WEBVTT 1 00:00:00.000 --> 00:00:01.400 A lot of times you're not gonna sell. 2 00:00:01.400 --> 00:00:02.680 A lot of times businesses fail. 3 00:00:02.680 --> 00:00:03.600 There are tons of risks. 4 00:00:03.600 --> 00:00:04.960 That's why business is one of the riskiest things 5 00:00:04.960 --> 00:00:05.800 to get into. 6 00:00:05.800 --> 00:00:07.640 Most businesses do not succeed. 7 00:00:07.640 --> 00:00:09.840 That's just, those are just the stats, right? 8 00:00:09.840 --> 00:00:13.080 And 99 times out of 100, business never actually sells. 9 00:00:15.640 --> 00:00:17.920 The wealthiest people in the world see business as a game. 10 00:00:17.920 --> 00:00:19.440 This podcast, the game is my attempt 11 00:00:19.440 --> 00:00:20.800 to documenting the lessons I've learned 12 00:00:20.800 --> 00:00:22.400 on my way to building acquisition.com 13 00:00:22.400 --> 00:00:24.000 into a billion dollar portfolio. 14 00:00:24.000 --> 00:00:25.760 My hope is that you use the lessons to grow your business 15 00:00:25.760 --> 00:00:27.160 and maybe someday soon partner with us 16 00:00:27.160 --> 00:00:28.600 to get $200 million in beyond. 17 00:00:28.680 --> 00:00:29.960 I hope you share and enjoy. 18 00:00:29.960 --> 00:00:34.960 I'm gonna shoot the seven ways to measure business value 19 00:00:38.200 --> 00:00:40.840 and how you're probably being deceived 20 00:00:40.840 --> 00:00:42.560 by most people you see on the internet, 21 00:00:42.560 --> 00:00:44.760 simply because you're not understanding the words 22 00:00:44.760 --> 00:00:46.240 in terms they are using. 23 00:00:46.240 --> 00:00:47.880 All right, so by the end of you'll understand 24 00:00:47.880 --> 00:00:49.960 who's BS, who's legit, who's real, who's fake. 25 00:00:49.960 --> 00:00:52.240 And if they haven't given you enough information 26 00:00:52.240 --> 00:00:54.640 to make the decision, exactly what question is to ask. 27 00:00:54.640 --> 00:00:56.520 All right, so let's dive in. 28 00:00:56.520 --> 00:00:58.760 So the first of the seven types of ways 29 00:00:58.760 --> 00:01:01.400 that people measure value is that they will extrapolate 30 00:01:01.400 --> 00:01:03.920 a single month of contract value into eternity 31 00:01:03.920 --> 00:01:05.120 or at least over a year. 32 00:01:05.120 --> 00:01:07.320 And so for example, what that looks like is 33 00:01:07.320 --> 00:01:11.080 someone selling a yearly contract at an event, 34 00:01:11.080 --> 00:01:12.960 they sell 100 people at that event, 35 00:01:12.960 --> 00:01:15.800 let's say for $30,000 a year, right? 36 00:01:15.800 --> 00:01:20.080 And they say we're doing $3 million a month, wow, right? 37 00:01:20.080 --> 00:01:24.920 Crazy, but the reality is they sold $3 million of contracts 38 00:01:24.960 --> 00:01:28.720 that are unenforceable to people on monthly income streams 39 00:01:28.720 --> 00:01:30.000 or monthly cash flow. 40 00:01:30.000 --> 00:01:33.160 And so 100 people at $2,500 a month 41 00:01:33.160 --> 00:01:35.920 is what will get you to that $30,000, right? 42 00:01:35.920 --> 00:01:36.920 Roughly. 43 00:01:36.920 --> 00:01:39.680 And so if you were, it really means 44 00:01:39.680 --> 00:01:41.880 that they did $250,000 at that event, 45 00:01:41.880 --> 00:01:45.720 but they said I'm doing $3 million a month, right? 46 00:01:45.720 --> 00:01:47.440 Even though it was a one time event 47 00:01:47.440 --> 00:01:49.520 that is not going to recur, 48 00:01:49.520 --> 00:01:52.480 and they based it on contract value 49 00:01:52.480 --> 00:01:53.720 and not payments collected. 50 00:01:53.840 --> 00:01:55.760 And so the first way to see through this stuff 51 00:01:55.760 --> 00:01:58.440 is to say, well, how much money was actually collected 52 00:01:58.440 --> 00:02:00.000 and how reliable are the contracts 53 00:02:00.000 --> 00:02:01.160 that you're actually selling? 54 00:02:01.160 --> 00:02:03.600 If you have highly secured contracts 55 00:02:03.600 --> 00:02:05.080 with companies that are legit 56 00:02:05.080 --> 00:02:06.760 or you have them secured against assets, 57 00:02:06.760 --> 00:02:09.000 meaning that the likelihood that they continue is high, 58 00:02:09.000 --> 00:02:10.600 or you have a net negative turn company, 59 00:02:10.600 --> 00:02:13.280 meaning the contract increases in value over time 60 00:02:13.280 --> 00:02:15.000 based on the business economics that you have, 61 00:02:15.000 --> 00:02:16.680 like Salesforce, for example, 62 00:02:16.680 --> 00:02:18.080 when you sign a contract with Salesforce 63 00:02:18.080 --> 00:02:19.640 you sign a contract with HubSpot, 64 00:02:19.640 --> 00:02:20.880 which is another CRM, 65 00:02:20.880 --> 00:02:23.640 most of those clients increase how much they spend over time. 66 00:02:23.640 --> 00:02:25.760 And so that would be legit in that instance, 67 00:02:25.760 --> 00:02:28.080 but the vast majority of people who are saying this to you 68 00:02:28.080 --> 00:02:29.120 are not being legit. 69 00:02:29.120 --> 00:02:31.080 And so first thing to look out for, 70 00:02:31.080 --> 00:02:32.840 at the very end I'll give you my rating 71 00:02:32.840 --> 00:02:35.120 for each of these ways of doing it. 72 00:02:35.120 --> 00:02:37.960 All right, the second is lifetime revenue. 