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I like to find ways that I can put some sort of compounding vehicle in the business because

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otherwise, the only way to use scale is by force and that is more difficult to sustain

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when you're trying to go to the big numbers, like 10 million a month.

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Welcome to the game where we talk about how to sell more stuff to more people in more ways

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and build businesses worth owning.

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I'm trying to build a billion dollar thing with acquisition.com.

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I always wished pesos, musk and buffet had documented their journey, so I'm doing it

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for the rest of us.

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Sharon, enjoy.

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My wife and I have been public about going from $100 million net worth to a billion dollars

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net worth through our acquisition.com vehicle, which if you don't know is a portfolio

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of companies that does right now at north of $200 million a year, and it's what funds

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all these and I make this stuff so that we can attract more companies to invest in.

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That's how we make our money.

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What I want to do is break down what we look for in companies that we invest in, and if

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you're a business owner or you're an investor, if you're a business owner, you can think

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about these frameworks as how can I use these to make my business more valuable?

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If you're an investor, you can think about these are the things or the lenses that we

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use in order to invest in businesses because if we're going to try to get to a billion,

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we better have a darn well good idea of how we're going to get there.

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These are the actual frameworks that we use to make the decisions about who's in and

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who's out.

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If you're thinking about starting a business of your own, you can start at the right

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way because it's much harder to fix a business that's fucked up than it is to start on the

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right path.

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If you have the opportunity, you might not even know this, but the first thing I did before

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I started my first real business was actually joined a group of other business owners, and

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I did.

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It was a bunch of gym owners, and I didn't even have a gym, but I wanted to learn from

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all their stuff so that I could start and try and make as few mistakes as possible.

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Just consider the things that I'm going to outline in this as you meeting other business

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owners who might be further ahead than you, saying, hey, when you're building it, try

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and have these elements inside of it so that you can build it the right way the first

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time.

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We break this into the hard stuff and the soft stuff.

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The hard stuff is all the business metrics when it gets to in a second of all, the hard

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stuff that we'll look at that a business must meet.

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The soft stuff is the more about the team, more about the people, the more nuanced and

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subjective component, but I might even argue the more important component about why we

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choose to work with some companies and not others.

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Right off the bat, there's some basic business things, and I would encourage you, if you're

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ever going to invest in businesses, especially private businesses, which increasingly is becoming

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the Vogue because it's becoming more and more difficult to become a public company because

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of the reporter requirements.

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40 years ago, it was way easier to go public because reporting wasn't as hard, but they

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continue to make reporting harder and harder, which I actually think is a bad thing because

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it means the general public has less access to private investments and only accredited investors,

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so wealthy people are the ones who are able to participate in more and more big private

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companies.

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I think that's a big picture, a down thing that I think we need to decrease the expectations

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on companies for reporting so that more companies will be willing to go public, so that

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more of the public market who are not accredited could participate in that growth, so that's

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just a two seconds on my two cents, but we do only private investments, and so we look

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for cash low positive companies, meaning every month they spit off more cash than they

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take to grow, and that means that after growing, they still are cash low positive.

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Now, there's a difference between being cash low positive and being profitable, so this

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actually has to come down to accounting rules, so there's two types of account, oh, there's

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different types, but we'll just call it, you've got cash-based accounting, and then you've

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got a cruel.

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All right, cash-based accounting just means what comes into the bank account every month,

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what goes out, right?

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That's how most small business operate, bigger businesses operate off of a cruel, which

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would mean that, for example, if you ran an event once a year and it cost you a million

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dollars that month to run your event, it would look like you had a huge loss that month

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when realistically, you'd be saving for the year, but then you also have a huge amount

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of revenue that would come in that month or the next month thereafter, but what a crew

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does is it spreads that over the year, so you have a much more balanced idea of how the

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business is operating overall, and so we want cash low positive and profitable companies

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that are growing and founder-led, and so that means the founder is still the primary driver

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of the business.

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From a size perspective, we have tweaked our requirements, originally it was they're

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doing over $3 million in top line, we have since tweaked that to at least $1 million

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in profit, and when I say profit, I mean cash flow profit, not paper profits, and the

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reason we do that is because we are cash flow investors overall, and so we invest in assets

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that hopefully make us more money over the long time than it costs us to buy them.

