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Editor’s Note: Adam Coffey is chief executive of Brea-based Coolsys, America’s largest refrigeration and HVAC service company. Coffey aims to grow revenue at the company to $1 billion annually. He was previously chief executive of Masterplan and WASH Multifamily Laundry. He also advises and invests in private equity firms. The following are excerpts from his book published last week: “The Private Equity Playbook.”
Twenty years ago, a recruiter approached me about working as a president at a small company. I was earning a six-figure salary at General Electric Co. and living comfortably. I asked my mentor, “Is it better to stay at the company and be one of a thousand people like me in middle management? Or should I go [and] become president of my first, much smaller company?”
He responded that it’s far better to go and take the president role.
“Once a president, always a president. You’ll never be thought of again as anything other than a president,” he said.
He was right.
A six-figure employee in middle management in the Fortune 500 world can be a seven-figure employee in the middle market once you factor in base, bonus, stock incentives and investing alongside private equity.
A middle management executive may want to know if there is a bonus opportunity. In the private equity world, it’s the opposite. You’re hoping for the chance to write a check and invest in Class A shares.
A management team might invest 10% into a company and as many as 20 members of the management team get stock. Of that 10%, the chief executive could get 30% to 50%, the chief financial officer another 10% to 20% and the chief operating officer another 5% to 10%. The remainder is divided among vice presidents, directors and other key employees.
As a chief executive, I tend to take the lower percentage in the range to be able to offer more stock to the lower levels of the leadership team. I prefer that they participate in the incentive equity as it provides the motivation I’m looking for to go the extra mile.
Typically, the owner of a company looking to sell is focused only on price. He doesn’t look at the scoreboard, consider management styles or think about personality. Instead, he looks at selling his company as a one-time event. I hear them saying, “I don’t want stock if I’m not in control.”
This is not a wise position to take.
Any company I run is going to be sold every three to seven years. Why take one bite out of the apple when you can take two, three or more?
My personal record is five, seven-figure paydays in the same company over a 13-year period.
If you’re selling your company, you’ve interviewed the private equity firms, and they have studied you. Now you’re entering the due diligence stage, which may eventually feel like a proctology exam that never ends.
Before I arrived at CoolSys, I spent 30 days working two days a week as part of a discovery phase. I leveraged the information gathered across 80 different interviews and began to look for common themes or issues across different categories. Then I thought about causation and looked for what conclusions I could draw.
Before I even started at the company, I had written a 100-page strategic plan. I documented the underlying symptoms and causes, what changes were required and detailed my plan of attack.
I shared that plan with my staff during a two-day session and then boiled it down to a 90-minute presentation that I gave to the top 60 leaders in the company. From there, I created eight YouTube videos that I sent out to the entire company over an eight-week period.
Just as private equity wants to align incentives, I wanted to align every employee in the company to understand my vision for the future and to prepare them for the changes that were coming.
I’ve done this in every company I’ve had the privilege to lead.
Private equity wants to have alignment with their executives. You never want to be in a situation where something that’s bad for the executive is good for the private equity group. You want something good for both of you or bad for both of you.
Private equity firms earn their money by charging management fees to keep the lights on and then they charge carried interest of their limited partners, which is typically 20% of every dollar of profit generated on a company that they buy, grow and sell.
By nature of a 10-year limited partner agreement, they are going to be buying, improving, growing and then selling portfolio companies over a three- to seven-year time frame.
This is what makes private equity a lucrative career path for anyone involved. They get to ride the coattails of sophisticated investors and there will be a liquidity event or a sale every three to seven years.
This is how management generates wealth. What is better than selling your company once? Perhaps it’s getting the opportunity to sell the same company two or three times and participate in the value creation each time!