WEBVTT 1 00:00:00.000 --> 00:00:05.680 Welcome back to the game. Business owner is making less than $10 million per year cannot 2 00:00:05.680 --> 00:00:10.000 afford to make this mistake, and it's a problem that limited me and my ability to sell 3 00:00:10.000 --> 00:00:14.560 my company, and there's four parts of this mistake, and it starts to something that I like 4 00:00:14.560 --> 00:00:21.120 to call a key man risk. If a single person is vital to how your business operates, and if they 5 00:00:21.120 --> 00:00:27.920 were gone, the business would cease to be able to exist, or be able to be as profitable as it is 6 00:00:27.920 --> 00:00:34.320 with that person. This key man risk can exist at the founder level, so it might be you. If you're 7 00:00:34.320 --> 00:00:38.960 business, if you leave for two months, which by the way is a great test of this, if the business 8 00:00:38.960 --> 00:00:44.000 cannot sustain its level of productivity, like if all of a sudden the sales go to zero, or they cut 9 00:00:44.000 --> 00:00:47.280 in half because you're the only good closer, or all of a sudden you're not even getting leads 10 00:00:47.280 --> 00:00:50.720 because you're the only good marketer, or because the product can't be delivered because you're 11 00:00:50.720 --> 00:00:55.840 the only person who knows how to do it. In each of these situations, there's key man risk, 12 00:00:55.840 --> 00:00:59.920 and that can be, of course, you, the owner in the beginning, it's more common than it's you, 13 00:00:59.920 --> 00:01:06.240 and then over time, that key man risk can be an employee who works for you. It's just as dangerous 14 00:01:06.240 --> 00:01:13.120 for a public company that has an employee who has zero stock in the business, who happens to own 15 00:01:13.120 --> 00:01:18.720 all the passwords, for example, to every single dedicated system. Like if that person leaves, 16 00:01:18.720 --> 00:01:23.280 it could do material damage to the business. You've got these functions that occur in the business 17 00:01:23.280 --> 00:01:28.320 on a regular basis, and there may be multiple people that can do these functions. And so the 18 00:01:28.320 --> 00:01:33.680 opposite of key man risk is redundancy, meaning if one of these people disappear, we still have a 19 00:01:33.680 --> 00:01:39.360 flow for, let's say, dollars to go across this bridge. It can still keep kind of make its way 20 00:01:39.360 --> 00:01:45.120 through. All right, so let me tell you a story. So one of the key man risks that existed in Jim 21 00:01:45.120 --> 00:01:48.880 Lunch, and we had multiple, so the thing is that this can happen at any function, so this could 22 00:01:48.880 --> 00:01:53.840 happen on the marketing side. If only one guy knows how to generate leads, or if that person left, 23 00:01:53.840 --> 00:01:57.760 you would get half the leads or a third of the leads, that would be key man risk. If only one guy 24 00:01:57.760 --> 00:02:03.200 knows how to sell like you, and that guy closes 80% and no one else can close 20, that would be 25 00:02:03.200 --> 00:02:07.600 material. That would be key man risk. If only one person can do the delivery, that would be key man 26 00:02:07.600 --> 00:02:12.560 risk. And so I'll give you an example of the delivery. And so when I had Jim Lunch, I was kind of the 27 00:02:12.560 --> 00:02:19.280 innovator of the product and the service. I came up with the solutions for the gyms. And so 28 00:02:19.280 --> 00:02:24.480 for an acquirer or a private equity firm who wants to buy this business, or whoever else you might 29 00:02:24.480 --> 00:02:29.600 want to sell a business to, having one person, especially if the person who's going to leave 30 00:02:30.160 --> 00:02:35.840 when the business is sold, is a huge massive red flag for them because they're like, wait, 31 00:02:35.840 --> 00:02:40.800 we're buying this production, but it's with this key cog in the machine, and you want to have us 32 00:02:40.800 --> 00:02:46.240 buy this thing and remove the cog. Now, in a situation where you raise money, for example, 33 00:02:46.240 --> 00:02:51.520 it's not as much of an issue because those people, those pieces, those cogs are still in the machine. 34 00:02:51.520 --> 00:02:57.200 If you wanted to sell a company, and you own the company, and you leave, and all the people who 35 00:02:57.200 --> 00:03:01.440 are still key man remain within the business, then what they're going to do is try and incentivize 36 00:03:01.440 --> 00:03:06.560 those people to stay, but it still makes the company sellable. So this just counts double if it's 37 00:03:06.560 --> 00:03:12.640 the owner, or somebody who's going to leave as a result of a transaction, is the key man risk 38 00:03:12.640 --> 00:03:19.360 in any of the functions of the business. So I was key man in the delivery. And so I did a couple 39 00:03:19.360 --> 00:03:26.640 things to solve the problem. So number one is that I created a department called the R&D department. 40 00:03:26.640 --> 00:03:30.640 And so the way it worked was simple. I thought about the process that I would go through when I 41 00:03:30.640 --> 00:03:35.040 wanted to innovate the product. So I'd say, okay, what can we do for our gym owners that will help 42 00:03:35.040 --> 00:03:41.200 them generate more leads, make more sales, whatever the issue was. And so the first thing that I did 43 00:03:41.200 --> 00:03:46.080 was that I would say, okay, I have a way of identifying problems. I would ask the customers, 44 00:03:46.080 --> 00:03:49.360 and the nice thing is if you listen to your customers, they will shout at you, and they will tell you 45 00:03:49.360 --> 00:03:53.200 exactly what their problems are. And so I'd say, okay, number one is that I had these problems. 46 00:03:53.200 --> 00:03:57.040 So I have to solve those problems. And so I'd have them rank the problems. They say, okay, 47 00:03:57.040 --> 00:04:01.920 this month lead generation is the biggest issue. They want more leads. And I'd say, all right. 48 00:04:01.920 --> 00:04:06.240 Now the next thing that I would do is I would deploy resources. So this would be time 49 00:04:07.280 --> 00:04:13.520 and money that ideally my customers couldn't deploy, but I could fractionalize that cost between 50 00:04:13.520 --> 00:04:18.240 all of my customers to create a much bigger individual investment that any one of them could afford. 51 00:04:18.240 --> 00:04:24.800 Let's say they pay three or four thousand dollars a month, I would spend $50,000 a month on this 52 00:04:24.800 --> 00:04:31.760 test. And so I'd say, okay, go hire a bunch of models, go out to a really good gym, film some great 53 00:04:31.760 --> 00:04:39.120 ads, then test those ads. So number three, I would test the ads in representative markets. So I'd 54 00:04:39.120 --> 00:04:44.160 have 20 markets or so. That would represent different demographics. So black, white, Asian, 55 00:04:44.160 --> 00:04:48.800 Hispanic, poor markets, rich markets, large markets, small markets, with good operators, 56 00:04:48.800 --> 00:04:52.640 with poor operators, with mediocre operators. That way I had a true sampling. Rather than just 57 00:04:52.640 --> 00:04:55.600 saying, I'm just going to send this to my favorite customers because that's not going to work. 58 00:04:55.600 --> 00:05:02.080 And so we test it. And then what I would do is hand off winners. And so what that meant was, 59 00:05:02.800 --> 00:05:08.880 I would say, okay, these ads of the 30 that we ran and we spent $50,000 on this whole thing, 60 00:05:08.880 --> 00:05:13.680 these two or three were the ones that generated the highest returns. And then I would give all of those 61 00:05:13.680 --> 00:05:18.560 to the gyms in our distribution base so that they could run those ads. They just wanted the 62 00:05:18.560 --> 00:05:23.520 inputs to feed the system. And those inputs were required on a regular basis. 