THE PRIVATE EQUITY PLAYBOOK: MAKING BILLIONS FROM BUYING BUSINESSES

picture this five years from now you're holding a check for $50 million that you created with zero money out of your pocket sound good to be true well my next guest is about to teach you how this happens all the time for you private Equity carnivores out there and he's about to teach you and I how to do it so that you too can enjoy your pursuit of making billions let's get into [Music] it [Music] hey welcome to another episode of making billions I'm your host Ryan Miller and today I have my dear friend Adam coffee Adam is the three-time best-selling author of Empire Builders the exit strategy Playbook and the private Equity Playbook he's a frequent contributor to Forbes and has sold over over get this $2.5 billion in private companies so what this means is that Adam understands how to buy companies for no money and sell them for insane profits So Adam welcome to the show man hey Ryan it's good to be here you may not know this but I'm a secret fan of the podcast and so glad to be on here hello to all your listeners out there nice to uh nice to hear everyone or see everybody so uh hey I'm I'm I'm I'm excited to be here let's do this let's do this well it's certainly an honor and and we've we've done very well we're in the top 2% in the world on this show and it's all because incredible guests like you so it's me being excited to have you my man so before we get into that maybe just 30 60 seconds bring us up to speed what you're up to and and and what you're all about you know so I boy God so many experiences in my life I'm an army veteran you know military taught me discipline teamwork leadership I I I'm a I'm an ex-engineer a recovering engineer call it so I'm a meticulous planner I'm a pilot I don't take off unless I know where I'm going and so I'm always planning the exit you know planning my hold period planning my company exit and then reverse engineering it back I spent 10 years working for Jack Welsh in the uh Camelot era of GE before Tech GE world's largest company number one on the Fortune 500 list growing so fast it's doubling in size every 2.8 years GE Jack taught me how to run a a a business I spent 21 years as a CEO build in three different National companies for nine different private Equity sponsors buy and build guy bought 58 companies uh two and a half billion in exits as we said and I just got bored I got bored building one company at a time I had been teaching at UCLA in the Executive MBA program for 15 years um you know started writing my first book and was like I wanted to just change my Dynamic instead made a lot of money being a CEO but wasn't having any fun anymore love teaching love giving back and I wanted to try to flip my world around and so I I I reinvented myself I told the world I'm done being a CEO uh I started a Consulting practice and my my goal is to spend the rest of my life helping entrepreneurs beat the odds become successful and and show them the way not because I'm a brilliant genius but because I've already made every mistake in the book A guy can make and so you can learn from my 35 years of uh of experience how to avoid the potholes I've already stepped in I love that thank you so much for that intro now you are very good in many areas but one of the areas that you're most known for thanks to your books and your wonderful knowledge you share is private equity right it's kind of one in the title of one of your books the private Equity Playbook now when it comes to private Equity really quick number one just quick sentence or two what is private equity and then we can jump into address the beginners uh in the early stage so what is private Equity so you know I I tell most people who are are they've heard the term everybody on the planet's heard the term now very few people have a good working understanding of private equity and so I I tell people think of a mutual fund think of you know you go on your Schwab account your Fidelity account you you go to Morning Star you look at rankings you you pick a mutual fund you you make an investment from your your uh your eade account or your Fidelity account or Schwab account and uh and you along with a bunch of other people's money is pulled together a fund manager then buys a basket of stocks and this has public you know it's publicly traded there's instant liquidity you can buy it today sell it tomorrow hold it for 10 years whatever you want to do you've got liquidity always available at your fingertips private Equity is very much like that except for you take the the the liquidity you know component out so it's it's think of a mutual fund it's large scale investors typical minimum investment $5 million you know kind of minimum and you're tying up capital for up to 10 years uh with no liquidity and so fund manager or private Equity Firm has a you know has a fund they're raising Capital they bring in money from a bunch of different people typically it's University endowments it's public you know Public Employee Pension funds things like that Union Pension funds and you know those are the biggest limited partners are the people who contribute money and so fund you know PE firm collects all this money and then over the next 10 years is going to invest the money kind of in the first five years and I'm talking about a buyout fund now so we're buying companies they'll serve as platform Investments over about a five-year hold period will then grow those companies both organically and inorganically you know by buying other companies doing buying builds mergers and Acquisitions and as we build those companies we'll then towards the tail end of the funds life sell them and return Capital plus proceeds minus you know minus the PE firm's portion of the profit you know back to the limited partner investors and so it's very much like a private mutual fund with a large initial investment usually five million and uh and it works over a 10-year period with no liquidity brilliantly said my man now for many people who want to get into this industry maybe they're angel investor or just you know High net worth person or maybe they just want to get their friends