Pick The Right Business Before You Even Start

Before we even got into the growth stages, Adam stopped me with something crucial. Most people don't think strategically about what kind of business to start.

"If I'm working for somebody else, I'm out there, I haven't started a business yet, how do I pick one that's going to be successful?" Adam asked.

He laid out three critical criteria that stack the deck in your favor.

First: needs versus wants. If your roof is leaking and it's raining on your head, you need to fix it. You can be unemployed, the economy can suck, the stock market can crash, but you still need to fix your roof. Compare that to wanting new tires for your monster truck. If money's tight, you can skip the want.

"Needs versus wants. If I'm a needs-based business, I'm going to do better in a down economy," Adam explained.

Second: contracted revenue versus project-based revenue. This is where pest control became Adam's perfect example. You sign a contract with a homeowner, hit their credit card every month, only spray once a quarter. Every month the revenue hits the bank three days after billing, and every new client is additive to the old clients. You're building steady recurring revenue.

Compare that to roofing. It's a need, but you only need a new roof every 15 years. You get that customer this month, next month you're back at zero looking for new clients.

Third: low capital expenditure versus high. Pest control requires trucks, sprayers, training, uniforms. But compare that to heavy construction with dump trucks, graders, and expensive equipment.

"I want the cash flow in the company I'm building to generate enough cash flow for me to service the loans if I'm buying it or if I'm going to grow it rapidly," Adam said.

These three criteria - needs-based, contracted revenue, low capex - create high free cash flow businesses that can scale.

Why 93% Never Hit One Million Dollars

Here's the statistic that shocked me: only 7% of business owners ever get to a million dollars in revenue. Of those, only 4% of that 7% ever get to ten million.

The reason? They don't understand unit level economics.

"The road from zero to a million is very unique. You have to focus on being an anal retentive control freak and you have to focus on unit level economics," Adam explained.

What does that mean? Let's use pest control as the example.

Your smallest unit level is one truck, one technician, one sprayer. What does it cost to hire that technician, train them, put them in a uniform, put them in a truck, equip the truck? Those are your operating costs at the smallest unit level.

You build an expense model: truck payment, gas, oil, maintenance, insurance, sprayer maintenance, uniforms, hourly salary, benefits. Add it all up on a monthly basis. That's your cost to have this technician in a truck ready to spray homes.

Next, build a revenue model. How many homes can this person visit per day, per week, per month? If you're charging $75 a month and visiting once a quarter, how much revenue are you producing per month per truck?

Add up the revenue potential, subtract the costs. What's left is your gross profit at the unit level.

This is where Adam introduced the 30-20-10 rule that changed everything for me.

The 30-20-10 Rule You Can't Break

"My business, perfect business needs to have at least 30% gross profit and I want less than 20% SG&A, which is my sales and general administration," Adam explained. "So more than 30 up here, less than 20 there, I have to earn at least a dime on a dollar."

30% minimum gross profit. Less than 20% back office costs. That leaves you with at least 10% net profit.

If you don't pass this rule, you don't scale. You don't add a second truck. You have to fix your fundamentals first.

If you're not hitting 30% gross profit, raise your price or lower your costs at the unit level. But don't scale a problem.

"If I pass the 30-20-10 rule, I can build a billion-dollar business. But if I'm not passing 30-20-10, I stop. I don't scale," Adam said.

This is what Adam calls "napkin math." Simple, basic formulas. If you can generate $250,000 per truck unit level for pest control, you need four trucks to hit a million. Four trucks, four employees, four sprayers. It's mathematical certainty.

"I make the first million a mathematical certainty. It's a mathematical formula based on this unit level economic concept," Adam explained.

Most entrepreneurs focus on revenue. They shouldn't. Adam doesn't sell revenue. He sells earnings. Everything is about earnings. If you can't pass the basic fundamentals, you have no way of scaling successfully. You're just going to scale a problem bigger.

The Route Density Secret Nobody Talks About

One thing Adam emphasized that I immediately recognized from working with pest control companies: route density matters more than most people realize.

If you have customers spread all over Dallas, you're driving long distances between clients. That's inefficient. But if you have 30 homes in one neighborhood, you're only driving 800 yards to your next client instead of across town.

"There's a magic around not just building clientele, but building density of clientele, clusters of clients within a certain tight geography because I want that pest control technician to spend all their time spraying, not driving," Adam said.

Driving is inefficient in a route-based business. This doesn't just make things convenient - it makes your business more attractive from a private equity perspective and frees up time to service more clients and make more money per technician.

One Million to Ten Million: Replication at Scale

If the journey from zero to one million is about defining and perfecting unit level economics, the journey from one to ten million is about replicating those same economics.

If you needed five trucks to hit a million, ten million is 10 times that. You need 50 trucks on the road. You can scale up your model using the same napkin math.

But here's what most people miss: you should actually get more profitable as you grow from one to ten million.

"If I need 50 trucks to get to 10 million, I'm going to be buying more than one truck at a time. When I'm buying 50 trucks, I'm going to get a better price than if I'm buying one truck," Adam explained.