63 00:05:23.520 --> 00:05:26.880 In order for me to hand this off to someone, I said, this is fundamentally the way I do it. 64 00:05:26.880 --> 00:05:30.400 I look at the problems that they have in this instance, it was lead generation. I would dedicate 65 00:05:30.400 --> 00:05:34.240 time and money to solving this problem in a way that they couldn't do it so that I could create 66 00:05:34.240 --> 00:05:38.560 a better solution that they could do it on their own. I would test to validate that the solution 67 00:05:38.560 --> 00:05:44.800 that I had was superior. And then we roll it out. And I followed this process for my R&D so that I 68 00:05:44.880 --> 00:05:51.040 could replicate the person with a system. Why this matters is that if you have key men risk, 69 00:05:51.040 --> 00:05:56.480 you don't have an asset, you have a high paying job. And I don't say that to insult you, 70 00:05:56.480 --> 00:06:01.680 I say that so that you can be aware of it, so that you can actually fix it. And to be clear, 71 00:06:01.680 --> 00:06:07.520 if you are fine just working and not necessarily owning an asset, that's great. There's nothing 72 00:06:07.520 --> 00:06:12.960 wrong with trading time for money. Big fan. It's just like, ideally, just trade it for lots of money, 73 00:06:12.960 --> 00:06:17.040 right? But if you do want to solve it, you will get more leverage on your time because then you 74 00:06:17.040 --> 00:06:21.120 don't have to do this thing. This thing occurs without you. And then you can take the remainder of 75 00:06:21.120 --> 00:06:26.080 your time and shuttle it to the things that make you even more money. And so typically, key man risk 76 00:06:26.080 --> 00:06:32.320 will occur in three primary areas. So number one is that it can occur in marketing. 77 00:06:32.960 --> 00:06:40.080 So how do we get leads in the door? The second big place that it can occur is sales or conversion. 78 00:06:40.080 --> 00:06:46.400 How do we get prospects to hand us money for our goods and services? And then third is the 79 00:06:46.400 --> 00:06:51.200 actual goods and services themselves, which you can consider product, et cetera. And so this 80 00:06:51.200 --> 00:06:54.560 happens at any level. So if you're a service and you're just happened to be the best plumber, 81 00:06:54.560 --> 00:06:59.280 the best electrician, or you're the best coder, or you're the best advertiser. Now with marketing, 82 00:06:59.280 --> 00:07:03.600 for example, if you own a marketing agency, you probably are key man on marketing for yourself 83 00:07:03.600 --> 00:07:07.440 and marketing for your customers, right? Like you can happen in multiple places, even if it's one 84 00:07:07.440 --> 00:07:13.120 person. And in the, and the more places one person is key man, the risk you're the businesses 85 00:07:13.120 --> 00:07:18.640 overall. Now I want to be clear, key man risk is a double edged sword because the more valuable 86 00:07:18.640 --> 00:07:26.480 you become, the more more of a key man you are. And so the idea is that as soon as you learn a 87 00:07:26.480 --> 00:07:31.120 very valuable skill, the most valuable thing that you can do next is learn how to transfer that 88 00:07:31.120 --> 00:07:36.000 skill to another person. And I think this is a skill that I've spent a tremendous amount of time 89 00:07:36.000 --> 00:07:41.920 trying to hone so that I can build companies. And I think about it like this, assemble companies, 90 00:07:41.920 --> 00:07:47.520 assemble people and then transfer the skills around whatever area has some sort of bottleneck where 91 00:07:47.520 --> 00:07:52.720 there's too few people who know how to do the thing. And this is so important because whether you 92 00:07:52.720 --> 00:07:58.560 want to sell a business or not, making a business that is sell a bull makes it better for anyone. 93 00:07:58.560 --> 00:08:02.960 Here's the best analogy I have, which is say that you bought a house. Now if you've never bought a 94 00:08:02.960 --> 00:08:06.640 house before, then this may be news. But when you buy a house, what happens is that after 95 00:08:06.640 --> 00:08:10.720 certain amount of time and the average Americans like three to five years, they change where they live. 96 00:08:10.720 --> 00:08:14.960 All right, so you buy a house. Now over time, you got some wear and tear on the house and the 97 00:08:14.960 --> 00:08:18.800 house kind of degrades in your mind, right? Like that you get a little crack on the front porch, 98 00:08:18.800 --> 00:08:23.440 this door kind of squeaks a little bit. And when you go to sell, what do you do? You fix the 99 00:08:23.440 --> 00:08:27.520 little path in front of the house, you put some oil on the little hinges here, you know, you're like, 100 00:08:27.520 --> 00:08:30.480 you know, maybe I'll put a little pat of you out back. I feel like that would increase our home 101 00:08:30.480 --> 00:08:35.200 value, right? And then all of a sudden, and this is the crazy thing, right? When you're about to sell 102 00:08:35.200 --> 00:08:39.120 the house and you fix to all the things that are wrong with it, you're like, you know, this is 103 00:08:39.120 --> 00:08:44.960 house ain't so bad, right? And so the same exact thing happens with the business. If all of a sudden 104 00:08:44.960 --> 00:08:50.640 you remove yourself as key man in marketing and sales and product, all of a sudden you're like, huh. 105 00:08:53.040 --> 00:08:59.040 This business almost runs without me. This ain't so bad. Now the last area that you can have 106 00:08:59.040 --> 00:09:04.320 key man risk that can occur. And this is kind of like the glue between all of these is operations. 107 00:09:04.880 --> 00:09:11.920 So if you have a key leader, for example, who has tremendous influence over the entire team, 108 00:09:11.920 --> 00:09:17.120 then the operations connects the people to their functions. And so think of that as kind of the 109 00:09:17.120 --> 00:09:22.960 glue that runs the organization. If Layla were to leave, she would leave a huge vacuum at acquisition.com. 110 00:09:22.960 --> 00:09:28.080 Now she is not specifically over marketing, sales or products. She just has all of these leaders that 111 00:09:28.080 --> 00:09:33.840 are rolling into her. And so if the leadership was gone, that in and of itself would also be 112 00:09:33.840 --> 00:09:39.200 somebody who's key man. So if you're thinking yourself, okay, this is me. I'm definitely key man, 113 00:09:39.200 --> 00:09:43.280 or there's somebody in my business who's key man, a marketing sales operations product, 114 00:09:43.840 --> 00:09:51.280 then there are two major ways that you can solve this. So the first is through process and people, 115 00:09:51.280 --> 00:09:56.000 just like I walked through earlier where I said, okay, what are the actual steps that I do in order 116 00:09:56.000 --> 00:10:00.320 to solve this marketing problem? What are the actual steps that I use to think through creating new 117 00:10:00.320 --> 00:10:04.320 products? What are the actual steps that I use to think through creating sales process, 118 00:10:04.320 --> 00:10:10.160 driving sales results, etc. So it's process in the people who will then do those processes within 119 00:10:10.160 --> 00:10:17.600 the business. The second way, and this really only applies if it's not you who is the person 120 00:10:17.760 --> 00:10:25.360 who's key man is incentives. And so if it's you, you only have option one. If it's somebody else, 121 00:10:25.360 --> 00:10:31.600 other people, you have option one and option two to solve the problem. And so for example, if I 122 00:10:31.600 --> 00:10:37.600 said, hey, I will incentivize you to stay in this business by giving you some vesting of shares 123 00:10:37.600 --> 00:10:43.120 over a three or five year period, then that would make it less likely that the person's going to 124 00:10:43.120 --> 00:10:47.680 leave and disrupt the business. I think through it in both of these now, which of these is the most 125 00:10:47.680 --> 00:10:54.480 valuable, like most valuable to the business to do? Well, the most valuable to do is this one. But 126 00:10:54.480 --> 00:10:58.960 the higher up the skill set is the more unique the individual, like think about Elon Musk. He's 127 00:10:58.960 --> 00:11:04.720 key man in almost all of his businesses. But the reason that it's okay is that he has no desire to 128 00:11:04.720 --> 00:11:11.200 sell them. And so people bet on Elon and the companies because they are inseparable entities, 129 00:11:11.200 --> 00:11:16.720 like they go one together and no one's leaving, right? They get public and all of their shares are 130 00:11:16.720 --> 00:11:20.960 still theirs and they're still incentivized to continue to grow it. Now, if you're watching this 131 00:11:20.960 --> 00:11:25.680 in one way, well, okay, processing people, what does that actually mean? So inside of $100 million 132 00:11:25.680 --> 00:11:29.520 leads, I break this down in the employees section, which is a chapter in the book in terms of how to 133 00:11:29.520 --> 00:11:34.800 help, how to get people to get you more customers. You have the functions that an employee would do. 134 00:11:34.800 --> 00:11:39.520 And so there's two aspects. One is like, how do I get these people? You