together and buy a company you see a lot of people that are starting to the it's the worst kept seceret of finances private Equity these days so everyone's saying hey like you go on social media these days and you have a lot of people that are doing quite well and they're like hey buy boring business go buy a bunch of plumbing supply places roll them together go buy a bunch of laundromats and roll them together and have a super Corp laundromat and I don't know so with that with people who are just starting out because we have emerging fund managers investment bankers and and people in high school I mean we got all kinds of people listening to this what would you say for people starting out in private Equity two things number one how do they win in the early days and number two how do they not lose okay so first of all let's just give some statistics there's 33 million small businesses in the United States today you know sba.gov defines small business as 500 employees or less that represents 99.9% of all companies in the country and they employ 50% of the nation's Workforce and so what's going on right now interestingly enough enough is the largest transfer of wealth in human history and so baby boomers are aging out and many of them are transitioning their life's work or their business you know looking for a buyer or they're just simply shutting it down with no buyer found you know and they're getting ready to retire and so you know it's a great time in human history right now for new people to step into this game you know true wealth in this country you know doesn't come from working for somebody else it comes from doing something on on your own you know buying companies is a big piece of or feeder of that so if you're new you know I want to Stack the deck in your favor so there's all kinds of companies out there H where where would I look to start and so let let's think about it in this term you know let's think about needs versus wants that's step one okay so a company you know let's say it's raining out which it is right by the way it's I'm in Dallas Texas it's raining outside right now if I had a hole in my roof and there was water dumping on my head I would have to need to fix my roof you know that's a need but if I'm going out to dinner on Friday night and I want a new sport code my wife wants a new outfit we're meeting friends but if I got laid off on Thursday well maybe I don't buy that new outfit I don't need to it's discretionary if we're going to buy a company if we're going to build an Empire we want to start by making sure that the company that we buy or the the company that we start focuses on needs not wants next step step two we want to look at recurring versus project-based Revenue so let let me give you a couple examples you know uh let's say pest control company there's a pest you know I've got a pest control company I live in Dallas because bugs here are as big as Horses and you can put saddles on these things and so Mama doesn't want any bugs in the house so I sign a contract and I forget about it with a pest control company they hit my credit card every month you know and charge me their fee they charge me every month because that way it looks like the fee is smaller but they only come once a quarter when they come they spray you know the perimeter of my house to keep bugs out and so that's a recurrent contract there's a need they hit my credit card the first of every month I forget about it you know I don't care when they find a customer a new customer it's additive to the revenue that they've already got from me and so they're building their business they've got contracted revenue and all of these things needs versus wants contracted Revenue versus project-based Revenue you know if the economy Cycles down companies focused on wants get soft companies focused on needs are resilient companies that have contracted Revenue stream have this recurrent nature that just makes them so much more predictable so if you want to Stack the deck in your favor we want to focus on needs not wants recurrent versus project-based and then I apply this thing I'll let you in on a secret you know I I I PE firms hire and pay me a bunch of money to come help them evaluate Investments and I use this thing I call the 302010 rule so I want to make sure that when I'm analyzing the finances of a of a business I'm looking at their at their income statement I want want to make sure they have at least 30% gross profit less than 20% sgna or or sales and general Administration back office cost and they better be making minimum of a dime on a dollar at the bottom and if I kind of line up all of these different criteria you know I can I can tell you that you know here again of those 33 million small businesses only 7% get to a million dollars in Revenue only 4% of the 7% get to $10 million in Revenue if I completely want to stack the deck in my favor as an entrepreneur these are the steps that I'm going to take when I'm analyzing a potential investment to make sure that the probability of My Success is just exponentially higher you can make money in any kind of company but if you follow those Simple Rules as a new new person just beginning I guarantee you you won't lose and so those are kind of my secrets for the the the new folks out there who are thinking about investing or buying a company for the first time man that was a mountain of knowledge thank you for that so folks people pay this guy a lot of money a small King's Ransom and he just gave you a lot of what a lot of people get charged for so if you ever have a chance to reach out to Adam coffee please say thank you for that all right so that being said um yeah don't tell anybody I just gave all my best secrets for free he's very generous and generosity is is one of those secrets that we also give away as far as raising capital and get to know people being a very generous person does matter especially in this industry now that being said I'd love to transition our conversation a little bit let's talk about the market what are you seeing out there where's the market at right now you touched a little bit on some statistics maybe we can unpack that