WEBVTT

1
00:00:00.000 --> 00:00:07.160
In this video, I'm going to show you the seven ways to measure business value and how you're probably being deceived by most people

2
00:00:07.160 --> 00:00:12.280
You see on the internet simply because you're not understanding the words in terms they are using all right

3
00:00:12.280 --> 00:00:17.360
So by the end of this video you'll understand who's BS who's legit who's real who's fake and if they haven't given you

4
00:00:17.360 --> 00:00:20.520
Enough information to make the decision exactly what questions to ask

5
00:00:20.920 --> 00:00:24.080
Welcome to the game where we talk about how to get more customers how to make more

6
00:00:24.080 --> 00:00:27.840
Procure and how to keep them longer and the many failures and lessons we have learned alone the way

7
00:00:27.840 --> 00:00:30.040
I hope you enjoy and subscribe in this video

8
00:00:30.040 --> 00:00:36.560
I'm going to show you the seven ways to measure business value and how you're probably being deceived by most people

9
00:00:36.560 --> 00:00:41.600
You see on the internet simply because you're not understanding the words in terms they are using all right

10
00:00:41.600 --> 00:00:46.640
So by the end of this video you'll understand who's BS who's legit who's real who's fake and if they haven't given you

11
00:00:46.640 --> 00:00:51.680
Enough information to make the decision exactly what question is to ask all right, so let's dive in

12
00:00:51.720 --> 00:00:58.800
So the first of the seven types of ways that people measure value is that they will extrapolate a single month of contract value into

13
00:00:58.800 --> 00:01:05.560
Eternity or at least over a year and so for example what that looks like is someone you know selling a yearly

14
00:01:05.560 --> 00:01:11.840
Contract at an event they sell a hundred people at that event. Let's say for $30,000 a year right and

15
00:01:12.600 --> 00:01:17.080
They say we're doing three million dollars a month. Wow, right crazy

16
00:01:17.720 --> 00:01:24.520
But the reality is they sold three million dollars of contracts that are unenforceable to people on monthly

17
00:01:25.120 --> 00:01:28.480
Income streams are monthly cash flow and so a hundred people at

18
00:01:29.160 --> 00:01:34.600
$2,500 a month is what will get you to that $30,000 right roughly and so

19
00:01:34.840 --> 00:01:42.320
If you were if what that really means is they did $250,000 that that event but they said I'm doing three million dollars a month

20
00:01:42.440 --> 00:01:48.520
Right, even though it was a one-time event that is not going to recur and they based it on

21
00:01:48.520 --> 00:01:54.120
Contra value contract value and not payments collected and so the first way to see through this stuff is to say well

22
00:01:54.120 --> 00:01:59.640
How much money was actually collected and how reliable are the contracts that you're actually selling if you have highly

23
00:01:59.960 --> 00:02:06.600
You know secured contracts with companies that are legit or you have them secured against assets meaning that the likelihood that they continue is high

24
00:02:06.600 --> 00:02:11.960
Or you have a net negative turn company meaning the contract increases in value over time based on the business

25
00:02:11.960 --> 00:02:15.960
Economics that you have like sales force for example when you sign a contract with sales force

26
00:02:15.960 --> 00:02:21.320
You sound a contract with HubSpot, which is another CRM most of those clients increase how much they spend over time

27
00:02:21.320 --> 00:02:23.640
And so that would be legit in that instance

28
00:02:23.640 --> 00:02:29.640
But the vast majority of people who are saying this to you are not being legit and so first thing to look out for at the very end

29
00:02:29.640 --> 00:02:35.880
I'll give you my rating for each of these ways of doing it all right the second is lifetime revenue

30
00:02:35.880 --> 00:02:38.360
So this is when someone says you know

31
00:02:38.360 --> 00:02:43.340
We've done X amount of total revenue collected in our business now a lot of times we'll say I have a I mean

32
00:02:43.340 --> 00:02:45.560
I see an ad right now that I run all the time

33
00:02:45.560 --> 00:02:47.560
It's like how I built a $50 million business

34
00:02:47.560 --> 00:02:55.320
But they mean how much revenue they've collected over the lifetime of the business and so for context of how ridiculously inflated this will be

