How to Sell Your Title Company Using Private Equity M&A | Ep 8

I need the cash flow of the companies I'm buying in order to make the math work. And so I would say if I'm a title company, my focus should be on building a great company. Ideally, I want to be growing strong organically. I want to also be potentially expanding my market presence and growing into new markets. In a world where change is the only constant, Mo Shamil stands at the forefront, guiding title professionals to not just grow their businesses, but to master the art of innovation.

With every episode, you're handed the keys to unlock unparalleled growth and stay ahead of the curve. Get ready for a transformative journey. Hello, everyone, and welcome to another episode of Title Agency's podcast. I'm your host, Mo Shamil, CEO of Alltech National Title. I am very honored to have my advisor, M&A advisor, Adam Coffey.

We've shared tons of wisdom and knowledge for the past few months that I thought it would only be fair to share this knowledge with you as a title profession. Welcome, Adam. Hey, Mo, how are you? It's good to see you. Hello to all your listeners out there.

It's 7.30 in the morning. It's a beautiful day here in Dallas, Texas. Let's do this. Let's start off. Give us a little back about your life, your history from the Army to GE to the M&A world.

Sure. Yeah. Well, I think for all of us, life is a set of experiences, and they're all additive. And things that we've done through our careers, they help us arrive at the destination where we're at today. So when I meet people for the first time, I generally talk about a few things.

Early in my life, I was a soldier in the United States Army. Military taught me something about discipline, teamwork, and leadership. Really good foundational skills. Later in my career, I became a CEO. From there, I became an engineer.

Engineering made me a meticulous planner. Also very helpful for a business guy to be very strategic in thinking and methodical in planning. Good skill set. I then went to work for Jack Welsh at GE. I spent 10 years at GE at a time I call the Camelot era.

Tech didn't exist. GE was number one on the Fortune 500 list. Jack was the world's most admired CEO. And that company was growing so fast, it was doubling in size every three years. The world's largest company doubling in size every three years.

And that was phenomenal. We're not talking about a tech company. We're talking about an industrial company. It was a magical time as a young up-and-coming executive to learn how to run a business. One day, the phone rings.

This was back in the days we didn't really have cell phones and we weren't tied. I had a pager. I had a beeper. Back in this world, this era, you answered your telephone when it actually rang. Recruiter calls me.

I'm chasing money and title. I have no idea what the hell private equity is. Really isn't even on my radar screen. But I am chasing money and title. There were job opportunities coming my way and opportunity to go be a CEO for the first time.

And so didn't know about the private equity aspect. I just kind of dumbed into it, if you will. And so moved from 10 years of GE, up-and-coming executive, and became a CEO for the first time. And when I think about that, that was back at that time. PE was a growing industry, but it really wasn't well-known at the time.

In 2001 is the time period we're talking about. It's roughly $800 billion in assets under management. Today, it's $6 trillion. And back then, there were maybe 1,600 companies that were doing private equity. Today, there's over 8,000.

If you include all the little guys who call themselves a private equity fund, I'm sure it's 50,000 by now. But real traditional PE firms kind of gone from 1,700, 1,500 to about 8,000. Assets under management, $800 billion to $6 trillion. And so I spent 21 years as a CEO building three national companies for nine different private equity firms. Can I ask you, what is a private equity for those that may not be familiar?

They may not have heard the term, but it's one more than a cent. Sure. Good question. If you think about mutual funds as a good proxy, because we all understand mutual funds. I can go on my Schwab account.

I can say, I want to buy so many shares or put so much money into this specific mutual fund. And I know that there's a fund manager, and there's someone who's aggregating money from a bunch of investors. And then they're buying a basket of stocks, and they're following some type of a flavor of prospectus that they've laid out. I'm going to be investing in growth companies or in real estate or whatever the case may be. And so we have instant liquidity.

These are publicly traded. We can buy them today. We can sell them tomorrow. We can hold them for 10 years. In the world of private equity, similarly, there is a private equity firm, which serves as the general partner or the fund manager, if you will.

They start a fund. The fund lasts for 10 years, typical. And they collect money from a bunch of investors. Minimum investment, typically around $5 million for a traditional PE firm and their fund. And so these are wealthy investors.

They're accredited investors. And the difference is there's no liquidity. You're tying your money up for 10 years, up to 10 years. And so whereas a mutual fund, I can trade in and out as I want. It's publicly traded.

These funds are investing in private companies, and there's not going to be any liquidity for an extended period of time, which is why the minimum investments are large and why it must be accredited investors. We don't want people who say, hey, I need my money back to, I'm getting divorced. I need my money back. Sorry, doesn't work that way. It can work that way with a mutual fund, not with a private equity fund.

So private equity firms then take that money. The largest class is called buyout funds. And so these are PE firms who want to buy companies. And for the first five years of the fund life, they're deploying capital. They're buying companies.

And they're improving them. And then selling them have to be kind of all wrapped up in a 10-year time frame, essentially what private equity is. Buyout funds is what we're talking about today. Funds that buy companies, they buy a controlling stake. They have about five years to deploy capital.

They then are working with those companies to grow them. They can do add-on acquisitions at any time. And then they're selling them. Typical hold period, about five years. So that's private equity.

So I spent 21 years as a CEO building companies for private equity. One of my adventures, I was a CEO. We bought 34 companies, put them together and got bigger, and then sold multiple times, multiple shareholders, different PE firms that owned me at different times. Another one I did, I bought 23 companies and put them together and got bigger, sold it. And so that was kind of my world for 21 years.

