Dan Martell - February 10, 2024


How to Buy Companies and Make Millions (Step-By-Step)


Episode Stats


Length

14 minutes

Words per minute

211.14107

Word count

3,055

Sentence count

151


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, I'm taking you behind the scenes of our strategy to buy 12 companies in 12 months. We're investing $100M in companies in 2024 and this is the exact strategy on how we'll do it. I'm literally bringing you behind-the-scenes, showing you the internal documents, the scorecard we use to evaluate businesses, the structure of our offer, and what we do in the first 100 days after we buy a company so that if you invest in companies, buy companies, you'll be able to follow our playbook to get incredible results.

Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 We're investing a hundred million dollars in 2024
00:00:02.400 and this is the exact strategy
00:00:04.760 on how we'll buy 12 companies in 12 months.
00:00:07.220 I'm literally bringing you behind the scenes,
00:00:09.500 showing you the internal documents,
00:00:11.520 the scorecard we use to evaluate businesses,
00:00:14.080 the structure of how we put together an offer,
00:00:16.420 what we do in the first hundred days
00:00:18.080 after we buy a company
00:00:19.200 so that if you invest in companies, buy companies,
00:00:21.460 you'll be able to follow our playbook
00:00:23.080 to get incredible results.
00:00:24.640 I've done this many, many other times.
00:00:26.160 I've never shared this before.
00:00:27.420 Here's the process we'll be using.
00:00:28.680 Number one is vehicle.
00:00:30.580 To get the vehicle right,
00:00:31.540 we need to understand the four investing vehicles.
00:00:33.820 The first one is angel investing.
00:00:36.520 This means that you have a lot of money
00:00:39.380 and you invest in companies to buy equity in those businesses.
00:00:43.000 I've done over 125 angel investments myself.
00:00:46.340 I really love this process because I get to coach
00:00:48.740 and advise great entrepreneurs building innovation.
00:00:51.820 But for what I'm doing with $100 million in capital,
00:00:54.360 this process is gonna take way too long.
00:00:56.420 The other option that I evaluated is private equity.
00:00:59.660 Private equity is buying companies,
00:01:02.580 usually with a roll-up strategy
00:01:04.780 so that you buy a company and create a platform around it,
00:01:08.640 meaning that if it's a real estate software company,
00:01:11.400 I buy one of them,
00:01:12.160 and then I might buy five or six or seven bolt-ons,
00:01:14.980 and that aggregated amount of companies is worth more
00:01:18.240 than I sell it to the next person.
00:01:19.820 The third option I evaluated is venture capital.
00:01:21.880 Venture capital works in the concept like an angel investor
00:01:24.420 where you pull investors' money,
00:01:26.580 typically called limited partners or LPs,
00:01:29.480 and then you have a fund and you find companies
00:01:32.060 that you wanna write bigger checks to.
00:01:34.420 The cool part about being a venture capitalist
00:01:36.300 is you get 2%, typically management fees,
00:01:39.140 for just managing the capital.
00:01:40.940 Like whether you get a return or not,
00:01:42.720 you get 2% of the total fund size.
00:01:44.700 So if it's $100 million, you get $2 million
00:01:47.100 just to manage that pool of capital
00:01:49.220 to invest in other companies.
00:01:50.520 Now, if you don't do well,
00:01:51.480 no other investors are gonna give you more money
00:01:53.460 to invest in more companies.
00:01:55.200 So each fund has to perform, okay?
00:01:57.580 I've already invested personally as a limited partner
00:01:59.840 in about five other venture capital funds.
00:02:02.600 The fourth option is holding company.
00:02:05.040 And a holding company is essentially the opportunity
00:02:08.120 to raise a bunch of capital and buy companies outright
00:02:11.260 without a thesis, without a structure.
00:02:14.080 So it gives you a lot more flexibility.
00:02:16.080 So these are the four options that we evaluated.
00:02:18.460 And for us, angel investing just felt too small and too slow.
00:02:22.300 Private equity had too many constraints
00:02:24.200 around the timing and the sequencing