where's it at and then maybe we'll follow on with where you see it going well you know in 2022 2023 interest rates were climbing up in 2023 deal volume and private Equity slowed down and I want you to just keep this in perspective you know when I was first a CEO as a 30 7-year-old guy many many moons ago at that time there was about 14500 private Equity firms in existence there was about 800 billion in assets under management today there's over 6 trillion in assets under management there's like 8,000 firms out there and so the world of private Equity has just grown dramatically over the last 20 25 years and it's not because they suck it's because they've been doing a really good job at finding companies buying companies building companies and creating alpha or generating returns for for their limited partner shareholders and so private equity's been growing like an absolute weed but because of the high interest rates deal volume slowed down in the first half of 2023 and a lot of people were saying gez is there a bubble is there is private Equity going to slow down you know private Equity right now is buying 50% of all companies bought and sold on the planet and so for entrepreneurs who are selling businesses even if you don't sell to private Equity it's because of all that private Equity activity that a market exists that's paying these you know higher multiples and really really setting entrepreneurs up for Success when they're selling their companies so deal flow slowed down first part of 2023 back half of 23 I call it a game of chicken so you had Founders who had high expectations for what the multiples would be that their businesses would sell for and they were holding out for high prices buyers were saying hey High interest rates you know normally I use 50% leverage and I use 50% Equity but with higher interest rates I got to use like 60 70% equity and 30 40% debt you know to to buy at these inflated multiples and so a game of chicken was played to see who was going to Blink first that's what slowed down in 23 back half of the year just recently money started to flow again and actually I'll tell you the PE guys lost the PE guys lost and Founders selling or PE firms that were holding assets that started to sell back into the market they won multiples stayed really fairly High didn't really come down that much and there is one cardinal sin of private Equity that a PE firm cannot overcome and that is do not deploy capital and so when limited partners they they you know so I got a billion dollar fund A3 billion doll fund it's like all my limited partners have committed this capital and so by committing the capital they don't actually send it in until I buy a company as a PE firm or put that money to work and if I don't put their money to work not only do they not get their double the stock market return from me but they lost the opportunity to invest that Capital somewhere else and so now they're really pissed off at me and if I go raise a new fund then all of a sudden my old limited partner say you didn't put my last money to work I'm not committing any Capital to you and the private Equity Firm has a really hard time raising their next fund so the cardinal sin of private Equity is don't invest money which means this game a chicken that got played in 23 in the first half once once the back half of the Year came it's like okay well we lost got to put the money to work and so 2024 interest rates are supposed to come down about 1% that's what the fed's you know signaling that's what Wall Street thinks is going to happen 2025 going to come down about another point and the FED fund rate will normalize somewhere around 2.5% so we're going to have downward pressure on interest rates the next two years deal flow is going to pick up right now this second there's 1.9 trillion in what's called dry powder which is committed Capital looking for something to buy right now this second while we're talking looking for companies to buy so I I'm expecting 24 to kind of get back to normal 25 there's going to be some Tailwinds pushing deal volume it's going to be a good couple of years in private Equity says my crystal ball well I love it man that was phenomenal so interest rates you expect them to decline a slower gradual tapering and then kind of land around 2 and 1 half by 2025 all right 2.5 by 2025 faring unseen circumstances that you know I mean there's Wars going on out there there's all kinds of weird things we're in a presidential election year um this is going to be an interesting ride you know so but generally speaking biases lower interest rates next two years deal flow increasing good time to uh sell a company absolutely love it now before we move on I'm I'm curious been Dy to ask you do you see any sectors in private equity maybe Services sectors anything at all that you kind of that you like or that you think is going to be good or you think is not going to be good like let's let's really drill down on this Market thing where are you seeing some of the the future growth or Shrink whatever you think it's interesting you mention that because I I'll tell you that so many entrepreneurs out there who want to do something new they're overthinking life and they're trying to think how do I start the next great tech company or software company or come up with a new ad and it's like you know how do I change the world and it's like you don't need to do any of that you can look at some of the world's most non sexiest companies and you know in there you'll find a recipe for Success so think about that framework I laid out needs versus wants recurrent contracted Revenue not project-based I'm stacking the deck in my favor I applied the 302010 rule so what kind of companies meet that kind of criteria you know I mentioned Pest Control pestol controls one you know plumbers HVAC electricians I think of you know Landscape Maintenance boy there's something that's not very sexy but it checks every box that I just laid out some some friends of mine recently they subscribed to a service of done in Brad street called Hoovers and they went on Hoover and then they can search necis codes NAIC codes or sic codes like every