And I got bored. I'm about to turn 60. I'm gonna turn 60 in a few weeks. And I'm like, there's gotta be more to life than being a CEO and building companies and making people billions. So I've got $2.5 billion in exits as a CEO selling private equity, selling to private equity companies that I've built.

And it's been a fun ride. I've enjoyed it. But I started to get bored, like anything in life. I've been doing it too long. So I wanted a different challenge.

I'm 60. I got 10 years left in my working career, the way that I look at it. And I want to do something. I decided that I wanted to work with a bunch of small companies. I wanted to teach individual investors and companies how to use the same tools that I developed over a 20 plus year career and billions of dollars in exits.

And I wanted to show smaller business owners how to take advantage of these same tools that private equity firms are using to generate outsized returns for their shareholders. And so that led me to hang up my CEO cleats to start a consulting business. I spent more hours working today than I ever did as a CEO, which I didn't think was possible. But I'm having fun. I'm working with dozens of companies.

You're a client. You and I are having fun together working in the title industry. And for me, the difference has been instead of running one company and focusing on one adventure, I get to work with, I think it's my total count is around 67 companies I'm touching right now, the second. And I'm getting to help all of these people do the same kinds of things that I was doing as a PE guy on a smaller scale and having a lot of fun doing it. And so because I'm having fun, I don't mind the hours and I'm working long and hard.

I've written three number one bestselling books on the topic. I write columns for Forbes.com every month. And so I'm busy doing that. Still writing books. I'm teaching seminars globally and having fun.

That's my wheelhouse. That's my background. And hopefully that's awesome. Hey, Adam, for title professionals unfamiliar with M&A process, would you please explain the basics of merchant acquisitions and how that works and how valuation works? Yeah.

And if you don't mind, I'm going to show a slide and I'm going to show people how this works in a very brief period of time. So what we're looking at kind of looks like a pyramid. There is essentially $6 trillion of private capital inside this pyramid. So let me explain how it works. So on this side of the pyramid, I've got my 8,000 private equity firms.

Up at the top, I've got names you've heard of every day, Blackstone, KKR, Carlisle, Apollo, the big boys of the industry. And their typical fund size is 10 to 30 billion in size. And then I got 8,000 firms all the way up and down and down at the bottom, I've got firms, some small PE firms might have $80 million or $100 million type fund. And so I've got big firms with big funds, small firms with small funds. And they all do the same exact thing.

And this is critical to understand because I'm going to teach you how to manipulate this capital stack to your advantage. So I've got 8,000 firms, they're all doing the same things. What are those things? They all have a 10-year fund. They have five years to deploy capital, could be as long as six, you know, that's built into their charter.

They all want to invest about 6% to 8% of. And so I've got big firms with big funds, small firms with small funds. And they all do the same exact thing. And this is critical to understand because I'm gonna teach you how to manipulate this capital stack to your advantage. So I've got 8,000 firms, they're all doing the same things.

What are those things? They all have a 10-year fund. They have five years to deploy capital, could be as long as six, you know, that's built into their charter. They all wanna invest about 6% to 8% of their fund into any one company. And they don't wanna invest more than about 12% of their fund in any one company for diversification rules that they build into their own fund perspectives.

And so they're all looking to invest. So what that sets up is I've got a big firm with big funds, they can't buy small companies. They wanna put 6% to 8% of their money in one fund and the fund's 30 billion, they gotta buy something big. And if they were buying small companies, it would take them 1,000 years to put their money to work and they only have five or six years to put that money to work. And they have to return the money in 10 years.

So they have to be wrapped up and done within a 10-year period from the time they take investors' money. And so as a result of that, what happens naturally is big firms buy big companies, small firms buy small companies. Makes sense, right? Pretty common sense. Okay, so what that's created is, I call it five different swim lanes or levels in the private equity pyramid.

And so I've got a swim lane, let's use this one for example, 15 to 50 million. I've got a bunch of people circling because 15 million in EBITDA is the typical size that they buy at based on their fund size. And so I've got a bunch of buyers swimming around down here at around 15 million. They're looking for stuff to buy. And then in a five-year period, they can generally get it to about 50 million and then they have to return it.

They have to sell it. They have to return the money to shareholders. They're running out of runway. They have to liquidate the holdings of the fund. And so these are private companies.

The only way to do that is to sell the company. And then some other group of PE firms that have bigger funds, they swoop in, they buy stuff around 50. They go up to about 100 million. People buy at 100, go to 200 and so forth. And so this is very regimented activity, very disciplined capital.

Because right now today, there's over a trillion dollars in committed capital looking for stuff to buy inside this pyramid. People who used to buy at like 15, there's not enough to buy and there's too many sharks circling and the prices being paid are astronomically high. So they start looking down a little bit. And so the new 15 is about 10 million. Some sharks have said, I'm peeling off from the crowd.

Let's go down just a little bit and see if we can find good companies that are coming up to the size we wanna buy at. And so we're all buying a little bit smaller right now. But it's very disciplined capital. Now let's apply a different layer. Here's a layer.

So in the bottom two runs of the PE pyramid, there are 34 million small companies in the United States, just in our country. Globally, there's hundreds of millions of small companies in the bottom two layers of this pyramid. Now, if you go to like our government statistics and Department of Labor, et cetera, it's like they define a small company as 500 employees or less. So you could be a pretty big company and still be in the bottom two runs of this pyramid, you'd still be classified as a small company. And so you've got literally 34 million companies down here.