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And so in terms of sizes, the biggest company we have to portfolio to $20 million in profit

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last year, and the smallest companies are like a million, right?

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So there's a range there, but that's kind of the midpoint is probably like five-ish

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in terms of profit, so there's obviously outliers, and that's kind of common in investing

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that you have two or three companies that carry a portfolio, and that's just because 80,

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20 Pareto's principle, and I won't even get into that, but that's common.

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Now the things that make a company attractive that we're looking for now is that I look

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at companies that I think are boring and simple in terms of they don't have a lot of moving

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parts.

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I don't think they're going to be disrupted by AI, or they have a lower likelihood of

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being disrupted by AI.

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So for example, one of our brands is enchanted fairies, and so that's a photography chain.

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I think at this point we have 40 locations open.

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When we first invested in them, they had one, and so that's been 30 months, and so we've

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gone from one to 40 in 30 months-ish.

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So kudos to them, they have an awesome product, awesome brand.

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But a company like that, I think about AI in the future, and I think you're still going

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to have to take your body in and get pictures taking of you to have that kind of experience.

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And I think a lot of it is about the experience itself, and so I feel like that is a company

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I feel more confident.

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And if you have a long-care business, I feel pretty confident you're still going to have

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to get the long cut.

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Now will there be robots in the future?

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Probably.

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The question is how long, and I think that we have more time there than we say, we might

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in say a design agency, that might be a little bit harder to defend with some of the stuff

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that's coming out with AI in the future.

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So it's not, will it disrupt it or not?

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It's how long away is that disruption, and how profound will the disruption be?

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And so that's a big factor in some of the companies that we're looking at taking on right

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now.

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Another factor is that we want it to be just a solid product, because the company either

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has to have an advantage on their exceptional marketing, or they have to have an exceptional

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product.

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The mistakes that I've made in investing is taking on companies that had neither.

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They're just like kind of mediocre at product, and the kind of mediocre at marketing.

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And those ones are just, they don't have anything good.

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And so that's the harder part of growing them, because once you have the right product,

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you can wrap them around the systems that we already know grow the business, bring the

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players in and then explode it.

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So part of the way that we measure how good the product is, we actually just look at

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reviews online.

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So just like the customer might look at reviews, we look at reviews.

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We look at Glassdoor, that's from an employee's perspective.

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We look at the triple B to see if they have some massive issue that's going on.

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We look at online reviews.

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We look at the trust pilot reviews.

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We look at all the different places that there are reviews to see.

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Now mind you, every business, especially if you have a lot of volume, it's going to

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have someone start.

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So that's just like that's part of doing business.

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But overall, we want to see that the majority of people are very happy with the outcome,

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because fundamentally, all of the money that you're going to make is going to be based

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on a extrapolation of the core unit of value you can provide to the end user.

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So if somebody can create some very important outcome to a specific type of person, the

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more valuable that outcome is, the more profit you can ultimately generate from the business,

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as you expand and take over the market that it exists in.

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And so that's probably the thing that we look at the most from a business perspective

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of like how valuable truly is the thing that they provide and is there any element that

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is unique.

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Aimos and Asian quick break, just to let you know that we've been starting to post

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on LinkedIn and want to connect with you.

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All right, so send me a connection request and let me know that you listen to the show

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and I will accept it.

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There's anyone you think that we should be connected with, tag them in one of my or

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layless posts and I will give you all the love in the world.

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All right, so let's get back to the show.

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Now zooming out to a business strategy perspective, I like to figure out a way to have one

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element of compounding within the business itself.

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And so in my experience, there are only two ways to have a compounding vehicle within

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the business.

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Well, maybe three, but I'll get to that in a second.

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The first way is that every year, if you don't do anything, more customers buy the thing.

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And so that is net negative turn.

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So ideally, that means that 12 months from now, all the customers you have now are still

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buying and ideally buying more, right?

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That's what makes an incredibly valuable company.

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If you buy Coca-Cola in the beginning, you'll probably keep buying Coca-Cola brands for

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the rest of your life, right?

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The other way of having a compounding vehicle is having a selling machine that compounds

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into and of itself.

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And so most of these times, it's word of mouth, which is always the compounding vehicle,

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either from a customer perspective or from an employee perspective, all right?

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And so I'll give you an example of an employee compounding.