00:02:25.980 and the structure of the deals
00:02:27.760 of the companies we wanted to buy.
00:02:29.460 Venture capital felt like a long time horizon.
00:02:32.300 Typically these funds are seven to 10 years
00:02:34.240 and you're on this continuous fundraising cycle.
00:02:37.660 So we decided to go with a holdco
00:02:40.080 because it gives us a lot more freedom.
00:02:42.060 There's no specific timeline.
00:02:43.320 It allows us to recycle the capital
00:02:45.160 and a holdco is the vehicle that we're using
00:02:48.300 to invest $100 million in the next year.
00:02:50.960 number two is alignment this is the alignment creator i use these three specific boxes to
00:02:57.120 ensure that every time i decide to make an investment i don't waste my money the first
00:03:01.280 thing is the market i remember back in the day i had a mentor of mine actually present me an
00:03:05.280 investment an opportunity to invest in a dating site now at the time i was already engaged i
00:03:10.000 wasn't looking at doing any investments i had my company that was growing and i should have stayed
00:03:14.720 focused on what i was doing because honestly i didn't know anything about dating nor did i
00:03:18.720 understand anything about investing or to have time to even look at the investment, but I trusted
00:03:23.160 my mentor. This company in the next nine months, not only did they burn through all the capital,
00:03:28.380 I eventually lost my whole investment. And that's when I realized for me, these three things are
00:03:33.680 required for me to say yes to move forward. Cause if not, it's just not a good fit. I look for
00:03:39.220 companies that are in industries that are boring. Why? Because I don't want to invest in a fast
00:03:46.360 growing, super disruptive market that might mean that my company that I buy becomes obsolete in
00:03:52.380 18 months because some new Y Combinator funded AI innovative business all of a sudden disrupts the
00:03:58.780 whole thing I'm in. So it sounds crazy, but when I buy companies, I want durable businesses that
00:04:03.800 have deep integrations in the markets they're in that other people find impressive because of the
00:04:09.280 market share they've gotten, but they're not necessarily easily disrupted because it's hard
00:04:13.460 for a customer to leave to another solution.
00:04:15.940 Number two is trust.
00:04:18.240 I'm always asking myself,
00:04:20.560 do I trust the people involved in this business?
00:04:24.340 Do I look at them in the eyes and go,
00:04:25.940 this is somebody that has ethics and character.
00:04:28.900 I always do background checks.
00:04:30.240 I'm always asking, I'm talking to their team.
00:04:32.800 I'm talking to their customers.
00:04:34.120 I'm talking to, they have investors.
00:04:35.960 I wanna know how do they act when times get tough
00:04:38.980 because that's gonna tell me how they're gonna act
00:04:40.760 as we move forward in this opportunity
00:04:42.680 for us to partner and collaborate together.
00:04:44.560 So trust is a big one.
00:04:45.540 And number three is value.
00:04:48.300 Do I feel like I can add value to the business?
00:04:52.900 If I buy a company, I'm looking for one to three things
00:04:56.080 where I feel they're unoptimized,
00:04:57.780 where I know better than anybody else.
00:04:59.560 It's why I only buy software companies
00:05:01.360 because I'm gonna look at a company and see clearly
00:05:03.440 where are the options for me to add value
00:05:05.700 with my background expertise
00:05:06.880 so I can take the revenue and the growth so far
00:05:09.040 and really amp it up.
00:05:10.540 So if I don't feel like I can add value,
00:05:12.240 I don't do the deal. So these are the three filters, the market, do I trust the team? And
00:05:16.680 can I create value that needs to be true for me to decide to move to the next step? Number three
00:05:20.840 is pipeline. You need to look at some deals. This is called the pipeline calculator. So it doesn't
00:05:26.600 matter if you want to buy one company or 10 companies or 12 companies like me, you need to
00:05:31.380 understand what are the activities that you start with that eventually over time go smaller and
00:05:35.600 smaller so that you finally end up with your number. Then we usually have to look at 900