35
00:02:56.360 --> 00:03:01.960
And McDonald's employee will collect a million dollars in revenue as income as honestly

36
00:03:01.960 --> 00:03:04.400
That's even better because it's income. It's not even revenue

37
00:03:05.280 --> 00:03:07.440
Just to show you how ridiculous and preposterous this is

38
00:03:07.440 --> 00:03:09.840
I'm McDonald's employee will collect that over the entire life

39
00:03:09.840 --> 00:03:13.360
So and if you work to McDonald's your whole life right and so if you if you use this metric

40
00:03:13.360 --> 00:03:15.440
Then it's incredibly inflating and it's great for it

41
00:03:15.440 --> 00:03:19.360
You go and it sounds good to impress people who don't know what you're talking about

42
00:03:19.360 --> 00:03:23.360
Okay, and so you may have seen one of my videos that said 122 million

43
00:03:24.720 --> 00:03:29.520
In revenue for for me and I do that a because the headline is more compelling than saying you know

44
00:03:29.520 --> 00:03:32.000
We've done mid 30s for the last three or four years

45
00:03:32.960 --> 00:03:35.120
But and I you know I'll play the game too

46
00:03:35.680 --> 00:03:39.680
But understanding what that comes from and so that's why I try and be as honest as possible as like

47
00:03:39.680 --> 00:03:41.760
Well, this is what we did in revenue. This is what we did in profit

48
00:03:42.400 --> 00:03:46.880
So that I can just be transparent with everybody so you know at least what to look for and so when someone says

49
00:03:47.200 --> 00:03:50.880
We have a 50 million dollar business or a hundred million dollar business ask them

50
00:03:51.040 --> 00:03:56.560
Are you talking about yearly revenue? Are you talking about profit? Like what are you talking about specifically when you say that number

51
00:03:57.120 --> 00:04:01.680
Right and a lot of times you're like whoa, I I meant I guess that's how much you know total revenue we've done

52
00:04:02.560 --> 00:04:09.440
You know since we started now mind you most entrepreneurs, especially new entrepreneurs will conflate or or they will mix

53
00:04:10.240 --> 00:04:17.200
Revenue with cash collected right those are two very different things right revenues is is contract value right

54
00:04:17.760 --> 00:04:23.280
But cash collected is really reality and so they'll use this term and for the purposes of this video when I say revenue

55
00:04:23.280 --> 00:04:26.400
I mean cash collected what was processed and received by the business

56
00:04:26.640 --> 00:04:31.120
So the second way that people describe their values how much total revenue they don't have a lifetime

57
00:04:31.280 --> 00:04:34.800
So you may actually have seen you can see this award kind of over here

58
00:04:35.440 --> 00:04:38.000
I got for doing a hundred million or passing a hundred million dollars until revenue

59
00:04:39.120 --> 00:04:41.760
In three years three and a half years, I think

60
00:04:42.640 --> 00:04:46.080
Since we started with clickfunnels, which is software that we use for landing pages

61
00:04:46.720 --> 00:04:48.880
And they recognize the people were top performers all right

62
00:04:49.680 --> 00:04:53.600
But again, that's revenue like it doesn't mean ever means cash collected

63
00:04:53.600 --> 00:04:57.920
But it doesn't mean that like we're doing that per year now this year is a breakout year

64
00:04:57.920 --> 00:05:01.200
And I'll tell you what we do at the end of this year because we will be close to that number

65
00:05:01.600 --> 00:05:03.360
I don't think we'll cross a hundred million this year, but

66
00:05:04.720 --> 00:05:06.720
We'll be really close

67
00:05:06.720 --> 00:05:07.760
So anyways

68
00:05:07.760 --> 00:05:09.760
Number three is business valuation

69
00:05:10.480 --> 00:05:15.280
So this one is one where it's based on the market's value of the business if it were sold

70
00:05:15.600 --> 00:05:19.040
So this is another way of kind of inflating the the business that you have now

71
00:05:19.120 --> 00:05:23.840
This isn't necessarily an unfair way of valuing your business right based on its own value

72
00:05:24.160 --> 00:05:27.600
But the thing is is it all depends on who's the one who's a scribe in the value

73
00:05:27.920 --> 00:05:30.160
What are they what are they using to create that value?

