The 30/20/10 Rule: Adam Coffey's Framework for Evaluating Any Business in Any Industry

When Adam Coffey walks into a business for the first time, he doesn't get lost in industry jargon or complex financial models.

Instead, the author of “The Private Equity Playbook” —who orchestrated 58 acquisitions and delivered over $2.4 billion in exits — relies on a deceptively simple framework that works across every industry: the 30/20/10 rule.

"Private equity firms pay me millions of dollars to evaluate companies," Coffey explained during his keynote presentation at the 2025 Business Acquisition Summit, "and I'm going to share the same basic tool I use with them."

This isn't theoretical advice from an academic. Coffey spent 21 years as a CEO building three large companies for nine different private equity firms, transforming businesses that "didn't work" into acquisition machines worth hundreds of millions. His framework has proven itself across dozens of industries, from HVAC services to pharmaceutical chains.

Let’s dive in:

The Foundation: Why Most Business Evaluations Fail

Before diving into the 30/20/10 rule, Coffey identifies a critical problem most entrepreneurs face: they focus on revenue instead of earnings. "Revenue doesn't matter, folks. Earnings do," he emphasizes. "I'd rather be on top of a company with $50 million in revenue earning $7 million than a company with $100 million in revenue earning the same $7 million."

This earnings-first mindset separates successful acquisition entrepreneurs from those who chase vanity metrics. In the private equity world—the largest category being buyout funds—mature companies are valued based on their track record of earnings and growth, not just top-line numbers.

The prerequisite for applying the 30/20/10 rule is having an accurate income statement. Surprisingly, most companies Coffey evaluates don't meet this basic requirement. "Accountants care about revenue and earnings because that's what we pay taxes on," he notes, "but I see a jumbled mess in the middle on most income statements."

Breaking Down the 30/20/10 Rule

The 30: Gross Profit Must Exceed 30%

The first stop on any income statement evaluation is gross profit. If a business doesn't achieve at least 30% gross profit margin, Coffey's advice is simple: stop everything and fix the unit-level economics before worrying about growth.

"If I don't have more than 30% at the gross profit level, do not scale," he warns. "I don't want to scale a problem or low margins. I only want to scale a well-performing business."

This isn't about arbitrary benchmarks—it's about mathematical necessity. Without sufficient gross profit, a business lacks the foundation to support necessary overhead while generating acceptable net profits. Scaling a business with poor unit economics simply amplifies the problem.

When gross profit falls short, Coffey focuses on three areas:

• Pricing strategy (moving away from cost-plus models)

• Direct cost reduction (improving operational efficiency)

• Unit-level economics (understanding the profitability of the smallest revenue-generating unit)

The 20: SG&A Must Stay Under 20%

Once gross profit meets the 30% threshold, attention turns to Selling, General & Administrative (SG&A) expenses—the back-office costs that keep the business running. These must remain under 20% of revenue.

"SGA is where I see a lot of companies getting out of whack," Coffey observes. This typically happens during growth phases when businesses add management layers without corresponding productivity increases.

A common problem Coffey encounters: "Too many chiefs, not enough Indians." He's seen companies with 3 worker bees for every manager—a recipe for bloated overhead. His benchmark from Fortune 500 experience suggests one dedicated manager per 30 line employees, though he considers one manager per 14-15 employees acceptable for smaller businesses.

The solution requires discipline in building the back office. Coffey's framework: if adding $1 million in revenue generates $300,000 in gross profit, only $200,000 can go toward SG&A expansion, leaving $100,000 for net profit.

The 10: Net Profit Must Exceed 10%

The final piece requires net profit margins above 10%. This isn't negotiable for Coffey when evaluating acquisition targets. "If I see earnings below 10%, I'm done. I don't even look deeper."

This 10% threshold serves multiple purposes. It indicates a business model robust enough to weather economic downturns while generating sufficient cash flow to service acquisition debt. It also suggests management competency in controlling costs while maintaining profitability.

For context, businesses meeting the 30/20/10 rule demonstrate they can generate $1 million in net profit from $10 million in revenue—a performance level that attracts private equity interest and commands premium valuations.