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So if you had an insurance business and you had sales guys that did insurance sales

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for you or you had a mortgage sales business or a solar sales business and you could get

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each of these salesmen to recruit other salespeople to continue to sell for you, then every

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year, let's say you grow by 10% in your sales staff, or let's say every month, you grow

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by 10% in your sales staff, then you're going to grow really, really quickly.

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And that thing will continue to compound unto itself.

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And so I like to find ways that I can put some sort of compounding vehicle in the business

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because otherwise, the only way to use scale is by force.

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And that is more difficult to sustain when you're trying to go to the big numbers, like

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10 million a month.

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It's easy to force growth at 200K a month, 500K a month, a million a month.

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You can force that growth relatively easily with paid ads or maybe some affiliates.

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But if you want to go to the big, big numbers, you need to have something that compounds unto

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itself.

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Otherwise, you'll flatline and then that's when the company becomes significantly less valuable.

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Another element that we look for is a niche that's easy to win in.

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And so if we were trying to get into AI something, there's going to be a lot of incredibly

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well-capitalized players who are really smart who are going for the next trillion dollar

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thing.

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Now, not to say that that's not a good opportunity, it is, but you're going to be competing

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against the best people.

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In general, the people who are trying to build billion dollar companies in tech, I would

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say if we had to take a midline of IQ levels, is higher and they're better capitalized than

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people trying to build a billion dollar long-care business.

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And I see that as an advantage to having the long-care business.

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You just have fewer incredibly smart and incredibly capitalized people competing against you.

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And so a great investor friend of mine said, don't fish for the fisherman or he said fish

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for the fish.

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Right?

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It's like, don't fish for everyone else is trying to fish.

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He's like, just try and find an open pond where you don't have to be the best fisherman,

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but there's plenty of fish.

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And we've tried to stick to that kind of thing.

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And we've tried to stick to that same mindset.

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Now, compounding vehicle is basically the fundamental of what every recurring revenue business seeks

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to get.

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Now, there are two types of recurring businesses.

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You have reoccurring and then you have recurring.

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So a recurring business is like, you were on a monthly subscription for Netflix.

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They are a recurring business model.

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A reoccurring business would be something like Facebook ads.

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Like when you pay Facebook as an advertiser, you're not on a fixed amount, but you will

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come back and buy again.

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If you buy Coca-Cola from Coke, you're not on a subscription monthly box.

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They just make sure their product's good enough that you buy it again, right?

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You reoccur.

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And so what we look at is, is there a way that we can add an element of this that is either

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recurring or reoccurring that we can predictably know a certain percentage of the people that

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we sell today will continue to buy from us five years from now.

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And this is like probably the biggest strategic point that I can make in this video, and arguably

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like in business in general.

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Like this is very important.

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If you don't get credit for the sales that you make today in two years, you're always

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starting at ground zero.

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That's very hard to do for 20 years.

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And so I want businesses that we get credit for the stuff we sell today in five or ten

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years.

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And so whatever we have to do, we try and either find businesses that already have that

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element, or we take businesses that we think we can configure ourselves in element within

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their current construct of how they create value, so that customers will continue to want

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to buy in the future from them.

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And that is where you can unlock huge amounts of value in cash flow and enterprise value

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because think about this way.

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If you were to spend $10,000 a month and get ten customers a month, okay?

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If you were to keep doing that, and those ten customers never left, in ten years, you

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would have 1,200 customers, but you'd still only be paying $10,000 a month in advertising.

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That would be an incredibly profitable business because you don't need to scale your marketing

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in lockstep with the number of customers and profit they're ultimately generating.

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And this is a huge profit enhancer.

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And profit is ultimately the thing that drives businesses' values now and in the future.

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And if you think about the value of a business as the all-future cash flow that it generates

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from now until it dies, then knowing that every single person that you've sold up to this

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point is going to continue to pay you for the rest of time makes it incredibly valuable.

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And the knowledge that everybody you sell from this point going forward also continues

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to stay in pay also makes it incredibly valuable.

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Those are the hard mechanics of the things that we look for at Acquisition.com in terms

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of companies.

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So like I said, $1 to $10 million in profit per year is kind of like, I would say, the

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majority of the, well, one is the minimum, but $1 to $10 is kind of like, I would say

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the sweet spot, like I said, we have outliers that are at $20, but that one, when they came

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to us, worn at $20, I think they were at $6 when they came to us.