can use warm outreach to 135 00:11:39.520 --> 00:11:43.840 ask your network. You can do cold outreach, which is basically recruiting. You can post content, 136 00:11:43.840 --> 00:11:48.320 which is basically posting job openings that you have available. Doing paid ads, so promoting 137 00:11:48.320 --> 00:11:54.000 job postings on like a Craigslist or an indeed or a monster or a ladder. Getting employee referrals, 138 00:11:54.000 --> 00:11:57.600 right? So rather than customer referrals, you're getting employee referrals. Affiliates would be like 139 00:11:57.600 --> 00:12:02.720 associations, guilds, listsers that already have a huge amount of people who want this specific 140 00:12:02.720 --> 00:12:07.600 type of roller job agency. So I think like staffing firms. And then obviously employees themselves 141 00:12:08.160 --> 00:12:12.960 could be the solution. Now, how do you get them to actually do this? And so the step one is that 142 00:12:12.960 --> 00:12:18.080 you document, which is basically saying, hey, here's our checklist of things that must occur 143 00:12:18.080 --> 00:12:24.480 in order for this process to be deemed complete or sufficient. The second D here is demonstrate, 144 00:12:24.480 --> 00:12:28.320 which is that you do it in front of them, right? So you do it on your own and create the checklist. 145 00:12:28.320 --> 00:12:32.720 Then you do that checklist in front of them. And you only stick with that checklist because if you do 146 00:12:32.800 --> 00:12:38.720 anything off the checklist, then you have to add to it. And then finally, they do it in front of you. 147 00:12:38.720 --> 00:12:43.840 So they duplicate it. So you document checklist, you demonstrate it in front of them, then they 148 00:12:43.840 --> 00:12:49.040 demonstrate it in front of you, which is basically duplication. And so that three step process is 149 00:12:49.040 --> 00:12:55.760 fundamentally how you can teach anyone to do anything. And in order to make a process more 150 00:12:55.760 --> 00:13:01.040 teachable, you simply have to break it down to more and more steps based on the skill of the person 151 00:13:01.040 --> 00:13:06.720 you're teaching it to. If I wanted to teach an advanced marketer, how should you email marketing, 152 00:13:06.720 --> 00:13:13.280 for example, I wouldn't say, hey, turn on your computer. Step two, pull up internet explorer. 153 00:13:13.280 --> 00:13:16.240 Step three, sign up for a Gmail account, right? I wouldn't have to go through all those steps 154 00:13:16.240 --> 00:13:20.720 because there's an assumed level of proficiency. This is why when you go to college or whatever 155 00:13:20.720 --> 00:13:24.640 education system you went through, there are prerequisites for moving on to the next level so that 156 00:13:24.640 --> 00:13:28.880 they don't have to teach you with rhythm tick and then teach you calculus later. They just assume 157 00:13:29.040 --> 00:13:34.880 you know it. And so your checklist that you create is going to depend on the level of the person 158 00:13:34.880 --> 00:13:38.880 that you're teaching the skill to and the lower the level, the more checks you're going to be on the 159 00:13:38.880 --> 00:13:43.200 list, the more you need to regress it. And so let's say you brought on somebody for sales, 160 00:13:43.200 --> 00:13:46.720 right? Who's going to be a director of sales? This might be a higher level role. You would still 161 00:13:46.720 --> 00:13:50.560 follow the same thing as, hey, these are the activities that I spend my time on. This is what I 162 00:13:50.560 --> 00:13:56.320 actually do. Then they're going to watch you do it. You probably are running teams. You're probably 163 00:13:56.320 --> 00:14:01.120 doing one-on-ones. You're probably looking at data to look for key outpoints so that you can 164 00:14:01.760 --> 00:14:07.120 address them and solve them within the team. And then they are going to take over those 165 00:14:07.120 --> 00:14:11.280 responsibilities. Do them in front of you. And then when they have done them to the satisfactory 166 00:14:11.280 --> 00:14:16.880 level, you can then delegate it. And so the easy litmus test for good delegation is that after 167 00:14:16.880 --> 00:14:22.240 you've given the responsibility away and someone else is actually doing the actions, 168 00:14:22.880 --> 00:14:27.760 then the performance of the department or function either remains neutral or goes up. 169 00:14:27.760 --> 00:14:32.080 That is when you have successfully delegated. It's not that you give something to someone that 170 00:14:32.080 --> 00:14:36.960 makes it delegation. You can give something to someone and completely abdicate or basically 171 00:14:37.520 --> 00:14:42.240 get rid of responsibility but with no feedback loop to determine whether or not you did a good job 172 00:14:42.240 --> 00:14:47.040 or that they're doing a good job. And so it has to be the performance of the function after you've 173 00:14:47.040 --> 00:14:51.680 headed off that determines whether or not you have successfully delegated. And sometimes you have 174 00:14:51.680 --> 00:14:55.680 to repeat the cycle multiple times with the same person and that's okay because you need to learn 175 00:14:55.680 --> 00:15:01.280 too on how to teach better. And quick pro tip, if you're a smaller business and let's say that you 176 00:15:01.280 --> 00:15:07.040 do some sort of service and it's just you or just you and a couple people, there are three options 177 00:15:07.040 --> 00:15:12.960 that you can do when you have too much demand and very fixed amount of supply. You can't, you're 178 00:15:12.960 --> 00:15:18.800 completely maxed out, you can't take on any more customers, you barely can't. So option one is that 179 00:15:18.800 --> 00:15:24.240 you can simply raise your prices. And if you do that, you'll absolutely make more money. So you'll 180 00:15:24.240 --> 00:15:28.320 get paid more for the same thing, which is my favorite way of getting paid. Now the second thing 181 00:15:28.320 --> 00:15:33.120 that you can do is you can increase the service ratio. And so that means instead of doing one on one, 182 00:15:33.120 --> 00:15:39.840 for example, I would do one on five or one on ten. Now alternatively, you can think of it with a 183 00:15:39.840 --> 00:15:43.920 team the same way, which is let's say I have four people who work in my agency and they do different 184 00:15:43.920 --> 00:15:49.040 functions to serve one type of customer. Then if I can change it from those four people together 185 00:15:49.040 --> 00:15:53.600 can handle 20 clients. I can have those four people together handling 40 clients. And so the 186 00:15:53.600 --> 00:15:58.400 ratio still shifts towards us. So you get more efficient, which is either process or some sort 187 00:15:58.400 --> 00:16:03.760 of technology or training that allows you to get more from your existing talent. The third, and 188 00:16:03.760 --> 00:16:08.560 this is the most valuable one, processing people. So you actually get somebody else to do the work 189 00:16:08.560 --> 00:16:13.120 for you, which typically means you have to organize the stuff, make sure they did it successfully 190 00:16:13.120 --> 00:16:18.000 and you can hand it off. And if I had to do this in sequence, meaning in what order what I do this, 191 00:16:18.000 --> 00:16:22.480 first is I would raise prices because that requires the least amount of work and can immediately 192 00:16:22.480 --> 00:16:28.080 make money if I'm supply constrained. Second, I would say, okay, well, people are saying, 193 00:16:28.080 --> 00:16:32.320 yes, these higher prices, well, I don't want to raise prices again, which you obviously still can. 194 00:16:32.320 --> 00:16:38.160 I can shift my service ratio at this current price to fundamentally dilute down the service 195 00:16:38.160 --> 00:16:42.880 that I have because it's so good. And as long as my value still exceeds my price without raising 196 00:16:42.880 --> 00:16:47.040 the price with the second implementation, I would still have people who want to give me money. 