time someone forms a business they have to pick a code what code does my business fit into and so there's this giant database and for about 2500 bucks a year for a license you can get on this done in Brad street neis code or Hoover's is the name of the product and so they went through and started sorting through like 15,000 different Industries and and on this database was all kinds of information about the average size of the company the margin profile the capital act you know capex intensity level of the business you know what the margin typical profile is it's like people are sorting through you know and different people come up with different different results and so I usually run people through an exercise Ryan and and I tell them take a blank sheet of paper make two you know three columns left column what are your skills what are you good at you know what you know hey I'm analytical I'm great with spreadsheets you know or hey I'm great at motivating people you know I'm I'm a people person it's like what are my skills and then the second column in the middle what are my passions and then the third column is what kinds of companies and what kinds of Industries would benefit from my skills and my passions because if I can get up in the morning and I've got I can put my skills to work and I've got passion about what I'm doing then my chances for Success are exponentially higher then I apply the needs wants 302010 contracted Revenue versus Project based revenue and it's like very quickly that I can start to come up with lists of different kinds of companies and industries that meet all of these litmus tests you know I recently not too long ago sold an insurance agency my brother and I were were were were building we owned it for 15 years um and so independent insurance agencies was another one that met all of these criterias bookkeeping companies meet these criterias private Wealth Management compan meet these criterias you know Pest Control meets this criteria it's like it can run the Gambit but when you apply these filters I call them then you know we start zeroing in on on Industries and companies that we have a a higher probability for success I like service companies the reason I like service companies is they tend to have very low Capital expenditures so I don't have to buy a plant I don't have to have a bunch of Machinery it's like I need trucks and dudes you know and you know it's a sprayer it's a long mower it's you know these are not sexy type companies but but the capital you know Capital expenditures are low The Profit margin's High you know in in my last book I uh I built a mythical landscape maintenance business in the book as a part of Empire Builder and to build a company with a million dollars in Revenue it only required you know it was less than $150,000 in capital expenditures and to build a company with 10 million in Revenue that was throwing off more than 1.5 million in free cash flow it took about 1 3 1.4 million in capital so really efficient less than a one-year payback you know and I'm building a business and an Empire that at some point I'm going to sell for a multiple of earnings and you know it's it's a short road to a 30 plus million doll exit a little bit longer road to a100 million plus exit but but the DNA makes it so yeah so much more predictable and so I I think for most people it's a lack of understanding these things like needs versus wants recurrent versus Project based you know Services business because it's low Capital expenditures it means earnings or eitaa is going to be similar to free cash flow you know and I can buy a business rather than start from scratch because it has a history of earnings it's already got customers it's proven that it can beat the odds you know it can it can be that 7% that get to a million or the the four of 4% of the 7% to get to 10 million and so it's like we really you know generating wealth and being successful is not as hard as people think once you understand you know the mechanics of what it is you're trying to do I love that and that's absolutely the mission of this show is to really liberate people and and help them understand that you that's that's the Credo the banner of Truth the the making billions so we'll you know we'll say look man people like yourself and myself and everyone else on this show we're here waving the same flag and saying hey you can do this just follow these steps try you'll be okay you know what Ryan I've got a lot of friends who are billionaires and there's 2,668 billionaires you know on the planet today and there's 763 here in the United States and I I've spent time with several and you know I look at them I look at you I'm in their house I'm looking at where they live and I'm like huh you know and I'm talking to them and I'm friends with them and I'm like huh these people aren't any different than me they aren't any different than you or anybody else in life it's like you can do this people you know it it's get off your rear end and start you know you start being a doer instead of a Dre and you'd be surprised at what you can accomplish in a very short period of time you know if you're armed with basic knowledge yeah that's right and one of the first things you can do read Adam's books that's definitely a great place to start sheep and I donate my royalties to charity you know and so it's like 12 bucks you know you get all three versions on Kindle I love that yeah and so as the saying goes uh earners are Learners so just always be reading always just be about that process I absolutely love it there's there's some truth to that you know there when we stop seeking knowledge and we stop learning I learn every day you know I learned from clients you know I I I recently was working with a company and I discovered something and and you know and it's like I immediately ran to all my other companies that I work with and all the PE firms I'm like you got to do this this is this works you know this is this is impactful it's like I learn every day you know don't ever you know I call it the accidental arrogance of success if you find success out there in life you know we we have a we have a a predisposition