74
00:05:30.160 --> 00:05:31.280
I hear all the time low

75
00:05:31.280 --> 00:05:34.480
I think I'm I'd be able to get 15 times top line you don't know

76
00:05:35.520 --> 00:05:37.520
squat right

77
00:05:37.520 --> 00:05:40.160
The market will pay with the market will pay all right

78
00:05:40.160 --> 00:05:42.640
And so for most businesses that are small businesses

79
00:05:42.640 --> 00:05:44.960
So anything that's under five million dollars a year in revenue

80
00:05:44.960 --> 00:05:49.680
Most of those guys are getting two to three times EBITDA which is another measurement and we get to in a second

81
00:05:50.640 --> 00:05:56.480
Which is the earnings before interest to tax and monetization and depreciation right and so those are

82
00:05:57.840 --> 00:05:59.840
Those are business metrics

83
00:05:59.920 --> 00:06:02.160
That is going to have a multiple scribe to it

84
00:06:02.160 --> 00:06:06.640
So if you're a mid market which would be like 10 to a hundred million dollars in revenue per year

85
00:06:06.960 --> 00:06:11.440
Then you might have a six to eight times multiple if you get above a hundred million dollars

86
00:06:11.440 --> 00:06:15.120
Then a lot of times you can get into the you know 12s 15s etc

87
00:06:15.120 --> 00:06:18.800
And most of the time that's done on EBITDA in a very very very rare

88
00:06:18.960 --> 00:06:22.240
Number of circumstances will they do it on top line revenue all right

89
00:06:22.240 --> 00:06:26.240
And that is in a fast growth company that has high amounts of capital that need to be reinvested in it

90
00:06:26.400 --> 00:06:31.040
That they believe are going to give it a strategic advantage for high gross profits in the future

91
00:06:31.440 --> 00:06:33.440
Um that they're reinvesting capital into all right

92
00:06:33.440 --> 00:06:34.640
And so that's where you know

93
00:06:34.640 --> 00:06:36.880
I saw somebody recently saying that they had you know

94
00:06:36.880 --> 00:06:42.320
They sold their business for a hundred times EBITDA right what that really means is that like and this is where this is what I want

95
00:06:42.320 --> 00:06:44.320
Everybody to watch this video to be thinking

96
00:06:44.400 --> 00:06:47.920
Well, either they had a really really crazy business or more likely

97
00:06:48.000 --> 00:06:50.480
They were making almost no profit in their business

98
00:06:50.960 --> 00:06:55.520
And just got a high valuation because of or not even necessarily a high valuation if they if they're doing a

99
00:06:55.520 --> 00:07:01.280
You know $10,000 a year in profit on a five million dollar business then if they sell for you know five million dollars

100
00:07:01.280 --> 00:07:03.280
They get 500 times

101
00:07:04.320 --> 00:07:06.320
Even though which is ridiculous right

102
00:07:06.480 --> 00:07:10.240
But people do that because it sounds impressive right so that's why we're that's why we're going through this

103
00:07:10.240 --> 00:07:13.840
So you can cut through the BS and hopefully get better sources of information

104
00:07:13.840 --> 00:07:17.760
Which is kind of my goal here is that you can measure you can measure other entrepreneurs value

105
00:07:18.000 --> 00:07:20.160
Based on the true value that they've been providing all right

106
00:07:20.240 --> 00:07:22.880
So the next one here is yearly revenue all right

107
00:07:22.960 --> 00:07:26.160
So this is how much revenue a business is doing yearly now

108
00:07:26.160 --> 00:07:30.080
We're getting a little bit closer to reality here now again revenue versus cash collected

109
00:07:30.080 --> 00:07:33.680
It depends on the type of business if you have a service business that's based on recurring revenue and contracts