197 00:16:47.040 --> 00:16:52.240 Now, if I've done as much of these two things as I can, I can then say, you know what, I want to 198 00:16:52.240 --> 00:16:56.880 not have to do any of these things at all. I want someone else to do them. And then that transforms 199 00:16:56.880 --> 00:17:01.120 this particular job that you have because as an entrepreneur, you'll have more than one job. 200 00:17:01.120 --> 00:17:05.200 It takes this job, takes the hat off your head and puts it on someone else's. And then that shifts 201 00:17:05.360 --> 00:17:10.800 you towards owning an asset rather than owning a job. And to be clear, I'm all for maximizing the 202 00:17:10.800 --> 00:17:16.160 amount of money that you're making. And some businesses lend themselves more to kind of the people 203 00:17:16.160 --> 00:17:21.440 and process stuff than others do. Taylor Swift, for example, is going to have a hard time being like, 204 00:17:21.440 --> 00:17:27.600 hey, this is my blonde double. And she's going to sing for you guys today because look, I've delegated 205 00:17:27.600 --> 00:17:33.280 the responsibility. Now, it's very unlikely that that would happen. And so there are situations 206 00:17:33.280 --> 00:17:37.760 where you just have unicorns in a business. And so that's where you just have to align incentives 207 00:17:37.760 --> 00:17:42.960 like crazy and try and take it all the way, right? Which is either you're just getting a paid 208 00:17:42.960 --> 00:17:49.600 it's not a money, which, you know, Taylor Swift does. Or you create liquidity, meaning you get paid 209 00:17:49.600 --> 00:17:55.600 for the equity shares that you have via a different vehicle than selling. So when you go public, 210 00:17:55.600 --> 00:17:59.280 you don't, you sell a little bit of the company. But the vast majority of the wealth that most 211 00:17:59.280 --> 00:18:03.680 of those founders have is that they have shares that they can take loans against. And bigger 212 00:18:03.680 --> 00:18:07.760 business gets, if you don't have any desire to sell it, you can take debt or other instruments 213 00:18:07.760 --> 00:18:12.320 where people will lend you and you can collateralize or back it up with the stock that you have in 214 00:18:12.320 --> 00:18:16.000 the business. And so if you don't pay them back, they get to own shares in the company. And so you 215 00:18:16.000 --> 00:18:23.600 can see with key man, it's all about risk. And so when we successfully bridge this gap, what we 216 00:18:23.600 --> 00:18:29.920 avoid is the risk pitfalls here at the bottom where we could just die of fiery death in our business. 217 00:18:29.920 --> 00:18:35.680 And so we just keep building our little bridge. The next brick in our bridge to our big money pile 218 00:18:35.680 --> 00:18:41.280 over here is single channel risk. Now that's just a fancy word. So let me tell you what it means. 219 00:18:41.280 --> 00:18:46.320 Very simple. If more than half of your customers or leads come from one place, you have single 220 00:18:46.320 --> 00:18:52.720 channel risk. And the concept behind this is that if that were to stop, it would materially affect 221 00:18:52.720 --> 00:18:57.280 your business on a long time horizon. So quick illustration. One of our portfolio companies, 222 00:18:57.280 --> 00:19:03.200 which is the teeth wedding chain, got a lot of business from outbound, meaning they had a team 223 00:19:03.200 --> 00:19:08.640 in the Philippines that would reach out to prospects in a specific geographic so that we could 224 00:19:08.640 --> 00:19:12.640 give them an offer to get them to come in and get their teeth white and very simple business. 225 00:19:12.640 --> 00:19:18.480 Almost all customers were coming from that specific source. All of a sudden, the rules on that 226 00:19:18.480 --> 00:19:25.120 platform changed based on the way that we could message. Almost overnight, we had 50 to 70 percent 227 00:19:25.120 --> 00:19:32.640 fewer sales coming in from that primary channel. Now that is single channel risk. Can you imagine 228 00:19:32.640 --> 00:19:37.040 as a business owner overnight? You're like, oh my god, this will change. Now this has happened for 229 00:19:37.040 --> 00:19:41.120 if your ads dependent. Let's say all of your ad, all the way that you get customers is on 230 00:19:41.120 --> 00:19:45.920 meta ads. And then you lose your account, boom, all of a sudden your business almost goes to zero. 231 00:19:45.920 --> 00:19:51.040 Or if you have an organic content following and you're only on one platform, for example, 232 00:19:51.040 --> 00:19:56.400 and that platform bans you or restricts you or shadow bans, whatever. And then boom, all of your 233 00:19:56.400 --> 00:20:01.440 lead flow disappears. Or you have, let's say, a domain or a server that you send your emails 234 00:20:01.440 --> 00:20:07.520 from. When you do outbound and all of a sudden that gets whacked with some sort of, you go into 235 00:20:07.520 --> 00:20:12.400 the promotions tab on email. All of a sudden, all your response rates from your domain go to 236 00:20:12.400 --> 00:20:18.080 almost nothing. In each of those scenarios, you have single channel risk. Now thankfully, 237 00:20:18.080 --> 00:20:23.920 for this particular business, I had spent the last six months or more building out a recurring 238 00:20:23.920 --> 00:20:27.680 revenue stream. And I detailed that in a different video where we went from like 5 percent of 239 00:20:27.680 --> 00:20:32.720 revenue being recurring revenue to over 60 percent of revenue being recurring revenue. And so 240 00:20:32.720 --> 00:20:38.400 even though we decreased the amount of new sales coming in by over half, it didn't actually 241 00:20:38.480 --> 00:20:42.880 change our overall revenue because we had so much compounding that had started to become unlocked, 242 00:20:42.880 --> 00:20:48.160 which is why there are multiple ways to stabilize a business. But for the purpose of this video, 243 00:20:48.160 --> 00:20:53.120 if you have only one way to get customers, then you have one way to lose them. So first off, 244 00:20:53.120 --> 00:20:57.920 who needs to worry about this? Well, bigger your business gets the more important this is. And let 245 00:20:57.920 --> 00:21:03.040 me explain tactically how this works. Because let's say even volatility from a single channel 246 00:21:03.840 --> 00:21:09.520 is something that could rock the boat figuratively. Well, if you have a small business and let's say 247 00:21:09.520 --> 00:21:13.840 the channel goes down by 20 percent, then let's say you've got one sales guy and his calendar goes 248 00:21:13.840 --> 00:21:21.360 from 100 percent filled to 80 percent filled. Not a huge deal. Now, if you have 100 sales guys and 249 00:21:21.360 --> 00:21:28.080 their calendars go from 100 percent to all of a sudden, 20 of the guys have completely empty 250 00:21:28.080 --> 00:21:34.080 calendars. That level of volatility that can occur when you only have one channel makes it 251 00:21:34.080 --> 00:21:39.440 much more difficult to do business on a regular basis. And so there's a variety of solutions that 252 00:21:39.440 --> 00:21:44.320 I will walk you through. So number one is that if you're a tiny business, you don't need to worry 253 00:21:44.320 --> 00:21:50.880 about this yet. But my biggest advocate for being a small business is that you're going to have one 254 00:21:50.880 --> 00:21:56.160 primary method for getting cold people, which is usually going to be outbound. Number one, which 255 00:21:56.160 --> 00:22:01.280 is you're reaching out to prospects who don't know who you are. Two is going to be affiliates. So 256 00:22:01.280 --> 00:22:07.760 again, you've got third parties that are sending you traffic. Three, you've got ads that are ways that 257 00:22:07.760 --> 00:22:12.320 people are coming into the business. And you've got organic. So this is going to be likely how you're 258 00:22:12.320 --> 00:22:16.720 going to be getting customers. This may seem like a little bit of a departure from some of the things 259 00:22:16.720 --> 00:22:21.440 I've talked before worth. One channel, one avatar, one product, up to a million dollars year. And 260 00:22:21.440 --> 00:22:27.520 that's true. It's just that I've seen like so many people be able to manage this. And I think it's 261 00:22:27.520 --> 00:22:33.680 such high return for such low effort that the organic that you put here is not really to acquire 262 00:22:33.680 --> 00:22:39.040 customers. It actually functions more to amplify what you're doing with these other channels. 