73 00:02:37.960 --> 00:02:39.480 So this is when someone says, 74 00:02:39.480 --> 00:02:42.560 you know, we've done X amount of total revenue 75 00:02:42.560 --> 00:02:43.400 collected in our business. 76 00:02:43.400 --> 00:02:44.800 Now, a lot of times we'll say I have a, 77 00:02:44.800 --> 00:02:47.200 I mean, I see an ad right now that I run all the time. 78 00:02:47.200 --> 00:02:49.560 It's like how I built a $50 million business, 79 00:02:49.560 --> 00:02:52.520 but they mean how much revenue they've collected 80 00:02:52.600 --> 00:02:54.040 over the lifetime of the business. 81 00:02:54.040 --> 00:02:57.480 And so for context of how ridiculously inflated this will be, 82 00:02:57.480 --> 00:03:00.600 and McDonald's employee will collect a million dollars 83 00:03:00.600 --> 00:03:04.160 in revenue as income, honestly, that's even better 84 00:03:04.160 --> 00:03:05.600 because it's income, it's not even revenue, 85 00:03:05.600 --> 00:03:08.840 but just to show you how ridiculous and preposterous this is, 86 00:03:08.840 --> 00:03:11.040 a McDonald's employee will collect that over the entire life, 87 00:03:11.040 --> 00:03:12.960 so if you work to McDonald's your whole life, right? 88 00:03:12.960 --> 00:03:14.600 And so if you use this metric, 89 00:03:14.600 --> 00:03:17.000 then it's incredibly inflating and it's great for ego 90 00:03:17.000 --> 00:03:18.200 and it sounds good to impress people 91 00:03:18.200 --> 00:03:21.200 who don't know what you're talking about, okay? 92 00:03:21.280 --> 00:03:23.600 And so you may have seen one of my videos that said 93 00:03:23.600 --> 00:03:26.840 122 million in revenue for me, 94 00:03:26.840 --> 00:03:28.840 and I do that A because the headline is more compelling 95 00:03:28.840 --> 00:03:30.880 than saying, you know, we've done mid-30s 96 00:03:30.880 --> 00:03:32.320 for the last three or four years. 97 00:03:32.320 --> 00:03:34.760 But, and I, you know, I'll play the game too, 98 00:03:34.760 --> 00:03:36.880 but understanding what that comes from. 99 00:03:36.880 --> 00:03:38.640 And so that's why I try and be as honest as possible 100 00:03:38.640 --> 00:03:39.840 as I was like, well, this is what we did in revenue, 101 00:03:39.840 --> 00:03:41.160 this is what we did in profit, 102 00:03:41.160 --> 00:03:42.800 so that I can just be transparent with everybody 103 00:03:42.800 --> 00:03:44.520 so you know at least what to look for. 104 00:03:44.520 --> 00:03:47.720 And so when someone says we have a $50 million business 105 00:03:47.720 --> 00:03:49.800 or a $100 million business, ask them, 106 00:03:49.800 --> 00:03:51.360 are you talking about yearly revenue? 107 00:03:51.360 --> 00:03:53.040 Are you talking about profit? 108 00:03:53.040 --> 00:03:54.320 Like what are you talking about specifically 109 00:03:54.320 --> 00:03:56.240 when you say that number, right? 110 00:03:56.240 --> 00:03:58.200 And a lot of times we're like, well, I mean, 111 00:03:58.200 --> 00:03:59.440 I guess that's how much, you know, 112 00:03:59.440 --> 00:04:01.840 total revenue we've done, you know, since we started. 113 00:04:01.840 --> 00:04:03.640 Now mind you, most entrepreneurs, 114 00:04:03.640 --> 00:04:05.800 especially newer entrepreneurs will conflate 115 00:04:05.800 --> 00:04:10.560 or they will mix revenue with cash collected, right? 116 00:04:10.560 --> 00:04:12.120 Those are two very different things, right? 117 00:04:12.120 --> 00:04:15.040 Revenue is is contract value, right? 118 00:04:15.040 --> 00:04:17.160 But cash collected is really reality. 119 00:04:17.160 --> 00:04:18.720 And so they'll use this term, 120 00:04:18.720 --> 00:04:20.320 and for the purposes of this one, I say revenue, 121 00:04:20.320 --> 00:04:22.280 I mean cash collected, what was processed 122 00:04:22.280 --> 00:04:23.680 and received by the business? 123 00:04:23.680 --> 00:04:26.280 So the second way that people describe their values, 124 00:04:26.280 --> 00:04:28.280 how much total revenue they don't have a lifetime. 125 00:04:28.280 --> 00:04:30.760 So you may actually have seen, you can see this will work. 126 00:04:30.760 --> 00:04:31.720 I got for doing a hundred million 127 00:04:31.720 --> 00:04:32.640 or passing a hundred million dollars 128 00:04:32.640 --> 00:04:36.840 until revenue in three years, three and a half years, I think, 129 00:04:36.840 --> 00:04:38.320 since we started with clickfunnels, 130 00:04:38.320 --> 00:04:40.600 which is software that we use for landing pages. 131 00:04:40.600 --> 00:04:43.200 And they recognize the people who are top performers, all right? 132 00:04:43.200 --> 00:04:45.360 But again, that's revenue. 133 00:04:45.360 --> 00:04:47.080 Like it doesn't mean it means cash collected, 134 00:04:47.080 --> 00:04:50.320 but it doesn't mean that we're doing that per year. 135 00:04:50.320 --> 00:04:51.440 Now this year is a breakout year, 136 00:04:51.440 --> 00:04:52.880 and I'll tell you what we do at the end of this year, 137 00:04:52.880 --> 00:04:54.880 because we will be close to that number. 138 00:04:54.880 --> 00:04:56.440 I don't think we'll cross a hundred million this year, 139 00:04:56.440 --> 00:04:59.040 but we'll be really close. 