00:05:40.540 companies as prospects. These are conversations, initial conversations. They get whittled down
00:05:45.660 into 300 snapshots that the team puts together. So we evaluate each one through the same lens.
00:05:51.700 And of those, maybe only a hundred offers ever get made to those companies. And just because,
00:05:57.000 you know, there's so many different emotions going on and details. And once we look under
00:06:00.300 the hood, we may only eventually end up with 10 companies. So what I want to walk you through is
00:06:05.800 the three areas when we're looking at pipeline that needs to be true for us to hit our numbers
00:06:11.020 at the end of the year. The first one is prospects. These are the companies that are in market that
00:06:17.600 are looking to sell. Now there could be thousands of these different opportunities, but what I'm
00:06:21.960 always looking for is the quality of the deal and make sure that I have enough of them so that I
00:06:27.220 hit my final number. I'm going to share with you how I do that in a second. The second area is
00:06:31.440 snapshot. Once I have the prospects, I've talked to them, then I want to put together a snapshot
00:06:35.880 of what the deal looks like. This is actually right here, what a snapshot deal looks like
00:06:42.000 when we're evaluating a company to purchase. These are the metrics. These are the source of the deal,
00:06:47.840 the reason for buying it. Do all of the numbers add up? I mean, there's a thousand reasons why
00:06:52.100 people sell their companies and the price is just one. So we look at all the different data points
00:06:56.920 to make sure that we have alignment
00:06:58.240 and what we're looking for.
00:06:59.640 The third is the offer.
00:07:01.540 Once we find companies that we like in the snapshot,
00:07:05.880 then we put together an offer that talks about the structure
00:07:08.660 so that everybody understands
00:07:10.200 what the deal is gonna look like.
00:07:11.880 Now, there's two other steps to get a great deal done.
00:07:14.860 And this is the letter of intent creator framework.
00:07:18.120 See, the end of the day, everybody wants one thing.
00:07:20.620 They want a signed deal.
00:07:22.860 Now, for us to do that,
00:07:24.080 we need to make sure that there's certain areas
00:07:25.860 covered in this LOI, letter of intent.
00:07:28.720 Because I've done deals in the past
00:07:29.940 where it wasn't clear that there was expectations
00:07:32.100 that maybe the seller was gonna hold back some capital
00:07:34.620 and help finance the deal,
00:07:36.020 or maybe that the terms of the deal
00:07:38.200 should have been structured a certain way
00:07:39.600 so that it was an asset sale,
00:07:40.700 they thought it was gonna be an equity sale.
00:07:42.140 But regardless, we wanna go through this process,
00:07:44.500 put everything down on a simple English-speaking
00:07:47.500 letter of intent so that everybody understands it,
00:07:49.500 so it gets everybody comfortable with moving forward.
00:07:51.720 So there's three key areas
00:07:52.660 that make a great letter of intent.
00:07:54.200 First one is a summary.
00:07:55.340 And this is usually the upper part of the document
00:07:58.960 that talks about the overview of the deal.
00:08:01.400 Is this gonna be an asset or an equity sale?
00:08:03.500 How much money is gonna be paid for the company
00:08:06.020 and how is it gonna get financed?
00:08:07.380 It's just high level summary of the deal.
00:08:09.400 The next one is the deal structure
00:08:10.920 because there could be different components
00:08:12.380 if they have investors or partners
00:08:14.520 or they wanna stay in the deal.
00:08:16.620 Some of them wanna own equity in the new entity
00:08:19.040 after you purchase it.
00:08:20.200 So this is everything from the timing of things
00:08:22.520 to the non-compete agreement.
00:08:23.780 is all aspects of the deal structure.
00:08:25.820 The final one is next steps.
00:08:27.280 Once we've got agreement on that,
00:08:28.400 we need to let people know what is the agenda,
00:08:30.440 what's the timeline of putting this deal together?
00:08:32.960 What are the meetings that are gonna happen?
00:08:34.400 What are the different steps?
