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Oct. 4, 2021

E:29 Top M&A Entrepreneurs - Adam Coffey CoolSys CEO - bought & sold 100 companies in 20 years - aggregate value $5 Billion

E:29 Top M&A Entrepreneurs - Adam Coffey CoolSys CEO - in 20 years, Adam has bought & sold 100 companies, values range from $1 million to over $1 billion, aggregate value close to $5 billion dollars.

00:00 Intro to Adam Coffey,  Army Vet,  bought sold 100 companies in 20 years, bought 21 for CoolSys, author of the Private Equity Playbook and The EXIT Strategy Playbook
02:07  Why did he write them and reason for Private Equity Playbook and The EXIT Strategy Playbooks - adding credibility
03:42  Sponsored by 2 different Private Equity firms - the back story - the goal of...
07:42  How he started with CoolSys 
09:42  The target & customer characteristics for CoolSys acquisitions
11:30  How he grows new acquisitions by cross pollination
13:37  How he sources new deals -what happens when CoolSys is shaking the trees 
17:00  Growth expectations,  before after,  organic and buy build
21:19  Rollovers,  2nd Bite of Apple - how the seller benefits, again and again and again - why sell your company once?
26:25  Three more ways for seller to generate multiple income streams
29:51  Working with, inspired by his brother, son & the entrepreneurial creative flair 
32:25  Ebidta,  Going into LOI landmines - Cash Profit - Value & Fair/Unfair Representations
37:35  How he values a business and offers calculates multiple ranges based on filter characteristics - why he buys world class assets vs fixing what is broken
42:05  Stephen Schwartzman - Don't Lose Money formal/unformal veto power over acquisitions
43:30  What kills a deal - maliciousness, accounting, or odd man out. 
46:57  Sellers motivation:  Turn out the lights or join the team  - focusing on price top dollar leaving money on the table 
50:47  Why he joined the United States Army - what it offered him - if not for his service...
54:17   The 3 types of employees he hires - how CoolSys created 21 blue collar - guys - in - trucks Multi Millionaires


Jon Stoddard: Welcome to The top M&A Entrepreneurs. I have a really special guest today, Adam Coffey. He's a army veteran. He runs CoolSys. I just want to read this. He's purchased 18 smaller companies. This is the last since he's running CoolSys. Three more letters of intent over the next four years. He's going to purchase a grand total, 50. Over his career, he's bought sold, financed around 100 companies in 20 years. That's an impressive record.


Welcome to the show, Adam.


Adam: Well, thank you. Thank you for having me. Hello, to your listeners. Very glad to be here. I think CoolSys, today, it's 21, are now complete with more on the way. Buy and build is kind of my thing.


Jon: Yes, that's beautiful.


Adam: After 20 years.


Jon: I forgot to mention this, he's also the author of these two books, The Exit‑Strategy Playbook, and The Private Equity Playbook.  I just want to start with the book, how simple you made the read.


Adam: Well, that was kind of the goal and objective, just to be honest with you. I really had something in mind and that was for a person to be able to go on a cross-country flight, as an example. Take off from New York, have a bad meal, have a drink, sit back in your chair, and decide "Am I going to do email for the next three and a half hours, or am I going to read this book?" For those who chose to read that book, the goal and objective was to give you 20 years' worth of CEO cliff notes, from my own career, having worked with private equity, and try to just impart some general knowledge and wisdom. Not necessarily going too deep on any subject because it's a rabbit hole, but just give a good broad overview of the topics that were being covered.


First book was all about private equity. Second book, partially about private equity but really just more for entrepreneurs who are exiting a business. What's that all about, what's that like, what are the options, et cetera.


Jon: I think they're great reads. If you don't have any experience in the industry, I'd start with these two. I keep these two on my desktop.


Adam: I appreciate that. I'd turn and say, I got a few on my desktop and they're not sitting there. Somebody just cleaned up my office, but they're back here on my mantel.


Jon: Do you use these books now to send out to prospective targets?


Adam: You know, not designed for that but I do have to admit that my M&A team, my in-house M&A team does use the books all the time with prospective entrepreneurs. People who've spent careers building businesses have not necessarily spent a career selling businesses, and so oftentimes for an entrepreneur, it's their first exit. It's daunting and trying to figure out who's a good partner or how to navigate that experience can be really daunting for people. My team likes to use our books or my books as kind of a primer on the whole subject.


Jon: Well, definitely, after reading, I was, "Hey, this guy's got credibility. Wrote a book and he wants to buy my company and based upon what I read in it, he's giving me top value, and he's going to tell me how to make more money by doing the rollovers," and it just adds credibility for your case.


Adam: You know what, it does. It wasn't why I wrote them but it's a great side-benefit. Don't tell anybody.


Jon: I want to get into this a little bit in detail. Your first private equity group that backed you was Audax Group, which is a middle-market.


Adam: For CoolSys, yes.


Jon: Then, I guess that grew too big for them or they got their 3x or 5x return or whatever it was, and then Ares Management Group bought them.