140 00:04:59.040 --> 00:05:02.440 So anyways, number three is business valuation. 141 00:05:02.440 --> 00:05:05.920 So this one is one where it's based on the market's value 142 00:05:05.920 --> 00:05:07.560 of the business if it were sold. 143 00:05:07.560 --> 00:05:09.400 So this is another way of kind of inflating 144 00:05:09.400 --> 00:05:10.760 the business that you have. 145 00:05:10.760 --> 00:05:12.880 Now this isn't necessarily an unfair way 146 00:05:12.880 --> 00:05:16.160 of valuing a business, right, based on its own value. 147 00:05:16.160 --> 00:05:18.360 But the thing is, is it all depends on who's the one 148 00:05:18.360 --> 00:05:19.840 who's a scribe in the value. 149 00:05:19.840 --> 00:05:22.120 What are they using to create that value? 150 00:05:22.120 --> 00:05:23.280 I hear all the time local, 151 00:05:23.280 --> 00:05:25.760 I think I'll be able to get 15 times top line. 152 00:05:25.760 --> 00:05:28.880 You don't know, squawked, right? 153 00:05:28.880 --> 00:05:32.040 Like the market will pay with the market will pay, all right? 154 00:05:32.040 --> 00:05:34.520 And so for most businesses that are small businesses, 155 00:05:34.520 --> 00:05:36.840 so anything that's under $5 million a year in revenue, 156 00:05:36.840 --> 00:05:39.760 most of those guys are getting two to three times EBITDA, 157 00:05:39.760 --> 00:05:42.480 which is another measurement and we get to in a second, 158 00:05:42.480 --> 00:05:44.440 which is the earnings before interest, 159 00:05:44.440 --> 00:05:46.480 tax, and monetization, and depreciation, right? 160 00:05:46.480 --> 00:05:50.040 And so those are business metrics 161 00:05:50.040 --> 00:05:52.280 that is going to have a multiple scribe to it. 162 00:05:52.280 --> 00:05:53.720 So if you're a mid market, 163 00:05:53.720 --> 00:05:57.080 which would be like $10 to $100 million in revenue per year, 164 00:05:57.080 --> 00:05:59.640 then you might have a six to eight times multiple. 165 00:05:59.640 --> 00:06:01.560 If you get above $100 million, 166 00:06:01.560 --> 00:06:05.240 then a lot of times you can get into the 12s, 15s, et cetera. 167 00:06:05.240 --> 00:06:07.240 And most of the time that's done on EBITDA, 168 00:06:07.240 --> 00:06:10.200 in a very, very, very rare number of circumstances, 169 00:06:10.200 --> 00:06:12.480 will they do it on top line revenue, all right? 170 00:06:12.480 --> 00:06:13.960 And that is in a fast growth company 171 00:06:13.960 --> 00:06:15.240 that has high amounts of capital 172 00:06:15.240 --> 00:06:16.560 that need to be reinvested in it, 173 00:06:16.560 --> 00:06:19.080 that they believe are going to give it a strategic advantage 174 00:06:19.080 --> 00:06:21.840 for high gross profits in the future 175 00:06:21.840 --> 00:06:23.520 that they're reinvesting capital into, all right? 176 00:06:23.520 --> 00:06:26.000 And so that is where I saw somebody recently saying 177 00:06:26.000 --> 00:06:27.000 that they had, you know, 178 00:06:27.000 --> 00:06:29.960 they sold their business for 100 times EBITDA, right? 179 00:06:29.960 --> 00:06:31.120 What that really means is that like, 180 00:06:31.120 --> 00:06:32.840 and this is where this is what I want everybody 181 00:06:32.840 --> 00:06:35.440 to be thinking, well, either they had a really, really 182 00:06:35.440 --> 00:06:37.560 crazy business or more likely, 183 00:06:37.560 --> 00:06:40.480 they were making almost no profit in their business, 184 00:06:40.480 --> 00:06:42.320 and just got a high valuation because of, 185 00:06:42.320 --> 00:06:43.800 or not even necessarily a high valuation, 186 00:06:43.800 --> 00:06:46.560 if they're doing, you know, $10,000 a year in profit 187 00:06:46.560 --> 00:06:48.000 on a $5 million business, 188 00:06:48.000 --> 00:06:50.800 then if they sell for, you know, $5 million, 189 00:06:50.800 --> 00:06:54.880 they get 500 times EBITDA, which is ridiculous, right? 190 00:06:54.880 --> 00:06:57.200 But people do that because it sounds impressive, right? 191 00:06:57.200 --> 00:06:58.680 So that's why we're going through this, 192 00:06:58.680 --> 00:06:59.960 so you can cut through the BS, 193 00:06:59.960 --> 00:07:02.000 and hopefully get better sources of information, 194 00:07:02.000 --> 00:07:02.920 which is kind of my goal here, 195 00:07:02.920 --> 00:07:04.000 is that you can measure, 196 00:07:04.000 --> 00:07:06.120 you can measure other entrepreneurs value 197 00:07:06.120 --> 00:07:08.400 based on the true value that they've been providing, all right? 198 00:07:08.400 --> 00:07:11.120 So the next one here is yearly revenue, all right? 199 00:07:11.120 --> 00:07:14.080 So this is how much revenue a business is doing yearly. 200 00:07:14.080 --> 00:07:16.080 Now, we're getting a little bit closer to reality here. 201 00:07:16.080 --> 00:07:18.160 Now, again, revenue versus cash collected, 202 00:07:18.160 --> 00:07:19.280 it depends on the type of business, 203 00:07:19.280 --> 00:07:20.480 if you have a service business that's based 204 00:07:20.480 --> 00:07:21.960 on recurring revenue and contracts, 205 00:07:21.960 --> 00:07:23.560 then you're gonna have contracts that are factoring to that, 206 00:07:23.560 --> 00:07:24.960 if you had an e-commerce business, for example, 207 00:07:24.960 --> 00:07:26.280 which is purely transactional, 208 00:07:26.280 --> 00:07:27.640 then the revenue and cash collection 209 00:07:27.640 --> 00:07:29.600 are gonna be very close to each other, right? 