E270 | Risk, Revenue, and the Quest for Business Empire with Adam Coffey
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CastBoxThis week on Mind Your F**king Business, we learned from founder and managing partner of the CEO Advisory Guru, and best-selling author, Adam Coffey. Adam started his CEO journey working for Jack Welsh at General Electrics when it was the biggest business in the world. He’s got a new book coming out, Empire Builder, which is a playbook on how to build a billion-dollar business.
He spent 21 years as a CEO of three different national companies for nine different private equity sponsors. He’s made billions of dollars in exits and completed 58 acquisitions.
In this episode, Adam talks about the difference between buy-and-build and organic growth, and how he did that in some of the businesses he’d done. He also talks about culture and how to avoid buying the wrong business, how he does due diligence thinking about the CEOs and the difference between trapping a CEO and letting them run their company post-acquisition.
Download and listen to learn more.
On today’s podcast:
- A meticulous approach to acquisition
- The role of the CEO as a motivator
- Building a sustainable empire
- Educating about Private Equity
- Culture and profit: mutually exclusive?
Follow Adam Coffey:
CEO, board member, best-selling author, Forbes Business Council member, and an acclaimed international speaker, Adam is an inspiring and authentic leader who creates high-performance cultures and drives transformative growth.
Over the past 21 years, he has had the honour of serving as President and CEO of three national private equity-backed service companies, each in different industries. Two of the three companies he built achieved enterprise values of $1B. Over 58 acquisitions completed. Throughout his career, Coffey has a proven track record of achieving notable outcomes for stakeholders. His career average at exit is 5x MOIC (Multiple of Invested Capital).
Adam’s first book, The Private Equity Playbook, became an instant #1 Amazon Best Seller and private equity cult classic. His second book, The Exit Strategy Playbook, also became a #1 Amazon Best Seller. He was named one of the “Most Influential Leaders” by the Orange County Business Journal in 2018, 2019 and in 2020 and 2021 was named to their prestigious “OC Top 50”.
In 2021, Adam founded the CEO Advisory Guru. Focused on a desire to help multiple companies at a time rather than just running one, he has quickly built a multi-million-dollar consulting business that works with private equity firms and more than 50 founders.
His new book, Empire Builder comes out on the 24th October.
From CEO to Growth Coach
As a veteran of the United States Army military, Adam has learned loads about discipline, teamwork and leadership. His engineering background has made him a meticulous planner. He spent ten years at General Electric during the Jack Welsh era. For him, it was a ‘magical time’ to learn how to run a business. He also spent 21 years as a CEO of three different national companies for nine different private equity sponsors; has billions of dollars in exits and completed 58 acquisitions. Then, he got bored.
“I got bored with running one company. I wanted to help multiple entrepreneurs at a time. So I left the CEO seat, and I’ve resisted for two years. Now, every phone call that’s come in, hey, Adam, come back to being a CEO, we’re looking at, I need a CEO for this company. I’ve resisted. I work more hours today than I did when I was a CEO. But I’m having fun. I’ve reinvigorated my career.”
After 21 years as a CEO, Adam sees himself as a CEO coach, a CEO mentor, a growth coach, and a growth mentor helping people with strategic planning and tactical execution. Whereas the leaders he helps are experts in their field, Adam is an expert in getting companies to grow at 30%+ and hold it, and to build billion-dollar businesses over an extended period of time, multiple hold periods, different private equity firms coming and going.
The CEO as a motivator
“There’s different kinds of CEOs. I think clearly to be successful as an entrepreneur or a CEO, even if it’s a big public company, you have to be able to articulate a vision and create some kind of a shared aspiration that people will stretch and work hard to achieve. So you have to be a motivator.”
The military taught Adam discipline, teamwork, and leadership. Engineering and being a pilot taught him to be meticulous not just about planning but as a pilot. That is, being meticulous about the exit and the destination.
“I don’t take off in a plane without knowing where I’m going. I mean, I have to have a destination in mind, and I think that has been helpful from a business perspective as well.”
He thinks of himself as a ‘RARA’ guy, a motivator. He is an articulate speaker who can describe a vision for a future that people can aspire to want to achieve.
“I’m not the smartest guy in any room. If I am, I’m in the wrong room. I hire talent that can help me execute tactically. I’m more strategic and visionary, but I am a meticulous planner.”
Levers for growth
Adam explains that when he thinks about strategic planning, he uses the Talent to Value methodology created by Sandy Ogg. Former CHRO at Unilever, who then became an operating partner at Blackstone, the world’s largest PE firm. At a time when PE was exploding, and returns were harder to find, Sandy taught them how to take strategic planning to another level and translate that to the people within your organisation who are going to make value happen and create a framework around that.
“Typical levers for growth include organic growth, which would include things like price and volume and making strategic pivots to create broader addressable markets to avoid red ocean get to Blue Ocean, where there’s less competition and ability to sell value at a higher price.”
