How to Use Private Equity M&A to Increase Title Agency Value | Title Agents Podcast Ep67

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 TitleAge's podcast. I'm your host, Mo Shamil, CEO of Altec 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, and I thought it would only be fair to share this knowledge with you as a title professional. Welcome, Adam. Hey, Mo, how are you? It's good to see you.

Hello to all your listeners out there. It's 730 in the morning. It's a beautiful day here in Dallas, Texas. Let's do this. All right.

Let's start off. Give us a little background about your life, your history, from the Army to GE to M&A role. Sure. Yeah. Mo, I think for all of us, life is a set of experiences, and they're all additive.

Things that we've done through our careers, they help us arrive at the destination where we're at today. 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 as 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 Welch at GE.

I spent 10 years at GE in 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. 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. 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 is 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. Private equity isn't even on my radar screen, but I am chasing money and title. There were job opportunities coming my way, opportunity to go be a CEO for the first time. Didn't know about the private equity aspect.

I just kind of dumbed into it, if you will. Moved from 10 years of GE, up-and-coming executive, and became a CEO for the first time. 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. I think that in 2001 is the time period we're talking about.

It's roughly $800 billion in assets under management. Today, it's $6 trillion. 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 have gone from $1,700, $1,500, to about $8,000.

Assets under management, $800 billion to $6 trillion. I spent 21 years as a CEO building three national companies for nine different private equity firms. I bought 15 of those companies. Can I ask you a quick clarification question? What is a private equity for those that may not be familiar?

They may not have heard a term, but it's one more than a term. Sure, Don, 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 gonna 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 kind of 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, that's publicly traded.

These funds are investing in private companies and there's not gonna 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 wanna 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 timeframe. And so that's 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 of, 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 two and a half billion dollars 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 my total count is around 67 companies I'm touching right now this 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 a lot of professionals unfamiliar with M&A process, could you please explain the basics of version acquisitions and how that works and how valuation works? Yeah, and if you don't mind, I'm gonna show a slide and I'm gonna 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, KKI.

If you don't mind, I'm gonna show a slide and I'm gonna 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. This podcast is brought to you by.

Struggling to set appointments and generate leads? What if you had a team working behind the scenes to help you book more meetings and close more deals? At Alltech National Title, our dedicated inside sales team help you find your pipeline so you can focus on what you do best, building relationships and closing business. Why join us? One, built-in lead generation.

Our inside sales team actively sets appointments for you. Two, more time selling. Three, proven support system. Advanced tech, industry expertise, and marketing tools at your fingertips. And four, unlimited growth potential.

No red tape, just the resources to help you thrive. Ready to take your career to the next level? Visit alltechnationaltitle.com or DM us today to start the conversation. 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 funds into the capital stack.

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 prospectus. 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.

You know, 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, you know, 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?

You know, it's 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 an example, 15 to 50 million. I've got a bunch of people circling because 15 million, you know, 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.

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. So 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. You know, 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 that 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, you know, 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 climb 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, you know, earnings before, you know, I buy stuff or pay taxes and depreciation and amortization. You know, but at 5X, you know, 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, you know, in our industry, you know, 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, you know, that have a, you know, that fit my, you know, 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, you know, 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 know, 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. You know.

It's very powerful. Or its shareholders. And, you know, it's not a secret. You know, I write books about how to do this. And it's like, and 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, you know, 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. And it's a great insight on the private equity world and how really the big boys play and how they use leverage and arbitrage to double, triple their money.

You know what? I just read a story Bain put out, you know. So if you do a Google search, you can find it. But Bain says, yeah, Bain Capital, serial acquirers generate three times the- and have 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 and it's a great insight on the private equity world and how really the big boys play and how they use leverage and arbitrage to double, triple their money.

You know what, I just read a story Bain put out, so if you do a Google search you can find it, but Bain says, yeah Bain Capital, serial acquirers generate three times the value creation than companies that don't do M&A. This podcast is made possible by our sponsor. You have worked so hard to build your business, so why do 70 to 80% of businesses never sell? The truth is, most owners wait too long. They don't plan properly or they can't find the right partner.

At Alltech National Title, we help title company owners avoid these pitfalls, ensuring that you maximize value, protect your team and transition on your terms. Whether you're looking to grow, merge or sell, we'll help you craft a strategy that actually works. A good deal is one where everyone wins. Let's talk about how to make that happen for you. Visit alltechnationaltitle.com or DM us to start the conversation.

Alltech National Title, smart transitions built to last. Wow. 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 what should the title professionals, title owners do to maximize the value of the company?