But at the top of the pyramid, there's only 3,000 companies globally that have a billion dollars in revenue. So I've got 34 million small just in the US here, and very quickly, companies as they get bigger become rare, and there's only 3,000 on the planet with a billion in revenue. And so as a result of that, there's this thing that's out there that's called arbitrage. It's naturally occurring. It's occurring because it's down at the bottom of the pyramid.

There aren't enough buyers on the planet to buy all those companies, from retiring baby boomers or people who are deciding it's time to cash in my chips. And so because there's so many small companies, the multiples they pay, they sell for tend to be small. Now this tab, I call it a patch. It's like a generic Velcro patch. I can pull this tab off and put it in a shoebox.

And I can pull up a shoebox, out of my shoebox, a patch that works for title companies. And I can slap it up here and put it on there and say, you know, there's gonna be a range. Small title companies will trade for a lot lower numbers than big title companies will trade for. It's because of this phenomenon where I've got disciplined capital that's in a swim lane looking for stuff to buy at a certain size. And as I climb the pyramid, there's fewer and fewer companies that are big that I can actually buy.

And so I pay more for them. And so if I think about the companies that I built, my last example, I bought 23 companies and put them together. I paid on average five times for each of those 23 companies. I put them together, as I climbed the pyramid, I'm now up here, I sell the company for 14 times. And so for every dollar of earnings, that's what EBITDA is, earnings before, you know, I buy stuff or pay taxes and depreciation amortization.

But at 5X, as I pay $5 for a dollar of EBITDA, up here, I'm selling it for 14, which means as a bigger company, I'm making $9 of profit for every dollar I bought and paid $5 for. And so this phenomenon is private equity's secret weapon. And Mo, this is something that we can take advantage of as small business owners, even in our industry, that we're talking about here, which is title companies. I can collect and put together a bunch of small title companies, good title companies. I only buy good companies owned by good people that fit my culture, that fit my way of thinking.

So I buy great companies run by good people and I pay low prices because that's what small title companies sell for, is a small number. And I put them together, I collect them, we get bigger as a collective group of people because the people that sell the company, I teach them, don't sell 100% of your company, sell a portion of your company, but keep some money invested so that you can take advantage of this thing called arbitrage. So Mo, if you went out and put together 23 small title companies, like I put together 23 HVAC companies in my last adventure, you would get bigger, you'd climb the pyramid. And if you decided to find liquidity and decided to sell it to a PE firm, who's your likely buyer or another big, large strategic title company that's out there, then you're gonna sell it for a higher price because it's bigger, because it's become rare. And so this is how private equity generates the lion's share of its returns.

Very powerful. Or its shareholders. And it's not a secret. I write books about how to do this. And it's like, I work with people like you to teach them how to do this.

And hey, we don't have to be a big PE firm to do this. We can do this as small companies and group ourselves together and become a band of brothers and sisters who are seeking to climb the pyramid and make more money. Thank you, Adam. That's very powerful. It's great insight on a private equity world and how really the big boys play and how they use leverage and arbitrage to double, triple their money.

I just read a story Bain put out. So if you do a Google search, you can find it. But Bain said, yeah, Bain Capital, serial acquirers generate three times the value creation than companies that don't do M&A. Three times the shareholder returns for companies that are aggressive and active in the world of M&A. Buying companies, collecting them, putting them together.

So how do private equities value companies? And should the title professionals, title owners do to maximize the value of their company? So it's not about revenue, people. It's about earnings. It's about earnings.

We have to run good companies that generate cashflow. The reason for this is that when private equity comes knocking on your door, they typically are going to use leverage and not equity. When they buy a platform company, they typically wanna do about 50%. What's a platform company? So a platform company is, when I bought my last 23 companies, I didn't just buy 23 and put them together.

First, there was a platform company that was purchased. This serves as the platform or the base that I'm then gonna use to buy other companies and put them into and on top of. And so like in our case, Mo, your company is the platform. You're the platform. You have the back office, the infrastructure, the systems, the processes that are dialed in.

And as you're buying other title companies, you're now aggregating them on top of the platform. So when private equity comes calling, if it's going to be a platform investment, typically they'll pay about 50% equity and about 50% debt. That would be the ideal mixture. And people think, you know, that's a lot of leverage. Well, think of it if you bought a house.

Since we're title companies, if I bought a house and I had a 50% down payment, I'd feel pretty good as a consumer. Hey, I got 50% equity in my house. I feel pretty good. I've got more equity than most Americans have in their home for sure. And so they tend to buy a platform using equity and debt.

But when they make add-on acquisitions, they tend to use leverage or debt. And so in order for the math to work, we're gonna use the cashflow of the business to service the debt that's required to buy the business. So when I bought those 23 add-on companies that I added on top of my platform that we bought with 50% equity, 50% debt, I bought 23 companies without one penny of equity. I used 100% bank debt to buy those 23 companies and put them on top. Now, because I was paying five times, the cashflow in the businesses I was buying was sufficient to service the debt long enough for me to build the company.

to buy the business. So when I bought those 23 add-on companies that I added on top of my platform that we bought with 50% equity 50% debt, I bought 23 companies without one penny of equity. I used 100% bank debt to buy those 23 companies and put them on top. Now because I was paying five times, the cash flow in the businesses I was buying was sufficient to service the debt long enough for me to build the company, also grow organically, also improve margins, build a great culture. I got to do all those other basics.

You know it can't just be a one-trick pony that's an M&A adventure only. We had to build a good company that takes care of our clients and our customers and grows organically and it does other things too. But you know when I put all these companies together, I need the cash flow of the companies I'm buying in order to make the math work. And so I would say if I'm a title company my focus should be on building a great company. It should be making sure that I am servicing my clients, doing a great job.

