We were fortunate to have the opportunity to sit down once again with Adam Coffey, #1 bestselling author of The Private Equity Playbook and his newest release, The Exit Strategy Playbook. Adam is generous with his time and expertise, and we at Blue Margin always appreciate his perspective on private equity trends and practical steps executives can take to leverage company data and improve their impact on the bottom line.

Watch the full interview below or listen to the podcast episode:

 

 

Adam is a serial executive, having served as president and CEO of three private equity-backed service companies: Masterplan, WASH Multifamily Laundry Systems and, most recently, CoolSys, a market-leading refrigeration and HVAC services company.

At CoolSys, Adam drove rapid expansion through acquisitions and organic growth as part of a buy-and-build strategy. CoolSys has 21 brands operating in 44 states and serves more than 50,000 customer locations across the US. During Adam’s tenure as President and CEO at CoolSys from 2016-2021, revenue grew from $240 million to $650 million, partly during a global pandemic.

Recently, Adam founded CEO Advisory Guru LLC, to “share his expertise with other CEOs, private equity portfolio companies, founders, family offices and C-suite executives to help them succeed and drive transformative growth.” You can find him at adamecoffey.com.

Ten highlights from our time together:

  1. Private equity continues to outperform the market. Is it a bubble?
  2. If you’re an executive looking to be noticed by private equity, Adam has written an article with you in mind.
  3. Selling your business is not a “one and done” transaction. Adam recommends a rollover investment that pays big dividends.
  4. The middle market provides greater opportunities for growth and wealth creation for the common executive than other market sectors.
  5. Building a business with a private equity sponsor requires intense commitment and effort, but the rewards are high for both executives and their teams.
  6. Data analytics are a foundational tool for optimizing business operations and they correspond to increased valuation for companies at exit.
  7. Dashboards are an executive’s best friend during PE diligence.
  8. A lack of visibility into company data leaves executives stuck “riding the waves” of the economy.
  9. Even with high interest rates and the current economic downturn, it’s still a favorable time to take on a PE partner.
  10. “Data transformation is a journey, not a destination…Take the first step.”

 

Private Equity Outperforms the Market – Is it a Bubble?

As an asset class, private equity continues to significantly outperform the market averaging two-times the average stock market return of ~7%. A 14% ROI is impressive in any industry, and it sheds some light on why there are now over 6,000 PE firms with over $4 trillion in assets under management, and the investments keep pouring in. There is currently 1.9 trillion of committed capital looking for something to buy, which presents a great opportunity for middle market companies.

 

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“A recent statistic I saw now puts it over 5 trillion in private equity. It's 7+ trillion if you include debt funds, but the apples-to-apples comparison is you've essentially doubled the amount of assets under management in the last four years within private equity, so massive amounts of money continuing to flow into this alternative asset class really driven by shareholder return profiles… Recent studies I've been reading say the 30-year average now for the S&P 500 or for the total stock market index is closer to 10%, but private equity continues to outpace that return threshold, and so as a result, money keeps on pouring in, and there’s more money that has to be put to work. Now currently about 1.9 trillion in committed capital looking for something to buy.”

“I think as a general asset class it will continue to hold true that private equity will outperform the broader market, but I don't want to call it a bubble because people have been waiting for something to change in the private equity world. Just more money keeps coming in. So, more money comes in, the multiples being paid are high, and it requires an active management style to ensure that private equity firms are hitting the return thresholds that they're looking for today.”

 

Looking to Be Noticed by Private Equity?

If you’re an executive looking to be noticed by private equity, Adam has written an article with you in mind. Check it out here: Landing a Job in the Lucrative World of Private Equity

 

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“One question I've been getting asked a lot lately is ‘How do I as a mid-career executive in the Fortune 500 world get private equity to notice me?’ ‘How do I get an opportunity to create that that swing of the bat?’ ‘How do I get into this game?’ So, I recently put out a paper on LinkedIn that anybody can go see. I won't get into great detail here. I threw it out there because there's really three things that you can do to increase the chances that you'll be noticed by a private equity portfolio company looking for a senior executive.”

 

Selling your business is not a “one and done” transaction.

Selling your business creates an opportunity for a rollover investment. In both of his books, Adam advises investing 34% of the first payout back into the business and expecting a 3x return or better. He calls it “riding the coattails.”

 

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“Typical private equity model is about a three-times multiple of invested capital. If I invest a buck buying a company, I'm hoping to get a $3 or a $4 return… My career batting average is over a four-times multiple of invested capital. So, what I often tell people is when they are making a rollover, if they're an entrepreneur selling a business, to think about the whole period that's upcoming over about a five-year period. What is the private equity firm underwriting? If it's a three-times return on investment, then you invest $0.34 on a dollar of what you've been paid. Roll that forward, so that when a three-times multiple of invested capital happens, 3 times $0.34 equals a dollar, too. Your second bite of the apple is bigger than the 1st. That gets to be very exciting for entrepreneurs who've sold businesses for a lot of money. A lot of people think with a mindset of 1 and done, ‘I built this business, built this empire. I'm cashing out my chips’ Arrogantly, they potentially think, ‘If I'm not the sole owner, if I don't have control, I don't want to have any money tied up in in this business.’ And yet people buy stocks every day, and they're not the main owner or driver of public companies that they're investing in. But in the world of private equity, these are some very sophisticated folks who we just said a minute ago are earning double the stock market on average, and money keeps pouring in. And so an entrepreneur or a mid-level career executive in the Fortune 500 world who’s transitioned [to PE], they get an opportunity to participate to ride the coattails of what I consider to be the world's most sophisticated financiers and investors on the planet as an asset class. To go from zero to over 5 trillion in assets under management in about 30 years is pretty phenomenal, and it's because of outsized returns. I'm not going to argue with that. I'm going to grab onto those coattails and, as I have for 21 years, I'm going to ride alongside and do my best to take advantage of the opportunity that they've created.”