Adam: A private equity firm, there's 6,000 of them on the planet today, which is amazing. If you go back to the beginning of my career, there were a few hundred. You've gone from hundreds of billions in assets under management to, now, trillions, four-plus trillion in assets under management. Seven trillion if you include debt funds. There are 6,000 firms out there but they all tend to be specialists. They specialize in certain size companies, in certain verticals, in certain industries, and so it's very common. When you're building a company as I am, the way that I look at it is I'm going to take an asset with revenue at the start, call it CoolSys, 200 million-plus. Then at the first flip, it's in the 400s. Then at the next flip, it's going to be over a billion. I'm building a company for the long haul. We have 3,000 employees now. We've combined 21 different companies, and the process of doing that, private equity would see the company as a tool for their investors to earn a return. I, as the CEO of a company, can look at private equity and think of them as a tool to help fund our growth.


When you're going to go, call it from 100, 200 million to over a billion in revenue, you're going to have multiple hold periods with different sized private equity groups.


You mentioned the Audax group. Great guys. Loved working with them. They typically are a very disciplined investor. All they do is buy and build. They typically buy companies in the lower middle market. So EBITDA  in the teams, generally, and then they typically sell when the companies get to about, call it between 40 and 60. So I'll call it 50. Teams to 50. That's all they do. They do it every day. When they get that business there, it's time to go. It's time to ring the bell. So they're very disciplined.


Ares, my current sponsor, they're over 260 billion in assets under management. They don't say it this way, I do. I can't because I don't work there. They're like the world's largest non-bank lender, private lender, Ares Management. They came in. They partnered with me at a company that I ran a long time ago. They were on the debt side. They were providing the debt, the debt capital for Wash Multifamily Laundry when I was building that company. I first met them 10 years ago, 15 years ago, whenever it was, way back when, and those relationships that I fostered there, they paid dividends today, much later. It was great to partner up with Ares. They took a company that was worth hundreds of millions of dollars, and once we're done on their watch, it'll be worth billions. So different private equity firms come in at different sizes, different points in time. The constant is the company, and the employees, and the entrepreneurs who join CoolSys when they sell us their business, were the constants going through time until, eventually, we hit so big that we ultimately wind up with a public exit somewhere. Hard to stay private at a certain size. There will be different PE firms that come and go during that time period. It's a lot of fun.


Jon: How did you start with CoolSys? I read about the washers and how many washers and dryers you own. You sold that. How did you start with CoolSys? Was it just one HVAC company?


Adam: That's a complicated story. Audax bought the platform and the platform was known as Source Refrigeration. Source was actually three companies that were put together by a public utility. It was called Edison Source. The Edison Electric Company or the public utility put together 3HVAC companies way back when, and had this great concept. The largest user of electricity is grocery stores and they thought "Jeez. If we could own a service company that could keep a grocery store finely-tuned, operating at optimal efficiency, instead of just selling power, we could sell, call it the total solution. We'll maintain. We'll provide the power. We'll maintain the equipment that's using the power. Wouldn't this be great? We can capitate your largest line-item expense." Somewhere along the way, regulators stepped in and said, "Oh, that's a great idea, but you can't do that."


Source, Edison Source was spun out. Part of our management-led buy-out and that began its PE adventure. But this was still going back to the year 2000. Audax bought it in December of 2015. They held it for just over three years. It was about a four times multiple of invested capital return. I ran it for 27 months. We bought eight companies, the first eight companies, and really took the growth trajectory. It went from something that was kind of sleepy to something that was more in the neighborhood of 30%, and that's what we're continuing to do today.


Jon: The model of acquisition target was set in where you're looking for HVAC companies with contracts, with large grocery stores, [inaudible], Albertsons[?], whatever, Whole Foods.


Adam: Yes. Literally, you could pick a brand. In the United States, we service over 45,000 different customer locations. However, today, we're not just, call it grocery. We build cold storage, warehouses. We do blood banks. We do pharmaceutical research, laboratories, drug storage facilities. We just recently re-outfitted the USS Comfort for the Navy to handle all the cold storage needs of the current vaccines. The company is many things to many people. We do cell phone towers by the thousands for self-carriers, data centers. There's just a whole myriad of new customer verticals that we've gone into. That was a part of the strategy.


We've done 21 Acquisitions. Now, eight on Audax's watch. The rest of them, now, on the Ares's watch, but a lot of strategic pivots to get us into new markets, new customer verticals. Places where a customer's core need is to do something but they have a mission-critical need to keep it cold. Meaning, if you think about it in basic terms, a grocery store, you can't turn off the refrigeration in the frozen food section at night when everybody goes home. The food has got to be frozen 24 hours a day or kept cold 24 hours a day. So, there's a mission-critical need to maintain that indoor environment at a certain temperature and that's where we like to play. It's beyond grocery now and it's taken us into a lot of different directions.


Jon: I love that. You can have one place in Tennessee, wherever you have a location, and then go "Hey, they're doing cell phone towers. They're doing refrigeration for blood banks," and then you just take those ideas to somewhere in Arizona.