210 00:07:29.600 --> 00:07:31.120 And so, and, you know, 211 00:07:31.120 --> 00:07:33.680 revenue would also not take into account refunds, 212 00:07:33.680 --> 00:07:34.600 charge vaccines like that, 213 00:07:34.600 --> 00:07:36.200 which then gets into net revenue. 214 00:07:36.200 --> 00:07:37.880 I won't get into it, there's a zillion terms, 215 00:07:37.880 --> 00:07:39.520 and just as a side note here, 216 00:07:39.520 --> 00:07:41.320 the reason there are so many terms 217 00:07:41.320 --> 00:07:43.240 is because measuring value is something 218 00:07:43.240 --> 00:07:45.160 that is one of the hardest aspects 219 00:07:45.160 --> 00:07:46.400 of investing in business in general, 220 00:07:46.400 --> 00:07:48.960 is that people wanna figure out what is this thing worth? 221 00:07:48.960 --> 00:07:50.520 And so that's why they have lots of different metrics 222 00:07:50.520 --> 00:07:52.360 that they look at, and so for you as a, 223 00:07:52.360 --> 00:07:55.080 as a keen entrepreneur or investor 224 00:07:55.080 --> 00:07:57.680 or a person who wants to grow within the business world, 225 00:07:57.680 --> 00:07:59.040 understanding all of these metrics 226 00:07:59.040 --> 00:08:02.360 and how they work together to assess or get as close 227 00:08:02.360 --> 00:08:04.120 to true value as possible, 228 00:08:04.120 --> 00:08:06.160 are these are gonna be tools in your skill set, 229 00:08:06.160 --> 00:08:07.600 and some of these are better and some of these are worse, 230 00:08:07.600 --> 00:08:09.560 and I'll get to my ratings in a second, all right? 231 00:08:09.560 --> 00:08:10.800 So yearly revenues, the next one, 232 00:08:10.800 --> 00:08:12.160 which is just how much are you doing every year 233 00:08:12.160 --> 00:08:14.240 in terms of top line, right? 234 00:08:14.240 --> 00:08:17.080 Now, the next one is profit or EBITDA. 235 00:08:17.080 --> 00:08:19.320 Now, these two things are not necessarily the same, 236 00:08:19.320 --> 00:08:21.400 but I'm gonna say EBITDA being earnings 237 00:08:21.400 --> 00:08:24.560 before interest tax, depreciation and amortization, right? 238 00:08:24.560 --> 00:08:27.200 For most businesses, this is where coming back 239 00:08:27.200 --> 00:08:28.920 to the business valuation, if you're mid market, 240 00:08:28.920 --> 00:08:29.760 you're getting six to eight, 241 00:08:29.760 --> 00:08:31.440 if you're kind of smaller than you're at, you know, 242 00:08:31.440 --> 00:08:33.800 two to three, sometimes four, if you're doing really well, 243 00:08:33.800 --> 00:08:36.040 or you have some sort of competitive advantage. 244 00:08:36.080 --> 00:08:38.320 And so, and again, that may sound soft to you 245 00:08:38.320 --> 00:08:39.600 in terms of those numbers, 246 00:08:39.600 --> 00:08:42.160 but the reality is that a lot of people just look 247 00:08:42.160 --> 00:08:45.160 at the outliers, which catch all the news in the press, 248 00:08:45.160 --> 00:08:46.840 but most businesses, you know, 249 00:08:46.840 --> 00:08:50.200 businesses are sold every day at 1X, 2X, 3X EBITDA, 250 00:08:50.200 --> 00:08:53.960 all the time, just no one wants to talk about it, right? 251 00:08:53.960 --> 00:08:56.480 And so this is even closer to reality. 252 00:08:56.480 --> 00:08:57.760 So if I'm looking at a business owner 253 00:08:57.760 --> 00:08:59.720 or somebody's trying to posture with me, 254 00:08:59.720 --> 00:09:03.440 right, the eggplant measuring contest of entrepreneurship, 255 00:09:03.440 --> 00:09:04.840 they're gonna, if they're starting to talk to me 256 00:09:04.840 --> 00:09:06.160 about these numbers, I'm like, hey, bro, 257 00:09:06.160 --> 00:09:08.240 like, what are we doing bottom line, right? 258 00:09:08.240 --> 00:09:09.440 What are we doing bottom line per year? 259 00:09:09.440 --> 00:09:11.080 This is what I want to know, right? 260 00:09:13.080 --> 00:09:14.280 We'll go guys, you guys already know 261 00:09:14.280 --> 00:09:16.240 that I don't run any ads on this, 262 00:09:16.240 --> 00:09:17.560 and I don't sell anything. 263 00:09:17.560 --> 00:09:19.400 And so the only ask that I can ever have 264 00:09:19.400 --> 00:09:20.760 are you guys that you help me spread the word 265 00:09:20.760 --> 00:09:22.280 so we can have more entrepreneurs, 266 00:09:22.280 --> 00:09:24.000 make more money, feed their families, 267 00:09:24.000 --> 00:09:26.400 make better products, and have better experiences 268 00:09:26.400 --> 00:09:28.000 for their employees and customers. 269 00:09:28.000 --> 00:09:31.000 The only way we do that is if you can rate and review 270 00:09:31.000 --> 00:09:32.440 and share this podcast. 