263 00:22:39.040 --> 00:22:42.880 If you are doing outbound and then people Google you and then they can find a little bit of 264 00:22:42.880 --> 00:22:46.960 content, then it's like, oh, this guy has a pulse. So this is a real business. Someone is 265 00:22:46.960 --> 00:22:50.400 an affiliate or affiliates are sending you customers or you're trying to sell affiliates, 266 00:22:50.400 --> 00:22:54.000 then just knowing that if some sort of presence increases the likely they do business with you 267 00:22:54.000 --> 00:22:57.280 and same thing with ads. And so if you're a small business, this is going to be one of the big 268 00:22:57.280 --> 00:23:01.680 ones that you're probably going to use. But the organic is just something that you can do even one 269 00:23:01.680 --> 00:23:05.760 post a week. It doesn't have to be a ton just to look like you have a pulse. So if you're a bigger 270 00:23:05.760 --> 00:23:10.720 business, the way that we solve this is a standardized process that I've now had to jump through with 271 00:23:10.720 --> 00:23:16.640 a lot of companies. So the first thing we do is we shore up long term nurture. All right. And you're 272 00:23:16.720 --> 00:23:20.320 like, how does this have to do with like what does this have to do with getting a second channel? 273 00:23:20.960 --> 00:23:27.680 Wait. So the reason we shore up the long term nurture is because we want to get more out of 274 00:23:27.680 --> 00:23:31.840 what we're already doing. And if we get more that's going to increase our cash flow without adding 275 00:23:31.840 --> 00:23:35.440 cost basis to the business. So it's basically thinking about it as like decreasing risk and 276 00:23:35.440 --> 00:23:40.960 increasing our ability to make bets. So long term nurture means a combination of making more content 277 00:23:41.520 --> 00:23:47.040 and hey guys real quick, this podcast only grows from word of mouth quite literally. There's 278 00:23:47.040 --> 00:23:50.080 no other way to grow podcasts in word of mouth. If there's some element of this that you think 279 00:23:50.080 --> 00:23:54.080 somebody else should hear or be relevant to them, it would mean the world to me. If you shared 280 00:23:54.080 --> 00:23:58.880 this via text via Instagram via DM via whatever way you like to share stuff with people you love. 281 00:23:58.880 --> 00:24:06.480 Thank you. Email specifically follow up because a lot of people, a lot of businesses don't do a good 282 00:24:06.480 --> 00:24:11.600 job following up with leads. And so they have this list of 10,000 or 20,000 or 1,000 people that have 283 00:24:11.600 --> 00:24:14.880 done business with them over a long period of time. We're at least giving them their information. 284 00:24:14.880 --> 00:24:19.760 And so if we create a cadence or some sort of schedule around reaching out to those people 285 00:24:19.760 --> 00:24:24.480 providing value and then occasionally presenting offers, we're going to have another stream 286 00:24:24.480 --> 00:24:30.320 of customers that's coming in. So think of this as in a way another customer stream, but it's 287 00:24:30.320 --> 00:24:35.760 an incredibly low risk customer stream that is the most profitable of all streams. And so email 288 00:24:35.760 --> 00:24:42.400 marketing for example has depending on the source of 42 to 1 to 36 to 1 return on dollars. 289 00:24:42.400 --> 00:24:47.040 And so it's like oh my god, like why would we not do that? So we do this to decrease our risk, 290 00:24:47.040 --> 00:24:51.840 increase our cash flow in the short term to get that engine going. The next engine that I like to 291 00:24:51.840 --> 00:24:57.120 make sure is very strong is my referral engine. And so if I haven't put a strong referral system in 292 00:24:57.120 --> 00:25:04.080 place to get customers to send me more customers and made sure that I'm asking multiple times in 293 00:25:04.080 --> 00:25:07.840 different and creative ways throughout the customer journey, then I implement that next. 294 00:25:07.840 --> 00:25:11.760 Again, we're getting more for what we put in. And so after we've got the long-term nurture 295 00:25:11.760 --> 00:25:16.240 firing and we've got the referral system going, this should give us a little bit of padding 296 00:25:16.240 --> 00:25:22.960 to then invest in the second channel. Now when I say invest, the way that it typically works is that 297 00:25:22.960 --> 00:25:28.480 you will see no outcome for an extended period and then all of a sudden it will start working. 298 00:25:28.480 --> 00:25:32.160 And you may get frustrated in the short term that you're not seeing immediate results, 299 00:25:32.160 --> 00:25:36.640 but welcome to business. You have to think long-term about the value of what a second acquisition 300 00:25:36.640 --> 00:25:41.120 channel or third acquisition channel means to you. So number one is that when you do the second 301 00:25:41.120 --> 00:25:45.840 acquisition channel, you can immediately double sales or more. And if you double revenue, 302 00:25:45.840 --> 00:25:52.320 you typically far more than double profit. So that's number one. Number two is that the business 303 00:25:52.320 --> 00:25:56.560 itself becomes less risky. So not only are we adding revenue and profit of the business, 304 00:25:56.560 --> 00:26:01.440 the revenue and profits itself is more likely to continue. And so the business itself becomes 305 00:26:01.440 --> 00:26:05.760 more valuable and you can sleep much better at night knowing that if one of these things goes down, 306 00:26:05.760 --> 00:26:11.120 my team is still fed. And so when we make this investment, here's one of the big no-nos, 307 00:26:11.120 --> 00:26:16.880 is you don't do two news. Like what's two news? So you don't want to have two news. So what does that 308 00:26:16.880 --> 00:26:21.680 mean? Well, if you're going to start a new channel, that's one new. What you don't want to do is put 309 00:26:21.680 --> 00:26:27.600 a new person on a new channel because they don't know which new is the problem. Because even if you 310 00:26:27.600 --> 00:26:31.920 take you and maybe you're really good or you're best person and you put them on the new channel, 311 00:26:31.920 --> 00:26:35.600 well, there's already the newness of the new channel and you won't know. But if it's somebody 312 00:26:35.600 --> 00:26:40.080 you know who's really good, then at least we're working through the channel itself. Otherwise, 313 00:26:40.080 --> 00:26:45.040 you could be stuck paying lots of money for a long period of time, not knowing if you're solving 314 00:26:45.040 --> 00:26:48.960 the right problem. Which is why I'm such an advocate for founders have deep understanding of the 315 00:26:48.960 --> 00:26:53.920 core processes of the business, which for me are understand how you get customers who's going to 316 00:26:54.000 --> 00:26:58.400 be marketing and sales and understand how you deliver value. Now, if you wanted to outsource IT, 317 00:26:58.400 --> 00:27:01.920 if you wanted to outsource accounting, if you wanted to outsource HR or payroll processing, 318 00:27:01.920 --> 00:27:04.720 those are things that I don't see as quarterly business. You can of course bring them in house 319 00:27:04.720 --> 00:27:10.400 when the cost makes sense. But in terms of the core economic engine of the business, those are the 320 00:27:10.400 --> 00:27:14.800 things that you the founder of the entrepreneur want to understand intimately. If I am going to start 321 00:27:14.800 --> 00:27:18.880 a new channel, I do these two things first in order to give myself some breather room. I get a 322 00:27:18.880 --> 00:27:23.600 little more cash flow. I get a little bit more from what I'm already doing. And then I have one new 323 00:27:24.720 --> 00:27:28.960 which is the new channel and then old person. Now, it doesn't actually have to be old, 324 00:27:28.960 --> 00:27:33.440 but it's somebody that I know. This can be tough because you're like, wait, I don't want my original 325 00:27:33.440 --> 00:27:38.640 channel to go down, which is the most common thing that happens in the situation. My recommendation 326 00:27:38.640 --> 00:27:45.760 is transfer the skill on the first channel first to someone else. Make sure that they can handle 327 00:27:45.760 --> 00:27:52.000 that without decreasing performance, ideally it goes up. Then and only then, you can then make 328 00:27:52.240 --> 00:27:57.360 the investment into the second channel where you're the old guy and the channels, the new thing. 