Adam: That's really the kicker. We use acquisitions to fulfill one of three strategies. Either I'm extending my geographic reach so that I can service a broader territory or I'm making a pivot to service a new customer vertical or a new market, or I'm building density in the existing markets that we have.


Going back to what your original question was, I hadn't answered yet, how do I find my way here? There was a search underway. It was a recruiter that called me and said, "Hey, we have this company. It's Audax-backed and they're looking for a new CEO." If you look at my 20-year career, the three companies that I've built, very different industries, but there was commonality. This is not to sound sexist, ladies, but a lot of guys, a lot of trucks, a lot of broken stuff. The first one was a medical company, fixing imaging equipment and hospitals, CAT scanners, MRIs, all over the United States. Then the next one was commercial laundry machines all over North America and 70,000 locations. Now, it's guys and trucks going to grocery stores, blood banks, and all these myriad of places, 50,000-plus now, to keep something cold.


A lot of guys, a lot of trucks, a lot of broken stuff. It's a service business. I'm a services expert. If you're a private equity firm and you're looking for a new CEO, and maybe even it's a buy and build, or it's a services-based business, my name is one that would pop up on the shortlist for a lot of people. It was just happenstance that brought me to CoolSys.


Jon: You're doing a great job. Now that you have your deal team in place and they're sourcing these deals, and you're looking for the right size to make sense that moves the needle, and when you guys make that first call, now that they know about you, is it kind of like "Hey, CoolSys is calling. Let's get a higher multiple."?


Adam: No. The interesting thing, in any industry, when you're doing a buy and build, the base requirement is highly fragmented industry. In our particular case, based on our own research and the research of others because we don't do it all in-house by any stretch of the imagination. We have outsourced partners that help us what I call, shake the trees. Then I have a deal team that can also field inbound inquiries, make outbound inquiries, et cetera, but we've identified over 4,500 companies in the United States that does what we do. Most of them are really small, mom-and-pop, call it. It's a person who started with a truck, and over extended period of time, they built an empire. They're wealthy guys. They built an empire but there's 4,500 of them in the US. It's so fragmented that really deals either are found by what I call our outsourced front end. They make calls. If you go to our website, you'll see I have a section for people to reach out directly to us and people do reach out to us, and, now, that we've bought 21 companies all over the US.


A lot of entrepreneurs know some of the entrepreneurs that have sold businesses to us. There's kind of a networking thing that goes on, "Hey, I respected that company. They sold the CoolSys. I respected that company. They sold the CoolSys. Maybe I know the founder, maybe I don't, but that's someone I want to talk to." We field a lot of inbound calls now and we have so many testimonials from our former owners. I call it my Former Owners Alumni Club. They sell the company. They get their jacket with their patch and it's the Former Owners Alumni Club. They become a rollover investor in CoolSys. They're a shareholder in the mothership, and then they go back to running their businesses as they have but now they got friends. I tell people it's kind of like you go into a bar fight and now you got 3,000 brothers with baseball bats behind you. You got the muscle of this giant organization, but you're still that small company in your own region, in your own territory. You're just now a part of the CoolSys family.


Then we cross-pollinate all these different customer opportunities. They may have a relationship with someone locally but because they're a local company, they can't grow out of state or grow in multiple states with that customer. Now, they can introduce that relationship to the rest of the CoolSys empire, and we can grow with their customers or when we go into a new geography, part of what we do is analyze the markets that we're entering to see where our existing customers have infrastructure and have locations, and then we'll do outreach to them. "Hey, we're now in a new geography and we can bring different products and services to bear in this market." There's a lot of cross-pollination that takes place which means on average, right now, when we acquire a company, they grow by about 20% organically after we buy them. It's a great story.


Jon: We just noticed the deal size you go after in the high, 20 to 30 high, 125, and then most of the companies you run into average 2% to 8% growth, and what you can do with those three to four levers is get it to 24 to 27.


Adam: What typically happens in an entrepreneur-founded company, organic growth is the primary driver of growth.


Jon: Almost blinders, yes.


Adam: In early years, it's very high growth rates because if one location becomes two, it's 100% growth. But over time, they build the empire to a certain size, and then it's like, "Okay, I'm comfortable managing this size empire. I'm good with the amount of trucks on the road, the income I'm generating," and so they never really go beyond a certain plateau.


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


To expound on that, a founder-owned company, typically, is a micromanager and that's one of the things that makes them successful. I call it the "Happy Meal effect." They want to make sure that anywhere you go in the United States, you know what a Happy Meal looks like. It's a red box, yellow handles, cardboard hamburger, and a little apple slices, and little thing of fries. It's very predictable. Entrepreneurs, in order to build the business, go down to the unit level economics and they make sure it's repetitive. The same thing. They have to be able to keep their arms around it, which limits their successful growing, but at some point, it has to become about we and not about me.