271 00:09:32.440 --> 00:09:33.800 So the single thing that I have to do, 272 00:09:33.800 --> 00:09:35.000 so you can just leave review, 273 00:09:35.000 --> 00:09:36.960 but take 10 seconds or one type of the thumb, 274 00:09:36.960 --> 00:09:38.240 it means the absolute will to me, 275 00:09:38.240 --> 00:09:41.040 and more importantly, it may change the world to someone else. 276 00:09:42.720 --> 00:09:44.800 And so that leads me naturally to the next one, 277 00:09:44.800 --> 00:09:46.880 which is, okay, well, you've got, 278 00:09:46.880 --> 00:09:49.000 you've got sort of amount of EBITDA that's coming up, 279 00:09:49.000 --> 00:09:50.440 but depending on your type of business, 280 00:09:50.440 --> 00:09:51.760 you might have to reallocate all that money 281 00:09:51.760 --> 00:09:53.200 back into the business to just maintain 282 00:09:53.200 --> 00:09:55.240 your competitive advantage, which, 283 00:09:55.240 --> 00:09:56.640 Charlie Munger, Warren Buffett, 284 00:09:56.640 --> 00:09:59.040 they talk about how their least favorite type of businesses 285 00:09:59.040 --> 00:10:01.800 are businesses that require lots of additional capital, 286 00:10:01.800 --> 00:10:03.840 right now as they've become gazillionaires, 287 00:10:03.840 --> 00:10:05.080 they have to find businesses like that 288 00:10:05.080 --> 00:10:06.240 because they have to put their capital work, 289 00:10:06.240 --> 00:10:07.680 but with the thing that created their wealth, 290 00:10:07.680 --> 00:10:09.160 with finding businesses that did not require 291 00:10:09.160 --> 00:10:12.160 a lot of additional capital, that created lots of, 292 00:10:12.160 --> 00:10:14.640 survey says, never cash flow. 293 00:10:14.640 --> 00:10:15.680 So how much owner earnings, 294 00:10:15.680 --> 00:10:19.120 how much can you extract from the business, all right? 295 00:10:19.120 --> 00:10:23.000 That's what this NFCF here is, never cash flow, right? 296 00:10:23.000 --> 00:10:23.840 And I've talked about this, 297 00:10:23.840 --> 00:10:26.720 but this is after I've reinvested profits in the business 298 00:10:26.720 --> 00:10:29.080 to maintain and grow our competitive advantage, 299 00:10:29.080 --> 00:10:31.200 how much can I as the owner take out? 300 00:10:31.200 --> 00:10:32.560 The reason this is so important is because 301 00:10:32.560 --> 00:10:33.920 a lot of times you're not going to sell. 302 00:10:33.920 --> 00:10:35.200 A lot of times businesses fail. 303 00:10:35.200 --> 00:10:36.120 There are tons of risks. 304 00:10:36.120 --> 00:10:37.440 That's why business is one of the riskiest things 305 00:10:37.440 --> 00:10:38.280 to get into. 306 00:10:38.280 --> 00:10:40.160 Most businesses do not succeed. 307 00:10:40.160 --> 00:10:42.320 That's just, those are the stats, right? 308 00:10:42.320 --> 00:10:44.120 And 99 times out of 100, 309 00:10:44.120 --> 00:10:45.600 you business never actually sells. 310 00:10:45.600 --> 00:10:47.480 You might do an asset sale or a garage sale, 311 00:10:47.480 --> 00:10:48.960 but it doesn't actually sell for what you think it is, 312 00:10:48.960 --> 00:10:50.720 which is why for me, as an entrepreneur, 313 00:10:50.720 --> 00:10:53.240 you want to de-risk by extracting cash flow. 314 00:10:53.240 --> 00:10:55.680 And many times this is one of the values of the businesses. 315 00:10:55.680 --> 00:10:57.120 So if I'm talking to an entrepreneur, 316 00:10:57.120 --> 00:10:59.040 and they tell me this, then I'm going to probably ask, 317 00:10:59.040 --> 00:11:00.320 well, what do you, what are you taking home 318 00:11:00.320 --> 00:11:01.160 and owner earnings? 319 00:11:01.160 --> 00:11:02.160 What are you extracting from the business? 320 00:11:02.160 --> 00:11:03.360 What are you taking out as dividends? 321 00:11:03.360 --> 00:11:05.960 Because I want to know what's reality, right? 322 00:11:05.960 --> 00:11:08.040 And that leads me to the last and the bottom one here 323 00:11:08.040 --> 00:11:09.560 and then I'll give you my ratings on these, 324 00:11:09.560 --> 00:11:11.440 which is, what's your net worth, right? 325 00:11:11.440 --> 00:11:14.040 This is what entrepreneurs, everyone's shying away 326 00:11:14.040 --> 00:11:14.880 from talking about. 327 00:11:14.880 --> 00:11:16.520 A lot of guys that you see on your new speed, 328 00:11:16.520 --> 00:11:19.440 those guys message me and say, hey, man, 329 00:11:19.440 --> 00:11:22.240 I want to do X, Y, and Z, I want to start investing, et cetera, 330 00:11:22.240 --> 00:11:23.880 and they've got half a million dollars to their name, 331 00:11:23.880 --> 00:11:25.600 and they talk about how they've done $10 million 332 00:11:25.600 --> 00:11:28.280 in revenue, right, lifetime. 333 00:11:28.280 --> 00:11:30.160 And so again, you could just, 334 00:11:30.200 --> 00:11:31.800 I'll give you a funny example for it. 335 00:11:31.800 --> 00:11:34.360 So if someone says, hey, we've done a million dollars 336 00:11:34.360 --> 00:11:36.440 in revenue, look at our award, right? 337 00:11:36.440 --> 00:11:38.160 That's over a total lifetime, right? 338 00:11:38.160 --> 00:11:39.480 That could be over 10 years. 339 00:11:39.480 --> 00:11:40.600 So if you did a million dollars in revenue, 340 00:11:40.600 --> 00:11:42.440 or 10 years, we did a hundred thousand dollars a year 341 00:11:42.440 --> 00:11:44.480 in revenue, right? 342 00:11:44.480 --> 00:11:46.760 And if you're doing 50% margins on that, right? 