WEBVTT

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If you are good at something, you need tools.

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Welcome to the game where we talk about how to get more customers, how to make more

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customers, how to keep them longer, and the many failures and lessons we have learned

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along the way.

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I hope you enjoy and subscribe.

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Mozination two days ago, I was speaking with some business owners that approached me

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about becoming portfolio companies in acquisition.com and I want to talk to you about how that

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conversation went and I want to give you one of the most useful frameworks that I use

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in analyzing a business that you can use today to analyze your own business and instantly

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make two, three exit, which is exactly what I do when I'm looking at the portfolio

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companies that we're considering investing in.

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The beautiful thing about this equation, and as you develop as an entrepreneur, at least

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as I have, and just so you guys don't know who I am, my name is Alex Ramozio, I'm

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acquisition.com.

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Our portfolio companies do about $85 million a year, and so the reason I make this channel

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is because a lot of people are broken, I don't want you to be one of them, and Mozination

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is not going to be one of them.

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Everyone needs, if you are good at something, you need tools.

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This equation is one of those tools that you have as an entrepreneur.

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If you have to rely on your systems, if you have to rely on finance to get you the

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reports to get to make general directional decisions, then you're going to be weak as an

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entrepreneur because you have to be able to do these calculations in your head back

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of napkin.

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I want to show you the most valuable equation that I use in analyzing my own businesses

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and potential portfolio companies.

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It requires five variables, and I'm going to show you what they are, and then I'm going

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to show you how I got the two hardest numbers that most people don't know how to get within

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their business.

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I can even give you the sixth number, which will be a bonus one.

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Number one is going to be number of new sales per month.

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Most people know this number.

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The next one is current revenue.

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Most people also know this number.

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The next number is price.

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Most people know this number.

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The next number is going to be churn.

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Most people do not know this number.

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The next number is going to be lifetime value.

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Most people do not know this number.

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The next number is gross profit.

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I'm going to show you how in a simple conversation, we can figure out all of these things and

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extrapolate where our business is going to cap out, where the weak points are, and how

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we can see what the size of the opportunity.

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I'm going to give you a hypothetical example that I just had.

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I was talking to a business, they were doing 100 new sales per month.

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That's number one.

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I said, cool, what are you guys doing in revenue right now?

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They were doing 400K in revenue.

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I said, okay, and I'll do this here, current clients.

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This is really important.

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You will want to pay attention to this video, all right?

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So they had 380 clients, all right?

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Their current price was $1,000 per month.

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They didn't know lifetime value, they didn't know, all right?

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So I said, okay, well, the first thing we have to do is figure out where your hypothetical

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max is going to be, all right?

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So if we know the current number of new sales, because they're like, well, I have to get

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you these numbers later.

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I don't have them on me.

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I was like, if you know these numbers, we can do them live together.

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And they were like, oh, I was like, yeah, so let's walk through it, okay?

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So $1,000 a month is the price, right?

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And I said, okay, well, how many customers are canceling every week?

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And they said 13 people per week were canceling.

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I was like, okay, so roughly 50 per month, okay?

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Makes sense?

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Everyone good here?

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Now, they said they have 380 active clients.

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So what we do is to take 380 active clients, we divide it by 50, oops, sorry, 50 people

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canceling divided by 380 active clients, already did the math for you.

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It's 13% churn, all right?

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So now we take our price, all right, which is $1,000 per client per month.

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We divide it by that 13% churn, and we get $7,700, all right, roughly.

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So now, I know that $7,700 is going to be the LTV per customer, all right?

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Which means that this business is going to cap out a $7,7K per month, all right, which

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is about $9 million a year.

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Now they were currently doing about $400, okay?

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Now the thing is, there's a lot of business out there, and they were growing really rapidly,

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right?

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And it makes sense, because they had this kind of sales velocity.

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So with this kind of sales velocity, they're going to keep growing pretty quickly, and

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then it's going to become an asymptote, which looks like this, all right?

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So an asymptote is you have a hypothetical max, and it approaches it, but never gets there,

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all right?

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So the asymptote here will be $770K.

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The thing is, is that the growth rate would slow down, because churn is going to start

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eating a bigger and bigger and bigger percentage of the new business that is coming in, right?

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Right?

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Okay.

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So we know the current clients, we know the new sales, we know the current revenue, right?

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We know the hypothetical max, which for me helps me analyze the potential opportunity

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of this business, right?

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We know the churn now, which is 13%, we know the lifetime value of each customer now,

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which is 7,700, and I asked them, what kind of margins are we running on this?

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And they were running over 90% gross margins, all right?

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And the easy way to do that is how much does it cost to fulfill a customer?

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So for them, for that $1,000 month customer, it costs them less than $100 to fulfill on,

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all right?

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So it was very, very, very low cost business, which means all you do is you multiply

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this by .9, and then you get, let's see here, let's see if I can do my own math really

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quickly, all right?

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So now you get roughly, let's say, $7,000, okay?