329 00:27:57.360 --> 00:28:01.600 Now, if you want to bring somebody in to help you with this, I think that's a great idea. Like, 330 00:28:01.600 --> 00:28:04.800 if you're a larger business and you're like, I can't actually just like figure out a cold 331 00:28:04.800 --> 00:28:08.720 outbound. That's fine. But you basically have a thought partner and you guys are working through 332 00:28:08.720 --> 00:28:12.400 it together because you'll have more context on the business overall and maybe they have more 333 00:28:12.400 --> 00:28:16.800 context on the methodology that you're going to use for the second channel. But that merger, 334 00:28:16.800 --> 00:28:20.320 those things coming together where you learn a lot about the method, they learn a lot about the 335 00:28:20.320 --> 00:28:24.880 context of the business, both people get better. And this is how I've seen, this is how I've 336 00:28:24.880 --> 00:28:29.040 been able to successfully use all of these different methods of getting customers in different 337 00:28:29.040 --> 00:28:36.000 companies. If any customer or associated customers left tomorrow, would your revenue drop by 20% 338 00:28:36.000 --> 00:28:41.280 or more? Now, the reason 20% is kind of the number I choose is that most businesses run at 10, 339 00:28:41.280 --> 00:28:46.080 20, 30, 40% margins. And so if you had even a 40% margin, which would be a great margin, 340 00:28:46.080 --> 00:28:51.280 you lose half your profit. This would be material to the business itself and its value. 341 00:28:51.840 --> 00:28:56.800 So I'll give you a real business start. So I had a business owner come out to acquisition.com 342 00:28:56.800 --> 00:29:05.920 who was an agency owner. And he had 10 customers. And nine of his customers were small like tech, 343 00:29:05.920 --> 00:29:13.200 SEO, like agency customers. And then one customer was Google itself. And he was a massive percentage 344 00:29:13.200 --> 00:29:19.280 of his revenue. So for him, for this example, this was actually 70% of his revenue. So if you 345 00:29:19.280 --> 00:29:22.960 actually look at the meat of this fish, and you added all these little pieces of meat in between 346 00:29:22.960 --> 00:29:27.440 together, this is definitely the fish that has all the money. If I'm this owner, I'm like, oh my god, 347 00:29:27.440 --> 00:29:32.960 if I lose this whale, it's going to kill my business. I won't be able to have to let go of half my 348 00:29:32.960 --> 00:29:39.040 staff. I would certainly lose all my profit. And so this is a huge risk to the business. Now, 349 00:29:39.120 --> 00:29:45.600 there are four ways that you can solve this problem. So there are four proven ways to solve this 350 00:29:45.600 --> 00:29:50.080 problem. So when this business owner came out, I said, we're going to go throw four and you're 351 00:29:50.080 --> 00:29:53.440 going to pick the one that you think you have the highest likelihood of achieving. And so this is 352 00:29:53.440 --> 00:29:58.400 you. This is how you solve it. So the first way you can do it, all of a sudden you get a bunch more 353 00:29:58.400 --> 00:30:04.640 minnows and then all of a sudden by percentage, man, these are ugly fish, by percentage, you know what? 354 00:30:04.640 --> 00:30:09.600 This whale isn't 70% of my business anymore. So you just keep adding minnows to your boat, 355 00:30:09.600 --> 00:30:13.360 and then all of a sudden you're like, you know what, my minnows weigh out weigh my whale. And so I 356 00:30:13.360 --> 00:30:19.680 don't have key customers anymore. The second way is that you lock this whale in to a long-term 357 00:30:19.680 --> 00:30:24.960 contract. So just think about this whale as signing his life away. But you get Google or whatever 358 00:30:24.960 --> 00:30:30.320 this customer is to sign a three year, a five year, a seven year commitment, and you can add some 359 00:30:30.320 --> 00:30:34.400 bonuses in there and say you're going to have some dedicated wraps or you're going to have some 360 00:30:34.400 --> 00:30:38.640 sort of discount that might be associated with that kind of commitment. But when they do that, 361 00:30:38.640 --> 00:30:43.200 then it makes it more stable because it's unlikely that they're going to leave. And if you want to be 362 00:30:43.200 --> 00:30:48.400 smart about this, just a little pro tip, add a little breakup fee because some people are still going 363 00:30:48.400 --> 00:30:52.080 to back out on their agreement and you don't want to get into a legal battle. So you want to just give 364 00:30:52.080 --> 00:30:56.720 them some way in the future, but just knowing that there's this nut that they're going to have to 365 00:30:57.280 --> 00:31:03.840 pay will prolong how long they'll stay with you. And so I would probably charge somewhere they 366 00:31:03.840 --> 00:31:09.440 would have 10 to 20% of the contract. Now all of the stuff's negotiable as a breakup fee. So 367 00:31:09.440 --> 00:31:13.920 if someone has a five year deal, then I might say you had to pay a year if you're going to break up 368 00:31:13.920 --> 00:31:18.560 beforehand. Another way of thinking about it is saying whatever discount I gave you, you're 369 00:31:18.560 --> 00:31:23.360 going to have to pay to make up that discount for the entirety of the contract in order to leave the 370 00:31:23.360 --> 00:31:28.480 contract. Another one is that they have to give you six or 12 months of heads up. So there's a lot 371 00:31:28.480 --> 00:31:33.520 of ways that you can write terms around this with the whale to decrease the likelihood that they 372 00:31:33.520 --> 00:31:39.360 leave and disrupt the business. Now that's path number two. The third path is, and this is my 373 00:31:39.360 --> 00:31:45.280 preferred path, is you just get more damn whales. And then all of a sudden you realize, you know what? 374 00:31:45.280 --> 00:31:50.400 Dude, I'm in the whale business, right? Why was I hunting menos? Look at the meat on these guys, 375 00:31:50.400 --> 00:31:55.840 right? And so all of a sudden, you don't try to outnumber with menos, you make all of a sudden, 376 00:31:55.840 --> 00:32:03.040 you just go get five, six more whales. And this isn't 10% or 20% of your business. So path four is 377 00:32:03.040 --> 00:32:08.320 a nasty one. And for many of you, if this is your situation, it may actually be the right path. 378 00:32:08.320 --> 00:32:12.000 And I'll tell you a story to illustrate it. So there was a recruiting firm that I was talking to, 379 00:32:12.000 --> 00:32:16.720 and they had grown a decent amount. And they had this Mondo contract that was on the horizon. And so 380 00:32:17.280 --> 00:32:21.280 they staffed for very specific types of engineering roles that were difficult to find. So they 381 00:32:21.280 --> 00:32:26.080 definitely had a niche that they had found. And they had some big whale come to them and say, hey, 382 00:32:26.080 --> 00:32:31.440 we want you to staff us with 20 new employees a month, which was a big contract for this firm. 383 00:32:31.440 --> 00:32:35.680 So this firm was probably doing $6,700,000 a month. And so this would be like an additional, 384 00:32:35.680 --> 00:32:41.200 you know, $200,000 a month that they were going to be able to contract through this new whale. 385 00:32:41.840 --> 00:32:47.040 And when they were asking, you know, how, like, how should we negotiate this deal? 386 00:32:47.040 --> 00:32:51.120 What pricing should we put in there? I thought about it for a long time. And I was like, you know, 387 00:32:51.120 --> 00:32:57.120 guys, I think the actual best move is to not do this deal because they were going to have to 388 00:32:57.120 --> 00:33:01.680 basically change the fundamentals of their business, their pricing, their delivery, the whale 389 00:33:01.680 --> 00:33:06.960 demanded so many so many custom things that were only going to be a use case for them. And we're 390 00:33:06.960 --> 00:33:11.600 not going to service the rest of their customers. And they had no way of reliably acquiring the whale. 391 00:33:11.600 --> 00:33:17.760 So I'll explain the difference. So if the whale comes in through a tried and true channel, 392 00:33:17.760 --> 00:33:22.640 then this might make a ton of sense. But if you just get a random referral or you just meet some 393 00:33:22.640 --> 00:33:27.360 of you, you work from your network, building your entire business around an unsustainable or 394 00:33:27.360 --> 00:33:33.440 unpredictable way of getting this type of customer is probably not smart. Now, if that recruiting 395 00:33:33.440 --> 00:33:38.000 firm had said, hey, we just got our first whale, but we have a new way of getting whales, 396 00:33:38.000 --> 00:33:43.360 then I say, oh, this is the first whale of many. This makes sense. But if this is just a random 397 00:33:43.360 --> 00:33:48.000 lottery ticket that falls into your lap, you have to make the decision of what business so I really 398 00:33:48.000 --> 00:33:52.560 want to be in and what customer do I really want to serve. And so I think that this entrepreneur 399 00:33:52.560 --> 00:33:57.280 just saw dollar signs in his eyes, but didn't calculate the cost of what it would mean to his 400 00:33:57.280 --> 00:34:02.640 business and the disruption of the main economic engine that he had spent years putting together. 