 

Opportunities in Middle Market

The middle market provides greater opportunities for growth and wealth creation for the common executive. According to the National Center for the Middle Market, “The middle market’s recovery from the performance lows of 2020 was well underway by mid-2021, and it accelerated in the second half of the year. At year-end, the vast majority of middle market businesses reported year-over-year performance improvements. Nearly four out of five businesses reported year-over-year revenue gains while 57% of middle market businesses expanded the size of their workforce. Among those reporting growth, a significant majority reported gains of 10% or more over the course of the year.”

 

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“The middle market is where the money is. It's where the action is, and it's so much easier for a person with strong business acumen to take a company that's relatively small and triple it in size versus taking one of the largest companies on the planet and trying to double it in size. It's my sweet spot for sure. Love middle market. Love private equity-backed middle market just because the wealth creation opportunities are so large for the common executive.”

 

Private Equity as a Professional Sport

Much like a professional sport, building a business with a private equity sponsor requires intense commitment and effort, but the rewards are high and create opportunities for executives, management teams, and employees alike. It takes effort, but as Lencioni points out in The Five Dysfunctions of a Team, “If you could get all the people in an organization rowing in the same direction, you could dominate any industry, in any market, against any competition, at any time.”

 

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“Private equity, in my opinion is the direct comparable to [professional sports]. It's the professional sport of investing and making money and returns. And it can be very, very intense… I look at professional athletes… These guys have to get up in the spring (or whenever their season is starting) and they’ve got to practice every day, and they're working out in the gym. It never stops, and that's the intensity level of a private equity-backed company. It's a professional sport. Be ready for that. Embrace that because what you get in return for investing that sweat equity in building a business with a private equity sponsor is a chance to create wealth, not just for yourself but for the management team. You get to create a great place to work for the employees. A growing business is so much more fun than a shrinking business or a business that's not performing. It gives you an opportunity to invest in… building a culture and building an employee environment. When I think of the last company that I was running, I had 3,000 employees, but we also had a great culture. People enjoyed getting up. The engagement scores were high. We had excellent benefits. We were taking good care of our employees, and so we were creating opportunity for everyone - not just for shareholders and investors. But it is intense. It really can be intense. This is the first time in my entire career (for the last seven months that I've been consulting now) where I've had time to destress and decompress from the sport that is private equity. It's been nice to relax a little bit. [Private equity] is like playing a professional sport at the highest level.”

 

Strong Data Infrastructure Correlates to Valuation

Adam has purchased 58 companies over the course of his career, and the ones with clean books have sold in as little as 23 days, while deals running on Excel have taken up to a year or more. Like clean financials, data analytics are a foundational tool for optimizing business operations and they correlate to increased valuation and higher multiples for companies looking to sell. In Forbes’s article, The Benefits of Leading Data-Driven Organizational Change, we read, “Data-driven organizations are seeing upwards of 20% to 30% improvements in EBITDA due to unlocked efficiencies.”

 

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“For a business that makes extreme use of data analytics and dashboards… (First of all, chances are I'm probably buying a company with a sophisticated management system in place, which includes the people, the process, the visibility) that business probably is trading at a much higher multiple than one that has none of that (one where someone sticks a finger up in the air and says, ‘How am I doing?’)… It's different than [a business] that can bring up dashboards and analytics and talk about trends and how things have been improving over time. From my perspective, having those capabilities makes the company itself more valuable… All businesses trade for a multiple within a range… a company that has good visibility into data and analytics is going to be perceived to be a better company than one that does not. It's going to trade for higher in the multiple range. You and I have worked together in companies in the past, and you've always brought extreme value to me as an operator.”

 

Dashboards Support Diligence Phase

Lack of a cohesive reporting structure can put the diligence process at risk and create unnecessary strain on executives to surface requested information. In Deloitte’s article, How Technology-Driven Data is Driving Deal-Making, the author states, “Expert deployment of data analytics can raise confidence levels on transactions; it can confirm suspicions about the direction of a business, help provide a better sense of factors that drive valuations, and help deepen awareness of risk factors.”