The Power of Unit-Level Economics

Behind the 30/20/10 rule lies a deeper principle: understanding unit-level economics. Coffey illustrated this with a service company example featuring thousands of trucks on the road. When the business was losing money despite massive revenue, previous CEOs tried fixing it from the top down.

"I come in, apply the 30/20/10 rule, and stop right at gross profit because I'm not at 30%," Coffey explains. "The reason four or five CEOs failed to fix this company is they were trying to fix it from the top down. We need to go to the bottom and fix it on our way up."

The solution? Focus on one truck—the basic unit-level economic model. What revenue can one truck with its crew generate? What are the expenses? Can that single unit achieve 30%+ gross profit? Once the unit economics work, scaling becomes a matter of replication rather than hoping larger volume will solve fundamental problems.

This principle applies across industries:

• Manufacturing: What's the unit economics for one widget?

• Software: What's the economics per user or per subscription?

• Retail: What's the economics per square foot or per transaction?

• Services: What's the economics per technician, per truck, or per service call?

Real-World Application: The UK Client Success Story

Coffey shared an example of a UK client who exemplified proper 30/20/10 implementation. The company achieved:

• 36.8% gross profit (well above the 30% threshold)

• 20% SG&A (exactly at the maximum threshold)

• 16.8% net profit (significantly exceeding the 10% minimum)

This performance earned "green lights" across all three metrics, indicating a business ready for aggressive scaling through organic growth and strategic acquisitions.

Beyond the Rule: When Problems Emerge

What happens when companies fail one or more thresholds? Coffey's approach is methodical:

Gross Profit Below 30%: Stop all growth initiatives. Focus exclusively on pricing optimization, cost reduction, and unit-level improvements. Don't move to the next step until this is fixed.

SG&A Above 20%: Analyze the organizational structure. Often this reveals too many management layers or poor delegation of responsibilities. Coffey separates sales costs from general administrative costs to identify specific problem areas.

Net Profit Below 10%: This typically indicates problems in both gross profit and SG&A management. Companies rarely achieve acceptable net margins without excellence in the first two areas.

The Acquisition Entrepreneur's Advantage

For acquisition entrepreneurs, the 30/20/10 rule serves multiple purposes:

Due Diligence Efficiency: Rather than getting lost in industry-specific complexities, you can quickly evaluate any business using these universal metrics.

Negotiation Leverage: Businesses failing these thresholds often trade at lower multiples, creating acquisition opportunities for buyers willing to implement operational improvements.

Integration Planning: The rule provides a framework for evaluating how acquired companies will perform within a larger portfolio, ensuring each addition strengthens rather than weakens overall performance.

Exit Preparation: Understanding these metrics helps position your business for eventual sale, as sophisticated buyers (including private equity) use similar frameworks for evaluation.

Implementation Strategy

To implement the 30/20/10 rule effectively:

1. Audit Your Income Statement: Ensure expenses are properly categorized and your accounting provides clear visibility into gross profit, SG&A, and net profit.

2. Identify Your Unit Economics: Determine the smallest revenue-generating unit in your business and model its economics separately.

3. Benchmark Current Performance: Apply the rule to your existing business or acquisition targets to identify improvement opportunities.

4. Prioritize Fixes: Address gross profit issues before worrying about SG&A optimization. Don't pursue growth until unit economics are sound.

5. Create Monitoring Systems: Establish regular reporting that tracks these three metrics, allowing for quick identification of problems.

The Path Forward

The 30/20/10 rule isn't just about evaluation—it's about creating businesses worthy of premium valuations. Companies meeting these thresholds attract private equity interest, command higher multiples, and provide the cash flow necessary for debt-financed growth.

As Coffey demonstrates through his track record, businesses that nail these fundamentals become platforms for aggressive scaling through both organic growth and strategic acquisitions. The rule provides the foundation; execution provides the results.

Whether you're evaluating your first acquisition target or preparing your business for exit, the 30/20/10 rule offers a proven framework for identifying scalable opportunities. In a world where most entrepreneurs chase revenue, focusing on these three metrics can provide the competitive advantage necessary for exceptional outcomes.

Remember: it's not about building the biggest business—it's about building the most profitable one. The 30/20/10 rule ensures you never lose sight of that distinction.

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