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And so like, obviously we seek to grow companies, but that's typically where people come in.

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Those are kind of the hard stuff, the hard sciences of the investment portfolio, like the

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buy boxes, what they call the investor world is like, what's your buy box?

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The other part is the soft stuff.

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And this may be, not may, it is actually the thing that we wait more, which are two elements,

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founder fit and leadership team.

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And so I'll start with founder fit.

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So when you get into a business partnership, or you invest in someone's company, like

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you're in, your co-owners, like you're now locked in, it's like a marriage, right?

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And so you want people that you think you could be married to in five years, right?

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You want people that you look forward to speaking with.

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And on a personal level, like, I want people that I want to see rich.

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Like the moment I feel like, I don't want this person to be rich or like, I don't want

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to help this person get rich, not a good deal for me, right?

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And so we try and find exceptional founders that live by our three values, which is sincere

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candor, unypeachable character and competitive greatness.

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And those are three simple sayings or three simple isms, but are very hard to find.

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It's hard to find people who even have one of the three, let alone all three, which makes

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finding great people difficult.

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And that's kind of the fundamentals of most businesses is that people are almost always

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the problem.

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And so we have a very rigorous screening process to finding the right founders.

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The reason for that, besides our obvious state of mind, is like, if I want to maintain

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excellent talent in my business, the easiest way to kill that would be to work with shitty

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founders.

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So for me to protect the talent that I have at acquisition.com, I have to only bring

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in excellent founders.

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The other piece is that if we want to grow these businesses, what do you think those founders

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need?

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They need an exceptional team.

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An exceptional team mates will not work for shitty leaders.

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And so if we want to build the business, even if we have some super smart, hardworking

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founder who's charismatic, but like, if shitty ethics, they're not going to be able to

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keep a team who's really smart and hardworking or who has experience.

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And so when we find a founder that we like a lot, we think to ourselves, will we be

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able to attract the level of talent that's required to get this person from, let's say,

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a million a month to 10 million a month, right?

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That's a who question more than a how question.

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And so the bigger the investment, the more the leadership team matters, the smaller the

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investment, the more the founder matters, because then we're going to surround them with

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the leadership team that we need to build.

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Because one of the big limiting beliefs that a lot of founders have is that they feel

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like they have to learn their way from one million to 10 million when it's much more about

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becoming the type of person who can attract the people who can help get you to 10 million

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a month and beyond.

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And when we're looking at those teams, we're looking at how many of these people have been

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there done that.

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We say, like, how much gray hair is there on the team?

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Like, we want at least 20% of the executive team or the leadership team to have already

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been there done that in a business that is like this one.

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So if they're at, let's say, 20 million in top on revenue and 7 million in EBITDA, I

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want to make sure that there's at least 20% of the leadership team who's been to 100 million

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once or twice in their career during that path so they know some of the roadblocks and

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they can speak and mentor some of the other people in the business.

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In terms of having an exceptional product, I measure the value of the product in a few

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ways.

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One is the, sure, there's reviews.

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The second is more of the hard metrics, which is if we can quantify how much value the

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product or service provides the average customer, which you can track, how much of that is being

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captured and monetized.

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So if we feel like it is being undermonetized based on the value that's being provided,

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that's a big opportunity for the business, both from a pricing perspective or either how

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we package the services.

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The biggest metric is always going to be the percentage of customers that come from referrals.

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And so if a large percentage of the customers come from referrals, not necessarily all of

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them, but a significant percentage, which for me is like 25 to 30% of the business comes

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from word of mouth, then I know that this is a solid business that automatically whenever

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we spend money to a car customer, we get a one-third discount because one out of three

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people is bringing another customer in, right?

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And so you can factor that into how much money you make.

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Now, you think about this from a profit perspective, if one-third of your business comes from

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free, then a lot of that extra that added or incremental revenue drops straight to the

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bottom line.

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And so that's why having strong word of mouth is such a powerful thing for the profitability

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of a business.

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Now, a lot of small businesses continue to grow off ads and no word of mouth, but what

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actually happens is they have negative word of mouth working against them.

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So if I see no word of mouth, I actually know that that negative word of mouth monster

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is always working.

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It's just working eat-way their profits.

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They're making less profit than they otherwise would have if they had no reputation.