My best analogy, I'm not even a huge classical music fan, but I like to use the concept of an orchestra. Instead of being the first-chair player in every section of that orchestra, the entrepreneur has to truly learn how to be a conductor, and it has to learn how to trust others to be first-chair players and all these different sections. That's the DNA shift that would allow people who are successful to a certain level, to amp it up and really blow out growth.


It's been a lot of fun working with, call it, 21 very successful, multi-millionaires who have sold businesses to us, and keeping that DNA, keeping that entrepreneurial spirit alive, while at the same time, trying to harness it collectively as a group, and drive it to new heights and new levels.


Jon: I had somebody explain that to me. It's like every level of coaching. Let's say if you're going to swimming coaching, you start out with your high school, and if you got any talent, then you'll go to college. If you got a talent, you go to the Olympics. But those are not going to be the same coach in each one because every level is going to expand your training.


Adam: That's a great analogy because people have different specialties. It's like I can take the raw talent, shape it, get it this far. Someone else takes it from there. It gets it to here. That's similar to that analogy we're using on the private equity. The size of firm, size of fund, being a tool for us as we're growing through evolution. For us being a tool for their investors to get outsized returns along the way. But that's also why you typically don't see a private equity firm go from startup to a billion-dollar company. These are very different growth periods and the evolution of a company.


Jon: It's way too much risk. There's a million ways to die in the West than a startup.


The chapter on rollovers. Everybody says like, "You get a second bite of the apple," but the way you explained that and definitely the extra little features you can give to a seller. Do you give that pitch to the seller of the organization?


Adam: I certainly do but my team is very well-versed on rollover investing. We have a 50-page entrepreneurs guide that we also use, which spells out some of those real-life examples. I think a lot of times, entrepreneurs put their blood, sweat, and tears into building their organization, but they think of exits as a singular event. I've learned through 20 years of working in the private equity-backed world of companies and building companies that, really, it shouldn't be thought of as a singular event. If you play your cards right, you can get multiple paydays and each payday can be subsequently larger than the one before it. I love to use that. The one example of the first company that sold the CoolSys for $16 million where they took $12 million home, rolled $4 million forward. That entrepreneur, if he had been given the chance to cash out his chips, he would have. "Sure. I'm selling for $16 million. That's a good number. I'm happy. I'm gone." But he took 12, rolled 4, and then 27 months later, I sold for a four-times multiple of invested capital. So guess what, the $4 million rollover became another $16 million. They got paid twice for the same company.


Jon: Already $3[?] million now.


Adam: Yes. Now,  is an investor in the third flip that we're doing. The first one being when they sold the company to us. Second one, being when I sold the entire company from Audax to Ares. Third one, whenever Ares does an exit. A rollover investing can be a really powerful tool. Many times, when an entrepreneur sells, it's not always what you think. It's not always someone who's in their late 60s, early 70s, who's just wanting to retire. Sometimes, it's guys in their 40s and 50s, and they're just starting to get a little nervous, and they're, "God, I want to diversify my assets. The world's going to hell in a handbasket. I got to make sure I don't get stuck with nothing when it is time to retire, but I'm not ready to hang up my cleats. I want to keep on working." Rollover investing and partnering with either a strategic company like CoolSys that happens to be backed by private equity or becoming a platform company direct with private equity. You get into that realm of additional bites of the apple.


I tell people, "Why sell your company once when you could sell it twice or three times." My personal record is selling the same company five times in 13 years and four months. It's a very powerful way for entrepreneurs to stay involved. Think of a squirrel, putting nuts in the tree for winter. It's constantly your storing up and diversifying, but you still have enough skin in the game to make life interesting to where the next exit is bigger than the last, and that exit was bigger than the last, and it can just [crosstalk].


Jon: You might not even be involved in the business after some point like the second or third year. Would that be true?


Adam: I'm sorry. Say that again?


Jon: If the seller sold out and he only worked for two more years, but you sold at three, and he still gets another check for $12 million bucks.


Adam: What I encourage with my entrepreneurs is I want to have a relationship with them forever. There is no time limit. They can choose how active they want to be in the business. If they start out being a full-time employee, God bless them, need them. Need to keep the relationships that they built over 20, 30 years with their customers, but then when it is time to slow down, love to see entrepreneurs then turn to part-time employees, consultants, whatever the case may be. I always want to have a relationship with them. These are people who built a business. They developed relationships. They're thought highly by their employees and it's like I'd never want them to go away. They can always be a rollover investor. They can always stay, in some type of a relationship with CoolSys, which allows them to continue to leverage all that experience and knowledge that they've built over a career and to continue to monetize it in some way, shape, or form.


Eventually, I have had a few entrepreneurs actually retire. They were in their 70s and they were like, "That's just what I wanted to do." I'm like, "God bless you. Go fishing. And I'm going to keep you on some kind of our little retainer because if I need you, I'm going to call you or send a boat out to find you, and I'm going to drag you back for 15 minutes to help us with a relationship issue or problem." Love having ongoing relationships with the people that we partner with.


Jon: When you talk about monetizing, there's three other features that you offer, the residual income stream, seller financing, can make extra money on the interest rate, being a landlord, and being a consultant. You've got this mapped out.


