Expert Insights into Building an Empire through Strategic M&A Part 1

Simplifying business growth and private equity for everyone

When I think about my books, I think of Star Wars. Star Wars started with Episodes 4, 5, and 6, then went back to 1, 2, and 3. 

When people ask me what order they should read my books in, I tell them to start with my third book, Empire Builder. It’s my favorite because it’s the roadmap: how to find, buy, or build a business and grow it from zero to a billion dollars. It explains the journey at different stages.

The Private Equity Playbook is about who you’re likely going to sell your business to, and The Exit Strategy Playbook is about maximizing potential at exit. 

So the order is: start with Empire Builder—let’s build it. Then, move on to The Exit Strategy Playbook. Along the way, you need to learn about private equity, because there’s a better than 50% chance you’ll sell to a private equity firm.

Recently, I published the second edition of The Private Equity Playbook. The first edition was written five years ago, and the need for it still exists. 

When I teach a seminar with a thousand business owners in the room—successful, wealthy people who’ve heard of private equity—90% of them will fail a basic ten-question quiz on private equity. They just don’t understand it.

The first edition of the book was number one on Amazon this morning, even five years later. But I wanted to update it with expanded content, updated numbers, and new insights because my thinking continues to evolve. Writing these books has been great, and I really enjoy doing podcasts.

I’ve held every job a person can hold on an organizational chart. After the military, I started my career as a guy in a truck. I wasn’t a Harvard MBA with a gold spoon in my mouth—I clawed and scratched my way up the organizational chart. 

I out-hustled and outworked those born with silver spoons, and that hasn’t changed who I am as a person. People might see me as a CEO today, but on weekends, I’m in shorts, a t-shirt, and flip-flops, driving a pickup truck. My DNA hasn’t changed. 

The 58 companies I’ve bought were mostly founded by people with high school educations—HVAC companies, electrical contractors, plumbing companies. 

Good people who built great companies, but their level of sophistication and how they think is different. That’s my background—coming from that world. So I write in a way that reflects my own simple nature. It makes my books understandable for the masses. 

Some private equity guys once told me they used to give new associates a 1,700-page textbook before they found my book. Now, they give them The Private Equity Playbook. That textbook would leave anyone brain-dead by the time they finished it.

My superpower is taking complex concepts and writing them so the guy in the truck can understand them.

The framework for building a resilient and profitable business empire

If someone doesn’t own a business today and is starting from scratch, I guide them through an exercise. I tell them to take out a sheet of paper and make three columns. In the first column, write down your skills—what you’re good at. 

In the second column, list your passions—what you love doing and enjoy spending time on. In the third column, identify industries or companies that could benefit from your skills and align with your passions. 

The idea is, if you can wake up every day excited about what you’re doing, you’re far more likely to succeed and find fulfillment. From there, I apply a framework to those ideas. 

Let’s start with some statistics: there are 33 million small businesses in the U.S., but only 7% ever reach $1 million in revenue. Of those, only 4% grow to $10 million. On top of that, 65% of businesses won’t exist in 10 years, and only 40% are profitable. 

Why is success so elusive? In a strong economy, you can make money almost anywhere, but the real question is how a business will perform during tough times—bad economies, pandemics, wars, or other disruptions.

The framework I use begins with focusing on needs versus wants. Let’s say you and I are in my conference room, and it’s raining on our heads. Fixing the roof is a need. 

On the other hand, if I want a new sport coat for dinner tomorrow, that’s a want—discretionary. If I’m broke or unemployed, I’ll grab an old coat from my closet. 

Many businesses fail because they focus on wants, which customers can cut out during a downturn. I focus on needs-based businesses—those that customers can’t easily cancel, even in tough times.

Next, I look for businesses with recurring revenue, specifically contracted revenue, not project-based. 

For example, roofing is a profitable industry for private equity, but if you sell me a roof this month, you won’t sell me another next month—it’s a one-time transaction, and you constantly need new customers to break even.

Contrast that with pest control, landscaping, or payroll services. These businesses sign customers to recurring contracts. 

A pest control company, for instance, hits my credit card monthly. Quarterly, they might spray my house and upsell me on mosquito, termite, or other services. 

By the end of the year, they’re billing me for multiple services, and every new customer adds to their revenue rather than replacing old ones. This creates stable, recurring income for the entrepreneur. 

