Buy and Build Strategy

PE firms have a very short-term holding period and need to grow businesses fast. Adam Coffey, CEO at CoolSys, Refrigeration and HVAC Systems, is an expert on growing these companies using the buy and build strategy. In this article, he will share what it is and how to create sustainable success.

Buy and Build Strategy

6 Sep
Adam Coffey
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Buy and Build Strategy

Buy and Build Strategy

"In a service business, culture is king. Your product is people and you need to talk to people and have a message that resonates with people in the trenches." - Adam Coffey

This episode of the M&A Science podcast is about how PE firms can ramp up the growth of their businesses using the buy or build strategy. Kison interviews Adam Coffey, CEO at CoolSys, Refrigeration and HVAC Systems, and author of The Private Equity Playbook.

special guests

Adam Coffey
Founding Partner CEO Advisory Guru LLC

Hosted by

Kison Patel

Episode Transcript

Text Version of the Interview

What is the buy and build strategy?

The buy and build strategy is essentially a private equity buy as a platform company, one of the anchor holdings of the fund that they're managing.

And what you're doing is you're buying other companies that are in the same industry, maybe slightly off-center. It could be a strategic pivot, adding some new capabilities; you can also choose to integrate or not. But essentially, it's buying a series of companies, putting them together, building a scalable platform, and leveraging the strength of the collective. And then add extreme shareholder value in the process. 

When do you start considering buy and build strategy? 

Let's back to private equity in general - The private equity type of return they desire is three to four times multiple of invested capital. To achieve that, a company has to be growing anywhere from 25 to 30% on a compound annual growth rate.

However, I'm typically running large business-to-business or B2C industrial service companies, and they're in mature markets. The businesses have been around for a long time. 

And generally speaking, when I come to a company, it's growing probably in high single digits, 6% to 8% would be typical. If you think about the law of seven, a company that's growing at 10% a year takes seven years to double in size. That's far too slow from a private equity perspective.

You need to amp that growth rate up to about 30%. And to do that, if you don't have it organically, you need to focus on increasing organic growth, but if you still can't get to 30%, then you need an inorganic component. 

And so buy and build makes sense when the organic capability of the business is less than 30%. You need to have a fill-in to get to the 30% level, putting you on a trajectory to double the company in size in around 2.8 to seven years.

That allows you to achieve the kind of returns that the private equity is looking for over a five-year period, the typical private equity hold period. In addition to that, you also need to have a fragmented industry. 

If the industry is fragmented like mine is, then buying and building is a strategy that can be employed quite effectively to help build scale in a business.

Operating the Company with Buy and Build Strategy

There are still 4,500 companies so this is something that I'm going to be doing for many years to come. And when that's the case, you need to develop a capability to do this in-house. 

So when I got to the company, I had no deal professionals working in the company. I had no legal department in the company. So I added counsel, co-counsel, and I now have four investment professionals.

So call it a team of six who focuses on mergers and acquisitions as their everyday mainstay part of their work. And I'm now expanding that team to include more deal professionals. 

But now also integration teams on the operating side, sales integration teams, because every time we enter new geography or add new strategic capability, I now can cross-sell that across the entire empire.

I went from no team in-house to six professionals. By the end of this year, I'll have nine people. And those people's main function in life will be to assist with the buy-in build effort and to make us a solid integrator. And to make us available and able to maximize growth potentials organically. 

We need to have muscle memory built within the company. We need to be good at it. We need to constantly improve our efficiency in how we do it. 

How Does the CEO Transition Post-Close?

There are many instances where founder-owned businesses transition to private equity and then a buy and build strategy can also be built from that point. But I would say that most founders tend to be focused almost entirely on organic growth. 

Mergers and acquisition is seen as expensive, complicated, and potentially not something very fun. They are good at building a business, and acquisitions can sometimes throw entrepreneurs out of their comfort zone. 

One of the beautiful marriages of a typical private equity firm and an entrepreneur-led business or entrepreneur founding business is the marriage of different strategies, skill sets, and capabilities. And when it works well, it's a beautiful thing to see. If it goes bad, it goes horribly bad. 

So you need to do a really good job upfront, making sure that when you're doing a buy and build, you're applying very good filters, picking good companies, and having a sound strategy. 

Make sure that you're not just out haphazardly buying. When it goes south, it's because people didn't put much thought into it ahead of time. And instead of buying the diamond, they bought the carbon chunk and it just didn't go smoothly. 

What was your first experience doing this?