110
00:07:33.840 --> 00:07:36.480
Then you're going to have contracts that are factoring to that if you had an e-commerce business

111
00:07:36.480 --> 00:07:40.800
For example, which is purely transactional then the revenue and cash collection to be very close to each other right

112
00:07:41.520 --> 00:07:42.880
and so um

113
00:07:42.880 --> 00:07:47.040
And you know revenue would also not take into account refunds charge vaccines like that

114
00:07:47.040 --> 00:07:51.520
Which then gets into net revenue. I won't get into it. There's a zillion terms and just as a side note here

115
00:07:51.920 --> 00:07:58.880
The reason there are so many terms is because measuring value is something that is one of the hardest aspects of investing in business in general

116
00:07:58.880 --> 00:08:02.960
Is that people want to figure out what is this thing worth and so that's why they have lots of different metrics

117
00:08:02.960 --> 00:08:08.160
That they look at and so for you as a as a as a as a keen, you know entrepreneur or investor or you know

118
00:08:08.160 --> 00:08:10.160
Person who wants to grow within the business world

119
00:08:10.160 --> 00:08:16.320
Understanding all of these metrics and how they work together to to assess or get as close to true value as possible

120
00:08:16.560 --> 00:08:20.000
Is are these are going to be tools in your in your skill set and some of these are better and some of these are worse

121
00:08:20.000 --> 00:08:22.000
And I'll get to my ratings in a second all right

122
00:08:22.000 --> 00:08:26.080
So yearly revenues the next one, which is just how much are you doing every year in terms of top line right

123
00:08:26.800 --> 00:08:32.720
Now the next one is uh is profit or EBITDA now these two things are not necessarily the same um

124
00:08:32.720 --> 00:08:37.600
But I'm going to say EBITDA being earnings before interest tax depreciation and mortization right

125
00:08:38.400 --> 00:08:42.720
For most businesses. This is where coming back to the business valuation if you're mid market

126
00:08:42.720 --> 00:08:45.840
You're getting six to eight if you're kind of smaller than you're at you know two to three

127
00:08:45.840 --> 00:08:49.440
Sometimes four if you're doing really well or you have some sort of competitive advantage um

128
00:08:50.240 --> 00:08:53.440
And so in the thing and that means sounds soft to you in terms of those numbers

129
00:08:53.840 --> 00:08:59.120
But the reality is that a lot of people just look at the outliers which catch all the news in the press

130
00:08:59.360 --> 00:09:05.680
But most businesses every are you know business are sold every day at one x two x three x EBITDA all the time

131
00:09:06.080 --> 00:09:08.160
Just no one wants to talk about it right

132
00:09:08.160 --> 00:09:10.720
And so this is even closer to reality

133
00:09:10.720 --> 00:09:15.840
So if I'm looking at a business owner or somebody's trying to posture with me right at the eggplant measuring contest of

134
00:09:16.240 --> 00:09:17.600
Of archpreneurship

135
00:09:17.600 --> 00:09:20.400
They're gonna if they're starting to talk to me about these numbers. I'm like hey bro

136
00:09:20.400 --> 00:09:24.960
Like what are we doing bottom line? Right? What are we doing bottom line for you? This is what I want to know right

137
00:09:27.600 --> 00:09:32.080
We'll go guys you guys already know that I don't run any ads on this and I don't sell anything

138
00:09:32.160 --> 00:09:36.400
And so the only ask that I can ever have are you guys that you help me spread the words we cannot more archpreneurs

139
00:09:36.880 --> 00:09:40.240
Make more money feed their families make better products and have better

140
00:09:40.400 --> 00:09:42.400
Experiences for their employees and customers

141
00:09:42.560 --> 00:09:46.880
And the only way we do that is if you can rate and review and share this podcast

142
00:09:47.040 --> 00:09:49.440
So the single thing that I have to do is you can just leave review

143
00:09:49.440 --> 00:09:51.520
Let's take 10 seconds or one type of the thumb

144
00:09:51.520 --> 00:09:55.280
It means the absolute world to me and more importantly it may change the world someone else

