know sometimes it just makes me think of something. And that is the difference between being a platform or being a bolt on to a strategic where I get to stay because they keep the lights on, as I call it. They want me to stay. They ask me to stay. I become a rollover investor. Well, you know, I'm going to get the same return because no matter whether I'm a bolt on or I'm the platform, the private equity firm is still modeling that 3 to 4 x multiple of invested capital.

00:33:32:03 - 00:33:52:02
Adam Coffey
Yes, I'm buying a share of stock, the same share a stock that they own. And now I get to take advantage of if they're doing a buy and build, they're buying a bunch of companies. You know, one of my empires I built, I bought 34 and another one I bought 23. Well, the first person on the ship, you know, is getting all the arbitrage upside of all the subsequent companies that I'm buying.

00:33:52:02 - 00:34:13:01
Adam Coffey
They're getting their piece of that arbitrage action and arbitrage being the difference between the multiple. I sell the business at the multiple, I buy it in the world of VC. I was buying companies at about five times and I sold for almost 14 times. And so there's literally, you know, nine turns of profitability. And I own a little piece of that company.

00:34:13:01 - 00:34:35:21
Adam Coffey
And so I'm getting every time they buy a company, I'm winning. I make money, you know, And as you said, I'm diversified across a larger portfolio of companies and I'm still there running my business, still growing my business. I'm using other people's capital. But every time they get bigger and they buy things, I get some profit and they afford me that opportunity by virtue of joining their adventure.

00:34:36:06 - 00:35:00:12
Todd Sullivan
Could we just just for the listeners to define this idea of EBITA multiple arbitrage, Right. So as you're a smaller company and maybe you have $3 million of EBITDA and you're seen as a bolt on to a private equity platform, you may get five times that 3 million of EBITDA. So $15 million enterprise value is what we would call it.

00:35:00:19 - 00:35:20:07
Todd Sullivan
But now when you're attached to a bigger platform or you were to stitch call three 3 million EBITDA businesses together, now you're at $9 million, a lot of times you get over ten that EBITA multiple arbitrage starts to come into play. So instead of a five times deal, maybe you're a nine times deal, right? So that is it.

00:35:20:08 - 00:35:23:20
Todd Sullivan
Would you define it any differently? Am I missing any components of that? Let me give.

00:35:23:20 - 00:35:47:12
Adam Coffey
You an example that I've been using, please, that really highlights it easily for people to see. Let's just talk about arbitrage. So let's understand that small companies sell for less than big companies. The reason is big companies are rare. So if you think of a pyramid, you have 33 million small companies in America defined as 500 employees or less, 99.9% of all companies.

00:35:47:17 - 00:36:10:12
Adam Coffey
So the bottom of the pyramid of companies is 33 million. There are only 3000 companies on the entire planet that have $1,000,000,000 in revenue. So 33 million at the bottom of the pyramid and the 3000 largest companies on the planet with a billion of revenue are at the top of the pyramid. As you're climbing the pyramid and getting bigger, you are becoming rarer.

00:36:10:18 - 00:36:34:17
Adam Coffey
As you're becoming rarer, you're becoming more valuable. So here's a classic example I've started using. Imagine, if you will, to 70 year olds. They each have companies with $5 million of EBITDA. They're consultants. So each of these businesses, they have consulting practices. There's other people. It's a salable asset. It's not a lifestyle business. You know, let's just you could say that there they own companies, they own plumbing companies, they own landscape country.

00:36:34:17 - 00:36:52:15
Adam Coffey
I don't care. I pick a pick and industry. I got two, 70 year olds. They have 5 million of EBITDA in this particular industry. Those businesses sell it eight times. So each person is sitting on top of an asset that's worth 40 million. And if I put those two businesses together now we have 10 million of EBITDA and instead of eight times they sell for 12 times.

00:36:53:03 - 00:37:13:10
Adam Coffey
Well, now that assets worth 120 million combined, if I break it apart and give each one their 50% something that was worth 40 million is now worth 60 million. They got a 50% increase in their value simply by going from 5 million of EBITDA to ten. I put two companies together, each one with five, eight times five is 40.

00:37:13:14 - 00:37:36:22
Adam Coffey
Put them together. It's ten. Ten times 12 is 120 divided by two. Each one now gets 60 million. They get a 50% increase in their own shareholder value simply by putting those two companies together. Now, do this at scale. I buy 23 companies and one empire. I buy 34 companies in another empire. And I put all these small companies together.

00:37:37:03 - 00:38:03:14
Adam Coffey
I'm climbing the private equity pyramid. I'm no longer one of the 33 million small companies down there. I'm half way up the pyramid slopes now and I'm selling something that's got $100 million in EBITDA and that assets trading for really big number. And as a result of that, I'm riding the arbitrage, you know, in creating shareholder value. Now oftentimes when I'm buying these companies, I'm using 100% debt.