Adam: If it's worth doing, it's worth being paid for. When an entrepreneur partners with me, I want to make sure that they're treated fairly and that they have multiple avenues or ways or abilities to generate an income stream.


As I've talked about in the books, most entrepreneurs on real estate, the universal buyers doesn't want to buy that real estate. It's a different asset class. The diligence requirements are very intense. So I always encourage entrepreneurs, take all your real estate two or three years before the sale, spin it out, separate entity. Put in place a fair market lease with the company. When the company is sold, as long as you have a reasonable fair market, rent, and duration, you can continue to generate income from the business you sold by being the landlord to the business. That's very common in today's world. That's one income stream. Maintaining either an employee-employer relationship or a consulting relationship, also, another great way to do it.


Then you touched on owner financing. I don't often talk about that much, but my brother and I bought an insurance agency from a founder who was in his 70s. He was retiring. He held back 25% of the capital that we needed. So 25% was equity that we put in. Twenty-five percent was a seller note and then 50% was other bank financing. The business itself financed all the debt, but here's this former owner, and he was able to charge us a 10% interest rate on a note. We paid more. It was like mezzanine financing. It's not secured. The bank debts in front of him, his second fiddle from a debt perspective. It was above-market interest rate but he made it easy for us. He was able to collect 10% interest on his money that he rolled over as a debt provider for a five-year period. He gets the payday when he leaves. Hold some of the debt. Keeps getting paydays every month as we're making interest payments. Rents us the building. He's getting money that way. We let him keep an office until, literally, the day he died. A lot of different ways for entrepreneurs to continue to make money.


Let's face it. When someone works their whole life and they build a company, and then they finally do that exit, what do they do with a pile of money? The first thing they have to do is figure out how to invest it or what to do with it. Through doing some of the things I talk about, you can diversify those assets and make some outside investments or get a money manager or someone to help you, but you can also still stay invested and generate income in that thing that you know, where you're an expert, where you spent 20, 30 years building the business. Why walk away? Why not continue to monetize?


Jon: Charge a full of money for two hours' worth of work.


Adam: Yes, pretty much.


Jon: You speak glowingly of your brother, in both books. Is he involved with CoolSys?


Adam: He is not but he was the perfect example. My first book, I had the two avatars, Josh and Rose. I'm the original Rose. I'm the Fortune 500 executive who transitioned to become a private equity-backed CEO. Rose is my daughter. She's my eight-year-old daughter. I used her name. She thought that was cool to see it in the book, but the avatar was really my experience going from GE to becoming a CEO of a business. Then Josh is my son who, by the way, just got his first payday when his business was sold for a few billion dollars in a private equity-backed adventure of his own. He represented the entrepreneurial spirit. My brother, Mike, is both characters. He was originally Rose. He worked in the insurance industry for a large company. He worked his way up through the ranks. He left to buy an agency and became Josh, became an entrepreneur. I helped him with the financing. I was a board member of the business. Then he ran that company for a long time. I think we owned it for 15 years. Then, as he's approaching retirement age, it's like, "Well, I'm not quite ready to hang up my cleats, but the world has gone crazy." Need to monetize. Need to diversify the asset base but want to keep working.


So he just was the perfect character to use as an example in the new book, The Exit Strategy Playbook because he spent 30 years or more working in the insurance industry. Not only for the Fortune 500 world but then, as his own, entrepreneur, as his own business owner. Then when it's time to exit, this is the first time he's going to exit. So, it's daunting and it requires some guidance. It just so happened, happenstance, that he was the perfect character to keep referencing in the book because the parallels were there.


Jon: You come from an entrepreneurial family. Your son, you, your brother. Was this taught by the parents or born and made?


Adam: My dad was a Notre Dame grad, Navy, ROTC officer. Served during kind of late in the Korean War era. He was a corporate guy. I would say that he was more conservative and a little less entrepreneurial, but his kids all have some type of creative flair. I have a brother who's a cartoonist in San Francisco who does movies and cartoons. I have a sister who built businesses and has run multiple businesses. Kind of a smaller entrepreneurial-type spirit. She was quite successful. My brother and I were the corporate guys. It seems like everybody in my family fit in one camp or the other. Either you're creative or you're entrepreneurial.


Jon: Right brain or left brain.


Adam: Yes, right brain, left brain kind of thing. My brother and I were probably the two who were guilty of following in Dad's footsteps to Corporate America. We just then had a second incarnation as entrepreneurs.


Jon: I have to ask you, you talked about, even in both books, and the way Warren Buffett and Charlie Munger talk about it, even [inaudible] but just because it doesn't account for manufacturing or inventory. When you guys go into an LOI, and this is another veteran asked me to ask that, what kind of landmines do you see in the due diligence with the EBITDA that once you start uncovering this?


Adam: I can understand why some, especially public companies, they talk about cash profit, but when you're buying a private company,  cash profit is very misleading. It's misleading because you could be a business that's not investing for your future, that's not investing in growth. Growth is expensive. So you could have high cash profit but be a business that doesn't grow and has no intrinsic value to get an increased multiple or purchase price.