145
00:09:58.320 --> 00:10:01.120
And so that leaves me naturally to the next one which is okay

146
00:10:01.440 --> 00:10:04.560
Well, you've got you've got certain amount of EBITDA that's coming up

147
00:10:04.800 --> 00:10:09.840
But depending on your type of business you might have to reallocate all that money back into the business to just maintain your competitive advantage

148
00:10:10.160 --> 00:10:11.040
Which

149
00:10:11.040 --> 00:10:12.800
Charlie Munger at Warren Buffett

150
00:10:12.800 --> 00:10:18.960
They talk about how their least favorite type of businesses are businesses that require lots of additional capital right now as they've become

151
00:10:19.200 --> 00:10:20.160
gazillionaires

152
00:10:20.160 --> 00:10:22.560
They have to find businesses like that because they have to put their capital work

153
00:10:22.560 --> 00:10:27.520
But for the thing that created their wealth was finding businesses that did not require a lot of additional capital that created lots of

154
00:10:28.480 --> 00:10:30.480
survey says

155
00:10:30.640 --> 00:10:33.520
Net free cash flow. So how much owner earnings how much can you extract

156
00:10:34.160 --> 00:10:39.840
From the business all right, that's what this NFC F here here is net free cash flow right now

157
00:10:39.840 --> 00:10:41.040
I've talked about this in other videos

158
00:10:41.040 --> 00:10:46.320
But this is after I've reinvested profits in the business to maintain and grow our competitive advantage

159
00:10:46.640 --> 00:10:51.920
How much can i's the owner take out the reason this is so important is because a lot of times you're not going to sell a lot of times

160
00:10:51.920 --> 00:10:56.560
Businesses fail there are tons of risks. That's why business is one of the riskiest things to get into most businesses

161
00:10:56.560 --> 00:10:59.520
Do not succeed that's just those are just the stats right

162
00:10:59.920 --> 00:11:04.880
And 99 times out of 100 you business never actually sells you might do an asset sale or a garage sale

163
00:11:04.960 --> 00:11:08.240
But doesn't actually sell for what you think it is which is why for me as an entrepreneur

164
00:11:08.240 --> 00:11:13.120
You want to de-risk by extracting cash flow and many times this is one of the values of the business

165
00:11:13.120 --> 00:11:16.720
And so from talking to an entrepreneur and they tell me this then I'm going to probably ask well

166
00:11:16.720 --> 00:11:19.600
What do you babe? What are you taking home an owner earnings? What are you extracting from the business?

167
00:11:19.600 --> 00:11:22.800
What are you taking out as dividends because I want to know what's reality right

168
00:11:23.600 --> 00:11:26.880
And that leads me to the last and the bottom one here and then I'll give you my ratings on these

169
00:11:27.600 --> 00:11:30.560
Which is what's your net worth right? This is what entrepreneurs

170
00:11:30.720 --> 00:11:36.960
You know everyone's shying away from talking about a lot of guys that you see on your new speed those guys message me and say hey, man

171
00:11:38.320 --> 00:11:40.880
You know, I want to do x1 z. I want to start investing etc

172
00:11:40.880 --> 00:11:44.960
And they've got half a million dollars to their name and they talk about how they've done 10 million dollars in revenue right

173
00:11:46.480 --> 00:11:51.600
Right lifetime and so again, you could just I'll give you a funny example for it. So if someone

174
00:11:52.320 --> 00:11:55.440
Says hey, we've done a million dollars in revenue look at our award right

175
00:11:56.400 --> 00:11:59.360
That's over a total lifetime right that could be over 10 years

176
00:11:59.600 --> 00:12:04.160
So if you did a million dollars remember 10 years means you're doing a hundred thousand dollars a year in revenue right

177
00:12:04.640 --> 00:12:07.360
And if you're doing 50% margins on that right that's a

178
00:12:08.000 --> 00:12:10.080
$50,000 a year owner income business

179
00:12:10.080 --> 00:12:12.560
Which is just the median income in the United States and there's nothing wrong with that

180
00:12:12.800 --> 00:12:15.280
But in terms of taking this person as an authority

