WEBVTT

1
00:00:00.000 --> 00:00:04.800
If you look at the biggest companies that exist out there, they sell something that's very valuable

2
00:00:04.800 --> 00:00:08.880
that costs them over nothing. Welcome to the game where we talk about how to get more customers,

3
00:00:08.880 --> 00:00:12.480
how to make more customers, how to keep them longer, and the many failures and lessons we have

4
00:00:12.480 --> 00:00:18.480
learned along the way. I hope you enjoy and subscribe. My wife and I, Laila, talked to 10 to 20

5
00:00:18.480 --> 00:00:24.080
service information, e-learning, coaching businesses per week that we're looking to invest in.

6
00:00:24.080 --> 00:00:29.040
And that's after they've gone through several screening processes. And what I wanted to talk

7
00:00:29.040 --> 00:00:33.120
about today is what are the ways that we think through in terms of the value of the business,

8
00:00:33.120 --> 00:00:38.240
and not from a dollar's perspective, but like what is the opportunity? And I want to give you kind of

9
00:00:38.240 --> 00:00:42.720
the three step checklists that I think through and how you can apply it to your own business and

10
00:00:42.720 --> 00:00:46.800
think like how could I take what I'm currently doing and make it more of an opportunity for me,

11
00:00:46.800 --> 00:00:50.080
right? And if you don't know who I am, my name is Alex Ramozzi, I'm an acquisition.com,

12
00:00:50.080 --> 00:00:54.080
it's a portfolio of businesses it does right now, $110 million a year. All right, so I make this

13
00:00:54.080 --> 00:00:58.400
just because I was once broke and I don't want you to be broke. So that is why we do this.

14
00:00:58.400 --> 00:01:04.240
Anyways, so let's rock and roll. When you've heard people say opportunity or opportunity vehicle,

15
00:01:04.240 --> 00:01:07.360
you need to get into a better monetization structure. There's different ways of kind of saying the

16
00:01:07.360 --> 00:01:12.240
same thing, which is like how much money can we possibly make from this core thing, right? And so

17
00:01:12.240 --> 00:01:16.800
when I'm thinking through this, there are three pieces that I think through and at the end of the

18
00:01:16.800 --> 00:01:20.800
video, I'm going to kind of walk through kind of the downstream impacts of these things and how

19
00:01:20.800 --> 00:01:24.560
you can apply them. But this is the this is the big picture. And you have to make these I have to

20
00:01:24.560 --> 00:01:28.240
make lots of decisions really quickly. So I have to use frameworks in order to make those decisions,

21
00:01:28.240 --> 00:01:31.600
right? And make snap judgments on like, do I think this is interesting? Should we pursue this

22
00:01:31.600 --> 00:01:35.920
further or do we should we just give some advice and and and you know, wish them well and maybe

23
00:01:35.920 --> 00:01:41.360
see them in the future if they implement it, right? So there's three things that I that I've kind

24
00:01:41.360 --> 00:01:45.680
of boiled down to an opportunity to vehicle. Is this something is this something a business or

25
00:01:45.680 --> 00:01:49.120
opportunity that I want to pursue? And so for a lot of you guys were starting out. This will be very

26
00:01:49.120 --> 00:01:52.400
valuable for you because hopefully you can just set this up right. And if you're already in the

27
00:01:52.400 --> 00:01:56.560
process of building your business, then maybe you can make alterations to the business and incorporate

28
00:01:56.560 --> 00:02:00.560
this. So there's three things that I'm looking at in terms of like what I think makes something

29
00:02:00.560 --> 00:02:05.840
much more interesting. Number one is the number of potential units sold. So a lot of times people

30
00:02:05.840 --> 00:02:10.240
talk about tam total just remarket and I'll talk about why I think that that the longer I do this

31
00:02:10.240 --> 00:02:15.200
is somewhat of a misnomer. So I'll talk about that at the end. But just how many people could

32
00:02:15.200 --> 00:02:20.160
potentially buy this thing right or buy this service or buy this you know, whatever this thing is

33
00:02:20.160 --> 00:02:25.440
right? How many people do I think would be a fit to be purchasers of the thing? So that's number

34
00:02:25.440 --> 00:02:30.240
one. And that's just going to show me how big how long we can run this game. Is this indefinite?