00:38:04:05 - 00:38:05:15
Adam Coffey
I'm not even using equity.

00:38:05:15 - 00:38:06:03
Todd Sullivan
That's right.

00:38:06:03 - 00:38:31:14
Adam Coffey
That's right. My last empire, I bought 23 companies, not one penny of equity was needed to buy 23 companies. The one before that where I bought 34. I did have one time where I had to bring in some equity. It was a small equity check, but most of the time I'm doing this by leveraging debt and I'm buying companies for a low price, and the cash flow of the companies I'm buying is actually servicing the debt that it takes to buy them.

00:38:31:16 - 00:38:55:10
Adam Coffey
And so why can't I sell a small company for 15 times it? Go back to the rarity. There aren't enough buyers on the planet to buy 34 million small companies and to create a competitive tension so the smaller companies trade for smaller multiples. Each industries, different different industries, trade different multiples. But the truth holds that small companies sell for less than big companies.

00:38:55:14 - 00:39:11:19
Adam Coffey
And what private equity is doing is it's just their number one primary way for growth is call a buy and build in the industry. I'm going to buy a whole bunch of small companies, put it together, create a big company, climb the pyramid, get a higher valuation, sell it and give all the money to my shareholders. And guess what?

00:39:11:19 - 00:39:14:06
Adam Coffey
If you join this, you're one of those shareholders.

00:39:14:08 - 00:39:38:15
Todd Sullivan
Yeah. Adam, That's awesome. Thank you. That's a much better example than I gave. You're a wealth of knowledge. I want to be respectful of your time. And so when we're talking about, you know, the advice that you would give to founders run one, we're really talking about education around this process. Getting smart about your business preparation, getting the right team in place, knowing your buyers, being able to ask the right questions, right, and understanding where you're coming.

00:39:39:06 - 00:40:04:01
Todd Sullivan
And then we talked about this idea of rolled equity, creating generational wealth by riding the coattails of seemingly the best investing investment class in the world. Right? So it's enormous opportunity. And in your book, you describe it incredibly well, how to take that second bite of the apple. And like you said, the third, the fourth, we had another woman, April Anthony, was on our podcast and she has done this multiple times, right.

00:40:04:01 - 00:40:24:01
Todd Sullivan
She really understands this game and I would really encourage people to look at your books about how do you really understand this game before you get into it? And you're never going to be an expert, but you can get a lot smarter before you start. What is one last kind of big nugget of advice that you would give to our founders who are thinking about selling to private equity.

00:40:24:10 - 00:40:46:11
Adam Coffey
Leveling the playing field. I was always a really good steward to people. When I would buy companies, I typically would start, you know, if we got past the letter of intent stage and we're doing diligence and the finances check out and I'm putting a contract in front of them, I'm going to start with an agreement that probably was a fully baked done deal with somebody else.

00:40:46:12 - 00:41:17:04
Adam Coffey
I'll go to the shelf and I'll say, I bought 34 companies. This looks like deal number 16. Okay, So I'm going to start with that, which was fully negotiated language because I just want to be efficient with time and but I can tell you that not everyone is like me. There are sharks out there in the world. And, you know, if a lawyer turns over a draft and I want to check whether the law firm on the other side is competent knows how to do M&A transactions or sell a business, you know, I could make five or six word changes to an agreement, and I'll just ship it over there.

00:41:17:12 - 00:41:38:14
Adam Coffey
Let's see if, you know, the counsel, a competent M&A counsel is going to find these five words in about 30 seconds. Well, if this seller is Billy Bob as high school buddy and golfing buddy who does divorces and ambulance chasers and oh, hey, buddy once in a while, you know, I'm helping him sell my business because my friend, they're not going to catch those.

00:41:39:03 - 00:42:00:14
Adam Coffey
And some people would take advantage of a seller who has incompetent counsel. So it goes back to that specialist thing. Please, as an entrepreneur selling your business, please don't think you can do this by yourself. Please don't think you can do this without professionals. Get the help to level the playing field. You know what? If I walk in a room, I don't want to be the smartest guy in the room.

00:42:00:19 - 00:42:18:23
Adam Coffey
I'm in the wrong room If I am. If I'm an entrepreneur, I don't need to think that I have to be the smartest person in the room. I'd rather know. I'm the absolute worst. I'm exact opposite. I'm the dumbest person in that room. And we're talking about selling my business. So let's get a team of people to level the playing field.