to want to just say hey I've arrived I'm God's gift I don't need to keep learning you know I I I don't need help from anybody out there in the planet it's like I learn every day yeah I still learn every day and I have a thirst for knowledge and if uh if I stop learning I'm going to stop growing you know as a human being so it's like be thirsty for knowledge that you don't have and be open to ideas because good ideas come from everywhere that's right yeah then the uh the enemy of of knowledge is not ignorance it's the illusion of knowledge so always be careful of that folks always say look there's always something more there's known unknowns and there's unknown unknowns but just be humble keep learning no matter how much your how many zeros in your bank account hopefully it's more than just one zero but either way don't have just the illusion of knowledge just keep your head down keep reading and foll guys like Adam making billions all of that stuff we're all here waving that Banner trying to help everybody as best as we can now that being said I'd love to just transfer into maybe round third base on this one and I'm wondering if you with all of your knowledge I mean I mean working with Jack Wells you've got billionaire friends you've written all these books you're speaking on stages you're doing so many cool things with all of that summarized I'm wondering if you could leave behind maybe two or three things that you find most impactful for people aspiring to really make a difference in the private Equity space what would you say so I I I would say you know let's a couple Concepts here boy I don't know how many times people approach me and say Adam my idea plus your wallet equals greatness and I'm thinking boy if you're after my wallet you just don't understand my value because money's everywhere money is literally everywhere and if we don't have it but we need some for our project all we have to do is treat money well and if we treat money well we'll get the disproportionate amount that we need to get our project done we'll let somebody else you know treat it Tre treat it poorly and and I'll tell you it's like once's better for you to to to own an entire grape or half a truck filled with watermelons it's like you so so you know when you're thinking about about business people have a predisposition when they see the potential of success before it even arrives they're already starting to act stingy they're already starting to to be protective of and it's like boy you know it's it's like you want to surround yourself with good people who can help you who can enable you and you want to make sure that you are not the problem or the reason your deals not getting done you know it's like you want to bring people in you want to be generous and uh you know and until you have your own Capital to fund your own deals it's like you need to be good to people and some Concepts that I I think basic entrepreneurs you know need need to understand or or grasp and so you know a lot of entrepreneurs they build a business they beat the odds and they decide I'm going to sell my company you know and usually they wake up on the day they decide they're going to sell their company and they haven't done any of the prep work so that's another book it's another another podcast but you know it it's like they they they have some preconceived notions look you know I'm God's gift to this business and there's no way I would ever consider being a minority shareholder and and they see an exit as a oneandone event and it's the it's the end of the road I see an exit as the the first rest stop on the wealth creation highway so where you're getting off Mr Mrs entrepreneur that's usually where I'm buying 58 companies and just getting started and so why sell a great business once when you can sell a great business twice or three times or like my personal record selling the same company five times in 13 years it's like you can you can keep building the Empire that you've started or that you've Acquired and at the same time you don't have to be the controlling shareholder to generate wealth just remember two names Jeff Bezos and Elon Musk what about these two people well first of all they're the two richest men on the world in the world on the planet one only owns 10% of his company the only other one only owns 13% and so if the richest people on the planet can become the richest people on the planet and they can be minority shareholders so can you and so these are some things don't be stingy you know and and make sure that you surround yourself with good people be generous with the proceeds and with capital and capital will will find its way to you and it's it's okay you know to not be the sole owner of a company and to be a minority shareholder and it's okay to keep going and keep building something you already know about and so you know I I get asked a question a lot too uh Brian you know one of the questions I get asked a lot is when's the right time to exit when's the right time to sell my company and you know if PE firm is pretty much programmed every five years I'm going to about every five years that's how much time I've got on average to to build my companies and sell them but if I'm an entrepreneur when's the right time to sell and so I I created this rule of 130 and I wrote an article for Forbes about it and it's the it it is the question I get asked the most when's the right time to sell and I tell entrepreneurs take your age as a two-digit number and then add to it the percentage of your net worth that's tied up in this illiquid thing that's known as your company and so you let's say I'm 40 years old and I've got 80% of my net worth tied up in my company put those numbers together it's 120 that's below my 130 threshold you're good you can still keep on on chucking along but hey I'm 50 and I've got 90% of my net worth tied up in this a liquid thing known as my company well that equals 140 that's over the 130 Mark and chances are are you're assuming too much personal Risk by not diversifying your own net worth and selling your company at least selling you know some type of stake in that company so that you're cashing