So it's not about revenue people, it's about earnings. And 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 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, also grow organically, also improve margins, build a great culture. I gotta do all those other basics. It can't just be a one-trick pony that's an M&A adventure only. We gotta build a good company that takes care of our clients and our customers and grows organically and does other things too. But when I put all these companies together, I need the cashflow 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 wanna be growing strong organically. I wanna also be potentially expanding my market presence and growing into new markets. But I have to be really focused on the financial fundamentals.

If I'm losing money, there's no cashflow. And if there's no cashflow, people who buy using leverage can't leverage enough. 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, or 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 all these 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, 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. So I gotta get the fundamentals right. I have to learn how to run a good title company. And 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. As 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, I give it to my investors in the PE fund, and I say, thank you very much.

And because we are also riding and holding onto their coattails, we're getting paydays too. And so I'll tell you when a private equity investment goes well, everybody smiles, private equity is very generous with returns. To piggyback off what we just said, one of your favorite lines is that, why sell once when you can sell twice? Exactly. 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, so I'm gonna, I wanna share my screen again here. I wanna 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, why should I do this? I'm Mo, I'm building a big title company, why should I as a small title company sell to Mo? 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 wanna Google it, it's when should I sell. 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 wanna Google it, when should I sell my company, Adam Coffee, Forbes, 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. 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. 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 0% capital gains tax and income tax. 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 up 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 $1.20. 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. I didn't have any faith that I'd make money 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 him roll over. 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 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 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. 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 that have been participating in this game, this arbitrage game, which is the primary way PE makes their money. That's why I call that a smart money. Well, you know what, it's like, hey, I'm not God's gift to anything.

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. Yeah, absolutely.

We learn through repetition. We learn through making mistakes. Matter of fact, I'll tell you in life, I learn 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.

You know what, we need our books to be accurate, and we need that. So it's the first thing a buyer's gonna ask us for, Moe, is 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 ballot sheets.

If you're using accrual-based accounting, I'm gonna want three years of your statements of cash flow, 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, 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, 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. 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, and so I need clean financials to do analysis.

These financials, as reported, when we're an entrepreneur, our goal and objective is we don't want to 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. My wife, I'm giving her 100 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, and 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. I have my plane expense running through there. We have to figure out what those adjustments are to normalize your book.

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 house is worth before I sell it. Absolutely.

This podcast is proudly sponsored by Need extra hands without extra overhead? Meet Safi Virtual, your on-demand team of virtual assistants trained specifically for the title industry. Our VAs come with foundational knowledge of title insurance, ready to handle admin tasks, client communication, data entry, and more. So you can focus on closing deals, not paperwork. Scale smarter, work faster, and cut costs without sacrificing quality.

Visit safivirtual.com or DM us to find your perfect VA. Safi Virtual, expert support, tailored for title professionals. You'd be amazed how many times conversations stall talking for the potential partners when asked about financials. They either don't have their act together or when they look, they see the numbers for the first time, they don't like what they see, they're embarrassed to share. Yeah, so 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? Is it 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, and another common mistake that people make and 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'm stop being aggressive about growing and making investments. And 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 the bookkeeper, controller, or even the CFO?

And they may come back like, yeah, I cannot afford to have a CFO, but there are fractional CFOs, fractional controllers that can help you with the fraction of the cost. But to kind of really make sure you have your act in your books in order. 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, an 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 in a given industry, let's say it's worth 10 million. So we said, we're gonna pay 10 million for this company, it's four times. You know, 2.5 million as reported. Signed 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, you know, 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. You know, TurboTax, you know, 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, you know, and 10 million, you know, we're talking 20 times.

You know, that's not happening. You know, this company's now worth, you know, 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, stuff like that.

What is the 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 and 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. And 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. It's like, 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 want to 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 neighbor. important things, 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, average price per neighbor, 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. And a lot of small companies, Mo, believe that they're worth a ton more than they actually are. So 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 cash flow, and I think it's worth 10 times in net profit. And I think it's worth, I think it's worth 3 million. Sure, what the hell? It's worth 3 million.

Mo walks in, looks at it and says, dude, it's worth 600,000 or whatever. And so there's, we should be educated as sellers because buyers are educated. And you know what? 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? You know, what?

So, well, we touched it by valuation and having that false value, like an owner's mind. In 2020 and 2021, we're nearly black swans or I don't know, to the moon kind of numbers for everybody. People still suck on those numbers. What advice do you give out? So remember, you know, I look at three years for a trend.