00:42:19:06 - 00:42:43:01
Adam Coffey
Let's make sure that we get the advice that we need in the expertise. And oftentimes what I'll tell you is you do that, you'll maximize the potential of the exit. You'll be well-protected, you'll make sure you get excellent terms and conditions, you know, your trailing liabilities. You change five words in an agreement. What you're trailing, liability exposure could be much larger than it needed to be.

00:42:43:15 - 00:43:09:04
Adam Coffey
And so it's build that team of professionals to level the playing field. They're worth the cost that it takes. This is not where we skimp and then maximize that that potential exit. But spend the time before you talk to anybody, before you pick up the phone and start thinking about what am I actually trying to accomplish? Because if all I'm chasing is dollars, I may wind up with the wrong partner, the wrong type of buyer.

00:43:09:12 - 00:43:28:19
Adam Coffey
And so it takes some effort, some planning and some just careful thought before we before we start, you know, can we can we just stop and think, what are we trying to accomplish? What's our goals and objectives? Do we want to stay? Do we want to go? Do we want to be a platform? Do we want to be an add on to a strategic you know, if we don't know what these terms are, read my books, they're cheap.

00:43:29:00 - 00:43:49:22
Adam Coffey
All my royalties go to charity, so I don't make profit off of them. Anyway, I'm here to educate you. So great. That's my last bit of advice is simply you are an expert at building that business. God bless you. You're successful. You're a diamond in a world full of pebbles and so you're successful. Celebrate that. But get help.

00:43:50:10 - 00:43:52:09
Adam Coffey
Get, get, get some good, competent people.

00:43:52:23 - 00:44:15:18
Todd Sullivan
It's so well said. Right? And it is, frankly, it's why we exist. I think I had two conversations this week where somebody said to me, you know, I'm trying to interview investment bankers and attorneys and frankly, I don't even know what to ask them. So I'm calling you. And they're like, Yeah, we've already done it. We can put the best possible people on your team and we tend to lead with that investment banker, the quarterback of your team.

00:44:16:02 - 00:44:37:04
Todd Sullivan
But that M&A attorney, we see so many mistakes where somebody goes, you know what, I'm really comfortable they did some of my business legal work. They're an IP attorney and they know how to do M&A transactions. No, they don't. You are bringing I'm not sure if I'm allowed to say bringing a knife to a gunfight. Right. You are putting yourself at a serious disadvantage.

00:44:37:11 - 00:44:56:21
Todd Sullivan
And on top of it. Well, we like to do is because we're building that dream team that investment banker and that M&A attorney work really well together because there's negotiation and then there's documentation. Right. And if those two are in sync, you're going to be protected. You are lowering your risk. We're maximizing your outcome. All the things that you're trying to drive to.

00:44:57:00 - 00:45:07:22
Todd Sullivan
And it really comes down to that, a team that you put on the field. So thank you for finishing it that way. I mean, that's our playbook and we love just doing that for founders. It's very empowering.

00:45:08:08 - 00:45:29:11
Adam Coffey
Yeah, One last comment. A lot of founders do say it's like, do I really need an investment banker? You know, and I recommend in all my books the answer is yes, you need representation. Why? Well, if we hire the right investment banker, which Todd is what you do, you start by let's get the right investment banker that understands this particular industry and sells in that industry every day.

00:45:29:19 - 00:45:53:08
Adam Coffey
But that person's job is not just to create the competitive tension amongst who the probable buyers are, but they also have a level of intelligence that we as individuals just never could have. Hey, you know what? I took three companies to market recently. This firm lost all three of them. They are not going to lose a fourth. They've done a ton of work.

00:45:53:08 - 00:46:11:09
Adam Coffey
They've lost a bunch of money. And by God, I know they're going to just do whatever it takes because they're not losing four in a row and then there's the other people who are like, Jeez, they raised a new fund and they haven't bought anything. And it's two years down the road and it's like they are the investors are starting to get a little nervous that their money's not going to get put to work.

00:46:11:09 - 00:46:30:00
Adam Coffey
And it's like, boy, they're going to stretch this time. And so they just know. They know the funds, they know the firms, they know the situations that we don't know. Yeah, it's kind of like that realtor that has all the pocket listings in that neighborhood where you just can't ever seem to find the right house for sale because they never hit the market.

00:46:30:00 - 00:46:46:20
Adam Coffey
They're already gone. And it's like it's that competitive knowledge that a banker brings to the table. So, hey, we could go on forever talking about this stuff. I'm passionate about it, but what we're really passionate about, Todd, if you think about it, we're passionate about entrepreneurs getting the best outcome.

