THE PRIVATE EQUITY PLAYBOOK: MAKING BILLIONS FROM BUYING BUSINESSES transcript

Picture this. 5 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 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, 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, 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 uh 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 business.

I spent 21 years as a CEO building three different national companies for nine different private equity sponsors, buy and build guy. I bought 58 companies, uh 2 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 loved 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 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 uh and show them the way not because I'm a brilliant genius 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 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 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 Erade 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 largecale 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 or the people who contribute money. And so, fund, you know, PE firm collects all this money and then over the next 10 years, it's 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 5-year hold period. We'll then grow those companies both organically and inorganically, you know, by buying other companies, doing buy and 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 5 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 worstkept secret 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 corpromat 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, 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 coat, 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 projectbased revenue. So, let let me give you a couple examples.

You know, uh let's say pest control company. There's a pest you 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.

And 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 projectbased 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 streams 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 projectbased. 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 to make sure they have at least 30% gross profit less than 20% SGNA or or sales and general administration back office costs. 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 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 uh that we also give away as far as raising capital and getting 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 is it at? And then maybe we'll follow on with where you see it going. Well, well, you know, in 2022, 2023, interest rates were climbing up. In 2023, deal volume in private equities slowed down. And I want you to just keep this in perspective. You know, when I was first a CEO, as a 37y old guy many, many moons ago.

At that time, there was about 14,500 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 has 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, geez, 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 re 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. And 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 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, a $3 billion 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 partners 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 of 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 a half by 2025. All right. 2.5 by 2025. Barring 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, bias is 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. I've been dying 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 mentioned 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 app 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.

And you can look at some of the world's most nonsexiest 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 projectbased. 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. Pest control is 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. So, some some friends of mine recently, they subscribe to a service of Dun and Brad Street called Hoovers. And they went on Hoovers and then they can search NACIS codes, NICS 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 Nackis Code or uh 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, 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 I 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 projectbased 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 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 companies meet these criterias.

You know, pest control meets these 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 lawnmower, it's, you know, these are not sexy type companies. But but the cap out, you know, capital expenditures are low, the profit margins 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 dollar 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 exit, a little bit longer road to a hundred 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 projectbased, you know, services business because it's low capital expenditures. It means earnings or EBITDA 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% that 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, 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. trust, you'll be okay. You know what, Ryan? I 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 know, start being a doer instead of a dreamer. 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.

Hey, they're cheap 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 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. You 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 follow 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 Welsh, 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 treat treat it poorly. And and I'll tell you, it's like what's better for you to to to own an entire grape or half a truck filled with watermelons?

It's like, you know, 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 it. 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 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 oneanddone 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, Ryan. 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 a PE firm is pretty much programmed every 5 years, I'm going to about every 5 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 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 illquid thing that's known as your company.

And so, you know, 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 trucking along. But hey, I'm 50 and I've got 90% of my net worth tied up in this illquid thing known as my company. Well, that equals 140. That's over the 130 mark. And chances 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 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 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. And 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 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 uh peeling off a few shares if if not all. So, that might be a good one, too. But, you know, like I'm curious about, you know, I'm in venture capital. 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 at 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.

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 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 5 years 50 plus% 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, they're 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, a 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 those 23 companies for five times earnings on average, you know, so five times EBIT DA. You know, most of them were 20 to 30 million in revenue, $2 to $3 million of EBA was kind of the proxy.

And so I'm paying 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 fixeruppers. 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 by 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 I want to buy a company that's 5 million.

How the heck do I pay for it? Well, my typical MO 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 mother ship that I was building. They they became a shareholder, a minority shareholder in the mother ship. 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 not wants, recurrent, you know, all of this stuff I've been talking about. That million dollars of EBITDA is actually very close to a million dollars worth of free cash flow because it's a low capex business. And 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 dollars to complete the transaction.

So if I borrow that from a commercial bank or from the SBA, get an SBA loan. Um 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 3.5 million.

Maybe I need 450 500,000 to include some principal payments. Um, but I've got a million dollar in free cash flow. So, the cash flow of the business I'm buying is now giving me a 2:1 or a 3:1 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 principal paid for by the cash flow of the 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 and 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 IBIDA.

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 IBIDA 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. And 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 merry band of 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 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, you make an offer, you offer to buy the company, and then also including in that offer, you'll make that the founder, the owner, the entrepreneur of say, let's say it's a pest control company, and you're rolling up a whole bunch of them. The first one you roll over and you say, "I'll also give you 30% in the new company, but you got to pledge your current equity into the new co." That current equity is then put up for to I guess make the banks feel a little comfortable in 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. 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 create a new holding company and I'm pushing up the assets of this company into 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 becomes 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 am advertise it, I'm probably needing 600750,000. And now I've got less than a 2:1 debt 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 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 on 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 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 the these owners, you know, and and so I can, you know, 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, "Hey, you want to get into the ultra wealthy world? Here's the secret code, the cheat code to get there with literally zero dollars." So no, let's do one more example real quick.

Right. So yeah, fire away, my man. Let's say I buy 10 companies. Each one has a million dollars in Ebida. And so I pay five times for each. So 5 million each time 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 EBITDA. Well, guess what? That company in the services type businesses we're talking about no longer sells for five times.

I get over 10 million of IBIDA. I'm probably looking at 12 times. That's 120 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 you know 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. You're meat eaters. I 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 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 30 2010.

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, you know, does exist. And if if by chance you fail, you I think I've learned more from my failures in life than I I have my successes anyway. So it's like you you'll learn how to build a better mousetrap. 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 piling 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 and 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 uh 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 he said 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 on your way in your pursuit of making billions. [Music]