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“When exiting a business, one of the biggest pieces of the process is…diligence. (I mentioned in both of my books that diligence is a proctology exam that never ends). For two to six months…whatever the length of time is…the buyer is going to ask a multitude of questions, and when you have analytics and data, it's just so much easier to present information … Buy-and-builds are always messy from a data and analytics perspective… I may be pulling data from multiple systems because I'm buying multiple companies and they're at different phases of being integrated. All of these things create issues and problems, and it's through the use of data and analytics that you solve these problems. I have closed companies…in three weeks…a lot of work was done in the three weeks, but certainly the only reason I could do that is because I had the capability to answer questions and present information. [Data] plays a big role in diligence. It helps present a company in its best light. Companies that are more sophisticated from a data perspective are also more valuable. They trade for a higher multiple. They probably have better growth trajectories than businesses that do not because they have a very cohesive set of operating parameters they're following.”

 

Without Data, Executives Must “Ride the Wave”

According to Adam, a lack of visibility into company data leaves executives at the mercy of economic fluctuations and limits their ability to impact business performance. By contrast, per Forbes' article, Why a Data-driven Culture Matters and How to Get There, “In a genuinely data-driven company, the work of every department is driven by the reality of its data. When that combined work effort pursues the goals and objectives of the larger enterprise, then the entire organization benefits from the focus on and clarity of a data-directed vision in all of its parts.”

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“If you are running a business that is in favorable economic times, [lack of visibility] may not kill you because the rising tide is floating all ships equally, but where it really makes a difference is in a downturn, a slowdown, a pandemic, or a recession. A storm or fog -- that's the analogy of a recession or a pandemic. It's during these times of poor visibility where the data matters… Usually when I come into a business, I don't have the data that I need. I'm running blind and have to create some base level metrics fairly quickly in order to steer the company and be able to see if the changes I'm making as CEO are causing a change in traction or trajectory. And then I immediately start working on trying to put in place more sophisticated systems which would help give me better visibility. Some visibility is better than none. Very good visibility is better than limited visibility. You could go on for days with those analogies, but yes, I have run businesses without [data visibility] and it's not fun. I'm riding the wave. It may be going up, it may be coming down. I have little ability to impact because I don't have visibility into the nuances of my business.

 

It's a Seller’s Market

According to a recent article in Inc. Magazine, “Over the past two years, with much pandemic uncertainty many owners have chosen to wait on the sidelines. This has created an imbalance in the market, whereas buyer demand exceeds the supply of available businesses for sale. Median sale prices are expected to grow as buyers continue paying premium prices for these businesses. Right now, it's a sellers' market.” Adam agrees that even with high interest rates and the current economic downturn, it’s still a favorable time to sell.

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“I would say that although the market is in turmoil and although interest rates are ticking up, they're still near historic lows, relatively speaking, if you go back 20-30 years ago and look at interest rates. So, from my perspective, still a very strong seller’s market, a lot of capital chasing very few deals, and as a result of that, I'm still seeing very robust sales activity… Multiples are still high. Interest rates are still low compared to historical norms, so as a result I'm seeing very little disruption, if any, in terms of buyer appetite to pay market clearing prices for businesses. However, some businesses have been hammered, and may be delaying their move into the market, waiting for their own financials to recover before selling, but there’s nothing wrong with the universe of buyers.”

 

“Data transformation is a journey, not a destination.”

The goal of becoming a data-driven organization remains elusive for many companies (only 19.3% respondents of the 2022 NewVantage Partners Survey reported having established a data culture) but spotlighting even a single metric to measure machine utilization, productivity, or slow-moving inventory is straight-forward and can produce quick gains. Blue Margin has experience developing reports to address urgent business needs in a matter of 3-4 weeks. The first step towards your goal doesn’t have to be a leap, and it can provide meaningful insight and impact on growth and profitability.

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“You don't have to go from, ‘I have nothing, to I'm world class.’ You can take some teeny steps on the way along the journey. I remember when I first got to that laundry company, and we had very poor visibility to data, so I created a metric. I was putting commercial washers and dryers out in tens of thousands of customer locations, and I had employees. I could measure productivity as simple as…machines divided by number of employees in the company, so I could create a metric that gave me a starting point. Then I'm investing millions of dollars in ERP systems and that takes years. And certainly, when I come into a lot of companies I do have data, but the data is located in different systems or different places and there's no aggregation of that data, and so I could start with…a vision for where I want to be over time, create a road map that will take me there, but then also look at short term… From a short-term perspective I can call someone like Blue Margin. I can say ‘Hey look, I don't have anything, and this is where I want to be three years from now and $15 million later. But can we do something today? Can I suck some data out of QuickBooks over here, an old ERP over there, and an HRIS system and create a data lake… to start to make some decisions based on data as an interim baby step?” [It’s] not an ideal solution, but it gets me started on the journey, helps me improve my business rather than just saying there's nothing I can do, and [otherwise] I'm going to wait until the perfect system is built by the IT department in five years. I can take baby steps along the way, and my suggestion is to think of digital transformation as a journey. It's never a destination. You're always going to be looking for better and for more. Start. That's the key. Take the first step.”

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Jon Thompson

Written by Jon Thompson

Jon Thompson is co-founder and Chief Strategy Officer at Blue Margin Inc. An author and speaker, Jon sheds light on how businesses can take advantage of a revolution in business intelligence to become data-driven and accelerate their success.