00:08:35.420 How's the due diligence checklist and the timeline?
00:08:37.260 All this comes together with next steps.
00:08:38.820 If we have a clear summary,
00:08:39.980 the deal structure and the next steps,
00:08:41.260 then we have a very simple LOI
00:08:42.920 that gets the deal moving forward.
00:08:44.060 This is the due diligence checklist,
00:08:46.360 and it's all about getting the offer done.
00:08:49.220 See, there's four key areas that if you don't follow,
00:08:51.880 the whole thing will fall apart. I learned this the hard way. When I bought one of my first
00:08:56.420 companies, we were looking through the agreements that all the different employees had signed and
00:09:00.540 we realized there was missing a clause called the IP assignment agreement. And that means that there
00:09:05.300 were people working on the code base of the software that technically the company didn't
00:09:10.200 own the intellectual property of the code. All these contractors and employees, they own their
00:09:15.340 portion of the code they contributed. And without that IP assignment re-signed by every contractor
00:09:20.880 they ever touched the code over the last seven years,
00:09:23.220 the deal couldn't get done.
00:09:24.380 So there's four areas we have to look at
00:09:26.320 to make sure that we cover in due diligence
00:09:28.220 to actually get to the next step.
00:09:29.820 The first one is financials.
00:09:31.360 And unfortunately, this is one
00:09:33.000 where most companies looking to sell,
00:09:34.800 they don't have their numbers put together in place.
00:09:37.400 They sometimes come together when we're doing a data room
00:09:40.140 or if they're lucky enough to have a great CPA
00:09:42.540 that's working with the business
00:09:43.740 to put together all the different financial models
00:09:46.240 so that a buyer like me buying the company
00:09:48.420 can easily run the numbers, test different assumptions,
00:09:51.540 and ensure I have clarity
00:09:52.620 around how the business is functioning today.
00:09:54.820 Number two is the technology.
00:09:56.520 When I buy a software company,
00:09:58.100 one of the biggest risks is technical debt.
00:10:01.240 If the product was not built properly
00:10:03.440 with the right technology in a modern framework,
00:10:05.900 then what I ended up buying is a rat's nest of code
00:10:08.740 that the whole thing is buggy
00:10:10.540 and could just fall apart the next day
00:10:12.340 after I buy the company.
00:10:13.380 The third area is the team.
00:10:15.260 I wanna look at the current structure of the team,
00:10:18.140 how the compensation model is set up.
00:10:20.160 Some people outsource all their development
00:10:21.860 to different parts of the world
00:10:22.960 and there's no cohesion on the team and there's no leaders.
00:10:26.420 There might be a lot of people doing stuff,
00:10:27.980 but nobody owns anything.
00:10:29.080 If I buy the company and there's nobody that knows
00:10:30.620 how the whole thing works,
00:10:31.580 then I might get myself in trouble.
00:10:33.020 And then the fourth one is legal,
00:10:34.800 making sure that every contract is signed,
00:10:37.780 all the customer contracts, all the vendors,
00:10:40.340 like I said, the IP assignment agreements
00:10:42.580 with team members and subcontractors,
00:10:44.760 every legal document that's ever been produced
00:10:47.180 needs to be reviewed and ensure there's no clauses
00:10:49.460 that might cause us issues downstream.
00:10:51.600 The fifth step is build.
00:10:52.660 And this is my favorite step.
00:10:54.600 Once we've got the letter of intent signed,
00:10:57.160 we do the due diligence.
00:10:58.320 Now we take the company and we build,
00:11:00.460 and this is probably the most important
00:11:01.720 because we gotta get it to produce.
00:11:03.200 This is the first 100 days.
00:11:05.580 When I buy a company, the first 100 days
00:11:07.360 is where we try to increase the value of the business
00:11:10.480 as fast as possible.
00:11:11.740 I remember one of my clients, he was buying a business
00:11:14.340 and he hadn't mapped out any of the first 100 days.
00:11:17.100 So post acquisition, the new company and the whole team
00:11:19.520 comes over on board on their team
