Podcast Interviewer (5:17)

That's awesome. And just to highlight a few things that I thought were relevant here, where you stepped in. You said you're not an expert in anyone given industry, but you were able to get in there and ask the right questions. You can look at a P and L and determine where the margins are and what needs to be at. But I like how you roll up your sleeves, get out in the field with the people, the people that are in the trenches doing the real work and asking those questions. I think that's awesome.

Adam Coffey (5:38)

As a leader, I call that my informal feedback loop because it's frequent. Then I'm a strong believer in culture and to build an empire, we need people. And you have to have a strong cult. Develop relationships with line employees early in my run at a company. And so, you know, you're a CEO, you're on top of the organizational chart. You have a staff, and so the staff you're interacting with on a regular basis, and they may be telling you what you want to hear, they may be telling you the truth, There may be some version in between. And so I'm creating also by developing friendships, you know, and relationships with people in the trenches, what I call an informal feedback loop, which also lets me assess from the trenches how they're perceiving what's going on in a company. And when I'm instituting massive change, oftentimes it's that informal feedback loop that helps me understand when I'm pushing too hard, too fast, because I can go quick. But you shouldn't go any faster in a turnaround than the culture can assimilate what you're seeking to achieve and what you're trying to do. I also find it very helpful in establishing kind of that informal feedback loop, which is very helpful to the future.

Podcast Interviewer (6:45)

Thank you, Adam. Next question. Having worked with nine private equity sponsors and completing 58 acquisitions, what key factors do you consider essential for a successful partnership between CEO and PE firms?

Adam Coffey (6:58)

So it starts with alignment, in my opinion. So first of all, we all need to be rowing in the same boat in the same direction. So how is that achieved? Well, in a typical PE backed company, there is an incentive equity pool that is created. It's often anywhere from 10 to 14% of the stock. You know, they'll create a separate class of stock. Equity comes in. In class A, they'll create a management pool. In a class B, once equity is returned to the original shareholders at an exit to the people who made the investments, then management is sharing in all of the upside, the profit that's being generated. And so by creating an incentive stock and then allowing different members of leadership, and more recently, you're starting to see some big firms like kkr, you know, actually give stock to everybody in the company, all employees. Creating this kind of an incentive pool aligns management with private equity. So I think alignment is the first key. We don't ever want to position ourselves to where what's in the management team's best interest is not in private equity's best interest or vice versa. That's when problems start. So alignment is key. That's first. But in addition to just simple alignment, we also need to learn how to recognize and stay within our own swim lanes. So let's say I'm a founder and I've built a great business and I'm selling it to private equity. And I'm aligned because I'm a rollover investor. I didn't take 100% of my chips off the table. I rolled 30% of the enterprise value forward. I've got that alignment. Private equity has created that class of stock where I'm now have incentive equity to give to key employees. You know, as we're building the business, we've got complete alignment, but we also need to learn and understand our own individual swim lanes. In the world of private equity, they're not an expert in running businesses, they're an expert in financial engineering. They certainly come up to speed on industries very quickly. But it's important that the PE team understand their limitations, what they bring to the table. It's important for the entrepreneur or the CEO to understand, you know, as an operator what their role is and to understand that they now have a partner. And when we lose alignment or we start playing in each other's swim lanes is where we start to get some potential issues. And so we have to be able to understand. Covid hitting was a classic example. When Covid hits, industries were impacted differently. Some did really well, some did really poor. And so trying to understand when a company is not performing, are we looking at a management team's failure to execute or are we looking at something that's a macro level economic factor that's impacting our ability to execute and understanding that, you know, hey, a management team isn't responsible for a global pandemic, but they are responsible for how they operate once within the global pandemic and making adjustments to do the best they can to ride out this unforeseen challenge. So I'd say alignment, which is accomplished through rollover equity or incentive stock and then understanding each other's swim lanes, understanding each other's needs, and making sure that we're cognizant that we are. As a founder, I just got a big payday because I sold the private equity. That's not time for me to. To dial out. That's not time for me to slow down. Private equity is who bought me. They just made me wealthy. But they're expecting me to work harder than I've ever worked before to generate returns for themselves, their shareholders, and because of alignment, also for myself and for my employees. And so it's truly, it's understanding roles, responsibility, it's having effective communication amongst the two sides of the table. It's having alignment through stock and incentive. These are the ways that we can achieve great outcomes. And it's when those things start to diverge that problems typically arise.

Podcast Interviewer (10:54)

Thank you. I appreciate that balancing act between the CEO and the PE team. Obviously that alignment is key of understanding, recognize and stay in your own swim lanes. Totally get that. Very much similar to, you know, a CEO on a board a lot of times. So thank you. And Adam, your book, the Private Equity Playbook, has been hailed as a private equity equity cult classic. What inspired you to write it and what core message do you hope the readers take away?