Economies of scale kick in. Better prices on trucks, sprayers, chemicals, everything. If you're passing 30-20-10 at a million, you should be exceeding it at ten million.

For building the back office, Adam shared a brilliant framework. For every dollar of new revenue, you generate minimum 30 cents of gross profit. You're allowing yourself 20 cents of back office cost. That puts 20 cents in a piggy bank.

"Revenue leads, expense lags. As I add a million dollar in new revenue, I now have $300,000 in gross profit and an ability to add up to $200,000 in back office expense," Adam said.

Build a wish list: a dispatcher, a digital marketing person, a service manager, a controller. Rank them in order of who keeps the trains running. As you build the piggy bank, go shopping from your wish list.

You're earning your back office while scaling.

The Shift That Determines If You Hit 100 Million

Somewhere on the journey from one to ten million, you have to make a critical shift. You can't stay an anal retentive control freak forever.

"Instead of becoming an anal retentive control freak, I now have to become a manager of process," Adam explained.

At 50 trucks on the road, you probably have less than 60 total employees. Your first five technicians might now be supervisors. Maybe one or two became exceptional and you've got service managers. You've built structure.

But most entrepreneurs plateau somewhere around 20 to 30 million because they can't make this shift.

"I bought 58 companies in my career. I'm typically buying from an entrepreneur who has plateaued. Somewhere around 20 million in revenue, maybe 30 million, they have just kind of tapped out. They were an anal retentive control freak. They make every damn decision. They empower nobody to think, and they're out of bandwidth," Adam said.

Their company stalls out. Someone like Adam comes and buys theirs and 22 others just like them, puts them together, and manages process instead of details.

"I'm a conductor of an orchestra, not a player within the orchestra and I can take it to a different level," he explained.

Ten to 100 Million: Geographic Expansion and Acquisitions

To go from ten to 100 million, you're most likely going to have to expand beyond your current metropolitan area. You've perfected your model in Dallas, now you're opening Houston.

Adam outlined two approaches: greenfield (starting from scratch) or acquisition (buying an existing company).

For a smaller market like Waco that's only an hour and a half away, maybe you start greenfield with one guy and a few trucks. You can surge resources if there are problems.

But Houston? That's five or six hours away and millions of people. Maybe on that one, you buy a pest control company from a retiring baby boomer and move one of your stars down to take over a business that's been around for 20 years with an established brand and customer base.

"That accelerates my growth. On the journey from 10 to 100 million, this is where things start to change. I'm going to spread from one MSA to multiple. I'm going to do some of it via acquisition. I may do some of it organically," Adam said.

This is also where your leadership structure changes. At ten million, you had a controller and service managers. Now you're creating VP-level jobs: VP of sales and marketing, VP of operations, VP of finance.

Somewhere around 50 million with six, seven, eight branches, you're approaching 100 million. At 100 million in revenue with 20 million in EBITDA (if you're a 20% margin business), you're selling to private equity for somewhere between 12 and 15 times. Let's say 15 times for easy math.

That's $300 million.

The First Exit: Derisking Without Leaving

This is where Adam's strategy gets really interesting. At 100 million in revenue, you don't want to leave. You want to derisk and get chips off the table.

"I want to put 100 million in the bank. And I want to start continuing to be an owner, but now I want to become a minority shareholder rather than a majority shareholder," Adam explained.

You take $200 million off the table, pay taxes, invest it elsewhere. Your family is set for several generations. But you take $100 million and roll it forward with a private equity owner.

Now you're a minority shareholder with a PE firm as the majority. You have a formal board. You can get fired if you don't perform. But you're going from 100 million to a billion using other people's money to scale more aggressively.

You probably won't get all the way to a billion with one PE firm. You'll go from 100 million to 500 million in the first five years, then sell again.

Here's where the math gets crazy: the typical PE firm models a 3x to 4x multiple of invested capital over five years. Your $100 million rolled forward becomes $300 to $400 million.

"My second bite's bigger than my first. I take 2/3 of it home. Now instead of 200 million out there, I've taken 400, 500 million out of the business," Adam said.

You've got another $100 million riding forward. You'll probably go from 100 to 500 million with one PE firm, then 500 million to a billion with another.

The Arbitrage Secret PE Firms Use

I asked Adam about buying companies since it becomes critical at scale. His answer revealed something most entrepreneurs get completely wrong.

"Most entrepreneurs think that the value they're going to create comes from buying a fixer-upper at a cheap price and fixing it. That's not where your increase in wealth comes from. Your value comes from arbitrage and multiple expansion," Adam explained.

Here's how it works: there are tens of thousands of small pest control companies in the US. They're a dime a dozen. There aren't enough buyers for them all, so they trade for smaller multiples.

But as companies get bigger, they become rare. There are 34 million small companies in the USA. Only 3,000 companies on the entire planet have a billion dollars in revenue.

Large PE firms with large funds buy big companies. Small PE firms with small funds buy smaller companies. There aren't enough buyers for the smallest companies.