I'm growing organically. Ideally I want to be growing strong organically. I want to also be potentially expanding my market presence you know and growing into new markets. But I have to be really focused on the financial fundamentals. If I'm losing money, there's no cash flow.

And if there's no cash flow, people who buy using leverage can't leverage. You know there's not enough there there. So I think focusing on running a good business is an important aspect. And so if I'm a small title company banding together with other title companies you're doing a project with you, potentially I can become more profitable by doing this because I'm shedding a lot of my back office expense because I could leverage your platform. That's your synergy that you bring to the table.

And now when I buy 23 companies I don't need 23 people answering phones and I don't need 23 people in accounting that are doing the same work and I don't need 23 HR leaders and you know all this other synergies that we gain we create a more profitable empire. Those are some of the benefits of doing this. But if I'm a title company I want to run fundamentally I need to be running a good business and I need to be growing and I need to be delighting clients and customers and I have to have a good reputation in the marketplace. If I'm starting to do that I'll call it I'm cooking with gas. I'm now gonna start building a successful company you know so I got to get the fundamentals right.

I have to learn how to run a good title company. As I'm doing that now I start growing it. Now opportunities will become available. I'll become attractive to someone like you who has a platform who's buying add-on acquisitions which is buying smaller companies to add together to put on top of your larger company. Or if I'm a PE firm and you're big enough you've gotten to these different levels of the pyramid now private equity starts looking at you and saying hey that company could be my platform.

So right now you're independent. If you put together 10 title companies and build a bigger company for yourself then you become attractive to a PE firm as a platform. I'm now big enough. I'm successful enough. I've got the right trajectory the right story.

I can now become a platform for a larger PE firm who's now gonna accelerate my growth by helping me manage capital and helping provide the debt and the equity and the things that I need so that I can continue to buy companies continue to grow organically continue to expand into new markets and do all those things that I need to do to grow my business. And I know as an owner that if I'm owned by private equity as I just described their fund lasts for 10 years. They have to invest the capital in the first five to six. The average hold period is five and that means that if they buy me as a platform I'm there running it building it acquiring companies. I'm a shareholder in it.

I'm gonna get upside and in five years they're gonna have to sell it because they got to return their money back to their investors and for me that's another liquidity event. And so one of the mistakes I think that business owners make is they think of exiting their business as a one-and-done event and they think that hey look I sell my business I get a wheelbarrow full of gold I ride off into the sunset and that's a really short-sighted way of thinking about it. I like to tell people that selling your business for the first time is merely a rest stop on the wealth creation highway. My personal record is selling the same company five times in 13 years and four months. It's like and so as PE guys as we're building it we're buying stuff we're climbing the pyramid they're generating their returns for shareholders and they're like hey time to ring the bell I got a good deal yeah that's I built a great company I'm out next person comes in and buys it I take the money I made and I give it to my shareholders my investors you know in the PE fund and I say thank you very much and because we are also riding and holding on to their coattails we're getting paydays too.

And so I'll tell you when you know a private equity investment goes well everybody smiles private equity is very generous. To piggyback off what we just said it's a one of your favorite lines that why sell once we can sell twice. Elaborate a little more on how that works. Yeah. With a private equity same way how they do it like you sell 70% 60 70 maybe 80% yeah.

I want to share my screen again here I want to show you a couple more slides that we can use to talk about this. So if you're an owner of a title company out there and you're thinking why should I consider selling my business you know why should I do this you know I'm oh I'm building a big title company why should I as a small title company sell them out. Well number one is diversification of risk and so we as entrepreneurs tend to have too much of our net worth tied up in this illiquid thing known as our company. It's just a natural we're building a company it's got value and that value is tied up and it's not liquid and so I can't get that value out. I wrote an article for Forbes last year and I created this thing I call the rule of 130 but if you want to Google it's when should I sell my company Adam Coffee Forbes you know and you'll pull up the article and I created this law of 130.

Take your age as a two-digit number and then add to that the percent of your net worth that's tied up in this illiquid thing known as your company. If you add those two two-digit numbers together and it equals more than 130 then it's probably time for you to think about de-risking you know so if I'm 50 years old and I've got 80% of my worth tied up in this company that equals 130 it's probably time for me to start thinking about getting some chips off the table and so if I think about working with someone like you I sell the company but I don't get out I don't stop I make a rollover investment why sell once when you can sell twice and so here's how it works for every dollar that I sell my business for I roll 30 cents forward I take 70 cents home I then have to pay some taxes yeah we all have to pay taxes you know or I create a charitable remainder trust or I do some kind of funky structure in order to try to limit that tax I hurry up and move from California to Texas which has got a zero percent you know income you know capital gains tax and income tax and so I do what I need to do but I get to invest that money elsewhere and I now have a different liquidity profile I now have gotten a 70% of my value out of my company and extracted it and invested it elsewhere and so I roll 30 cents forward I'm hoping to get some kind of a good return on that next bite of the Apple my career batting average is better than a four times multiple of invested capital which means for all those 30 cents as I'm rolling forward in my typical company I'm gonna get a four times multiple or a four times return 30 cents becomes a dollar 20 so let me give you a live example I told you my last platform I bought 23 companies first company I bought we're gonna call him John Doe it's not his real name but he laughs every time I tell this story I tell his story so John sold me his company for 16.4 million and he took 12 million home and he rolled 4.4 million forward he kind of followed my formula my math mind you this was a guy who would have said if you'd have given me all 16.4 I would have taken it you know I didn't have any faith that I'd make money you know on that rollover but I was just hoping to get it back someday but I wouldn't buy his company unless he rolled forward because I wanted him aligned with me wanted him to help me continue to retain his clients wanted him to stay active in the business and so I made a rollover so he rolls over 14.4 well three years later I had bought seven more companies and I'd gotten arbitrage on all those I got bigger I climbed that PE pyramid I showed you stuff I was buying for five times now sells for 14 times it was a four times multiple of invested capital which means the 4.4 million that he rolled forward 27 months later turned into 17.6 million and so the math he sells me his company for 16.4 I don't double count the rollover because that's already his money so I subtract it and then I add the second bite of the apple second bite of the apple bigger than the first bite of the apple he's now gotten 29.6 million in three years less than three years on a company that he originally was happy selling for 16.4 that's the power of rollover and when I build a spreadsheet you know for entrepreneurs and I say okay what's your company's current size revenue earnings what's the growth rate how big will it be in five years how big will it be in ten years what is the value it would sell for at those two points that's one path that you could pay let's look at another path let's say you sell the mo today and so I get some money and I take 70 cents and I take it home and I put 30% to roll it forward mo goes out and we buy together another eight or nine title companies put them together we've gotten bigger we've climbed the pyramid how big is that What's your company's current size, revenue earnings? What's the growth rate? How big will it be in five years? How big will it be in 10 years?