Adam Coffey (11:17)

It was funny because I was walking the dogs with my wife and it was actually my wife who spurred me to write it. I had been talking, I think we all have a book in us out there somewhere. And it was actually my wife that got me off my rear end and actually caused me to sit down and write it. But the business case behind it was really quite simple. I had been running companies for private equity for decades. And when I started in the world, when I left the Jack welch era of GE in 2001 and I started running companies for private equity as a CEO, the world of private equity was small. There was about 800 billion in assets under management. There was about 1400 PE firms in existence. And over the last 20, 30 years, the world of private equity has just exploded. Just recently, I read an article that McKinsey had put out that said private equity had eclipsed the $7 trillion mark. When I wrote the first edition of the Private Equity Playbook five years ago, and I just recently came out with a second edition that was updated. But when I wrote the first edition, it was 2.83 trillion. And now, just a short five years later, it's over 7 trillion. The asset class is literally exploding. There's tens of thousands of firms that have been created during this time period. But yet, to be honest, if I'm teaching a seminar and I have a thousand entrepreneurs or business owners, successful people, millionaires sitting in an audience, if I start a private equity seminar with a basic 10 question quiz, multiple choice about private equity, 90% of the room fails that miserably. And so although we've all heard the term, very few entrepreneurs actually understand what private equity is and how it works. I saw that gap. And at this stage, private Equity is buying. 50% of all companies sold, you know, bought and sold on the planet are bought and sold or financed by private equity. And so it has quietly, very quickly permeated every industry on the planet. Yet still to this day, there's a basic lack of understanding of what it is. You know, we hear nothing but negative things on the news. And so the private equity we hear about on TV is the destroyer of companies, you know, the destroyer of industries in the name of profit. Well, they can't be that and grow at the rate that they've grown. And so the private equity that I worked with was different than the private equity I heard about on tv. And the lack of understanding can lead to entrepreneurs choosing bad partners or not optimizing their exits. And so the purpose behind the private equity playbook was to educate a generation about what private equity truly is, how it works, and how to use it as a tool for your own personal gain and benefit versus just being a tool for them to generate returns for shareholders. Let's learn how to use them as a tool for wealth creation.

Podcast Interviewer (14:16)

That's awesome. Thank you for highlighting that and clearing that up, because we do see both sides around private equity today. But I like the stat of over 7 trillion worth in this PE industry today. And while PE might have infiltrated into all industries and all companies, it can be used to your advantage. And I really like that. And then, Adam, the last question of the day, if you could briefly share, given your extensive background in building national service companies, how have you seen the commercial and industrial service sectors evolve over the years? And what future trends do you anticipate.

Adam Coffey (14:46)

As private equity has exploded and grown? Multiples being paid for, companies have expanded. There's no question about that. And because private equity's one cardinal sin is not deploying capital, they must invest all of this money that they're taking into their funds. And so as a result of that, there is kind of a feeding frenzy. It's a great Time to exit. You couple that with the fact that right now is the largest wealth transfer of human history. Over the next 10 years, as baby boomers retire, millions of baby boomers around the globe will be selling companies that they've built, you know, across a career or a lifetime. And so there's a tremendous amount of opportunity that's out there. And although PE buys 50% of all companies bought and sold on the planet, that also means they're not buying at least half of the companies that are bought and sold out there. But it's because of the accelerated PE activity that multiples have expanded. And companies where the prospect of selling a business was not great are now much improved. And the valuations that people are receiving as a result of PE's activity is allowing entrepreneurs to exit companies and truly create, you know, not just a retirement, but generational wealth for future generations of their families. And so what I'm seeing is more and more money flooding in. The money has to be put to work. A high interest rate environment did put a little bit of a wet rag on the flame, if you will, for a little bit while people were adjusting to this environment. But the money has to be put to work. So at the end of the day, deal flow is back 2025. Interest rates are starting to moderate. And so we're seeing an increase in deal activity. And the money must get put to work regardless. And so it's a great opportunity for entrepreneurs to be building businesses, to be selling businesses. Service companies are very popular in the world of private equity, you know, for a few reasons, especially when it's a company that's needs based, not wants. So I need my roof fixed when it leaks. I want a new car. But if I'm unemployed or broke or the economy's bad, I don't necessarily have to buy the new car or my wife wants to buy a new dress for a dinner we're going to, but if we're struggling, then she just goes to the closet, gets out an old one. I just keep driving my car for an extra year, but if my roof's leaking, I gotta fix it. So service companies, hard to disrupt necessarily by, you know, through AI, guys in trucks that need to get someplace. You know, not to sound sexist, but, you know, a lot of the companies that I've. I've run in my career are guys, trucks fixing things, guys, trucks installing things, building things. And so needs versus wants, low capital expenditure versus high capital expenditure, contracted revenue versus project based revenue makes it more popular. Low capital expenditure, high free cash flow. Means I've got a lot of cash flow in the business that I can use to service the debt that's required to buy the business. You're seeing services, whether it's professional services like accounting firms, independent wealth management firms, insurance agencies, or blue collar type services, or trades like H vac, roofing, pest control, landscape maintenance services are very popular sector. They're also highly fragmented industries, which means that private equity can come in and use their favorite tool, which is the buy and build. So we can buy a bunch of companies, put them together, create something big very fast. Big is rare, big trades for a higher multiple. So I can use multiple expansion to create arbitrage, which is how PE generates the majority of their return. So service sector, service industries, very healthy, lots of PE activity, higher multiples than were being paid 10, 20 years ago for sure, but a lot of activity, which means a lot of opportunity. That's what I'm seeing, you know, and the economy will continue to, to do whatever it does. Good cycles, bad cycles, stock market goes up and down. But the world of services, industrial, commercial, residential is alive and well and healthy.

Podcast Interviewer (18:52)

Thank you, I appreciate that. Adam, just highlight a couple things. I agree with you.

Podcast Host Intro (18:56)

The largest wealth transfer in the world.

Podcast Interviewer (18:57)

History of the world, is happening now with a lot of baby boomers retiring. But like you said in P.E. there's lots of opportunities because of this, including that 50% opportunity untouched. Right. But we must put that money to work. And did take a note that services industries are very popular right now and things are thriving. So I appreciate that. And Adam, it was such a pleasure having you on today and I look forward to speaking with you real soon.

Adam Coffey (19:21)

Well, thank you for having me and good luck to everybody out there.

Podcast Interviewer (19:24)

Bye for now.