Today's episode is sponsored by. Hey, you, title agents, stop wasting time digging for answers or waiting on an email or call back from your underwriter. With titleGPT.ai, you get instant, reliable answers to your title questions fast. No more delays, work smarter, close faster and keep deals moving. Try www.titleGPT.ai today.

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. You know, and so I'll give you a great example, runs parallel to title. I work in the trucking industry with some trucking companies. And the price to move freight in 2021 was astronomically high per container.

And so trucking companies that were making a hundred million dollars 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. You know, sorry, you know, 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, you know, 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, you know, 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, you know, that anomaly is not repeating. And even if we did, my guess is we don't shut all our countries down again. You know, I don't know about you, but I'm done with COVID. You know, I've, 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. All the three old strains didn't kill me. God wants me, knows where to find me, you know, come get me. I'm not wearing a mask anymore.

You know, it's like done with face diapers, you know, done with shots, I'm done with COVID. And, you know, and so I think that, you know, when an anomaly occurs, you know, a buyer that does research is well aware of that anomaly and they're not paying you for that anomaly. Yeah, yeah. It's really it's education. People are just like, hey, I want to sell.

And then all of a sudden they had this idea in their mind where somebody might not have talked to them three years ago, four, two years, and they gave them some ridiculous number which they passed on. They still have that number stuck in their head. They do. Like, well, we should have, we should have sold them. Woulda, coulda, shoulda, you know?

Yes. And so that's, yeah, it's unfortunate, but that's the reality. Yeah. What's a personal quote of yours, Eugene? Personal quotes of mine?

Yeah. You know, we've covered a few, you know, my classics. Why sell once when you can sell twice? You know, that's one. I can't fix stupid, you know, is another one that I like to say.

It's like, if I'm evaluating a company and, you know, the owner has an unrealistic expectation on what valuation is, I don't buy bad, you know, I don't pay bad, 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, I'm 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, you know, we need to focus on, 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. You know, well, I control 100% and by God, I'm God's gift. And my little $5 million company, I'm God's gift.

Well, I've built 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. Yeah.

And it's okay for them, it's okay for you too. So, you know, I mean, you know, colloquialisms or sayings, it's like, you know, why sell once when you can sell twice? I think that's my biggest. And then the other one, 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, you know, 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 your three amazing books, which I've had a pleasure of reading, what's a favorite book of all time or a great book you're reading right now you wanna share with us? Well, so I'm a classics kinda guy, you know, 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, you know, was a book that was very informative to me as a young man up and coming, you know, executive. It's like, you know, 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. You know, that's one book. You know, Jim Collins in Good to Great, you know, is another classic, you know, what he calls, you know, finding, you know, the flywheel effect, I call bending the growth curve. And, you know, 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, but a lot of my clients use EOS. Oh, we do.

You know, I get it. You know, it works. We need something rather than nothing. So for a lot of entrepreneurs, you know, EOS, I ascribe to something that's called talent to value and, you know, and value creation planning, just a different methodology of trying to do the same thing. And so, you know, I think those would be good examples of books, you know, 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 wanna know what's going on in my book, I have to go out and walk. Audible, do you use Audible?

good examples of books, none of them recent. I'd like to tell you I read a bunch of books every day, but to be honest, I'm reading fiction. 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 wanna know what's going on in my book, I have to go out and walk.

I've conditioned myself. Audible, do you use Audible? I do, I use Audible. All my books are available on Audible, and you know, starting now. I know we're coming to the end here.

Can you talk about your books? And I said I adore Tremendous, and great insight to the private world. 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 I actually rewrote based, you know, to become an Audible book. That's how I find 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's my personal favorite.

That's the roadmap 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 roadmap. 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's still at number one. And so I was asked to do a second edition. And so a second edition of that book's gonna come out later on this fall.

You know, 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 on the planet. They buy 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 gotta kind of slice it, dice it, and put them back in chronological order.

But, you know, those are the books. They're available on Amazon, Audible, or anywhere books are sold. That was an amazing, amazing insight, and 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, 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, you know, unless you're aggressively thinking about your exit and how you're gonna generate value for you and future generations of your family, you know, you gotta think about it, and you gotta get out there and do it.

Don't be a dreamer, be a doer. And, you know, if you're in the title industry, you know, you can band together and work with guys like Mo here, you know, who can help you accelerate that value creation and, you know, build something special. So good luck to everybody out there who's listening. God bless, and I wish you prosperity in business. And that's a wrap on today's journey with Mo Shamil from the Title Agents podcast, reminding you that mastering the art of innovation is key in the title industry's 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.