35
00:02:30.240 --> 00:02:34.000
Is this like you know, I mean like if you're selling weight loss like do I believe that people are

36
00:02:34.000 --> 00:02:36.800
going to continue is food going to keep chasing better and are people going to be able to change

37
00:02:36.800 --> 00:02:42.560
their genetics in terms of how they how they rely on it. No is status associated with being

38
00:02:42.560 --> 00:02:47.760
thin are men going to be you know attracted to women who are in general like thinner. I think

39
00:02:47.760 --> 00:02:51.440
those things are things that aren't going to change overall. And so those are assumptions that I'm

40
00:02:51.440 --> 00:02:54.400
willing to base the fact that there's me a lot of people want to buy this thing. All right,

41
00:02:54.400 --> 00:02:57.120
this is a simple way of thinking through like what are the assumptions that would continue to make

42
00:02:57.120 --> 00:03:01.920
this trip. All right. So number one is how many people could potentially buy this service?

43
00:03:02.560 --> 00:03:06.720
Number two is going to be what is the potential profit I can make from the service. All right. And

44
00:03:06.720 --> 00:03:11.040
that's a function of two things which is what is the value that people are are getting from this

45
00:03:11.040 --> 00:03:15.440
outcome. And then how much does it cost us to deliver it? And so those are two very important

46
00:03:15.440 --> 00:03:19.760
components is there's some some elements right that are extremely valuable but also very costly to

47
00:03:19.760 --> 00:03:22.720
deliver. So that's something that I'd be less interested in. It might be very valuable but like

48
00:03:22.720 --> 00:03:27.600
there's not a lot of opportunity for profit right on the flip side. Sometimes it's a very very small

49
00:03:27.600 --> 00:03:31.680
amount of value, but it costs nothing right. And the thing is is there the gross profit is actually

50
00:03:31.680 --> 00:03:36.320
kind of enticing and depending on what that first one was, which is how many people are willing

51
00:03:36.320 --> 00:03:40.080
to buy this thing. Then it's like ah this becomes a little bit more interesting right. And so

52
00:03:40.080 --> 00:03:44.560
the potential for profit and the gross margin of the of the unit of thing that we are selling

53
00:03:44.560 --> 00:03:48.400
becomes more interesting, which is why Laila and I in general like course,

54
00:03:48.400 --> 00:03:52.560
e-learning you know guru coaching type businesses to work with because we can transition them

55
00:03:52.560 --> 00:03:56.160
from a not valuable model into a much more valuable enterprise model that has something that

56
00:03:56.160 --> 00:04:01.520
they could sell in the future if they wanted to right. The third piece is the supply demand

57
00:04:01.520 --> 00:04:06.080
or competitive dynamics of the landscape. And so I'll give you a counter example and a good example

58
00:04:06.640 --> 00:04:12.320
right. So if I wanted to get into let's say wireless cell phones right like our cell phone service.

59
00:04:12.320 --> 00:04:17.920
Well, lots of people need it. Okay, that's good. Supply the value versus what it costs me to add

60
00:04:17.920 --> 00:04:21.760
in additional use on the gross margins are really good right because how much does it cost me to add

61
00:04:21.760 --> 00:04:27.120
one more user to my phone network pennies right. And what do I charge them hundreds of dollars

62
00:04:27.120 --> 00:04:32.720
a month right. But then the third one is competitive dynamics. Well, I'd have to beat out Verizon and

63
00:04:32.720 --> 00:04:37.280
AT&T and all the other big conglomerations of phone servers that exist it'd be very difficult for

64
00:04:37.280 --> 00:04:41.920
me to break into that right. And so that's an example of it checks two of the three boxes but not

65
00:04:41.920 --> 00:04:47.360
the third one right. And so different example of that I'll tell you like a hypothetical crazy good

66
00:04:47.360 --> 00:04:53.120
example would be if someone had figured out a way to create hardware that does crypto mining right.