343 00:11:46.760 --> 00:11:49.840 That's a $50,000 year owner income business, 344 00:11:49.840 --> 00:11:51.360 which is just the median income in the United States, 345 00:11:51.360 --> 00:11:52.640 and there's nothing wrong with that. 346 00:11:52.640 --> 00:11:55.440 But in terms of taking this person as an authority, 347 00:11:55.440 --> 00:11:59.760 I would be hesitant to take their advice 348 00:11:59.840 --> 00:12:02.120 because, candidly, they're probably just spending 349 00:12:02.120 --> 00:12:03.480 what they're making on living, 350 00:12:03.480 --> 00:12:05.320 because if that's how they're trying to position. 351 00:12:05.320 --> 00:12:08.800 So just take that with a grain of salt, you know what I mean? 352 00:12:08.800 --> 00:12:10.200 And the reason I'm going through this is, 353 00:12:10.200 --> 00:12:13.400 because the best thing you can do is learn from others. 354 00:12:13.400 --> 00:12:15.880 But to make sure that you're actually learning from others, 355 00:12:15.880 --> 00:12:17.960 learning from people who are good information sources 356 00:12:17.960 --> 00:12:18.800 is important. 357 00:12:18.800 --> 00:12:21.200 And there's tons of people in a way more about business, 358 00:12:21.200 --> 00:12:22.160 but I just try to share this stuff 359 00:12:22.160 --> 00:12:24.200 that has worked well for us in creating, you know, 360 00:12:24.200 --> 00:12:25.760 for me, an ultra high net worth, 361 00:12:25.760 --> 00:12:27.080 which is over 30 million. 362 00:12:27.080 --> 00:12:30.200 And there's two aspects of net worth, all right? 363 00:12:30.200 --> 00:12:33.520 You have your net worth that comes from your investable assets, 364 00:12:33.520 --> 00:12:35.240 which is what you've extracted, right? 365 00:12:35.240 --> 00:12:37.280 What you've extracted, paid your taxes on, 366 00:12:37.280 --> 00:12:39.680 and then been able to reinvest and grow. 367 00:12:39.680 --> 00:12:42.320 And the second is the percentage of the businesses 368 00:12:42.320 --> 00:12:44.400 that you own, business or businesses that you own, 369 00:12:44.400 --> 00:12:45.920 all right, which is why having a fair 370 00:12:45.920 --> 00:12:47.520 and reasonable valuation is important, 371 00:12:47.520 --> 00:12:49.280 because what's the true market value of the business 372 00:12:49.280 --> 00:12:50.120 that you have? 373 00:12:50.120 --> 00:12:52.120 Now, if someone says like, my business does, 374 00:12:52.120 --> 00:12:53.920 like $10 million a year, 375 00:12:53.920 --> 00:12:56.840 and they do $2 million of EBITDA, right? 376 00:12:56.840 --> 00:12:57.680 $2 million a year, 377 00:12:57.680 --> 00:13:00.320 and they're getting a five times multiple on that, 378 00:13:00.320 --> 00:13:01.720 because it's truly a business 379 00:13:01.720 --> 00:13:03.040 and doesn't require their face. 380 00:13:03.040 --> 00:13:04.120 If it requires their face, 381 00:13:04.120 --> 00:13:06.240 then they're not gonna get that multiple, right? 382 00:13:06.240 --> 00:13:08.200 So it's important to understand these variables 383 00:13:08.200 --> 00:13:10.800 that create and measure value in a business, 384 00:13:10.800 --> 00:13:12.200 because if you're looking for people 385 00:13:12.200 --> 00:13:13.800 and you're trying to listen to advice, 386 00:13:13.800 --> 00:13:14.760 then make sure you're getting it 387 00:13:14.760 --> 00:13:17.200 from the sources that are true and real, all right? 388 00:13:17.200 --> 00:13:19.400 And so, again, two different ways 389 00:13:19.400 --> 00:13:22.360 that combined to create net worth 390 00:13:22.360 --> 00:13:24.600 is gonna be your after tax wealth 391 00:13:24.600 --> 00:13:26.000 that you've extracted from the business 392 00:13:26.000 --> 00:13:27.880 and be able to reinvest on the side 393 00:13:27.880 --> 00:13:29.600 and grow on your own, right? 394 00:13:29.600 --> 00:13:31.720 And the percentages of the businesses 395 00:13:31.720 --> 00:13:33.200 that you own and the value around them, all right? 396 00:13:33.200 --> 00:13:35.240 So, let's get to the good part, which is, 397 00:13:35.240 --> 00:13:36.480 yeah, your nay, is this something 398 00:13:36.480 --> 00:13:38.480 that I'd be looking at in terms of 399 00:13:38.480 --> 00:13:40.240 whether I'm gonna value this person's opinion 400 00:13:40.240 --> 00:13:41.920 based on this stat alone? 401 00:13:41.920 --> 00:13:43.920 Survey says contract value? 402 00:13:43.920 --> 00:13:45.760 No, I would not do that, 403 00:13:45.760 --> 00:13:49.000 and that is because this can be wildly inflated, 404 00:13:49.000 --> 00:13:51.720 especially if you extrapolate on one month's contract value 405 00:13:51.720 --> 00:13:52.680 for the rest of the year, 406 00:13:52.680 --> 00:13:54.600 it can be wildly inflated, all right? 407 00:13:54.600 --> 00:13:56.920 So, number two, lifetime revenue. 408 00:13:56.920 --> 00:14:00.400 Survey says, no, I would not use this as a way 409 00:14:00.400 --> 00:14:03.080 of measuring how good someone is at business 410 00:14:03.080 --> 00:14:05.000 because you wanna know how long was that? 411 00:14:05.000 --> 00:14:06.440 Was that over 20 years? 412 00:14:06.440 --> 00:14:07.600 Was it over 40 years? 413 00:14:07.600 --> 00:14:09.640 Cause that's what McDonald's employee can earn 414 00:14:09.640 --> 00:14:11.000 over that amount of time, all right? 