I have to go way back and say that my parents are both 90 years old; their formative years were during the great depression and World War II. They have a very different mindset, and I was taught very early to chase titles and money. That is how they define success.

So I was chasing titles and money. After getting out of the service, I went to GE. in the Jack Welch era, the heyday of GE. And then pirate equity started calling me and offering me the president preposition of a middle-market company.

Should I stay and be one of a thousand general managers trying to be a VP, trying to be a division president one day? Or should I step out of GE and go run a company and be a president? 

And I'll never forget the advice that I got - "once a president, always a president." I took that and ran with it. It was the best advice I ever got in my life. I stepped out and became president of a company. 

But I didn't know what PE was. I had no clue. I'm just a guy chasing titles and money, and I landed in private equity. 

So I dove into private equity. I learned everything there is to know about and I became an expert at it. That's why I wrote my first book, took 20 years' worth of learnings, and transferred that to the business community. 

I was seeing that private equity quickly has become 50% of all merger and acquisition activity on the planet, either as a buyer or a seller or both. 

And based upon the continuing sales of that book, I have to tell you, it has resonated with many people around the world, just as being a great resource to learn the basics of private equity in about four hours. 

Role of Culture in your Company?

When you're the CEO of a service company, if you can not store your product in a box and put it on a shelf and bring it out later when you need it and open it up and use it, then I'm afraid to tell you that your product is people.

And if your product is people, then your entire focus should be culture. And so my philosophy on building revenue is to go all the way down to the ground level and to start with people. 

If I build a cool culture, I get an engaged workforce. If I get an engaged workforce, they take care of customers. Customers like to be taken care of. They give us more stuff to do and revenue rains from the sky. 

So the secret to building a topline in a services business is to focus on people and culture. In a service business, culture is king. Your product is people. You need to talk to people and have a message that resonates with people in the trenches if you want to find sustainable success. 

When most people take over a business, they always lead top-down. I go through the process of what I call the discovery phase. 

When I go into a new service company, the first thing I do is look at a spreadsheet and the different classifications of employees. And then I go out in the field, and I ride around with all these people. And I assume I know nothing about the business, and I do discovery. 

I learn about what these people do for a living day in and day out. So when I'm looking at spreadsheets, I do not see numbers in columns, I'm seeing people and jobs. It makes the company come to life differently. 

How to Get Consistency In Culture?

If you don't get this right, one bad acquisition can take your entire leadership's energy and strength and cause a distraction that could last years. And I've seen this play out on the bad side. 

If you're doing mergers and acquisitions, you need to bat 900 plus. You had best be batting near a thousand because one bad acquisition will zap your entire leadership team's energy.

You must build a culture that you buy a company that fits when you make an acquisition. I don't just go buy any company. As soon as I encounter that arrogant owner, I walk away. Someone else can partner up with that guy. 

I'm looking for a person that wants to be a part of something bigger. Often, I'll solicit input from early companies that I buy and ask them who they think is an excellent company. 

If I'm going into new geography, I'm not looking to buy the cheapest thing or the broken thing cause I can get it for a low price. I want the best company in that territory that everybody respects and likes and wants to emulate.

And if I buy and spend a lot of time upfront buying good companies, then it's much easier on the integration side to integrate cultures.

I'm a very transparent CEO. Every employee in this company knows who I am. I couldn't be an undercover CEO. It just wouldn't work. If a person can be an undercover CEO, they don't know their employees, which is a problem to begin with.

So I have 3000 employees. I'll hold general wide-open town halls and sometimes have more than a thousand employees tuning in to my own radio show. And I'm talking to the employees of the company. I'm transparent. I make videos welcoming the incoming company.

If we're not there in person, we work hard to buy good companies and ensure that the employees' experience in an acquired company is either neutral or better, never worse. 

So as a part of diligence, we spend a lot of time analyzing things like paid practices and benefits and how do our benefits align with their benefits? And I want to demonstrate that I'm going to take care of employees. So I have very good benefits. Every time I buy a company, I have to spend money. 

It's all about making sure early-day employee culture is positively impacted in a relationship with us, as part of a buy and build because there will be nervousness. Anytime a company is sold, employees are looking up from the trenches wondering, how will my life get screwed up as a result of this?

So much work goes in diligence and upfront, buy good companies, be transparent, talk to the incoming employees, manage their experience to be neutral or positive. Change does happen ultimately; you do have to do different things in integration, but you lay the expectations clearly upfront. 

Deal Sourcing?

There are 4,500 plus companies for me to look at and buy in my world, that's a lot because I only have a team of six. 