181
00:12:15.680 --> 00:12:19.120
I would be I would be hesitant to take their advice

182
00:12:20.160 --> 00:12:23.440
Because gandily they're they're probably just spending what they're making on living

183
00:12:24.400 --> 00:12:28.800
Because if that's how they're trying to position. So just just take that with a grain of salt

184
00:12:28.880 --> 00:12:33.840
You know what I mean? And the reason I'm going through this is because I would the best thing you can do is learn from others

185
00:12:34.320 --> 00:12:39.360
But to make sure that you're actually learning from others learning from people who are good information sources is important

186
00:12:39.760 --> 00:12:42.080
And can there's tons of people in a way more about business

187
00:12:42.080 --> 00:12:43.920
But I just try to share the stuff that is work well for us

188
00:12:44.720 --> 00:12:49.360
In creating you know for me an ultra high net worth which is over 30 million and there's two aspects

189
00:12:50.160 --> 00:12:55.120
Of net worth all right you have your net worth that comes from your investable assets

190
00:12:55.120 --> 00:13:00.720
Which is what you've extracted right leave extracted page your taxes on and then been able to reinvest and grow

191
00:13:01.200 --> 00:13:05.760
And the second is the percentage of the businesses that you own business or businesses that you own

192
00:13:05.920 --> 00:13:11.840
All right, which is why having a fair and reasonable valuation is important because what's the true market value of the business that you have now

193
00:13:11.840 --> 00:13:13.920
If someone says like my business does like

194
00:13:14.480 --> 00:13:17.760
$10 million a year and they do two million dollars of EBITDA right

195
00:13:18.560 --> 00:13:20.560
$2 million a year and they're getting a

196
00:13:20.560 --> 00:13:24.800
Five times multiple on that because it's truly a business and doesn't require their face

197
00:13:24.800 --> 00:13:28.000
If it requires their face then they're not going to get that multiple right

198
00:13:28.000 --> 00:13:32.560
So it's important to understand these variables that create and measure value in a business

199
00:13:32.560 --> 00:13:35.520
Because if you're looking for people and you're trying to listen to advice

200
00:13:35.520 --> 00:13:39.040
Then make sure you're getting it from the sources that are true and real all right

201
00:13:39.040 --> 00:13:41.360
And so again two different ways that

202
00:13:41.920 --> 00:13:46.000
That that combined to create net worth is going to be your after tax

203
00:13:46.000 --> 00:13:51.760
Well that you've extracted from the business and be able to reinvest on the side and grow in your own right and

204
00:13:51.920 --> 00:13:54.960
The percentages of the businesses that you own and the value around them all right

205
00:13:54.960 --> 00:13:57.440
So let's get to the good part which is um

206
00:13:57.440 --> 00:14:00.640
Yeah, your name is this something that I'd be looking at in terms of

207
00:14:01.200 --> 00:14:04.640
Whether I'm going to value this person's opinion based on this stat alone

208
00:14:04.640 --> 00:14:08.240
Survey says contract value. No, I would not do that

209
00:14:08.880 --> 00:14:10.640
And that is because

210
00:14:10.640 --> 00:14:12.560
This can be wildly inflated

211
00:14:12.560 --> 00:14:16.160
Especially if you extrapolate on one month's contract value for the rest of the year

212
00:14:16.160 --> 00:14:18.160
It can be wildly inflated all right

213
00:14:18.160 --> 00:14:21.120
So number two lifetime revenue survey says

214
00:14:22.320 --> 00:14:25.520
No, I would not use this as a way of measuring how good someone is at

215
00:14:26.320 --> 00:14:30.400
At business because you want to know how long was that was that over 20 years?

216
00:14:30.400 --> 00:14:34.720
Was it over 40 years because that's what a McDonald's employee can earn over that amount of time

217
00:14:34.720 --> 00:14:41.040
All right, so don't be impressed by this number ask more questions which we which you should hopefully do as we go down this

218
00:14:41.200 --> 00:14:44.400
All right business valuation survey says yes

219
00:14:45.120 --> 00:14:48.880
But caveat on this you want to know what type of multiple are you assuming

220
00:14:49.520 --> 00:14:52.800
And what is that off of top line or bottom line and why can you defend that right?