Another critical element is low capital expenditure and high free cash flow. Manufacturers or heavy construction companies need expensive plants, machinery, or trucks, which eats into cash flow. 

In contrast, a bookkeeping service has low overhead—just people, computers, and desks. High free cash flow is essential because it allows you to use the business’s cash flow to pay off the loan you took to buy it.

Finally, I target fragmented industries. If an industry has a lot of small players, there aren’t enough buyers to purchase them all, which keeps acquisition costs low. 

Take bookkeeping as an example—there are 1.8 million bookkeeping and accounting firms in the U.S., and the multiples of earnings to buy them are very low. 

When you combine all these factors—needs-based business, recurring revenue, low capital expenditure, high free cash flow, and fragmented industries—you set yourself up for success. Many entrepreneurs start businesses based purely on passion without applying science. 

But if you stack the deck in your favor with this framework, you dramatically improve your odds of joining the 7% that reach $1 million, the 4% that hit $10 million, and eventually building a profitable empire you can sell for a significant return.

It’s low capital expenditure overall, but I’d classify it as maintenance capital expenditure. Once you’ve created the platform and the product, the margins are very high. However, there is some high upfront capital expenditure. 

Not every business is perfect, and for your example, that’s the blemish—there’s a significant investment required to create the software platform. But once that initial investment is made, the profitability is outstanding. 

The business can become a free cash flow machine. So, while the upfront cost is higher than in some other models, the long-term returns more than make up for it.

The strategic role of software in scaling M&A operations

When I think about needs versus wants, it comes down to identifying your target customer. For your business, the target isn’t an individual or a very small company. You’re looking at small to medium-sized businesses, potentially private equity-backed companies that use M&A as an ongoing strategy—not just as a one-time event, but as a continuous tool for growth and expansion.

Take my last company as an example. Over five years, I acquired 23 companies—one in the first year, seven in the next two, and 15 in the final two years. 

That’s the type of customer you’re aiming for: someone who consistently uses M&A as a growth engine. These customers, because of their deal volume, won’t want to manage everything on spreadsheets and Word documents. 

They’ll need a platform—a kind of CRM for M&A deals and integrations. To them, having software like yours isn’t a luxury; it’s a necessity. Your platform enables teams to manage high deal flow efficiently. While a company buying one business may not need it, those continuously leveraging M&A will see it as critical. 

In industries like HVAC, for example, where there are tens of thousands of companies, businesses engaging in serial acquisitions will never stop using M&A. They’ll need a robust system to keep up with their growth.

On a broader scale, look at the software industry as a whole. Companies like Salesforce, Oracle, and Microsoft all started with niche solutions—CRM, finance, desktop computing—but expanded by acquiring other software companies to build comprehensive platforms. 

While your specific market may not appear fragmented, from a strategic standpoint, your business is highly attractive to potential buyers.

As M&A continues to grow, more private equity firms, portfolio companies, and strategics will look for software solutions to power their M&A operations. Massive amounts of capital are flowing into private equity, and M&A remains the key tool for deploying it. 

Over time, as your business proves its value, it will attract interest—not just from private equity firms but also from strategics like NetSuite, Dynamics, or Salesforce, who may see your product as a perfect bolt-on capability.

For your intended customers, your software is not a want—it’s a need, a recurring one. These clients will never stop doing M&A. 

The initial investment in engineering and development is a challenge for software companies, but that’s overcome by the high valuations paid for businesses like yours once they achieve proof of concept. 

The highly recurring revenue stream of software businesses drives those valuations, making them immensely attractive.

Building a scalable business through smart acquisitions

Here’s a guiding principle: I’d rather not buy a company I should have than buy one I shouldn’t have. Let’s break that down. You can either build a business from scratch or buy an existing one. Each approach has its pros and cons.

If you’re starting from scratch, you face all the risks of a startup. Can you find customers? Can you build a financially sustainable model? 

Meanwhile, we’re in the midst of the largest wealth transfer in history, as baby boomers—people like me, the youngest of whom just turned 60—are retiring and transitioning their businesses. 

If I buy a business versus build it, I’m buying something that’s already beat the odds—it has a track record, customers, and earnings. I can buy something proven and set myself up for success.

Through due diligence, you can identify opportunities and mitigate risks. With my framework, you can leverage the cash flow of the business to finance the purchase, setting yourself up for long-term success.