67
00:04:53.120 --> 00:04:57.920
And let's say that that crypto mining could make people let's say $50,000 a year all right.

68
00:04:57.920 --> 00:05:03.120
This is I'm using an extreme example to illustrate the point. Well, if they had figured that out then

69
00:05:03.120 --> 00:05:09.280
one just about everybody wants passive or close to passive side income. So total number of people that

70
00:05:09.280 --> 00:05:15.200
we could sell this to a lot amount of of value that someone's getting a lot $50,000 in this case it's

71
00:05:15.200 --> 00:05:18.880
actually quantifiable. How much does it cost us in this instance we'd have to figure out what the cost

72
00:05:18.880 --> 00:05:24.480
of the rig would be. But let's say it was you know small let's say it was $500 well then this

73
00:05:24.480 --> 00:05:28.960
business becomes incredibly interesting as an opportunity. And then the third is what are the

74
00:05:28.960 --> 00:05:33.680
competitive dynamics well if there's no one else who can offer this then then we're off to the

75
00:05:33.680 --> 00:05:38.240
races right. But on top of that how new is the space are there a lot of new people coming into it

76
00:05:38.240 --> 00:05:43.280
are there established people who are killing it that would try and price us out etc. And in this

77
00:05:43.280 --> 00:05:47.520
space for example everything's brand new and said the competitive dynamics are great and it's massive

78
00:05:47.520 --> 00:05:50.800
you know it's it's very quickly growing and we'll continue to grow probably for the foreseeable.

79
00:05:50.800 --> 00:05:54.960
So in this instance it'd be like wow this is a very interesting business that I would want to

80
00:05:54.960 --> 00:05:59.280
participate in or learn more about. And so if you're thinking through these lenses and I'll talk

81
00:05:59.280 --> 00:06:03.440
about the tam thing in a second about why I don't think it's necessarily as good as people use to

82
00:06:03.440 --> 00:06:06.880
think in terms of assessing the value of the business I'll talk about that in a second.

83
00:06:09.360 --> 00:06:13.120
Amos in Asian quick break just to let you know that we've been starting to post on linked in

84
00:06:13.120 --> 00:06:16.800
and want to connect with you. All right so send me a connection request and note letting me know

85
00:06:16.800 --> 00:06:20.400
that you listen to the show and I will accept it. There's anyone you think that we should be

86
00:06:20.400 --> 00:06:25.440
connected with tag them in one of my or layless posts and I will give you all the love in the world.

87
00:06:25.440 --> 00:06:31.280
All right so let's get back to the show. If you're using these three lenses to think about your

88
00:06:31.280 --> 00:06:37.120
own business you can ask yourself okay is there a way that I could make this you know applicable

89
00:06:37.120 --> 00:06:42.080
to potentially more people right so that I could have a total higher number of units or bigger

90
00:06:42.080 --> 00:06:46.960
audience that I could sell to number one. Number two is is there a way that I can reconfigure this

91
00:06:46.960 --> 00:06:52.800
thing so that it either makes the customer a more valuable outcome right and or it costs us

92
00:06:52.800 --> 00:06:58.240
less to fulfill that outcome right so increase the gross profit per unit sold all right is there a

93
00:06:58.240 --> 00:07:02.080
way that I can reconfigure what I'm doing right and I'll give you a couple rules of thumb here that I

94
00:07:02.080 --> 00:07:08.720
like which is if I'm just doing any kind of service business I like to have 80% or higher gross margins

95
00:07:08.720 --> 00:07:13.120
all right so what that means is if I'm selling something for a thousand dollars a month it has to

96
00:07:13.120 --> 00:07:16.880
cost me less than two hundred dollars a month and for those of you who are new to making money