out your chips you're paying some taxes you're reinvesting the money and you're diversifying you know against U an uncertain ver you know future I'll call it and entrepreneurs tend to do a couple things when we're young we're aggressive and we aggressively build our businesses we get to be my age you know and all of a sudden it's like we start making bad business business decisions because subconsciously we know that one day we're going to retire we got a lot of money tied up in our business and we don't want to screw it up so because we don't want to screw it up we get to about 50 and we start making bad business decisions we start getting conservative and we're no longer really growing our businesses we're we're we're we're running a prevent defense trying not to lose our business and so I even find that if I if I I sell a portion or even a controlling stake to a PE firm I become a minority shareholder I keep running the business but now now I'm using somebody else's money I can get aggressive again I've got asset diversification and so you know I think that that's also something that that we need to uh to think about when we're entrepreneurs I love that so the rule of 130 so uh if if you're a young entrepreneur I was thinking about the lower limits you got 100% of your net worth in your business and you hit 30 yeah probably some time to start peeling off a few shares if if not all so that might be a good one too but you know I'm curious about you know I'm inventure capital uh I'm in many things but venture capital is one of those areas that tends to be the the feeder of of private Equity at least the successful ones are the the ones that don't make it certainly not so with that being said you know I'm just curious when you go in so let's talk about the other side of the coin because we both deal with businesses and profit margins and all these things but a different life cycle of the business and so I'm curious about there's these people who want to build businesses right and those are the ones that come to you and say my idea plus your wallet and you're like well maybe not yeah maybe I'm not your guy but those people who are out and they're creating cool technology great good for them business Builders hats off to you but you don't necessarily according to you keep me honest here Adam but sometimes it's okay to not necessarily start a business and I'm talking to you entrepreneurs out there you don't always have to start a business and have this technology that's going to blow people's minds this is this is what Adam's saying instead of starting a business why don't you just buy one now I'm curious about buying versus starting from your perspectives I think it's it's pretty self-evident on what side of the the aisle you lie on that one which I love and I want to get some information out of that if we could what would you say when you go to buy some business what are some general rules we talked about selling the rule 130 and we talked about the 302010 rule but what about purchasing Equity I mean how would you suggest that that initial start of buying a business what would you say about that so there's there so first of all you know great great concept so let me say this of the $2.5 billion in exits of private companies that I have I did not start a single one of those businesses I jumped the line call it rather than starting at zero and having all the risk of failure you know 20% of businesses fail in the first year and you know by the end of five years 50 plus perc are gone and it's like instead of having all that risk and you know I buy a pre-existing business and I've already eliminated that risk because the company has a history it's got revenues that I can I can study I can look at I can do diligence on I can apply my 302010 rule and it's like I can buy a great business for not a lot of money and right now again it's the largest wealth transfer in human history with all these baby boomers retiring here's a scary statistic 80% of people who have a business today never find a buyer and they simply just shut them down and they ride off into retirement land you know their lifestyle businesses they leave the revenue leaves or you know they just never found a buyer and they get old and they age out and they decide damn I'm just going to shut the darn thing down and so as a as an end result it's like you know again here's some more scary statistics that work to your advantage 33 million small companies we talked about that but there's only 3,000 companies on the planet that have a billion dollars in Revenue only 3,000 2,000 of them are public 1,000 of them are private and so 3,000 globally at the top 33 million small ones just in our country at the bottom which means there's not possibly enough buyers on the planet to buy all of these companies which means when there's a lot of them the price that we have to pay to acquire one is very low and so like my last empire that I built I started with a company couple hundred million in Revenue it was bought with 50% Equity 50% debt sponsor was a PE firm I then bought 23 companies smaller companies and put them together and I bought each one of of those 23 companies for five times earnings on average you know so five times evit do you know most of them were 20 to 30 million in Revenue 2 to3 million of vah was kind of the proxy and so I pay in five times for each of them I put the 23 together I put them on top of my platform which had a couple hundred million in revenue and before you know it I sell it for 14 times matter of fact I sold it three years after I started building it for 14 times and so for every dollar of earnings I bought I paid $5 for I then turned around in three years and sold it for $14 so I made $9 of profit off of every dollar of earnings that I bought and folks let me tell you some other little nuggets of wisdom never buy fixer uppers life is too short buy good companies run by good people that have good reputations that Delight customers pay a fair market Price and as you're getting bigger Arbitrage that's created from small companies selling at small prices turning into big companies that sell for bigger prices your profit is