How Private Equity Values Your Business

**Adam Coffey** (0:00)
There's 1.8 million of them in the United States, and they're all small, and they're all owned by people whose ages start with 50s to 60s. So as a result, you've got baby boomers. I'm the youngest of the baby boomers. I was born in 64 And we're aging out. Our careers are coming to an end, and there's just this massive transfer of businesses and wealth that's going to take place over the next 10 years.
So last company I ran, I was buying the smaller companies at about five times. And after buying eight in three years, I did the first exit and sold that company for 14 times earnings. If you're above four million, you'll be in a platform. It comes down to Friday night lights. Do you want to be the star quarterback with a target on the back of your shirt, you know, call in the shots, you know, as a platform, or do you want to be an add-on and kind of, kind of fly under the radar screen?

**Jacob Oros** (1:04)
Welcome to M&A Talk, the number one podcast on selling a business brought to you by Morgan & Westfield, a boutique M&A firm specializing in the sale of small to mid-sized companies. I'm your host and president of Morgan & Westfield, Jacob Oros. If you're considering selling your business and you'd like to work with me throughout the process, you can schedule a free consultation at morganandwestfield.com or if you'd like my team and I to perform evaluation of your company for a one-time fee of $1,500, visit morganandwestfield.com or see the link in the show notes. Today, we're going to talk with Adam Coffey. He's been on the show multiple times in the past, private equity, investor, operator, author of several books. We're going to take you behind the scenes of private equity, talk about the differences between lower, middle market and upper market, private equity, and Adam. Welcome back to the show.

**Adam Coffey** (1:58)
Jacob, good to see you. Hello to all your listeners out there. It's good to be back. Always good to talk to you.

**Jacob Oros** (2:05)
Lower middle market versus middle middle market versus upper middle market. First of all, let's define those real briefly. How would you define lower middle market?

**Adam Coffey** (2:15)
If you think about just PE in general, all PE firms, they all do the same things. They have a 10-year lifespan of a fund. They have six years to invest their capital. They invest about six to eight percent of their capital in any one deal, and usually never more than about 12 percent. Based on fund size that they raise, is created what I like to call these five different layers of capital.
I call it the capital pyramid or the private equity pyramid. At the lowest level, if you take the lowest, smallest of the lower middle market funds, they typically have around 200 to 400 million in fund size, and they're generally buying companies that have EBITDAs of somewhere between four and seven million as an entry point. May go as high as 10 For those funds, it's like their natural journey, typical hold period is five years, and so their typical journey is if I buy at four, I'm four to seven, I'm headed to 15 15 to 17 is their exit point.

**Jacob Oros** (3:25)
So 3X the EBITDA and five-ish years or so?

**Adam Coffey** (3:29)
Yeah.
The five-year typical hold period is what defines the work to be done. So if I'm buying companies at four, five, six million of EBITDA, that's the first level of a real private equity firm buying a platform. Generally speaking, in five years, they can normally get to somewhere around 15 to 17 million dollars. There's another group of funds that come in at about that size. They may have anywhere from 750 to a billion and a half. I've seen some, I know AudEx does fund sizes as big as three billion, three and a half billion, but still buy in that 15 million of EBITDA level as an entry point, and then about a $50 million exit point, because that's about how far they can take a company when they're starting at 15 and get to about 50 during a typical five-year hold period. Then there's people that come in at 50, generally they go to 100, and people that come in 100 generally go to 200

**Jacob Oros** (4:35)
We're talking about EBITDA here, right?

**Adam Coffey** (4:37)
EBITDA, yeah, EBITDA. Then you've got the big boys who come in, and their typical exit path is generally public company or some engineered large strategic deal.
Over the years, more and more money has been pouring into private equity.