Then there’s margin improvement and revenue. Can we service it more effectively or efficiently? For Adam, that includes investments in technology in order to take what he calls low-value work that employees are doing and automate it or outsource it so that they can focus their time and energy on high-value work – which directly translates to increases in revenue or customer satisfaction.
Then, there’s mergers and acquisitions.
M&As have been a central thesis of every company that Adam has built. In his last empire, he bought 23 companies and put them together. Before that, he bought 34 companies and put them together across multiple hold periods. He explains that the three companies that he built had been in business for 40 years before he got there. And all of them were growing at kind of low to mid-single-digit rates.
“And my job was to bend the growth curve, get them to grow at 30%+ compound annual growth rate and hold it. And so there was a balance between organic growth, improving margins and then inorganic growth, and doing M and A or a buy and build in order to create that 30%+ compound annual growth rate.”
How to build a sustainable empire
In order to sell for maximum value and to build a sustainable empire, you have to solve for organic growth and margin improvement. When you’re doing buy-and-build, says Adam, the biggest mistake people make is they don’t know what good looks like before they start. They fall victim to what he calls ‘Shiny Penny Syndrome’ when everything looks good because they’re trying to buy a bung of stuff and slam them together.
“I’m very thoughtful around the strategy of M&A, and I use data science to inform where we should be buying, what we should be buying. And here’s a statistic that might blow you away. Typically, after I buy a company, within twelve months, it’s growing at a 25%+ organic growth rate because I’m very mindful about what I’m buying, why I’m buying it, and how I’m going to integrate it to maximise the potential.”
To illustrate this, Adam shares the example of the last empire he built. He was building a US nationwide HVAC and refrigeration service company whose largest customer is Walmart. It’s, as he calls it, red ocean.
“When your largest customer is Walmart over here, that means your margins are low because they go to the lowest bidder. And so I’m in Red Ocean. I make some strategic pivots, and I say, okay, I’m a refrigeration and HVAC company. I have a $5 billion addressable market where I have to be the lowest bidder to win. Let’s change that dynamic.”
To do so, Adam created new divisions like engineering and energy optimisation as a consultant rather than a contractor. This allowed him to get upstream of the bidding and know years in advance how much customers would spend. An ecosystem was created to provide multiple services and secure future remodelling work.
Then, he expanded the service offerings beyond grocery stores into higher premium sectors like data centres, pharmaceutical facilities, research and telecommunications, growing the addressable market from %5b to $20b. Additional products and services were added to provide a suite of offerings and cross-sell opportunities.
“I create a suite of products and services around my customers. I can now go back to all my existing customers. Instead of bringing one truck to your location, I can bring you four trucks, and I can do your engineering work and construction and installation and service. And I start building an ecosystem.”
The business is now growing at a different rate and aspiring to be a national company. He’s looking at acquisition in new geography and looking at existing customers and those across the entire country.
“Let’s find an area that has the highest concentration of my existing customer logos that I’m not servicing because I’m not in that territory. Likewise, when I’m looking at targets, let’s look at the logos they’re servicing and the national footprint those logos have that that customer can’t serve because they’re a small local customer or small regional company that I’m going to buy. And now I have a sales effort to cross-pollinate.”
So, Adam shows that by setting up a cross-sell activity, additional products and services, plus using the data science of logos and where they’re at and where the opportunities were, they were able to increase organic growth from single digits to 25%+ organic growth in the first twelve years following an acquisition.
“There’s a science to doing M&A, and most people fail the test at identifying what’s the strategy. How do I then maximise the potential using data and science and creating a strategy, a true strategy?”
The truth about Private Equity
Most of the time on the news, we hear about the negative side of private equity. They love to tell us about how the ‘evil’ PE break up companies and destroy value, says Adam. For him, that hasn’t been the experience as a CEO. As a CEO, Adam has worked with nine of them, and with a dozen as an operating partner. His advice to people is to start by getting educated.
Today, PE has over 5 trillion in assets under management. They have permeated every industry on the planet. You can’t get through a day without encountering logos of companies that are owned by private equity. Adam adds that, it’s thanks to private equity that we have a great market for entrepreneurs to sell businesses into. They’re buying over 50% of the companies that are sold on the planet today.
“And if you include financing or strategics backed by private equity that are buying, it’s most likely that you’re going to sell to either a PE firm directly and become a portfolio or a platform, or you’re going to sell to a PE-backed Strategic who is then going to amalgamate you like I did those 23 companies and put them together. So learning about the world’s largest source of non-bank capital and learning about how it works, I think, is germane to your future success.”
Adam explains that as a buyer in a meeting talking to a potential acquisition target, one of the questions entrepreneurs or owners should ask potential investors is, what does my future look like with a PE sponsor? So, Adam wrote an article for Forbes where he talked about when is the right time to sell to private equity.