What is the value it would sell for at those two points? That's one path that you could take. Let's look at another path. Let's say you sell to Moe today. And so I get some money and I take 70 cents and I take it home and I put 30% to roll it forward.

Moe goes out and we buy together another eight or nine title companies, put them together. We've gotten bigger, we've climbed the pyramid. How big is that company now? What is the multiple it trades for? And what's the value?

Now I'm not done yet, don't have to be done. I can do it again. And so I take 70 cents home a second time, invest it elsewhere. I take 30 cents, roll it forward. And then I go buy 10, 15 more.

You know, my last company in the first hold period, I bought eight companies total in three years. Then I bought 15 companies in two years. And so as you get better at M&A, it starts accelerating. As you become more of a machine, you're buying more stuff. And when you've got an unlimited checkbook with a PE partner behind you, you've got the ability to really move fast.

And so I'm climbing the pyramid, arbitrage is the vehicle that's generating the returns. But I take the original payday plus the investment and the value I got from that. And I now add it to the second payday after Moe's bought eight, nine more title companies. And then the third payday plus the investment there, plus the original investment, the third bite of the apple. And it's like within a 10-year period.

I have never yet in my lifetime built a spreadsheet like that where the seller makes more money staying alone and being independent than they do putting themselves into the ring with a bunch of other companies and participating in this game, this arbitrage game, which is the primary way PE makes their money. I call that a smart money. Well, you know what? It's like, hey, I'm not God's gift to anything. You know, certainly wasn't the best CEO in the world.

I learned by making mistakes. I wrote my books to help you eliminate making those same mistakes. And over 20 years of doing something, hey, you learned something. I bet you the first day you started a title company, you didn't know as much as you know today. Absolutely.

We learn through repetition. We learn through making mistakes. Matter of fact, I'll tell you in life, I learned more from my mistakes than I do from my victories. Absolutely, school of hard knocks, as they say. Yes.

It's the best school. So what steps should title companies take to prepare for potential acquisition and what are some common pitfalls we should avoid? So we should know what the heck our companies are worth before we think about selling them. We need to get our financial house in order. We gotta clean up the books.

If we need our books to be accurate and we need that, you know, so it's the first thing buyers gonna ask us foremost, they're gonna say, hey, are you interested? Yes, I'm interested. Great. Happy to sign an NDA, but once we do, I want three years worth of financial statements. I want three years worth of your balance sheets.

If you're using accrual-based accounting, I'm gonna want three years of your statements of cashflow and I'm gonna want potentially even, I might ask for tax returns. I'm gonna want three tax returns on this business. And if it's an LLC and it's a flow through, and then I'm gonna want to see your Schedule C, you know, relating to this business. And so I'm gonna need to have clean books. And so as an entrepreneur, if I don't have my books reviewed or looked at by anybody and I think I'm doing it right, but no one's ever looked, it's like, it's time to clean up all your bad habits, get your books in order.

And then what's the story? I'm gonna look at three years worth of, you know, if I'm buying your company, I'm gonna look at three years worth of data because I'm looking for trends. Is this business growing? Is it flat or is it declining? And if I see it comping down, red flag.

If I see it flat, it's not a growth company, I'm gonna pay less for it. And if it's a growth company, it's valuable to me. And so I'm looking at what are the dynamics of this company, but I'm gonna value it based on the last 12 months. I'm looking for trends over three years, but I'm valuing based on 12 months. I need clean financials to do analysis.

These financials as reported, when we're an entrepreneur, our goal and objective is we don't wanna pay taxes. So we run a bunch of expenses through our business. And I'm not saying stop doing that because your goal is not to pay taxes when you own the business. But if you're gonna sell a business to me, you better identify all of those, I'll call them expenses that are questionable or expenses that don't go forward. You know, my wife, I'm giving her a hundred grand a year in salary, but she spends two hours a month in my company, but I'm paying her or I got an airplane.

I pay for my airplane because I do fly for business. Every time I go on vacation, I talk to a client or do something. And so I have my plane expense running through there. We have to figure out what those adjustments are to normalize your books. So I've got, here's my as reported clean books.

Here are the adjustments that I make because these are lifestyle expenses I've got buried in the business. And so this is the adjusted earnings that I've got to sell. We should also get educated really around understanding what title companies of different sizes sell for. And there are tools out there that we can use. I've showed you the tools for title companies.