Time is the one thing we can’t buy. Careers are finite, and once you’ve figured out what you want to do, you need to act efficiently. Organic growth can be painfully slow. 

For instance, if you’re growing 10% annually and start with $1 million in revenue, it takes over seven years to double your revenue to $2 million, and 21 years to hit $8 million. 

At 60 years old, I’d have a walker and a drool bucket by the time I got there! If we want to build a big empire, we need to grow faster. The key to rapid growth is aiming for an annual growth rate closer to 30 percent.

With that growth rate, starting at $1 million, you could reach $190 million in revenue in 20 years. If both companies maintain 15% earnings, the slower-growing business might generate $1 million in EBITDA and sell for $5 million. 

In contrast, the faster-growing business could achieve $20 million in EBITDA and sell for hundreds of millions. The difference is staggering, and this highlights the importance of reverse engineering your journey to meet your desired destination.

If you’ve identified an industry, the next step is defining the perfect acquisition. Some call this the “buy box”; I call it the “avatar.” Create a profile of the ideal target. Who owns the business? How old are they? Where might they be reachable—social media, networking events, or other channels? 

For baby boomer owners, you’re unlikely to find them on TikTok or Instagram. Think about their needs—many are transitioning out of their businesses and may be interested in seller financing to generate steady income.

Beyond the owner, assess the business itself: revenue, earnings, customer base, verticals served, and other variables. Some companies will naturally be more attractive than others within the same industry. This detailed pre-work is essential before building a funnel or actively seeking targets.

When you do start looking, you’ll naturally check companies listed with brokers, but my best deals often come from owners who don’t realize they’re sellers when I first reach out. Once a seller engages a broker, they focus on price, driving it higher. 

I prefer partnering with good companies run by good people, offering them a transition that aligns with their needs. Whether they want to stay involved, exit entirely, or retain a minority stake, understanding and addressing their priorities helps me secure better deals than just bidding on broker-listed businesses.

The power of buy and build for exponential business growth

I consider myself a very disciplined buyer. I focus on acquiring good companies built by good people—not fixer-uppers. If I’m using a buy-and-build strategy, I can accelerate growth and scale quickly while naturally benefiting from valuation arbitrage or multiple expansion. Let me explain.

There are 34 million small companies in the U.S., but only a fraction are bought and sold due to limited buyers. Small companies sell for lower multiples of earnings because they’re abundant. 

As a company grows larger, it becomes rare, which increases its valuation. For example, there are only about 3,000 companies worldwide with over $1 billion in revenue. This scarcity creates value.

In my career, I’ve seen this play out firsthand. For instance, in the HVAC industry, I acquired 23 companies. On average, I paid five times EBITDA for these acquisitions. But when I sold the consolidated business, it fetched 14 times EBITDA.

For every dollar of earnings I purchased at five times, I sold it 14 times, generating $9 of arbitrage per dollar of earnings. This naturally occurring arbitrage drives substantial value creation.

Why focus on good companies? Because there’s no need to waste time and resources fixing bad ones when the market is so fragmented. I stick to fair market valuations—paying five times EBITDA for acquisitions—even when others might overpay. That discipline allows the arbitrage to do the heavy lifting.

Let’s break it down further. If I acquire 23 companies, each generating $2 million in EBITDA, I’m effectively purchasing $46 million in earnings at five times EBITDA, totaling $230 million. 

Using the business’s cash flow to service the debt, I can sell the consolidated company at 14 times EBITDA, or $644 million. After paying off the $230 million debt, shareholders walk away with $414 million. That’s the power of valuation arbitrage.

To execute this strategy, I ensure the entrepreneurs I partner with remain engaged. These are people who’ve never had a boss and are now financially secure after the sale. Getting them aligned and working toward the same goal is challenging enough. Adding broken companies into the mix would only complicate things.

If I’d relied solely on organic growth, it would’ve taken a lifetime to achieve the same results. Using buy-and-build, I achieved in five years what would’ve otherwise taken decades. This is why M&A is the number one tool private equity firms use to create shareholder value. 

Most mature companies in non-sexy industries can’t grow at 30-40% annually like some young software companies can. M&A becomes a necessity for accelerated growth, especially given the five-year investment horizons typical of private equity funds.