415 00:14:11.000 --> 00:14:12.920 So don't be impressed by this number. 416 00:14:12.920 --> 00:14:16.080 Ask more questions, which you should hopefully do 417 00:14:16.080 --> 00:14:17.240 as we go down this. 418 00:14:17.240 --> 00:14:18.800 All right, business valuation. 419 00:14:18.800 --> 00:14:22.560 Survey says, yes, but caveat on this, 420 00:14:22.560 --> 00:14:25.280 you wanna know what kind of multiple are you assuming? 421 00:14:25.280 --> 00:14:26.280 And what is that off of? 422 00:14:26.280 --> 00:14:28.640 Top line or bottom line and why can you defend that, right? 423 00:14:28.640 --> 00:14:29.880 So this is asking good questions 424 00:14:29.880 --> 00:14:32.160 so that you can actually get closer to true value, 425 00:14:32.160 --> 00:14:34.320 which is why all these metrics even exist to begin with 426 00:14:34.320 --> 00:14:37.600 is so that people wanna ascribe and measure value, all right? 427 00:14:37.600 --> 00:14:39.040 Next one, yearly revenue. 428 00:14:39.040 --> 00:14:42.320 Survey says partial answer because it goes with number five, 429 00:14:42.320 --> 00:14:44.080 which is yearly profit, all right? 430 00:14:44.080 --> 00:14:46.080 The difference here, if someone's doing $100 million 431 00:14:46.080 --> 00:14:48.160 a year in top line revenue, 432 00:14:48.160 --> 00:14:50.880 and they're spinning out just a little bit of profit, 433 00:14:50.880 --> 00:14:52.600 that may be okay, right? 434 00:14:52.600 --> 00:14:54.080 If you're doing $500,000 a year in profit, 435 00:14:54.080 --> 00:14:56.240 I knew a company that that was doing 20 million a year in profit 436 00:14:56.240 --> 00:14:58.200 doing $500,000, sorry, 20 million a revenue, 437 00:14:58.200 --> 00:14:59.520 $500,000 a year in profit, 438 00:14:59.520 --> 00:15:01.880 and they got sold for $168 million, right? 439 00:15:01.880 --> 00:15:03.680 Now, that's a super valuable business, 440 00:15:03.680 --> 00:15:05.640 and it's because the bankers and the people who bought it 441 00:15:05.640 --> 00:15:08.400 saw that they had reinvested everything, right? 442 00:15:08.400 --> 00:15:10.400 Intergrowing the business, right? 443 00:15:10.400 --> 00:15:13.320 And so understanding the relationship between these two things. 444 00:15:13.320 --> 00:15:15.960 If I have another business that's doing $500,000 a year 445 00:15:15.960 --> 00:15:18.000 and $1 million a year in top line revenue, 446 00:15:18.000 --> 00:15:20.080 then it's gonna be a far less valuable business. 447 00:15:20.080 --> 00:15:21.680 All right, so understanding that they might be making 448 00:15:21.680 --> 00:15:23.400 some strategic decisions about how they're reinvesting 449 00:15:23.400 --> 00:15:25.320 the business, et cetera, or some capital costs 450 00:15:25.320 --> 00:15:27.080 that might have cost them, but they see what it's going 451 00:15:27.080 --> 00:15:29.720 to yield them in the future, et cetera, all right? 452 00:15:29.720 --> 00:15:32.680 Now, this is especially true with software businesses, 453 00:15:32.680 --> 00:15:34.800 FYI, all right, which that particular business 454 00:15:34.800 --> 00:15:36.240 was a software business. 455 00:15:36.240 --> 00:15:39.840 Next one, survey says, yes, on Nefricashville, 456 00:15:39.840 --> 00:15:42.160 this is Uncle Warren, this is Uncle Charlie, 457 00:15:42.160 --> 00:15:45.360 Munger, this is their primary metric for measuring business. 458 00:15:45.360 --> 00:15:47.000 They try and figure out what is the Nefricashville 459 00:15:47.000 --> 00:15:48.480 after I reinvest everything. 460 00:15:48.480 --> 00:15:52.080 This is an excellent way, excellent way 461 00:15:52.080 --> 00:15:54.960 to figure out the value of the business, all right? 462 00:15:54.960 --> 00:15:56.800 Because if you can do your Nefricashflow 463 00:15:56.800 --> 00:15:59.360 and then you multiply it, then you're gonna get very close 464 00:15:59.360 --> 00:16:02.440 to what an investor might be willing to pay for the asset, 465 00:16:02.440 --> 00:16:04.680 excluding some sort of crazy monopoly thing 466 00:16:04.680 --> 00:16:06.100 that they're trying to get with some sort of 467 00:16:06.100 --> 00:16:08.960 category king situation in a marketplace. 468 00:16:08.960 --> 00:16:11.520 All right, and then finally, net worth, 469 00:16:11.520 --> 00:16:15.080 how do we see this on the valuing of an entrepreneur's eggplant, 470 00:16:15.080 --> 00:16:15.960 right? 471 00:16:15.960 --> 00:16:19.840 Survey says, yes, I think this is an excellent measure 472 00:16:19.840 --> 00:16:23.200 of value because this is what is left after all the chips, 473 00:16:23.200 --> 00:16:25.360 all the chips of phone, all the cookies have crumbled, 474 00:16:25.360 --> 00:16:27.320 all the roosters have roosted. 475 00:16:27.320 --> 00:16:30.080 This is what's left after everything, right? 476 00:16:30.080 --> 00:16:32.920 Because if you, you know, like I've had 13 businesses 477 00:16:32.920 --> 00:16:36.200 and I now own eight more, so I've had 21 businesses, right? 478 00:16:36.200 --> 00:16:37.480 So I've had a lot of these things 479 00:16:37.480 --> 00:16:39.600 and the thing that remains is you, 480 00:16:39.600 --> 00:16:41.000 you're not worth this entrepreneur. 