And there's a repository every time a company is sold, people who are involved in those transactions report numbers on a no name basis. So that other brokers and other bankers and people can understand what's the kind of market value for a type of a private company in a given industry. And so we should understand, we should not hand a bunch of raw QuickBooks files or a shoebox full of stuff to a potential buyer and wonder what kind of price they're gonna come back with. Just like a house. I should know what my houses were before I sell it.

Absolutely. You'd be amazed how many times conversations stall talking to potential partners when asked about financials. They either don't have their act together or they see the numbers for the first time. They don't like what they see, they're embarrassed to share. Before I lose it, let me go off on a little bit of a tangent.

So something else that you have to do is you have to be able to make your business an ongoing concern. It can't be a lifestyle business where if you walk out the door. So here's a question to ask. If I leave the building for 30 days and I don't check in, did my company earn any money? Does it continue to exist as an ongoing concern?

Or if I walk out the door, the revenue walks out the door with me and it stops. Because if I think I'm gonna sell my business and walk away and that business isn't capable of continuing to generate revenue after my departure, I've got a problem. It's not a sellable business. If I'm a one person title shop and I've got one or two people working in the back office helping me and I wanna retire, I'm limited on who I can sell to because if I leave, so does the revenue production of my office. But if I join with 10 other small shops and put them together, now I have a practice and I have multiple people and multiple agents and I've got, someone can retire because the others can assume the book and continue to prologate it into the future.

And so we have to think about what's our succession story. Here's a scary statistic. 80% of people who would like to sell their business cannot find a buyer and they fail to sell their business and they retire and turn the lights off and the business just ceases to exist because the business doesn't go on without them. And so sometimes if I'm thinking about it, another common mistake that people make, I'm assuming title companies would make as well, and that is as I get older, I recognize that there's risk. I recognize that.

I know that the rule of 130 exists. Somewhere down the road I wanna sell my business and so I become risk averse because I've got so much of my money tied up in the business of my net worth, I stop making good business decisions. I stop being aggressive about growing and making investments. What happens is my performance, I was a growth company when I was a young person and as I'm getting older now, I'm getting conservative, I stop investing and now my growth starts to fall off. And since my company is sold as a multiple of earnings and my trends over time, I'm actually hurting the value of my business by not being aggressive.

And so I'm actually, it's a self-defeating prophecy. So it's like, I really have to think about what's the story? How is an investor gonna look at my company and what are they gonna see? What are they gonna like? What aren't they gonna like?

And how do I make it better so that it's more attractive to people? First of all, you'll be running a better business, making more money, but secondly, it'll be attractive to Mo or somebody else, a large strategic. And then now I've got, I'm cooking with gas, I got a company with value. Most of those hatches on the PE pyramid are in ranges. So a growth company is gonna trade for more than a stagnant company at a given size.

And a stagnant company is gonna trade more than a company that's in decline. That's gonna be a dog with fleas, that's gonna be a fixer-upper, that's gonna be a distressed asset buy. And so the multiple or the value I'm gonna get for my business is even at a given size is gonna be variable based upon how it's performing. Can you explain to our audience, especially the title company owners, how important to have bookkeeper, controller, or even CFO? They may come back, like, hey, I cannot afford to have a CFO, but CFO is fractional controller that can help you with the fraction of the cost.

But to kind of really make sure you have your- Well, let me tell you, you must have your books in order. And it's not as expensive as you may think, to be honest with you. I would think for as little as $500 a month, I could have a financial accountant, a CPA reviewing my books, a bookkeeping firm could be reviewing my books. If I'm on QuickBooks, I could have QuickBooks, they have a live bookkeeping service, they could be reviewing my books. Somebody needs to be reviewing the books, bottom line.

I'll tell you a real life story, just example, very quick. I recently was working with an entrepreneur to help them buy a company. As reported in QuickBooks, the company was showing when they hit the report button, they were showing about 2.5 million in net earnings. And so we ascribed a value to the company, or its size. a CPA reviewing my books, a bookkeeping firm could be reviewing my books.

You know, if I'm on QuickBooks, I could have QuickBooks, you know, they have a live bookkeeping service, they could be reviewing my books. Somebody needs to be reviewing the books, you know, bottom line. I'll tell you a real life story, just example, very quick. I recently was working with an entrepreneur to help them buy a company. As reported in QuickBooks, the company was showing when they hit the report button, they were showing about 2.5 million in net earnings.

And so we ascribed a value to the company, or its size in a given industry, let's say it's worth 10 million. So we say we're gonna pay 10 million for this company is four times, 2.5 million as reported. Sign a letter of intent, this is what we're willing to pay. The first thing we do in diligence is we go through the books. And we bring in our accountants to do what's called a quality of earnings.

You know, buy side quality of earnings. And in that buy side quality of earnings, I kid you not, 2.5 million in earnings that they were reporting actually was closer to about 500,000. And it wasn't malicious. It wasn't that they were trying to defraud us. They were not keeping clean books and they did not know how to keep clean books and no one was reviewing their books.

And they were wrong, they were just wrong. They were filled with mistakes. And so as a result, they were probably paying too much in taxes to begin with, TurboTax and QuickBooks. And now I have to go back and tell them, look, I was paying four times 2.5, but at half a million and 10 million, we're talking 20 times. That's not happening.

This company's now worth next to nothing because the percentage of earning based on the revenue is actually garbage. They were making common mistakes. You know, when you get a PPP loan, that's not income. When you get an ERC credit, that's not income. You know, that's not repeatable.