00:46:47:01 - 00:47:11:01
Todd Sullivan
Absolutely. We say create the exit you deserve, right? It is the mountain that you've climbed to build the business that you have. You know, you should not be shortchanged. So one thing that I've pulled from your book and I've used as an example is that a true industry expert, right? An investment banker who really knows the buyers. They know the past transactions, who's been involved in it.

00:47:11:10 - 00:47:28:15
Todd Sullivan
And from I got this from your book that they know the ones that came in seconds, right? The buyers that really wanted to buy something and they couldn't quite get there. And they've lost a couple of times and they know they cannot afford to lose again. Right. It is the right fit and that is where you're going to maximize your outcome, right.

00:47:28:15 - 00:47:46:10
Todd Sullivan
And there are lots of reasons why insiders understand like a can create that maximize that outcome, just like you had the analogy with real estate, but that when I pulled you right from your book, I've used it. It makes so much sense that inside baseball that the industry expert gets to play and gets to play it to your advantage.

00:47:46:20 - 00:47:48:18
Adam Coffey
And the entrepreneur gets the benefit.

00:47:48:18 - 00:48:08:22
Todd Sullivan
Yeah, exactly. Exactly. Adam, thank you so much for being here. I can tell you I got to have well, before we leave, I want everybody to kind of know your books. They should be checking it out. Like I said, it needs to be on the shelf that you will reference over and over to get smart about. You're never going to be an expert at selling businesses, but you can get a lot smarter with your books.

00:48:09:05 - 00:48:17:11
Todd Sullivan
But can you tell us what you're doing today? Right, That the guru, the guy that is advising founders much more intimately than beyond the books.

00:48:17:15 - 00:48:36:15
Adam Coffey
So, you know, I've made the pivot, told the world I'm no longer a CEO and I'm now a consultant and I work with private equity firms. I help them analyze investments. This is my wheelhouse. And I sit on their boards. I work with their CEOs. I also work with founders. Most of the founders that I work with probably read my book, heard me on a podcast.

00:48:36:15 - 00:48:52:09
Adam Coffey
You know, they're eventually going to be a seller, and so they want to maximize the potential. They're not ready to hire all their advisors yet, but they want to spend some time maximizing the business in advance of the sale. So it's 2 to 3 years in advance. Let's spend the growth curve. Let's not sell a hockey stick dream.

00:48:52:09 - 00:49:08:22
Adam Coffey
Let's actually do it, you know, sell a trend line. And here's the different things we need to do in order to check more boxes when it is time to exit so that we get the maximum value. And so I help them with the growth. I help them with that. The story and and so I do that working with founders.

00:49:08:22 - 00:49:28:22
Adam Coffey
And then thirdly, I educate people, I teach seminars, I get people from around the globe who come - they’re called Empire Builder. I have got one coming up here in Dallas in September so people can reach out to me on LinkedIn, you know. Adam Coffey. I'm not hard to find. And, you know, I love engaging with people.

00:49:28:22 - 00:49:47:18
Adam Coffey
That's the other thing too. You know, people who read my books reach out all the time. I love engaging with them and I feel a sense of responsibility to their success. And so find me online, find me on LinkedIn. I have a Web site you can find me there. And so I enjoy helping at this point. This is how I give back.

00:49:47:18 - 00:49:48:06
Adam Coffey
You know, it's.

00:49:48:06 - 00:49:49:11
Todd Sullivan
Incredibly fulfilling, right?

00:49:49:11 - 00:50:07:11
Adam Coffey
And I've turned it into a business now. So I, you know, very successful one very short period of time. So I was a a CEO 21 years in and kind of getting tired of being a CEO. I needed a new challenge, wasn't that I was exhausted, needed to retire. I'm bored. You know, there's got to be more. And I love teaching.

00:50:07:11 - 00:50:18:10
Adam Coffey
I'm like, I would flip the world around. Now I help others and that's how I earn a living. And so it's great because I'm doing something I love. I'm helping people and I'm I'm generating my income that way.

00:50:18:23 - 00:50:29:01
Todd Sullivan
Adam, this is awesome. Thank you so much for being here. I know our listeners will learn a ton from this particular episode and certainly from your books, so thank you again.

00:50:29:11 - 00:50:37:14
Adam Coffey
Thank you for having me. If if anybody out there still still with us, I look forward to engaging with you down the road. So thanks for having me.

00:50:37:14 - 00:51:01:14
Todd Sullivan
Todd Sounds great. Thanks again for listening to the Cashing Out podcast. For more founder exit stories, please subscribe to the Cashing Out podcast on Apple, iTunes, Spotify, or wherever you listen to your favorite podcasts. And please remember exercise dot com and the cashing Out podcast are for entertainment purposes only. This should not be relied upon as the basis for investment decisions.