481 00:16:41.000 --> 00:16:44.920 And if you look at the Inc500, sorry, the Fortune 500 482 00:16:44.920 --> 00:16:46.160 and you look at it 50 years ago, 483 00:16:46.160 --> 00:16:47.800 what you'll see is that there's only two businesses 484 00:16:47.800 --> 00:16:50.560 that are still on the Fortune 500 from now, 485 00:16:50.560 --> 00:16:52.600 from 50 years ago, G and Ford. 486 00:16:52.600 --> 00:16:54.760 That's it, that's it, right? 487 00:16:54.760 --> 00:16:56.480 And so when you think about that, 488 00:16:56.480 --> 00:17:00.000 a lot of times what business becomes is you create something 489 00:17:00.000 --> 00:17:01.640 and then as an entrepreneur, you wanna be able 490 00:17:01.640 --> 00:17:02.880 to create enough personal wealth 491 00:17:02.880 --> 00:17:04.680 throughout the trajectory of the business. 492 00:17:04.680 --> 00:17:07.320 That's like literally all businesses, Fortune 500. 493 00:17:07.320 --> 00:17:10.120 And only two of them, right, are still there. 494 00:17:10.120 --> 00:17:12.800 And so thinking about that, that should hopefully 495 00:17:12.800 --> 00:17:15.240 shift your perspective, which is why I'm so big on 496 00:17:15.240 --> 00:17:17.960 extracting dividends while the business is growing. 497 00:17:17.960 --> 00:17:19.840 And I know that that might not be as popular 498 00:17:19.840 --> 00:17:20.960 in the Silicon Valley world, 499 00:17:20.960 --> 00:17:22.960 but all of those guys don't live in reality. 500 00:17:22.960 --> 00:17:24.480 And for the everyday business owners, 501 00:17:24.480 --> 00:17:26.800 everyday entrepreneurs that are hustling out there, 502 00:17:26.800 --> 00:17:29.280 trying to make a buck, trying to feed their families, 503 00:17:29.280 --> 00:17:31.440 it's important to de-risk because you can't put 504 00:17:31.440 --> 00:17:34.080 all your eggs in the single basket, that is my opinion. 505 00:17:34.080 --> 00:17:35.560 Sure, you can bet on yourself, 506 00:17:35.560 --> 00:17:37.160 but there are so many more stories of guys 507 00:17:37.160 --> 00:17:39.080 who bet everything on themselves at the casino 508 00:17:39.080 --> 00:17:40.800 and walked away empty handed. 509 00:17:40.800 --> 00:17:42.080 All right, and so it is my belief 510 00:17:42.080 --> 00:17:43.640 that if you were generating a profit, 511 00:17:43.640 --> 00:17:46.160 you should be purposely taking some out every month, 512 00:17:46.160 --> 00:17:48.440 even though for me, the vast majority of my net worth 513 00:17:48.440 --> 00:17:50.800 is in my business valuations still, 514 00:17:50.800 --> 00:17:53.200 I still have over whatever, a lot, 515 00:17:53.200 --> 00:17:57.000 in investable assets that categorizes me 516 00:17:57.000 --> 00:17:58.320 as ultra high net worth, all right. 517 00:17:58.320 --> 00:17:59.840 And so again, ultra net worth, 518 00:17:59.840 --> 00:18:01.440 just so you know from the definition standpoint, 519 00:18:01.440 --> 00:18:04.040 is investable assets, it's not based on total value. 520 00:18:04.040 --> 00:18:06.640 All right, and so these are the seven ways 521 00:18:06.640 --> 00:18:08.560 that I wanted to highlight for measuring value. 522 00:18:08.560 --> 00:18:10.720 If you see someone and they say, 523 00:18:10.720 --> 00:18:13.160 I am worth this, or my business is worth this, 524 00:18:13.160 --> 00:18:15.720 I built an ex million dollar business. 525 00:18:15.720 --> 00:18:17.800 Ask these questions. 526 00:18:17.800 --> 00:18:19.520 Is that lifetime revenue? 527 00:18:19.520 --> 00:18:21.640 Is that contract value that's been extrapolated? 528 00:18:21.640 --> 00:18:24.480 Is that your business valuation based on what multiple? 529 00:18:24.480 --> 00:18:26.200 Is that based on a top line multiple? 530 00:18:26.200 --> 00:18:28.000 Or is that based on a bottom line multiple? 531 00:18:28.000 --> 00:18:29.120 What's the net free cash flow? 532 00:18:29.120 --> 00:18:31.080 What are you taking out as dividends every year? 533 00:18:31.080 --> 00:18:33.000 And then finally, if someone will share it with you, 534 00:18:33.000 --> 00:18:35.560 which I'm actually not that opposed 535 00:18:35.560 --> 00:18:36.960 to sharing net worth numbers, 536 00:18:37.000 --> 00:18:38.600 I know some people are. 537 00:18:38.600 --> 00:18:40.400 I don't really know why I figure if you make enough money 538 00:18:40.400 --> 00:18:42.000 over time, people will always end up finding out 539 00:18:42.000 --> 00:18:43.480 what your net worth is, which is basically 540 00:18:43.480 --> 00:18:44.880 the entire Forbes list. 541 00:18:44.880 --> 00:18:47.080 And so anyways, these are the ways that you measure value, 542 00:18:47.080 --> 00:18:49.640 these are my two second snap judgments on them. 543 00:18:49.640 --> 00:18:51.960 And if you have your stoop cap on, 544 00:18:51.960 --> 00:18:53.360 then you probably figured out 545 00:18:53.360 --> 00:18:55.480 that a lot of these things go together, right? 546 00:18:55.480 --> 00:18:56.720 And it's not just one number, 547 00:18:56.720 --> 00:18:58.600 it's understanding the interplay between them 548 00:18:58.600 --> 00:19:01.160 so that you can ascertain with the true value 549 00:19:01.160 --> 00:19:04.000 of a business and or the entrepreneur that owns it is.