“And if an entrepreneur takes their age as a two-digit number and then they take their percent of net worth that is tied up in this illiquid thing called their company and they add those digits together if it equals more than 130, chances are you have too much risk and you need to diversify your holdings.”
He adds that entrepreneurs don’t have to sell their company and leave. They can sell it and keep running it. They can become a rollover investor and get a second bite of the apple.
“In my case, my personal record is selling the same company five times in 13 years, four months, a few days and a couple of hours. And I’ll tell you that too many entrepreneurs have an arrogance of success: ‘Hey If I’m not the controlling shareholder, I don’t want to have anything to do with this company. I don’t want to be an investor in it.’”
Can you create a great culture and profit at the same time?
Adam has always believed that profit and culture aren’t mutually exclusive. He argues that you can build a great company with a great culture and a great place for people to work. All whilst making shareholders money. In today’s world, he adds, if you don’t take care of employees, you won’t be able to find them. You have to build a company that takes care of people; that’s a great environment to work. And that’s what he’s always believed and has done.
“And I learned that people add value and that I need to embrace and nurture people. And if I can build a great culture, revenue takes care of itself. Build a great culture, get an engaged workforce, they take care of customers. Customers give you more stuff, and revenue reigns from the skies.”
Turning culture around
Adam has one simple rule when buying a business: avoid buying a bad business. If you’re doing an M&A, you can afford one bad deal in twenty, but you won’t survive long. For example, when he bought 23 companies, there was ‘one dog with fleas’, so that’s one bad acquisition that shouldn’t have been made. That acquisition represented less than 5% of his revenue, but it created 80% of his headaches for three years.
“And so my teaching to people is, know what good looks like, be very disciplined in your approach. And if you look at my diligence items and my filters and how you do this culture, you’re going to see culture right at the top of it.”
When he bought his last company Adam was looking for a certain size – 10-30 million in revenue, minimum 10% EBITDA, margin 12 – 15 –. He was looking for an entrepreneur who was going to roll over 20% to 30% of the purchase price, not because he needed their capital but because I needed their relationships with their customer base to stay intact. The way he could guarantee that was by making them a rollover investor who had significant capital at risk so that they would remain an active part of the empire that he was building.
“And in there was culture. If there’s no cultural fit, even if you’re a great company and you meet all my filters, walk away, run away, these aren’t the droids you’re looking for.”
So, how does he assess culture from the outside?
“In most cases, entrepreneurs are so secretive they don’t want you anywhere near their company. They don’t want anybody in the company to know they’re selling. What I’ll do is look at their website, and I’ll talk to them. Often when you’re negotiating a deal, somewhere in there, their true colours are going to show.”
One of Adam’s criteria is looking for the company’s reputation in the marketplace. He wants great positioning and strong cultures that are thought of highly by their competitors and by the customers.
“So if I buy a company in a region, it’s a new region, the first thing I’m going to do is I’m going to ask them, who do you respect? Who do you think is a great competitor that’s worthy of competing? It’s like I want to buy good companies.”
Before making the decision to buy a company, Adam investigates problems that will cause him headaches on the post-acquisition side. He’s vetting them on a pre-acquisition and eliminates those that he thinks are going to be high risk.
“Bad deals can happen, but I really try to limit the number, and I focus on only buying good companies with good entrepreneurs that fit my mold.”
Do entrepreneurs stay after selling the business?
Adam explains that from the 23 companies he bought, twenty entrepreneurs still there working after getting multiple paydays.
Adam’s superpower is aspiration and being able to articulate a vision and then share that with these entrepreneurs. He tells them that, yes, they will make money out of the acquisition, but there is more work to be done.
“And here’s the vision. Have you ever thought about being a part of a billion-dollar company and getting three or four paydays along the way and really making a mark on our industry and doing something special?”
Adam bought 34 companies, and from those, he only wanted one entrepreneur to stay. Everything in life and investment is about risk.
“So if I’m buying companies and putting them together, the first question I have to ask myself is, what’s the risk of me losing the revenue that I just bought and paid a multiple for its earnings? And when I was building a commercial laundry company, these were long contracts, they were secured contracts. They couldn’t be broken. They were five to ten years in length. I didn’t need the entrepreneurs because the revenue was secure. So I would use a consulting agreement and I would play to their own vanity. If I’m not there, I don’t want to be a rollover investor. Great, take all your money. Give me a one-year consulting agreement. And because I’m not worried about losing the revenue or the earnings in that particular buy-and-build, I didn’t want the entrepreneurs to stay because they added an element of risk and complexity, and I didn’t need it to secure the revenue.”
For Adam, everything starts with risk. If there’s no risk of losing what he bought, he doesn’t need the entrepreneurs. If there is a risk, he will need to keep them.