Another entrepreneur may be building a business and they're investing heavily. They're buying companies like somebody I know or they're investing in technology and they're driving. They're opening up new offices and new cities and new markets. All of this stuff costs a tremendous amount of money. They would show no cash profit. Well, which business would you rather own? Would you rather own the company that's making cash, but not growing or the business that's growing and investing in its future and not generating as much free cash.


There can be a disconnect when you're trying to value companies. So, how do you level that playing field? The way that private equity levels that playing field is to focus on the EBITDA line. That doesn't mean it's solely about EBITDA but it is a place where you can level out. Call it those who are investing versus those who are not, and get to some kind of a leveled playing field to then dig deeper into a business, and to try to determine what the value to you is in making it an investment. Whether it's a platform or an add-on to a company you already own.


I guess it depends on the angle in which you're looking at it. It was funny, I had a large strategic looking at my company last time I was in the market. I remember a senior executive making, "You don't make very much cash profit." I'm like, "Yeah, I don't make any. Did you read my book?" It's all about EBITDA and the private equity-backed world. I'm Investing for my future. I've bought eight companies. When you bought eight companies and spend and invest the kind of capital that we're talking about, you are guaranteed not to be generating cash profit because I'm building a multi-billion dollar company. You just don't know it yet because I'm not done. But it's a journey and you have to invest heavily in order to grow. Growth is expensive.


I understand how some people look at it and say, "Nah, that's not a fair representation." Exactly. Neither is cash. You have to use some combination of factors. I talked a lot about EBITDA strictly because entrepreneurs, most of them, don't know what it is or what its value is to them in an exit. I'll leave Warren Buffett to argue with the senior PE guys at a cocktail mixer, at a university endowment, or something, or at some charity function. They can argue about whether or not it should be used. The reality is it is used and so I'm educating the entrepreneurs what is it, why is it important, why you should understand it, and how you should manage and manipulate it because, at the end of the day, it's all about generating for that entrepreneur who's monetizing their asset. How do you get maximum value? You need to understand how someone's evaluating that business and EBITDA is the way it's done today.


Jon: Would you say when you go look at a territory like Tucson, Arizona, there's a $25 million business, that you can tell that they're growing, putting investments into growth versus these guys are tapped out. He's fine with the $25 million family-owned business and the income. Can you give them a multiple based upon that?


Adam: Most industries have some kind of a trading range. There is an envelope of price value from left or right. Maybe it's four times EBITDA, a six times EBITDA, and that's a pretty typical range. Where a company falls in their range can then be dictated by, what's the market they serve, the size of that market, are they tapped out, what's their organic growth story, is there a way to continue the growth of the business, and then what's the strategic value to me as the buyer. From my perspective, we put a lot of work. I'll tell you that it's not as simple as someone's for sale and I'm a buyer. We put a whole lot of work into what I call, filters. Upfront, I lay out what is my perfect acquisition and we're very active.


My deal team has some proprietary tools that they've developed where we take our universe of customers. We lay out all their locations in the United States. We also look at population factors. We break them down into MSAs. It's kind of city markets. Let's find MSAs that are growing. People are moving to them, their growth areas, just in general, and then they happen to have a large footprint of our existing customers in a new market that we're not currently servicing. Which means not only do I inherit the customers we're buying, but I also then get to cross-pollinate customers that I have. Then let's look at the actual business. What percent of it is serviced, what percent of it is construction, what is the EBITDA margin of the business. Is it union, non-union, etcetera, so on, and so forth? I have all these filters that help us identify a good acquisition. Because buying someone for the sake of buying someone can lead to a lot of problems and a lot of headaches. Buying a bad company for cheap can zap so much energy out of a leadership team, trying to turn it around or trying to fix it.


I'd rather buy world-class assets, best-in-class assets, and add those to the team because they're very easy to integrate. Don't require as much management effort to continue to operate. The conversations are all about growth. How do we grow faster? What are the limitations that you have today to grow? How can I, as the parent and the larger entity, how can I help you solve those problems? Instead of focusing on how do I fix what's broken, I focus on how do I grow what's already good and make it much larger, and a more important piece of the empire? That's more higher value-added work.


We put a lot of effort into screening upfront. When we find that asset, that fits the profiles that we're looking for, then that's an asset I want to own. It's an asset that I'm willing to pay a premium price to get. It's going to be an important valuable piece of our future.


Some companies, in smaller markets, help us strategically build density in a market that's not very dense. You used Tucson, so I can stop driving guys from Phoenix over to Tucson, if I buy that small company in Tucson, that now gives me a hub in Tucson, and it could be much more cost-effective to service. Call it the greater Tucson area, from a Tucson-based hub than it is to drive people over from Phoenix and they spend half the day driving back and forth.


Jon: Nobody likes that 100-mile drive. I've talked to a lot of service companies. Nobody [crosstalk].