built in it's going to happen so buy a good company good entrepreneur now if you have no money how do we pull this off so let's say I want to buy a little company that's got a million dollars in earnings got four million in revenue and I'm going to have to pay five times for it and so I have no money I got no money no equity no money I want to buy a company it's 5 million how the heck do I pay for it well my typical like with those last 23 companies that I bought I used 100% debt and I made every entrepreneur become a rollover investor and be a part of the mothership that I was building they they became a shareholder a minority shareholder in the mothership and so if they roll over 30% on that $5 million purchase they create 1.5 million of rollover Equity that's going into the new entity that I'm forming that they are now joining by selling me their company and so their rollover investment becomes my equity and now I've got a company you know service business needs now wants recurrent you know all of this stuff I've been talking about that million dollars of eitaa is actually very close to a million dollars worth of free cash flow because it's a low capex business so I buy that company and now they just put up a million and a half dollars of My Equity I need three and a half million dollar to complete the transaction so if I borrow that from a commercial bank or from the SBA get an SBA loan I'm now showing 30% Equity because my new partner who's the majority shareholder I'm the majority shareholder between the two of us we have 30% equity in this business and so if I've got you know a $3.5 million note maybe it's 10% interest and let's go for light amortization over a long period of time you know I I need 350,000 just to service the interest on the three and a half million maybe I need 450 500,000 to include some principal payments um but I've got a million dollars in free cash flow so the cash flow of the business I'm buying is now giving me a 2 to one or 3 to1 debt coverage ratio on the interest or interest plus small amortization payments that I've got to make and so entrepreneur who sold me business rolls over owes 30% that created My Equity I borrow SBA loan you know yes I got to do a personal guarantee that's that's part of life you know when I got no money you know and so I get the money for the three and a half I've got debt coverage ratio interest and principle paid for by the cash flow business I just bought and I'm literally I I have not invested a dime and I just bought a $5 million company and the hardest one to buy is the First Once I buy the first now I buy the second and I do the same thing and I buy the third and I do the same thing in the fourth and do the same thing and those entrepreneurs now as they're rolling over they're rolling over and getting a smaller percentage because the company is now valued for the both companies the first one I bought plus the second one I bought plus the third one and the fourth one it's like and their rollover Equity is now buying smaller and smaller percentages of a bigger company I forever will be the majority shareholder and after I put four or five of these together you know this company that I I I had you know if I bought each one the same size I buy four companies each one a million dollars in IA I put those four together I'm working with them these were good companies they're growing organically you know doing other things and so now maybe I sell $5 million worth of EA and I get eight times instead of the five times I was paying and now I get 40 million and I've got $3.5 million in debt from each company I got to pay that off and I'm not the I'm not the only shareholder so I'm sharing in the proceeds with these other entrepreneurs that join my my Mary Banda brothers and you know before you know it it's like I just joined the DECA millionaire club and I did this in a couple of years and you know Andor in this country we call ultra wealthy 30 million net worth or higher and so you know it's like in a matter of five you know five six years I can join the the ultra wealthy Club you know by doing this behavior and so Ryan we can do all of this with no no money brilliant so just to recap if you have no money keep me honest Adam so folks out there if you have no money you go make an offer you offer to buy the company and then also including in that offer you'll make the the founder the owner the entrepreneur of say let's say it's pest control company and you're rolling up a whole bunch of them the first one you roll over you say I'll also give you 30% in the new company but you got to pledge your current Equity into the newco that current Equity is then put up for to guess make the banks feel a little comfortable on loaning you so now they own 70% is that well no they loan 100% but there's a 30% Equity kicker on that and so that's how you can pledge the other owner's equity is that right it's all about debt coverage ratio cash flow to debt coverage and so you know um you know SBA is built here in this country to help entrepreneurs succeed and get secured loans and so I'm I'm buying 100% of every company I buy but I'm forcing the you know I created new holding company and I'm pushing up the assets of this company into the into my holding company and I'm making the entrepreneur who's selling roll 30% of their Enterprise Value 30% of that 5 million I'm paying now becom stock in my my holding company and I borrow the 70% from the SBA because I had that small rollover investment I've now got the debt coverage ratios where I need it to be if I didn't have you know if I didn't have that rollover I would need some Equity because if I borrowed all 5 million to buy that business you know at 10% interest I need at least 500,000 to service interest but now when I amortise it I'm probably needing 600 750,000 and now I've got less than a 2 to1 dead coverage ratio and so the numbers aren't aren't there and so I'm I'm using Equity from the former owner and in the SBA world you can now have a former owner and roll over investing this is all fair game wasn't always that that case but it is today and so as a result of that literally I can be an entrepreneur