97
00:07:16.880 --> 00:07:21.600
people will get their panties in a wand about that but like profit is what drives business all right

98
00:07:21.600 --> 00:07:27.440
and it's not that all of that gross profit that's before cost of doing business goes to the owner

99
00:07:27.440 --> 00:07:32.640
that's just everything that you have to chip down away from so you're starting at 80 and let's say

100
00:07:32.640 --> 00:07:37.680
you want to run a business that runs 50% margins right well then that means you've got 30% there

101
00:07:37.680 --> 00:07:42.720
right if in that thousand dollar month example I got 300 bucks a month to cover everything else

102
00:07:42.720 --> 00:07:47.040
that I do in the business that covers that covers marketing that covers admin costs that covers

103
00:07:47.040 --> 00:07:51.280
payroll that covers HR finance all of these other fun legal whatever all the other functions of the

104
00:07:51.280 --> 00:07:56.560
business so the thinking is 80% is minimum and the thing is especially smaller businesses think for

105
00:07:56.560 --> 00:08:01.440
some reason that that that's like charging more is bad right and you got to get out of that because

106
00:08:01.440 --> 00:08:05.360
if you want to help more people you need to have gross profit in order scale if you look at the

107
00:08:05.360 --> 00:08:10.240
biggest companies that exist out there they sell something that's very valuable that costs them almost

108
00:08:10.240 --> 00:08:14.480
nothing all right so think about google right they sell ad space it costs them almost nothing

109
00:08:14.480 --> 00:08:19.920
besides the actual like their incremental cost running ad is virtually zero right and they charge

110
00:08:19.920 --> 00:08:24.560
a king's ransom for it right Facebook same thing right they charge for eyeballs that cost that like

111
00:08:24.560 --> 00:08:28.800
they've one-time cost of building that after that the incremental cost of of showing ads more eyeballs

112
00:08:28.800 --> 00:08:33.520
is almost nothing so it's all margin right look at the phone company that I was I was explaining

113
00:08:33.520 --> 00:08:37.120
earlier like they have their one-time cost of building the thing but then the at the additional

114
00:08:37.120 --> 00:08:42.000
cost of adding one more user is almost insignificant right but they can still charge a great amount

115
00:08:42.000 --> 00:08:45.440
of money for it this is the recent software is something that people finding incredibly valuable

116
00:08:45.440 --> 00:08:49.840
it costs one time to build it and then after that the incremental user is almost all profit now the

117
00:08:49.840 --> 00:08:55.440
only other type of business that's like this with a close to 100 percent gross margin is information

118
00:08:55.440 --> 00:08:59.520
and education businesses which is why Layla and I like these types of businesses because they have

119
00:08:59.520 --> 00:09:04.880
the same margin as software businesses except you don't have the cost of development the downside

120
00:09:04.880 --> 00:09:10.880
is that those types of businesses tend to have higher churn because the increased value

121
00:09:10.880 --> 00:09:15.280
are the value declines over time when someone learns a skill from this type of business that being

122
00:09:15.280 --> 00:09:20.720
said there are ways of reconfiguring the business to increase the stick of the client by pulling out

123
00:09:20.720 --> 00:09:25.600
the things that are consumable versus not versus one times consumable and I'm going into the weeds

124
00:09:25.600 --> 00:09:31.040
here but hopefully you'll enjoy it all right so something that is a one-time consumption is like okay

125
00:09:31.040 --> 00:09:35.040
I've gotten this value that I now understand a new business model that I could potentially be

126
00:09:35.040 --> 00:09:39.840
using you know or an improved version of the business model that I have and so finally I want to

127
00:09:39.840 --> 00:09:46.320
talk about why I think Tam is not as good of a you know indicator for the potential size of a company

128
00:09:46.320 --> 00:09:50.560
well look at some of these original companies so look at Facebook when they started out it was like