Adam: Yes. There are different strategic reasons to make acquisitions. I think what's important is if you're going to be an acquirer, if you're going to have an acquisitive nature, you need to understand good versus bad, and what good means to you could be different than what it means to someone else.


Jon: I just finished Steve Schwarzman's book from Blackstone and he talks about that one deal where he basically was a loser. That's a $300 million deal. Don't lose money, but then he created this new process where it had inputs from everybody in the team, the yes or no veto, up or down. Do you guys have that in the role?


Adam: In our particular case, we do but it's informal. He's putting to work billions and billions of dollars. They're making very big decisions and their life's blood comes from the limited partners that invest large sums of money. What he does is a different universe, different world, from what Adam Coffey does. But we essentially are following, call it a similar profile. It's just less formal. In our world, we have to like the business, as a company, and then I involve my private equity partner and present to them. I call it a white paper but it's kind of a diagnostic deck. Here's why we like this company. Here's the strategic gaps that it fills for us. Here's what we think the growth profile is for that business over the coming years. Then we certainly get buy-in. I have to have board approval to do an acquisition. We do have a process and there are plenty of people who could veto that acquisition.


Jon: Have you seen anything peculiar? Just says, "Hey, this guy has got..." I can't think of the exact like too much debt or "He's got a code[?] problem" or whatever. Have you seen anything like that?


Adam: Most of the times, what kills a deal from my perspective, there's really two things. One is they tell us that they're making X and they're really making X minus about 90%. Their numbers just aren't accurate.


Jon: How does that happen? I know that everybody's embarrassed by their numbers. You're only going to get paid on actual value. How does somebody get in that position, you wanted to say, "We're doing this, no-cost"?


Adam: Well, I would say it's rarely malicious. Oftentimes, it's just poor accounting practices or simplified accounting practices, and a lack of understanding of corporate finance, and not truly understanding EBITDA, going back to that term again.


The second reason and the real reason why we walk away from most of the companies that we walk away from is personality fit of the entrepreneur. In this particular case, I'm building an Empire, will ultimately acquire, as I said, 50 companies or more. The reality is I would like to have a relationship with 50 entrepreneurs. Well, if I have 50 cowboys that you can't put a saddle on and they're not going to play well with others, and they're going to be headcases, then guess what, I've got an empire that I can't manage.


For me, it's all about cultural fit. Do they think like we think? Do they value people as we do? Are their core beliefs and values similar to ours? I got to tell you, I look at companies all the time where the arrogance or egotistical-ness of the entrepreneurs are so off the charts that it's just like, "You know what? I'm better served[?] going somewhere else because I want people to stay associated with our company and I want to have a relationship with these people," and I've got a great crew of entrepreneurs. If you don't fit into that mix, then you're going to be odd man out and so we just don't want to go there.


I'd say, most of the times, for us, we pass probably first because the personality of the entrepreneur, too strong, not a good fit for what we're building. Then, two, just a total lack of understanding of what their numbers really are. They report to us something and then in diligence, we find that it's not accurate. We've had some big swings where, potentially, you have 50% reduction in earnings because they're just doing accounting wrong. I've had deals fall apart for those reasons too.


Generally speaking, we focus on buying good companies with good people. They go hand in hand. Great market reputation and they fill some of our strategic needs. They check all my filters. When we find that company, it's easy to really put your arms around it, dive in, and make it work.


Jon: You're on a different level of motivative reasons to sell. A lot of people buy these companies, 10 reasons, like divorce or death or something else. You're on the other level. It's like "Hey, do you want to turn off the lights or join the team?" I like the way you explain that.


Adam: That's important. You go back to my brother again, great example. He was an entrepreneur who was approaching retirement. He wanted to keep working for at least another three or four years. So, in his world, in understanding the universe of buyers that either needed to be a financial buyer who would make him a platform and keep him around, or it had to be a strategic buyer who wasn't going to just suck and integrate the entire company, and then lay everybody off and get rid of everybody because that wouldn't accomplish my brother's goal and objective. Needed to either be a strategic buyer where he could join the team and still keep going forward, only now, no longer the sole shareholder of his company. Now, he's an employee of the bigger firm with some rollover stock, and ultimately, that's what we wound up doing. We were too small with not enough growth trajectory to be a platform for a private equity firm. So his best exit path was either going to be an owner or operator, someone who would come in stage left, by the business, and then keep running it while my brother eventually rides out stage. Or that large strategic who would make him part of a bigger company and afford him an opportunity to diversify his assets, but yet still be a rollover investor. Kind of like how CoolSys does it. In this case, it was a large insurance corporation called Acusure.


So my brother got to cash out his chips, make a rollover, and that company is growing like a weed. They will have an IPO down the road, multi-billion-dollar exit in its future, and my brother probably makes a three to five times return on his rollover investment in about a three, four-year period. He's happy and it was the right fit.