401 00:34:02.640 --> 00:34:08.560 And so path four is you just realized that this whale might be someone else's customer and you 402 00:34:08.560 --> 00:34:14.240 let it swim on by. And the fourth one, and this one is a crazy one that I've got a story for you, 403 00:34:14.240 --> 00:34:21.040 is single vendor risk. All right. So the first example of this that I had, like, unfortunately, 404 00:34:21.040 --> 00:34:26.880 I've had this happen a lot. All right. So with prestige labs, I had one manufacturer who made 405 00:34:26.880 --> 00:34:34.080 our products. And it turned out we found out that he ended up stealing about $400,000 in cash 406 00:34:34.080 --> 00:34:39.840 that I had sent. So and he kept asking for early and earlier payment on stuff to lock in greater 407 00:34:39.840 --> 00:34:45.200 discounts. And in general, if I have cash and I can guarantee a 10 or 20% return on that money, 408 00:34:45.200 --> 00:34:49.920 then it's almost like I could put it in the stock market, but I know for sure I'm going to get 20% 409 00:34:49.920 --> 00:34:56.320 less discount. I'm going to get a 20% discount for sure that it's like getting a 20% return on the 410 00:34:56.320 --> 00:35:01.840 money guarantee. So I'll take those those deals when they come. But kept asking for early and 411 00:35:01.840 --> 00:35:06.880 earlier and earlier. And when we just said, Hey, you know what? It had been enough times that we're 412 00:35:06.880 --> 00:35:13.520 like, why don't you just send us what you owe us in terms of product all of a sudden. He couldn't 413 00:35:13.520 --> 00:35:18.720 because what he had used is he was using our cash to run his business rather than use it as an 414 00:35:18.720 --> 00:35:25.200 account for the products and raw materials that he needed to purchase for our account. And so, 415 00:35:25.280 --> 00:35:30.560 obviously that was a big no-no. And we were able to, thankfully, like bridge to another provider 416 00:35:30.560 --> 00:35:35.040 and not really create a disruption. But for probably a period of six months, we were running out 417 00:35:35.040 --> 00:35:40.960 of product on a regular basis and had like three month lead times where we had to basically make 418 00:35:40.960 --> 00:35:46.080 this transition. And we lost a serious amount of revenue. And that was a big hit both to the revenue, 419 00:35:46.080 --> 00:35:50.400 but also just reputation because prestige labs sold through affiliates. It still does sell through 420 00:35:50.400 --> 00:35:54.400 affiliates. And during that period of affiliates were like, dude, we can't sell half the products we 421 00:35:54.400 --> 00:35:58.480 normally do because you don't have a stock. And so that was very tough. And I learned that lesson. 422 00:35:58.480 --> 00:36:02.640 Prestige Labs, which is a sub-company that I owned it about 20 million bucks a year. And I ended 423 00:36:02.640 --> 00:36:07.920 up selling that in that $42 million, $46 million sale to American Pacific Group in 2021. 424 00:36:09.040 --> 00:36:15.840 Allen was a third company that I started and sold in 2021, which was a company that helped 425 00:36:15.840 --> 00:36:23.600 brick-and-mortar businesses work their leads through automated messaging. And I didn't understand 426 00:36:23.600 --> 00:36:28.000 how software worked at the time. And so I just said, cool, I know this problem. I'm going to go 427 00:36:28.000 --> 00:36:34.320 hire an outsource dev team to go build me this software stack. And they did. And Vloen behold, 428 00:36:34.320 --> 00:36:40.400 here's the crazy thing. No one on my team was any bit technological or a developer. And so 100% 429 00:36:40.400 --> 00:36:46.720 of the development was happening in this outside shop. Now, what do you think the outside shop owner 430 00:36:46.720 --> 00:36:54.560 did when all of a sudden this thing that he builds doing 500,000, 800,000, a million, 1.2, 1.5, 431 00:36:54.560 --> 00:37:02.000 1.7 million dollars in sales? All of a sudden, magically, what was once $100,000 a month in 432 00:37:02.000 --> 00:37:08.320 development became 200, 300, 500,000 dollars a month in development because he could see how much money 433 00:37:08.320 --> 00:37:12.080 we were making. Which is why I'm such an advocate if you are going to start a software company, 434 00:37:12.080 --> 00:37:16.640 you want that person to be in-house, at least it be key man risk that you can control, right? 435 00:37:16.640 --> 00:37:22.080 But instead, I had a key vendor who literally designed and built the entire product that I was 436 00:37:22.080 --> 00:37:27.440 selling. And so this guy had me buy the balls. There was nothing I could do. And so I had to start 437 00:37:27.440 --> 00:37:34.640 building an in-house team in parallel without trying to like let, let him know that I'm doing this 438 00:37:34.640 --> 00:37:37.840 because obviously he could see the writing on the wall. And then he was difficult to work with 439 00:37:37.840 --> 00:37:42.720 and transferring the knowledge over and it was a nightmare. And so that was my second big experience 440 00:37:42.720 --> 00:37:47.360 with this. The third, you're like you should learn this lesson. You know what? Sometimes it takes 441 00:37:47.360 --> 00:37:53.280 me a while. So in my first book, $100 million offers, I talk about how I lost my payment processor. 442 00:37:53.280 --> 00:37:58.160 And it was this terrible experience for me because it was the only problem I'd ever encountered in my 443 00:37:58.160 --> 00:38:05.280 life that I couldn't save with sales because no one would process the money. TLDR, I was running a 444 00:38:05.280 --> 00:38:09.920 national business out of a brick and mortar store that I had in Southern California. So I'm 445 00:38:09.920 --> 00:38:14.080 processing payments out of Canada, I'm processing payments out of Mexico, I'm processing payments 446 00:38:14.080 --> 00:38:18.320 out of out of the United States all over the country. And they're like, wait, how is this happening 447 00:38:18.320 --> 00:38:22.320 out of a little brick and mortar store in California? I didn't know how this worked. I was 25 448 00:38:22.320 --> 00:38:27.280 years old. And so I broke the rules and was unaware of it. And so they they held my processing. 449 00:38:28.000 --> 00:38:32.400 After that happened and you only need to tap in once for every single business that I've had 450 00:38:32.400 --> 00:38:38.080 afterwards, I always have redundancies in processing. Meaning I have multiple processors that are 451 00:38:38.080 --> 00:38:42.720 approved, spun up and can handle the entirety of my monthly volume at a moment's notice. 452 00:38:43.280 --> 00:38:48.960 Because I only had one payment processor, I had no ability to negotiate anything in terms of my 453 00:38:48.960 --> 00:38:53.840 fees as well. And so having multiple there that are approved gave me leverage with the relationship, 454 00:38:53.840 --> 00:38:58.560 I got better service. And if for whatever reason something goes down, I can switch it over in a 455 00:38:58.560 --> 00:39:06.000 heartbeat and not even miss anything. Now, I had a second occurrence with this later on in my 456 00:39:06.000 --> 00:39:11.520 career where we did have redundancies. And the here was the issue. I had a recurring revenue 457 00:39:11.520 --> 00:39:16.400 business and the payment processor acted a little bit shady, which is why I decided to shift away 458 00:39:16.400 --> 00:39:22.640 from that specific processor. And they said, oh, if you want to transfer away from us, that's going 459 00:39:22.640 --> 00:39:28.160 to cost $150,000. And I was like, what? And they're like, yeah, it's just a lot of work to transfer 460 00:39:28.160 --> 00:39:32.240 all those things over. I was like, I'm pretty sure it's a button that you click export. But 461 00:39:33.360 --> 00:39:38.480 the thing is, what was I going to do? I had multiple millions a month in recurring revenue across 462 00:39:38.480 --> 00:39:45.360 thousands of customers. There was nothing I could do is basically extortion. And so I paid the bill. 463 00:39:45.360 --> 00:39:50.000 And then I got my, I got all my customer information and I transferred it to a more ethical provider. 464 00:39:50.000 --> 00:39:55.520 And so I bring these stories up because I hope that you don't have to live through each of these. 