Dan Martell - February 10, 2024


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

Topics
holdco investment strategy value filters pipeline first 100 days
Hosted by
Dan Martell
Why You Should Hire A Coach Why I Got Sober

Episode Stats


Length

14 minutes

Words per minute

211.14

Word count

3,055

Sentence count

172


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).
Topics generated with Qwen2.5-3B-Instruct.
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
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.