I think, a lot of times, for entrepreneurs, they're focused on price. I want to get max value, but they don't know necessarily if max value is also the best outcome for their situation. Part of The Exit Strategy Playbook is really to get someone to look in the mirror and start thinking about here's the different buyers, here's what's going to happen to you if these people are your buyers, and then you can start to think about, what do you really want for the future? What do you want for your employees? Do you want to see them all lose their jobs because you sold to a strategic who's just literally taking your contracts and your customers, and then they're going to turn off the lights on all the offices, and all those people are out of work? There is no right or wrong, but what do you want as an entrepreneur?


I get them to think about all this stuff in advance so that when they head into a sale process, they know what kind of buyer universe they're really interested in finding. Yes, they want maximum value. You always want maximum value. But you also want the best exit for your situation that accomplishes your goals and objectives. So often, I think people put very little thought into either preparing the company for sale or and who the right buyer is. They just wake up one day and say, "Bye, God. I'm gone. Let's sell this puppy, top-dollar. Whoever the hell pays it, that's who I'm riding out of town," and they're leaving money on the table by not preparing. They're potentially setting themselves up for some trouble if they haven't thought about who that buyer is and what's going to happen after the deal is closed, to them and their employees and their empire.


Jon: You're an Army Veteran. Why did you join the Army? Are you still in contact with people from [inaudible] because that's been...


Adam: Yes, like the Stone Age is.


Jon: No. Like '79 to '83, I was in the Air Force. That's long ago.


Adam: I'm a '82 to '86-er. For me, I grew up in an affluent area of Detroit, Michigan called Birmingham. Upper middle class and everybody on my block raise the American flag every day. Most of them fought in World War II, fought in Korea. I probably watched too many war movies, as a kid growing up, playing army in the fields around the neighborhood with my friends. I played with G.I. Joe's as a kid. I could show you a picture of me when I'm 12 years old, wearing an army uniform, and carrying a little Crossman BB gun, and I'm running around playing soldier. I just always knew that the path for me coming out of high school was not going to be a traditional high school to college. Of course, back then, that wasn't necessarily just the traditional path. There was trade school. There were other things. So for me, I always knew, as a 12-year-old kid, that I'd get out of high school and I'd go in the service.


For me, the military really gave me discipline. It taught me about leadership and teamwork. How to work in a diverse world with a diverse set of people and how to accomplish something bigger than just one person could do on their own. I tell people all the time, if not for my service there, way back then, I'm never a CEO. I'm not here today at this level. The military gave me a great foundation to build upon, but I also knew I wasn't going to do a career in the military. I knew that I would get out, but I wanted to go, really to learn a trade. I was into electronics. I wanted schooling. Goal and objective eventually was engineering and technical avenue. Military afforded me that education, gave me those opportunities, gave me discipline and leadership, and teamwork, kind of a foundation. Then that was the start of the adventure.


So for me, it was just like the commercial used to say back in our era, the military, the Army was a great place to start. For me, it really was. I like the Air Force too. I think the reason I chose the Army was the Army at the time would guarantee you your specific school or military occupation, specialty, MOS, and your first duty assignment. The Air Force, when I went in, would guarantee me a field, but not necessarily the job, or the school, or the duty station. I took the longest technical training that the military had and it wound up being air defense radar systems repair and missile systems repair. It gave me my technical school. Kick me off on the road towards engineering, and straightened me out. I was a young kid that needed to be slapped around and put into shape.


Jon: I bet that a lot of people, guys, you hire now are ex-military too?


Adam: We really have three feeders for employees. There's a huge shortage of technicians in our industry. There's a huge shortage of tradespeople in every trade in the United States. Thirty-five years ago, I blame Nancy Reagan and I also blame Hillary Clinton. That way, I pick one of each and you can't put me in a corner. But very laudable goal and objective. Everybody needs to go to college. They kind of turned off trade school somewhere back just after I got out of high school. Everyone started going to college and we hadn't been creating enough plumbers, electricians, and HVAC [crosstalk].


Jon: The dirty jobs guy. He talks about that. Some people are just not right for college and then they'll make more money in a trade.


Adam: You know what? I've bought 21 companies in this industry and those 21 gentlemen all started out as guys in trucks, fixing stuff, and they are all multi-millionaires today. The first things people say, "Trades? Well, how much are they learning in 10 years?" Well, if you talk to the 21 guys I bought companies from, they're worth a hell of a lot more than most of those folks who did go to college.


The trades were always a good way for someone to earn a living, and for those who are entrepreneurs and also started businesses. They created generational wealth by being plumbers, electricians, builders, and all those different trades that we've got.


I have 250 job openings today for refrigeration techs. There's not enough women in the trades. There's not enough people in the trades, in general. Let alone, there's a very low representation by women in the trades. For everybody out there wondering, what could I do in a matter of eight months to a year, be earning a lucrative living, come to the trades. Tons of opportunities.


Jon: Adam, it's already an hour up. I want to thank you for the time and be on the podcast. For everybody out there who doesn't know, get these two books. He's on LinkedIn.


Adam, thank you so much.


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


Jon: Yes, great show. Thanks, Adam.


Adam: Thank you.