465 00:39:55.520 --> 00:40:00.320 And so let's get to the tactics for how to actually solve against key vendor risk. And I think 466 00:40:00.320 --> 00:40:05.040 this one can be so nasty because it's one of the only times where like the person on the other 467 00:40:05.040 --> 00:40:10.800 side of the table has leverage. And if you don't have a good person on the other side, like 468 00:40:11.360 --> 00:40:15.440 they may use it and they may try to put you out of business or put you just as close to getting 469 00:40:15.440 --> 00:40:19.760 out of business as they, I mean, they basically can just blackmail you for your own business. 470 00:40:19.760 --> 00:40:24.480 And the amount they can blackmail you for is proportional to how much money you got or at least 471 00:40:24.480 --> 00:40:30.480 how much money they think you got. All right. So number one rule always have backups for just 472 00:40:30.480 --> 00:40:34.160 about everything that's important. So you want to think about this in terms of acquisition, 473 00:40:34.160 --> 00:40:40.560 conversion, product, and then the layer on top of this obviously is processing, banking, 474 00:40:40.560 --> 00:40:46.160 anything that you do that facilitates transactions with customers. And so the big solution, 475 00:40:46.160 --> 00:40:52.480 and we're going to put this in big green letters. So solution number one is redundancy, right? 476 00:40:52.480 --> 00:40:58.480 Now I want to be clear about redundancy. Sometimes redundancy looks like waste but is actually 477 00:40:58.480 --> 00:41:04.800 insurance the day you need it. And so think about it this way. If I pay for fire insurance and my 478 00:41:04.800 --> 00:41:09.680 house never catches on fire, if I knew for a fact that my house would never catch on fire, 479 00:41:09.680 --> 00:41:13.440 then 100% of that money is completely wasted. I literally just flushed the money down the toilet 480 00:41:13.440 --> 00:41:19.440 because I didn't get anything for it. If my house does catch on fire, the day it catches on fire, 481 00:41:19.440 --> 00:41:25.440 every one of those payments was 100% worth it. And so I see redundancy the same way, 482 00:41:25.440 --> 00:41:31.200 which is that it is insurance against existential threats to the business. And these are the things 483 00:41:31.200 --> 00:41:36.720 that I'm telling you, now that I have these things in place, it's like one, I have leverage and 484 00:41:36.720 --> 00:41:40.720 negotiations, which is probably the more reasonable thing that you get in terms of short-term benefits 485 00:41:40.720 --> 00:41:45.040 of having redundancy. The second is that you sleep great at night knowing that your business can't 486 00:41:45.200 --> 00:41:48.880 get taken down at least from the things that you know about. Like listen, you can't control the 487 00:41:48.880 --> 00:41:55.760 unknown unknowns, but at least control the nodes. And if the chickens do come home to roost and you 488 00:41:55.760 --> 00:42:00.880 do have that bad day and the bill is due, then you will be grateful that you had this redundancy 489 00:42:00.880 --> 00:42:07.360 in place. The second way of doing this is having mutually dissenture destruction. So what does that 490 00:42:07.360 --> 00:42:14.960 even mean? So it basically means that if the bigger you get, the bigger you are as a percentage of 491 00:42:14.960 --> 00:42:20.640 their business, the more they need to keep your business and not let you go. Because basically you 492 00:42:20.640 --> 00:42:27.760 shift from them being key vendor risk to you becoming key customer risk for them. And so to shift 493 00:42:27.760 --> 00:42:32.480 in power, basically the bigger you get, the more important you are to them. And so there's this 494 00:42:32.480 --> 00:42:37.120 saying in the finance world where it's like, if you owe a bank a million dollars, they own you. 495 00:42:37.120 --> 00:42:41.360 If you owe a bank a billion dollars, you own them, right? Now obviously it depends on the size of 496 00:42:41.360 --> 00:42:46.080 the bank and things like that, but the saying kind of carries, right? And so you want to understand 497 00:42:46.080 --> 00:42:51.760 what percentage of the business they're business you are. And that way if they fuck you, they get 498 00:42:51.760 --> 00:42:56.080 fucked too. So this is where the size of the person that you're working with can be kind of a 499 00:42:56.080 --> 00:43:00.400 double-edged sword. The small guys are probably the guys that are most likely to do the shady stuff. 500 00:43:00.400 --> 00:43:04.320 On the other hand, if you become a huge percentage of their business, you have some leverage 501 00:43:04.320 --> 00:43:09.520 back towards them. And so redundancy number one, mutually intro destruction number two. And here's 502 00:43:09.520 --> 00:43:13.920 a big one, covenants in terms, which are just fancy ways of saying, what do we agree to? Now, 503 00:43:14.560 --> 00:43:18.560 kind of like key customers, because key customer key vendor are kind of opposite sides of the same 504 00:43:18.560 --> 00:43:24.560 point. So all the terms that we asked from our customers before in the last section from mistakes, 505 00:43:24.560 --> 00:43:32.080 we also can ask now as the customer of the vendor. So we say, hey, if you, if you want to stop doing 506 00:43:32.080 --> 00:43:36.240 business with us, you have to give us a six or 12 month lead time to letting us know that that's 507 00:43:36.240 --> 00:43:40.560 going to occur so that we can find another vendor. So this number one is lead time. Number two, 508 00:43:40.560 --> 00:43:44.080 is you can have a breakup fee associated. Now you can imagine on the other side of the vendor, 509 00:43:44.080 --> 00:43:48.400 you're like, this guy wants to put a breakup fee on me. My God, this guy's going to be sticky. But 510 00:43:48.400 --> 00:43:53.120 at this point, when you have key components of the business that are outsourced, which I fundamentally 511 00:43:53.120 --> 00:43:58.480 don't do this anymore, because I have been screwed so many times, which is why I think that marketing, 512 00:43:58.480 --> 00:44:04.000 sales, delivery should be in house to a business, because it's just two important payment processing. 513 00:44:04.000 --> 00:44:06.960 It's unlikely you're going to start a payment process just to be able to process your own payments, 514 00:44:06.960 --> 00:44:10.240 right? There are some things that are going to be outsourced. You have to have trust. Now, 515 00:44:10.240 --> 00:44:18.400 one is give the heads up. Two is the breakup fee. Third is that you have fees or fines associated 516 00:44:18.400 --> 00:44:23.520 with service level agreements. Meaning, you're going to respond to us on this timeline. You're 517 00:44:23.520 --> 00:44:28.960 going to ship to us products or raw materials on this schedule. You're going to get us 518 00:44:28.960 --> 00:44:32.800 leads or run this amount of ads on this cadence. And when we think about it that way, 519 00:44:32.800 --> 00:44:37.200 that allows us to say, if you don't do those things, then you hedge the amount of money that you 520 00:44:37.200 --> 00:44:42.400 would have lost as a result of them not doing the work with the fine associates. It's basically 521 00:44:42.400 --> 00:44:47.280 a hedge. Now, if you have a vendor, they're going to try and decrease with that amount of money is. 522 00:44:47.280 --> 00:44:52.560 But them also having transparency into understanding how important their role is is again, 523 00:44:52.560 --> 00:44:56.960 a double-edged sword. One is to understand leverage. On the other hand, if you get the term inside 524 00:44:56.960 --> 00:45:01.760 the deal in terms of the cash required from them to make sure that they're doing their job, 525 00:45:01.760 --> 00:45:08.160 you cover your downside. And finally, and this is a bit of like an advanced move. But if you become 526 00:45:08.160 --> 00:45:12.480 significantly bigger than they are, or you're a huge percentage of their business and they're still 527 00:45:12.480 --> 00:45:18.960 important to you, that's where things like aquahires and acquisitions can be very strategic. 528 00:45:18.960 --> 00:45:23.760 So you say, hey, under what circumstances would you like to do what you do inside of our company? 529 00:45:23.760 --> 00:45:27.680 Right? Is there a way that we could work together more permanently? And then you permanently 530 00:45:27.680 --> 00:45:30.720 align the incentives if they're doing a good job. Now, if they're doing a terrible job, then you 531 00:45:30.720 --> 00:45:38.320 have someone to do that. But this is how I think through reducing risk with key vendors who are 532 00:45:38.320 --> 00:45:49.040 core to how we make money. And if they were to disappear, so too with our business.