So we use a company who shakes the trees for us. They have over a hundred employees, and they do my early outreach and find companies that potentially are interested in having a conversation. And then, they will hand those warm leads off to my deal team, who then reaches out to the target company.

It's harder when you haven't done this, and you're starting to buy and build. But I've bought 20 companies so they can talk to any one of the 20 people that have sold to CoolSys and to me. I have testimonials. 

So we've become the acquirer of choice in the industry. We're not perfect. No company's perfect. We aspire to be perfect, but we have a lot of work to do to get there. 

My one goal and objective for all employees is to create an environment where you can spend your entire career in one place. To do that, I have to do four things: pay a fair wage, or I'll lose talent, have great benefits, and have a great retirement plan. And then the most important thing, create opportunities for advancement. 

Building an M&A Function

Often, I work with people who have industry-specific expertise, and I am a generalist. I run service companies, but they could be in any industry. And so often, the skillset of the great sales leader is industry-specific, or the great operations guide is industry-specific. 

So I tend to assemble new teams everywhere I go with a combination of the existing talent. That's there, augmented by new positions where we don't have the talent inside.

I'll give you a little secret. When I build an M&A team, what I have found is my hunting ground is a go-to the big accounting firms. They all have transactional diligence teams, and these people work on nothing but M&A transactions all day long. These people know the nuts and bolts of M&A. 

So find a charismatic guy or lady who not only knows their stuff but has that ability to take it to the next level then and be the front end of the deal team or the leader of a deal team.

I also look for private equity analysts who have worked in private equity early in their careers and worked on many deals. They left to go to business school, but then they never went back. 

Many people don't find their way back after that first iteration, or I'll find people who've got an investment banking background. Still, I tend to favor the transactional diligence folks who understand the nuances of doing diligence. 

Because a big part of an M&A team in-house and a company is leading diligence, they don't necessarily do all the work, but they've got to do some of the early work and they have to quarterback external resources that do the work. 

And they have a real good understanding of how that process works. And so, for me, it starts with one leader. I build a department around them. I hire the leader; I don't hire the worker bee. I do employ the leader. 

I build teams; I don't hire individuals. I hire teams. I'm hiring one; a second one's coming close behind, hire two, another one's coming close behind. 

I build the team in that fashion with a mixture of senior and mid-level people, developing their cadence amongst themselves. And now we're adding integration teams because I want my deal guys focused on the front end of the deals. 

And when we close it, I want them to be able to throw it over their backs and let someone else catch it, and I'll run with it from there to make sure it gets integrated, and that thing happens smoothly and effectively. 

Do they already know what to do?

No, but these are smart people; they already know so much about it. It can be very successful and it makes for a quicker ramp up. 

Each private equity firm that I've worked with also has its own flavor and way of wanting to do things and how much level of authority or approval they want or involvement they want. 

I've been with firms that virtually are hands-off and my team does everything, and we create what I call white papers or diagnostic decks. 

And I've also had it where the private equity guys want to look over your shoulder every step of the way. And then I've also had the private equity firms that offer up analysts capacity to help out, especially in the early days when you don't have the deal team.

Many private equity firms have enough capacity to where they'll step in and provide you with some additional bandwidth. And so, there is a lot of learning that is taking place. 

It's not that you hire a team and abandon them. They do get oversight from senior leadership in the company and the private equity sponsor, but they bring a lot of skills to the table.

Do You Focus on M&A?

Early in my career, I was the superstar operator guy, the turnaround guy, the spreadsheet KPI guy who could go in and analyze and fix anything. As I've gotten older and more mature, my real ability to help and to accelerate growth in a business is to be the M&A guy. 

So I spent a lot of my time building relationships with entrepreneurs, overseeing the M&A function, the buy and build function. 

Working with the capital markets, the rating agencies, the lender syndicates, the investment bankers when it's time to exit to work with the incoming investment community.

So my specialty is to buy and build, provide oversight, goals, and objectives, strategic objectives to a leadership team, but to really empower my leadership team. 

And so I work with a very strong CFO who can run the financial side of the house, a very strong COO who can run operations. And that frees me up to focus on buy and build and M&A in the capital markets.

And you put that together, and that's the recipe for that 30% compound annual growth rate and getting something up north of a billion dollars; it's a different world. 

And you get there really quick at a 30% growth rate. So as a result of that, each senior executive plays a role and I assemble a team of people to provide a total package. But my focus is predominantly the capital market side and the M&A buy and build type stuff. 


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