with no money and I can still buy a $5 million company have sufficient debt coverage ratio for my loan to be approved and top of that hey you know it's like as this company is growing you know I can actually be taking distributions and earning income from this business you know with the excess cash flow that's being produced and not going to service debt you know and so different ways to pull this off but that's like the simplest math and you know I i' I've I've done other deals like this where I've used a family office and I've arranged financing where there was no interest payments during call it the first two or three years I buy four of these I got $4 million in free cash flow I don't have to pay make any debt payments and I can suck all that money out and call it income make it make it a distribution you know and given the 30% to each of you know the these owners you know and and so I can you there's so many different ways to creatively engineer so no one should should be out there listening say I don't have any money and I can't do this it's like we just need to know how money Works in in order to to make something happen I love it thank you so hopefully folks you are not glossing over what Adam just gave you he gave you the mother of all gifts he's like right you just said Babe you want to get into the ultra wealthy World here's the secret code the cheat code to get there with literally zero dollar so no let's do one more example real quick right so let's say I buy 10 companies each one has a million dollars in ebit do and so I pay five times for each so 5 million each times times 10 that's 50 million I need 50 million in money to buy those 10 companies if I put those 10 companies together I now have a company with $10 million of ebit well guess what that company and the services type businesses we're talking about no longer sells for five times I get over 10 million of e I'm probably looking at 12 times that's 100 20 million in Enterprise Value I pay off the 50 million I put 70 million in the bank you know so that's the math now if I got to borrow the money I got to pay interest so it's it's more than 50 million if I you know but I'm just just wanted to show just the the end result is it's like assuming money is solved for money's no issue it's like boy there's no end to what you can do in this kind of a scenario and I dedicated the rest of my career to teaching people how to do this you know because I've been doing this with institutional shareholders on a giant scale you know my Empire last empire bought 23 the one before that I bought 34 you know it's like it's like and I've got a the biggest checkbook in the world you know with some of the big biggest PE firms in the world and so now I'm like I'm I'm teaching entrepreneurs on a small scale how to do the same type of behavior that I was doing on a grand stage you know and allowing them to learn how to make this Capital rather than just the the institutional shareholders man I love it that's why I call you guys the private Equity carnivores your meat eaters I love love it this is good stuff that's a compliment by the way this is really really cool stuff so before we wrap things up is just is there anything else you'd like to say any parting remarks any ways they can reach out if they want to hire a consulting firm if that's a thing or get your books anything at all well so F first I'm going to tell you don't be a dreamer be a doer don't be afraid to take a risk a good calculated risk that's why I I talk about things like needs wants recurrent versus project and 302010 it's like don't be afraid to take a risk don't be afraid to bet on yourself and if you can do that you know then the probability of success really it you know does exist and if by chance you fail you I think I've learned more from my failures in life than I have my successes anyway so it's like you learn how to build a better mous starp you know my my books can certainly help you know I tell people all the time Ryan it's like reach out to me I'm on LinkedIn I'm you know that's that's where all my clients are that's where my world is is LinkedIn and so you can reach out to me on LinkedIn I respond I I don't have a team uh I do have a publicist uh but I don't have a team of people who are just ping through my my thousands of emails a day or my social media accounts you know it's me you know it's me and so I engage with uh people all the time people who've read my books or or heard me on a podcast and you know yeah sure I I I I do work with entrepreneurs and I do work with private Equity firms but you know I love hearing from people who uh who have read my books tried you know tried they they've been a doer you know and I I love getting the the messages of the success stories hearing about people people who have have have had some big wins in their their career it's a lot of fun so I appreciate you Ryan and I appreciate this podcast and uh and thank you for having me on you bet brother it's really good to have you so just to summarize everything that uh Adam and I talked about don't build a company learn to buy one Adam literally laid out how to do it with no money I mean if you're not buying a business after that I I'm going to have some questions for you the second thing that we talked about is don't be stingy a whole grape or half a watermelon or I think had half a truck of a watermelon even better and then finally the rule 130 know when the right time to exit is you do these things and you too will be well in your way in your pursuit of making [Music] billions

Channel: Making Billions with Ryan Miller

Views: 115,353

Keywords: Adam Coffey, Buy a company, Capital, Dream Life, Founder, Funds, How to, Investing, Investors, Make Billions, Make Millions, Making Millions, Private Equity, Private Equity Playbook, Raise Capital, Raise Money, Real Estate, Rich, Rich life, Ryan Miller, Venture Capital, ask slim, business acquisitions, buying a business, codie sanchez, funds that won, how to invest, how to make money fast, motivation, private equity explained, rasing money, think and grow rich

Id: QAHm7n96EZ8

Length: 46min 24sec (2784 seconds)

Published: Mon Feb 12 2024