129
00:09:50.560 --> 00:09:55.680
supposed to just be a college you know network thing right it was supposed to be you know Facebook

130
00:09:55.680 --> 00:10:01.920
I think is what the actual term was way back in the day for like a yearbook right and so that's

131
00:10:01.920 --> 00:10:06.400
literally what the name of the thing was right and so somebody might look at that initially obviously

132
00:10:06.400 --> 00:10:10.480
people could see what where could potentially go but they saw that me like well maybe the the

133
00:10:10.480 --> 00:10:15.200
tam the total just remark is just cost students the reason I think it's interesting is that businesses

134
00:10:15.200 --> 00:10:21.760
and founders expand in vision over time and the the time when when a vision is a visionary or founder

135
00:10:21.760 --> 00:10:26.560
has run out of vision or run out of futures the moment that the business dies or they sell because

136
00:10:26.560 --> 00:10:30.960
they just don't know what else to do to grow it right and so what happens a lot of times is that if

137
00:10:30.960 --> 00:10:35.120
we can if we can continue you know continue to increase and eat up the the total just a market

138
00:10:35.120 --> 00:10:40.160
that we have defined for ourselves in our business a lot of times adjacent you know or adjacent markets

139
00:10:40.160 --> 00:10:43.440
or silos all of a sudden become more and more attracted we find out that there's a lot of similarities

140
00:10:43.440 --> 00:10:48.480
or that we find out there's another need and then we can branch into yet another silo now if

141
00:10:48.480 --> 00:10:52.240
you're like I that's the exact decision I did and I went from a hundred thousand to two and a

142
00:10:52.240 --> 00:10:56.800
thousand year no that was dumb like that's not that's not the point of this like you could you could

143
00:10:56.800 --> 00:11:01.440
just scale one avatar to probably you know a hundred million a year before doing that that's not

144
00:11:01.440 --> 00:11:06.960
the point the point is that you know on a long enough time horizon businesses also through

145
00:11:06.960 --> 00:11:10.480
mergers and acquisition things like that they can buy up other companies that are adjacent close

146
00:11:10.480 --> 00:11:16.080
to them etc and expand the total just market they have which is why I don't necessarily think of it

147
00:11:16.080 --> 00:11:19.920
on a long term time horizon but I do think about it on a short term time horizon so if I'm looking

148
00:11:19.920 --> 00:11:22.720
at like the next three to five years then I'm going to be like okay we're not going to change

149
00:11:22.720 --> 00:11:26.720
avatars next three to five years but do I think that this thing over the next 20 years could

150
00:11:26.720 --> 00:11:31.920
could eat up more and more of the pie by expanding who were potentially serving if the answer is yes

151
00:11:31.920 --> 00:11:36.960
then the original tam where the current tam is not necessarily the future tam is going to be all right

152
00:11:36.960 --> 00:11:43.680
and so that's why I don't see tam as as valuable as I think it you know it is purported to be all right

153
00:11:43.680 --> 00:11:48.720
so you hopefully can think through those three different opportunity kind of vehicle frames in

154
00:11:48.720 --> 00:11:54.160
terms of like how can I how can I look at my tam in a way that potentially could sell more customers

155
00:11:54.160 --> 00:11:58.320
how can I increase the value versus the cost of what it is that I'm delivering and is there a way

156
00:11:58.320 --> 00:12:04.560
that I can enter a space that is more unique or newer which I can either do by going into the

157
00:12:04.560 --> 00:12:09.440
clearly new spaces or by trying to redefine what I'm doing in a new way right and if we can do

158
00:12:09.440 --> 00:12:14.800
those things then we increase the what I would consider the opportunity size of what we are pursuing

159
00:12:14.800 --> 00:12:17.840
and then ultimately make more money all right and so that's what I'm thinking about when I'm looking

160
00:12:17.840 --> 00:12:22.640
into these companies that were you know potentially investing time and money into um and uh

161
00:12:22.640 --> 00:12:30.320
otherwise hope you have an amazing day bye