What’s more, this strategy isn’t limited to large firms. Entrepreneurs of smaller companies can use buy-and-build to create wealth too. For instance, say I buy four companies, each generating $1 million in EBITDA, at five times earnings—spending $20 million. 

By consolidating and achieving synergies, I increase EBITDA to $5 million. If I then sell at eight times EBITDA, the business is worth $40 million. That’s a $20 million profit in as little as 18 months. When you become proficient in this strategy, you can move quickly. 

In my last company, I acquired one company in year one, seven in the next two years, and 15 in the final two years. Tools like M&A software streamline the process, making it even more efficient.

Think of growth as baking a cake. To grow a company at 30% annually in earnings, I need three main ingredients: organic growth, margin improvement, and buy-and-build. 

Organic growth involves increasing prices, boosting volume, and expanding products or services. Margin improvement comes from leveraging scale—for instance, getting better prices on trucks or consolidating HR and accounting functions. Buy-and-build adds earnings through acquisitions while creating synergies.

Combining these three elements accelerates profit growth. Wall Street rewards growth, but it values diversified approaches. A company must demonstrate organic growth, improve margins during scaling, and execute M&A effectively. 

By mastering all three, you build a platform for growth that commands a high valuation from private equity firms looking for scalable opportunities. This approach ensures that when the time comes to exit, you’re not just a company—they see you as a platform for future growth.

Strategically structuring growth and valuation for maximum exit potential

When I think about growth levers, I consider three key areas: price, volume, and pivot. Price is about selling your products at a higher value. Volume is about selling more products to more customers. Pivot refers to strategically expanding your offerings, which is what you're describing—a strategic pivot.

I think about the customer I’ve worked hard to acquire and ask, "What else can I sell to this client? What else do they need?" Often, I look at what they’re buying before and after using my product. This helps identify new capabilities to add, so I can increase wallet share with existing customers.

Hypothetically, let’s say your software manages the M&A process. Does it include tools like a Gantt chart integration template, a due diligence checklist, or cash flow modeling? What additional features would simplify your customers’ workflows? 

For example, a company like Grata provides tools for finding acquisition targets—it’s like a specialized phone book for M&A. Your software could manage the M&A process and integrate with tools like Grata or valuation resources like DealStats to provide a seamless experience.

I’d think about the entire M&A journey: what steps are involved, which ones your software addresses, and which ones it doesn’t. Companies like Salesforce and NetSuite are great examples of this approach. 

Salesforce, for instance, started as a CRM but has expanded by acquiring complementary capabilities, creating a more comprehensive ecosystem. Similarly, Oracle was strong in finance but has expanded into sales and operations tools. These companies aim to offer an all-in-one platform, reducing the need for customers to bolt on additional software.

For your company, the question is: how do you create an ecosystem around the M&A process? Once you start building that out, you increase the value of your offering and make it indispensable to your customers.

Valuations also come into play. Software companies tend to have high valuations, but even within software, there are variations. For example, transactional software like DataRooms often trades at lower multiples. But strategic acquisitions can create opportunities to change the valuation narrative.

I’ll share an example. Last year, I helped an entrepreneur sell their company. The industry they operated in typically traded at around 12 times EBITDA. However, we sold the business to a strategic buyer in the financial services sector, which trades at 20-25 times EBITDA. 

By rolling over a portion of the equity into the acquiring company, the entrepreneur not only benefited from the higher multiple but also gained exposure to the acquirer's future acquisitions. That strategic alignment significantly boosted the value of their second bite at the apple.

When you’re thinking about adding products or capabilities that might have lower valuation multiples, the key is to maintain the DNA of your company. 

As long as the core business remains intact and aligned with a higher-multiple industry, you can integrate these additions without dragging down overall valuation. If the new segment becomes too large, buyers might blend the valuations of the two business types, but staying focused can help avoid that.

In some of the companies I’ve built, there was a distinction between revenue from service and revenue from construction. Wall Street discounts construction-heavy businesses because they’re cyclical and volatile, while service-oriented businesses are seen as stable and predictable. 

To improve valuation, I shifted the business mix from 50% service and 50% construction to 75% service and 25% construction. This deliberate strategy increased the company’s attractiveness at exit.

As a pilot, I always deconstruct the trip. I think about what the buyer will value most at exit and work backward to build toward that vision. By carefully structuring growth, adjusting the business mix, and leveraging strategic pivots, you can engineer a higher valuation and maximize your exit potential.

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