"I can go out there and I buy them, but I want to buy good companies run by good people that have good fundamentals that have a good culture and I'm going to pay fair market value and no more," Adam said.

In his last empire, Adam bought 23 HVAC companies and paid an average of five times EBITDA. When he put the first eight together and sold the company, it traded for 14 times EBITDA.

The profit is the difference between selling a dollar of earnings for $14 versus paying $5 to buy a dollar of earnings from small companies, putting them together, integrating them, and getting them growing organically.

"That wealth creation is happening naturally. My value doesn't come from buying fixer-uppers or crappy companies. Better for me to just go find a bunch of good companies, pay fair market value, put them together," Adam explained.

His personal record? Selling the same company five times in 13 years. Multiple paydays instead of one, working with a team of entrepreneurs who all get multiple bites of the apple.

What to Look For in Private Equity Partners

Adam emphasized that while PE firms do extensive diligence on you, most entrepreneurs don't do enough diligence back on PE firms.

Have they owned a company in your industry before? What was the outcome? How did they work with management teams in home services?

"I want to talk to CEOs that they fired. I want to talk to CEOs that are currently in part of their portfolio. I want to understand what life is going to be like working with these people because it's an arranged marriage," Adam said.

Once you cede control as a minority shareholder, you're a minority shareholder forever. Make sure that first transition is with someone you like, someone who's a good steward to your employees and legacy.

Adam also addressed the control issue. Some entrepreneurs say they need to maintain control, they'll only sell a minority stake. Bad idea.

"The majority of capital wants to buy the majority of your company. If you're not selling majority, they're not even going to talk to you," Adam explained.

The handful of people buying minority stakes pay way below market multiples. You think you have control, but their minority shareholder rights let them force actions on you anyway.

He closed with a powerful point: "Elon Musk and Jeff Bezos, the two richest men on the planet, both own less than 13% of their respective companies. You can be a minority shareholder and be the richest guy on the planet. How do you get there? You got to sell the damn thing."

Why You Must Derisk

Adam shared horror stories about entrepreneurs who lost everything during COVID not because they couldn't run a business, but because the government decided they weren't essential and forced them to close.

He told me about a client in the UK whose largest customer was in Russia. When Russia invaded Ukraine, the UK government banned exports to Russia. Everyone thought it would be an eight-day war. Three years later, they're still fighting. His client went from healthy to nearly bankrupt overnight.

"Bad things happen all over the place and they seem to happen quicker in today's world. Once you build success and you've got some level of net worth embedded in your business, we have to extract it and get it into the bank and invest it elsewhere," Adam said.

Keep building your company, but derisk so your family is taken care of forever.

My Main Takeaway

The biggest lesson from talking to Adam is that building a billion-dollar company isn't about luck or genius. It's about mathematical certainty starting at the smallest unit level.

The 30-20-10 rule is non-negotiable. Minimum 30% gross profit, less than 20% SG&A, leaving at least 10% net profit. If you can't pass this at one truck, you'll never build to 50 trucks or 500 trucks. Don't scale a problem.

Only 7% of businesses ever hit a million dollars because they don't understand unit level economics. They focus on revenue instead of earnings. They try to figure out how to make money once they get bigger instead of making sure the fundamentals work small.

But if you get it right at a million, there's no reason you can't build to ten. If it works at ten, it works at 100. If it works at 100, it works at a billion. Every step creates more operating leverage - better prices on trucks, chemicals, equipment because you're buying in bulk.

The journey has four distinct stages with different skills required at each level. Zero to one million: perfect unit economics as an anal retentive control freak. One to ten million: replicate those economics and build your back office. Ten to 100 million: shift from control freak to manager of process, expand geographically, start using acquisitions. 100 million to a billion: partner with PE, use their capital to scale aggressively, get multiple paydays through multiple exits.

Most entrepreneurs plateau around 20 to 30 million because they can't stop being the key decision maker. They won't empower people to think. They run out of bandwidth. Someone like Adam buys them and 22 others, manages process instead of details, and takes it to a different level.

The wealth creation in acquisitions comes from arbitrage and multiple expansion, not buying fixer-uppers. Small companies trade for small multiples (5x). Put eight together and suddenly you're trading for 14x. That's the game.

And critically: once you have significant equity in your business, you must derisk. Adam tells most entrepreneurs that if you have 10 million of EBITDA and ability to get a nine-figure exit, take it. There's too much volatility in the world. Bad things happen to good people for reasons totally beyond their control.

If you can run a successful one million dollar business with unit economics that work, there's no reason you can't build a billion. The DNA is created at the smallest level. But it all starts with needs versus wants, contracted versus project revenue, low capex, and the 30-20-10 rule that determines if you scale or fail.

Want to learn more from Adam? Visit chairmangroup.us or find him on LinkedIn - when you reach out, you get him directly, not an army of social media people. Read his books "The Private Equity Playbook," "The Exit Strategy Playbook," and "Empire Builder" for the complete frameworks on building and selling businesses.

Listen to the full episode below to hear more of Adam's insights on unit economics, PE partnerships, and the mathematical certainty of building a billion-dollar empire.