00:11:21.280 and they're like, what do you want us to do?
00:11:22.940 The challenge with that is that
00:11:24.040 if you have a bunch of people that don't know what to do
00:11:25.860 and they're leaderless
00:11:27.080 and you don't have a plan for the first 100 days,
00:11:29.420 then unfortunately the numbers can start to slide downwards.
00:11:32.120 And if you've gone out of your way
00:11:33.300 to buy this massive company,
00:11:34.620 you finance a deal and you're paying every month,
00:11:36.680 then it doesn't take a long time
00:11:38.160 for the whole thing to get upside down really quick.
00:11:40.360 So when you buy that company,
00:11:41.400 you want a plan to execute to get the revenue
00:11:44.260 and the production and the value as high as possible.
00:11:47.060 So everybody wants ROI, return on investment.
00:11:52.380 At the center of the first 100 days model,
00:11:54.420 we wanna focus on generating
00:11:55.920 as much value, profit, revenue as possible.
00:11:59.800 To do that right, we gotta focus on these three things.
00:12:02.100 First off is the people, okay?
00:12:04.120 We look at the team.
00:12:05.540 We gotta understand who's doing what.
00:12:07.540 What is the talent we're dealing with right now?
00:12:09.680 So we might wanna evaluate
00:12:10.640 and get everybody to do profile assessments.
00:12:12.200 Then we're gonna focus on the meeting rhythms.
00:12:14.260 for strategy and execution and make sure that everybody's got a scorecard that they understand
00:12:19.560 what's the one number that they're individually responsible for to move forward. Second is pricing,
00:12:26.400 probably one of the most important things you can do in your business. You know, there's this old
00:12:30.540 saying that says, if somebody knows your industry bought your business tomorrow, what's the first
00:12:34.860 thing they would change? And then the follow-up question that is why haven't you made that decision
00:12:38.740 yet? And for most companies, once they get bought, the first thing they're going to change is the
00:12:43.240 pricing because most people haven't updated their pricing in years and the truth is the whole world
00:12:47.920 and your product has changed. So we always look at opportunities to increase the expansion revenue
00:12:53.460 which means the ability to sell more things to our existing customers. We want to look at our
00:12:57.280 free cash flow to ensure that our pricing supports the ability to acquire more customers and also
00:13:01.760 what does the retention look like of our existing customers because if we're losing a bunch of
00:13:06.060 customers out the back door as we put them in then it doesn't allow us to stack revenue as fast as
00:13:10.700 possible. So those areas will get us the biggest ROI more than anything else we could do in the
00:13:15.380 business. And the third one is pipeline. Pipeline is overall production of the revenue. What is our
00:13:21.760 current volume for lead generation? Are we scoring those leads so we can be more efficient in our
00:13:26.580 activities? And how are those conversions of those leads into opportunities, into customers looking
00:13:31.880 today? We want to map that out in our CRM typically so that we can really focus on increasing what's
00:13:37.240 called our sales velocity to convert leads into dollars. Now, if we do those things, then we get
00:13:43.000 these three primary outcomes. Number one is we increase our margins. The higher the margins of
00:13:49.400 the business, the more we have to invest in the business. The second is consistency. What I love
00:13:54.420 about software is that it creates repeatable, predictable, what I like to call durable revenue,
00:14:01.300 consistency. And the final area of value we get is expansion. We have expansions on all levels.
00:14:07.320 We get expansion on the revenue side and we get expansion on the sales velocity side. When we
00:14:12.160 focus on these three areas, that's how we maximize the ROI in the companies that we buy to make sure
00:14:17.320 that we're building with the right focus. So that's how we'll be investing a hundred million
00:14:21.240 dollars in 2024. And if you want to learn the four CEO skills to get to 10 million a year,
00:14:26.560 click the link and I'll see you on the other side.