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So the lifetime gross profit per customer is $7,000, which means as long as we're spending

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less than $7,000 to acquire a customer, we are going to be a profitable business, right?

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For the most part.

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Hey guys, love that you're listening to the podcast.

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If you ever want to have the video version of this, which usually has more facts, more visuals,

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more graphs, you know, drawn out stuff, sometimes it can help hit the brain centers in different

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ways.

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You can check out my YouTube channel.

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It's absolutely free.

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You can check that out if that's what you are into and if not, keep enjoying the show.

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So when we had this little discussion, all right, let's go back to our little drawing,

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right?

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We know that they're going to cap, right, at $7,700K, right, whatever you got them saying

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here, right?

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So if we want to grow this business, we either have to increase this one or we have to

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increase this one.

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That's it.

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We're going to grow a business by getting more customers or making them worth more.

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Period.

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That's all we have to do.

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And within this particular business, I saw the opportunity here because I saw a 13%

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turn, right?

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Because check out how this goes.

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If we can just cut the turn to let's say 3%, let's do some cool math, you want to see

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something really quick?

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Sure, Alex, I want to see.

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All right.

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Fine, I'll show you.

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All right.

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Change this to just 3% turn, all right?

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The new LTV becomes $33,000 per customer, all right?

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Now this misses all of a sudden, without changing anything else, becomes a $3.3 million per

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month business.

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That will become the new hypothetical cap and almost all of that would be margin.

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Ah, much more interesting, right?

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What most people do is they say, hey, I want to take this thing and see how we can get

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it to, you know, $1,000, right?

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Which would be, you know, awesome, because then that would get us to $7.7 million, right?

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Per month.

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But which of these do you think is easier to do?

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10x in the acquisition or simply dropping your turn from 13% to 3%.

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Right?

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And there's lots of ways to drop turn and I had a different video or I said how I cracked

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Netflix for current revenue model, there's 8Cs to increase your stick or decrease your

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turn, whatever way you want to say it, right?

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That we'd be going through to figure out how we can cut turn from 13% to 3%.

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And FYI, for a company to have enterprise value, most private equity firms want to see

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80% yearly retention, all right?

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Meaning you keep 80% of your clients per year.

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So if you started 1,000 to the beginning of the year, you have 800 at the end of the year,

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all right?

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Now, if anyone wants to venture a guess at what 13% monthly turn looks like, you're probably

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keeping less than 20% of your customers by the end of the year, all right?

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And so for them, they don't think that's an enterprise that's very valuable because

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what they're looking at, just in case, I'll give you guys a little nugget here, all

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right?

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There's three main variables that they're going to be looking at, any kind of potential

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buyer, which is what's the growth, right?

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Number one, number two is how likely stickiness, which is like how likely is the business going

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to be here, and then what's the profit, right?

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So you could pretty much multiply these things together, which is if I have a super fast

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growth company, all of the revenue is super sticky, and we're very profitable, and this

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is going to be a very, very, very valuable business.

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If I have a business that is mediumly growing, right, it is not sticky, and I have low profit,

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then this is going to be a low value business.

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And so the objective for us at Acquisition.com is how do we take one of these guys, right?

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One of these businesses and turn them into one of these businesses.

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And so it's really looking at these fundamental metrics to figure out where the weak points

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in the business model exist, all right?

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So right now, if you're a business owner, and you don't know what your hypothetical

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max is, with your current model and your current numbers, you are fooling yourself.

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You don't know where you're going to cap out, which means you don't know where your

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weak points are, all right?

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And so right now, everyone should be able to do this math within their own business without

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any kind of complex recording without any kind of, you know, Excel sheets that you're getting

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sent from finance.

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All you need to do is you got to know how many new customers you're getting, which is

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this guy, how many new sales you're getting, how many current clients you have, where

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your current revenue is, right?

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What your prices are, you should know all that stuff.

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And as long as you can know how many people are canceling every month, then you can calculate

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the rest of this entire equation for yourself and figure out how you can debottleneck the

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growth of your business.

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Because I'm a big believer in the theory of constraints, which is a business will grow

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up to its nearest constraint.

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And so I try and do is simply remove the constraints of the business to allow it to grow, right?

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I see businesses are organic beings, they want to grow, and they're simply being constrained

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by something.

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And our goal is to find what the biggest constraint is and remove it.

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Most people try and do lots of things.

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I believe that the smartest people in the world try and find how to do the fewest things

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that get them the most returns.

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And removing the biggest constraint is the biggest one of those, all right?

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And so any of my friends, this is Alex Ramose reporting in from acquisition.com.

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We're doing $85 million a year in our portfolio revenue, and I have absolutely nothing to

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sell you.

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Most of you nation, keeping awesome.

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If you enjoyed this and you're new to the channel, hit subscribe if you liked it.

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If you didn't like it, I love you either way, keeping awesome.

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I'll see you guys the next bit.

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Bye.