221
00:14:52.800 --> 00:14:56.400
So this is asking good questions so that you can actually get closer to true value

222
00:14:56.400 --> 00:15:01.360
Which is why all these metrics even exist to begin with so that people want to ascribe and measure value all right

223
00:15:01.840 --> 00:15:04.000
Next one yearly revenue survey says

224
00:15:04.400 --> 00:15:08.080
Ah partial answer because it goes with number five, which is yearly profit

225
00:15:08.240 --> 00:15:12.160
All right the difference here if someone's doing a hundred million dollars a year in top line revenue

226
00:15:12.960 --> 00:15:17.040
And they're spitting out um just a little bit of profit that may be okay

227
00:15:17.440 --> 00:15:19.120
Right if you're doing 500,000 as year in profit

228
00:15:19.120 --> 00:15:22.400
I knew a company that um that was doing 20 million a year in profit doing 500,000

229
00:15:22.480 --> 00:15:27.520
Sorry 20 million revenue 500,000 as year in profit and they got sold for 168 million right now

230
00:15:27.600 --> 00:15:31.680
That's a super valuable business and it's because the bankers and the people who bought it saw that they had

231
00:15:31.760 --> 00:15:33.680
Reinvested everything right

232
00:15:33.840 --> 00:15:38.720
Intergrowing the business right and so understanding the relationship between these two things

233
00:15:38.880 --> 00:15:43.520
If I have another business is doing 500,000 a year and a million dollars a year in top line revenue

234
00:15:43.520 --> 00:15:45.520
Then it's going to be a far less valuable business

235
00:15:45.600 --> 00:15:49.760
All right, so understanding that they might be making some strategic decisions about how they're reinvesting the business etc

236
00:15:49.920 --> 00:15:54.400
Or some capital costs that might have cost them but they see where what it's going to yield them in the future etc

237
00:15:54.640 --> 00:15:56.240
All right now

238
00:15:56.240 --> 00:16:01.600
This is especially true with software businesses FYI all right, which that particular business was a software business

239
00:16:02.560 --> 00:16:04.320
Next one survey says

240
00:16:05.200 --> 00:16:08.480
Yes on net free cash flow. This is uncle Warren. This is uncle Charlie

241
00:16:09.120 --> 00:16:14.560
Munger. This is their primary metric for measuring business. They try and figure out what is the net free cash flow after I

242
00:16:14.560 --> 00:16:17.360
Invest everything this is an excellent way

243
00:16:17.840 --> 00:16:19.840
excellent way

244
00:16:19.840 --> 00:16:25.440
To figure out the value of the business all right because if you can do your net free cash flow and then you multiply it

245
00:16:25.440 --> 00:16:29.920
Then you're going to get very close to what an investor might be willing to pay for the asset

246
00:16:30.080 --> 00:16:34.560
Excluding some sort of crazy monopoly thing that they're trying to get with some sort of category king

247
00:16:35.200 --> 00:16:37.040
You know situation in a marketplace all right

248
00:16:37.840 --> 00:16:41.920
And then finally net worth how do we see this on the on the valuing of an entrepreneur's

249
00:16:42.720 --> 00:16:44.320
eggplant right

250
00:16:44.320 --> 00:16:46.320
survey says yes

251
00:16:46.320 --> 00:16:48.320
I think this is an excellent measure

252
00:16:48.800 --> 00:16:54.720
Of value because this is what is left after all the chips all the chips of phone all the cookies have crumbled all the

253
00:16:55.120 --> 00:16:57.120
roosters have roosted

254
00:16:57.520 --> 00:17:03.280
This is what's left after everything right because if you you know if you like I've had 13 businesses and I now own eat more

255
00:17:03.280 --> 00:17:05.280
So I had 21 businesses right

256
00:17:05.760 --> 00:17:10.480
So I've had a lot of these things and the thing that remains is you your net worth is an entrepreneur