It's like basic mistakes like that. And when I'm talking to them, I'm taking their information that they're giving me at face value. Once I sign a letter of intent, my first goal and objective is I wanna do a quality of earnings review. And so I often tell sellers, before you sell, you should have a quality of earnings done, a sell side Q and B done. It's not that- What is a quality of earnings for those who don't know?

Yeah, so for those who don't know, so you've been running your business, you're on QuickBooks like millions of other people, and you're just entering stuff and you think it's right. You push report, hey, here's my revenue and my earnings, and I pay my taxes. But what an accounting firm does is they come in and they look at the books. They apply some forensic tools to those books. And they look at, okay, let's look at revenue.

Let's tie invoices to bank deposits. Let's tie certain expense categories to bank withdrawals. They'll start doing forensic accounting on all your books, and they'll start by just sampling. Let's look at one out of 10 invoices, and oops, I'm finding mistakes. I need to look at 20, 30%.

Oops, it's riddled with mistakes. Red flag, major problem. And do you want me to keep working or not? Because I'm paying a fee for all this work that's being done. And so I tell people, probably the most important thing is make sure I've got clean books.

Make sure I've got good fundamentals, a good growth story. I've got an ongoing concern. And I probably wanna get a sell-side Q of E done just so that I truly understand what are my earnings? What are my earnings? And there, think about it like selling that house.

I don't just put up a for sale sign and let someone tell me what it's worth. I look at cups, and I understand what it's worth based on my square footage, the square footage average price per neighborhood. I've got all these methodologies of valuing. Those same methodologies exist for valuing companies. And so I should know what my company's worth before I seek to sell it.

A lot of small companies, Mo, believe that they're worth a ton more than they actually are. I would say the problem sometimes I encounter it's a bigger company than average is asking for less than it's worth. That's an equally bad mistake. But a lot of times buyers just describe some kind of phantasmic value to their business. I'm running a little business.

I've got 300,000 in cashflow, and I think it's worth 10 times in net profit. I think it's worth 3 million. Sure, what the hell? It's worth 3 million. Mo walks in, looks at it and says, it's worth 600,000 or whatever.

And so we should be educated as sellers because buyers are educated. And if you don't know your value and you don't have clean books, then you're just asking for someone to say, what do you give me? We're talking about valuation and having that false value in a good owner's mind. In 2020 and 2021, we're nearly black swans or I don't know, through the moon kind of numbers for everybody. People are still stuck on those numbers.

What advice do you give out? So remember, I look at three years for a trend and I don't look at three years to ascribe value. I value based on the trailing 12 months because that's the business you have today. And so I'll give you a great example, runs parallel to title. I work in the trucking industry with some trucking companies.

The price to move freight in 2021 was astronomically high per pound or per container. And so trucking companies that were making $100 million in 2021, in 2023, now that freight has normalized, they're making 50, $60 million on the same number of containers because the price of freight has cratered. Well, they all say, I want you to take 21, my great year, 22, 23 and average. I want value for what I was in 2021. And I'm like, dude, that's not reality anymore.

Sorry, but that was an anomaly and it's a non-repeatable anomaly. And so you can sit around and wait to sell your company for that anomaly to occur again or for a market to rebound, markets go in cycles. But if we're on an up cycle and I see historically the freight prices have been high, now low, and now they're high again, I'm still gonna look at that and it's gonna temper what I pay and what I value for the company. So if you're trying to market time, just like people tell you in stocks, trying to time the market kills you. It's like companies trade for a range.

People look at economic cycles and how companies are impacted and they're making an adjustment in the multiples that they're paying based on that anyway. So if you're thinking that you're ever gonna get the value you think you were worth in 2021, I've got news for you, until we have another big ass pandemic, that anomaly is not repeating. And even if we did, my guess is we don't shut all our countries down again. I don't know about you, but I'm done with COVID. I had the shots and I still got it three freaking times.

So it's like, I'm done with COVID. I don't give a damn. There's a new strain I read this morning. Oh my God, there's a new strain. Well, the three old strains didn't kill me.

God wants me, knows where to find me, come get me. I'm not wearing a mask anymore. It's like done with face diapers, done with shots. I'm done with COVID. And so I think that when an anomaly occurs, a buyer that does research is well aware of that anomaly and they're not paying you for that anomaly.

It's really it's education. People, they want to sell and then all of a sudden they have this idea in their mind or somebody might talk to them three years ago, and they give them some ridiculous number which they passed on. They still have that number stuck in their head. They do. You should have sold.

Woulda, coulda, shoulda. So that's, yeah, it's unfortunate, but that's the reality. Personal quotes of yours. Personal quotes of mine. We've covered a few, you know, my classics.

Why sell once when you can sell twice? That's one. I can't fix stupid is another one that I like to say. It's like if I'm evaluating a company and the owner has an unrealistic expectation on what valuation is, I don't buy bad companies. I don't do fixer uppers and I don't buy companies and pay over market price.

I just don't. You're a disciplined buyer. You have to be because arbitrage is naturally occurring. I can't overpay, you know, or I ruin the arbitrage which is my upside in doing the deals and doing the things that I do. So it's like, we need to focus.

I only buy good companies. I pay fair market value and I do my best, you know, to let them continue with me as an investor, you know, but now not a majority shareholder. That's another thing too, Mo, I'll just say quickly is people say, I don't wanna be a minority investor. I control 100% and by God, I'm God's gift. And my little $5 million company, I'm God's gift.

Why build billion dollar companies? You know, I know a thing or two as well. And guess what? You can partner with me and you can be a minority shareholder and you can make money, it'll be okay. Just ask Jeff Bezos and Elon Musk, the two richest men on the planet who both own less than 13% of their respective companies.

And it's okay for them, it's okay for you too. So, I mean, colloquialisms or sayings, it's like, why sell once when you can sell twice? I think that's my biggest. The other one would be, look guys, selling your business is not the end of the road. It's the first rest stop on the wealth creation highway.

And so you think of selling your business at exit number one, I'm a guy who collects a bunch of businesses and then I go to exit two, three, four, five and I drive it down the highway to places you never dreamed were possible. Only now we're disclosing that it is possible that you can do this too. So besides three amazing books which I've had a pleasure of reading, what's your favorite book of all time or great book you're reading right now you wanna share with us? Well, so I'm a classics kinda guy. And so I'll say, if I think of books in general, this is an old book now, been around for over 20 years, but The Millionaire Next Door.

Well, it's a book that was very informative to me as a young man, up and coming executive. It's like, big hat, no cattle is what we call it here in Texas. So I'm all flash, but I don't have any substance. You know, it's like, learn what wealth is like, learn how wealthy people act, learn what the profile of success looks like so that you can emulate it. That's one book.

You know, Jim Collins and Good to Great is another classic. What he calls, you know, finding the flywheel effect, I call bending the growth curve. And it's really about how to find exponential growth. I think that was one of the classics that I enjoyed. It's like big hat no cattle is what we call it here in Texas.

I'm all flash, but I don't have any substance You know, it's like learn what wealth is like learn how wealthy people act learn what the profile of success looks like so that you can emulate it That's one book, you know, Jim Collins and good to great as another classic what he calls, you know Finding you know, the flywheel effect I call bending the growth curve and it's really about how to find exponential growth I think that was one of the classics that I enjoyed, you know There's a lot of small businesses out there that are reading like traction EOS things like that I do believe that regardless of what the system is Entrepreneurs should have some type of a continuous improvement system in place I don't use EOS a lot of my clients use you know, I get it. You know, it works We need something rather than absolutely so for a lot of entrepreneurs, you know EOS I ascribe to something that's called talent to value and value creation planning just a different methodology of trying to do the same thing I think those would be good examples of books. None of them, you know recent I'd like to tell you I read a bunch of books every day, but to be honest, I'm reading fiction, you know and so when I'm reading it's like I'm not consuming as much from a business perspective as I am just trying to De-stress and detox and break away and so I go for walks I do books on tape. And so if I want to know what's going on in my book, I have to go out and walk I've conditioned my audible use audible. I do I use audible.

All my books are available on audible and You're I know we get them into it in the end here You talk about your books and I've said a door tremendous and I'm gonna talk about them in reverse order Just like a Star Wars trilogy, you know They went episode four five six and then went back to one two, three My last book is called Empire Builder Empire Builder is my personal favorite and it's the first book that was I actually rewrote Based, you know to become an audible book. So that's how blind you by the way Yeah The book script is different than the written script because when I look at the charter graph Well, if I'm on an audio book, I can't look at the charter graph And so I have to describe things differently and so but Empire Builder is my personal favorite That's the road map on how to build an empire how to go from startup or existing small business to call it giant company What does that look like and that's the road map private equity playbook was my first book That one is about to come out again as my fourth book. It's been out now for over five years It was the number one bestseller yesterday, you know five years down the road that thing still hit number one and so I was asked to do a second edition and so a second edition of that books gonna come out later on this ball and And so that book is really subject matter. What is private equity? How does it work?

How do I work with it? I covered in very brief detail some of the aspects of private equity with you today But the book is really designed to educate a generation because when I do a seminar I kid you not I'll have smart business owners in the room I'll give a basic 10 question quiz on private equity and 90% of the room fails it miserably And so we want people to succeed. I want people to succeed It's the biggest source of capital in the world and it's the largest buyer of companies in the planet 50% of all companies and so you need to understand how it works truly and not just a name I hear and a bad story I see on TV once in a while with all the other crappy news and then the exit strategy playbook is like so empire builder I build an empire. I'm gonna sell it probably to private equity I damn well better learn about them and then the exit strategy playbook is how do I get maximum value for the company? I've now built I didn't write them in that order if I thought about it more logically I probably would have but you know So I would read book three first book one second book two, you know last and that would be how I order It's kind of like the Godfather trilogy You got a kind of slice it nice and put them back in chronological order But those are the books they're available on Amazon Audible or anywhere books are sold.

That was an amazing amazing insight I'm very grateful and thankful any last words for our audience. No get out there and do this Don't just dream about it. You know, there are in life There's dreamers or doers get off your butt and get in the game You can't win if you don't play the you know, they say you can't win the lotto if you don't buy a ticket Well, unless you're aggressively thinking about your exit and how you're gonna generate value for you and future generations your family You got to think about it. You got to get out there and do it Don't be a dreamer be a doer and if you're in the title industry you can band together and work with guys like Moe here who can help you accelerate that value creation and Build something special. So good luck to everybody out there who's listening.

God bless that I wish you prosperity and business and that's a wrap on today's journey with motion mill from the title agents podcasts Reminding you that mastering the art of innovation is key and the title industries fast-paced world If you're finding it tough to keep up with the changes and challenges Remember you're not alone. Our calendar is open for you. Find the link in the show notes and let's connect Make sure to hit subscribe to not miss out on strategies that elevate and insights that empower Together we'll navigate the future of the industry. I look forward to our next meeting in the upcoming episode Keep pushing keep innovating and see you in the next episode