257
00:17:10.640 --> 00:17:15.920
And if you look at the ink 500 I saw the the fortune 500 and you look at it 50 years ago

258
00:17:15.920 --> 00:17:21.200
What you'll see is that there's only two businesses that are still on the the fortune 500 from now from 50 years ago

259
00:17:21.200 --> 00:17:23.200
G and Ford that's it

260
00:17:23.520 --> 00:17:27.680
That's it right and so when you think about that a lot of times what what

261
00:17:28.080 --> 00:17:34.640
Business becomes is you create something and then as an entrepreneur you want to be able to create enough personal wealth throughout the trajectory of the business

262
00:17:34.640 --> 00:17:40.560
That's like literally all businesses fortune 500 and only two of them right are still there and so

263
00:17:41.360 --> 00:17:44.960
Thinking about that that should hopefully shift your perspective, which is why I'm so big on

264
00:17:45.360 --> 00:17:51.040
Extracting dividends while the business is growing and I know that that might not be as popular in the Silicon Valley world

265
00:17:51.600 --> 00:17:55.920
All of those guys don't live in reality and for the every day business owners every day entrepreneurs that are you know

266
00:17:55.920 --> 00:17:59.120
Hustling out there trying to make a buck trying to feed their families

267
00:17:59.360 --> 00:18:03.840
It's important to de-risk because you can't put all your eggs in the single basket that is my opinion

268
00:18:04.160 --> 00:18:08.320
Short you can bet on yourself, but there are so many more stories of guys who bet everything on themselves

269
00:18:08.320 --> 00:18:10.640
That the casino and walked away empty handed

270
00:18:10.800 --> 00:18:16.160
All right, and so it is my belief that if you were generating a profit you should be purposely taking some out every month

271
00:18:16.240 --> 00:18:20.400
Even though the like for me the vast majority of my net worth is in my business valuations still

272
00:18:20.800 --> 00:18:25.600
I still have you know over whatever a lot um in in in investable assets

273
00:18:26.080 --> 00:18:31.600
That categorizes me as ultra high net worth all right, and so again all trying to worth just you know from the definition standpoint

274
00:18:31.840 --> 00:18:34.720
Is investable assets. It's not based on total value. All right

275
00:18:35.440 --> 00:18:39.360
And so these are the seven ways that I wanted to highlight for measuring value

276
00:18:39.680 --> 00:18:44.240
If you see someone and they say I am worth this or my business is worth this

277
00:18:44.320 --> 00:18:48.080
I built an ex million dollar business ask these questions

278
00:18:48.960 --> 00:18:55.280
Is that lifetime revenue is that contract value that's been extrapolated is that your business valuation based on what multiple

279
00:18:55.600 --> 00:19:00.320
Is that based on a top line multiple or is that based on a bottom line multiple what's the net free cash flow

280
00:19:00.320 --> 00:19:04.160
What are you taking out as dividends every year and then finally if someone will share it with you

281
00:19:04.160 --> 00:19:08.080
Which I I'm actually not that opposed um to sharing net worth numbers

282
00:19:08.480 --> 00:19:13.760
I know some people are I don't really know why I figure if you make enough money over time people will always end up finding out

283
00:19:13.760 --> 00:19:16.080
What your net worth is which is basically the entire Forbes list

284
00:19:16.480 --> 00:19:21.760
Um, and so anyways these are the ways that you measure value these are my two second snap judgments on them

285
00:19:21.920 --> 00:19:27.120
And if you have if you have your astute cap on and you probably figured out that a lot of these things go together

286
00:19:27.440 --> 00:19:28.960
Right, it's not just one number

287
00:19:28.960 --> 00:19:35.920
It's understanding the interplay between them so that you can ascertain with the true value of a business and or the entrepreneur that owns it is

288
00:19:36.080 --> 00:19:42.240
So hope you found valuable in that um hope you found valuable in that hit the subscribe button if you did and if you didn't

289
00:19:42.320 --> 00:19:46.400
Then don't hit the subscribe button because that's what this is for all right, so it's for you guys

290
00:19:46.480 --> 00:19:49.680
So hope this found valuable and keeping awesome because bye