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one of the ways that people try to see you into thinking that they have a more valuable business.

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

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

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along the way. I hope you enjoy and subscribe. In this video I'm going to talk to you about the

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seven most common ways that people measure or measure the value that they are providing in

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business and to the marketplace. This is kind of the eggplant measuring contest if you will

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of entrepreneurs. I want to tell you which ones are BS and which ones are my favorite

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in the remainder of this video. The first and possibly the most BS way, especially in the

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information space of measuring this, is on contract value. That's when someone says,

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I like to call this marketer math. That's when someone goes to an event and pitches

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something of some sort and gets people to sign it for a one-year program, for example.

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That means that people are paying monthly. When they say, hey, we did $2 million in sales.

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The reality is that we're doing $2 million a month. They're extrapolating a single month that's

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a one-time event based on contract value in the future that's in no way guaranteed. In the

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reality, they might have signed up 100 people at $2,500 a month. In their minds, they say,

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we're doing $2.5 million a month. In your mind, you're thinking, oh, this is a $30 million

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revenue business. In fact, they literally only added $250,000 a month in one month that they

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did and they have probably lots of turn in people leave. One of the ways that people try to

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see view into thinking that they have a more valuable business is that they will tell you the

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contract value. On the BS omit her of this one, actually, I'll rate them at the very end,

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so it'll be a little bit fun. Number two, we've got contract value. The next one is revenue

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over lifetime. That is the total amount of sales that was collected. In terminology, revenue versus

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cash collected are two different terms. Most of the time people use them interchangeably. They

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shouldn't be used interchangeably, but for the purpose of this video, I will talk about revenue

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from a perspective of cash collected. Revenue over lifetime is basically saying, all right,

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I've been in business for 10 years and over those 10 years, we've done $2 million. That

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sounds impressive because then they have an award and it says, I've done over a million dollars

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in sales in my business, but the reality is they were doing $200,000 a year. If it was a business,

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let's say they ran 40% margins and they mean they were making $80,000 a year for 10 years,

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which you can do just driving Uber and not have any of the stresses of running a business.

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And so I find this one kind of funny, but it is one of the ways that people talk about

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business revenue. I'll get to rating these in some of the pros and cons at the end, all right?

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So contract values number one, lifetime revenues number two, number three is business valuation.

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So that means how much is the business worth to the marketplace? So if I were to sell my

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business today, how much is that worth? Now, this is actually fairly common, especially in more

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publicly traded companies, that's where you get the CEOs, like Jeff Bezos has his personal net worth

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is based on the business valuation, right? That means that if someone were to buy the business

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today, what would they value at? And a lot of that is taking the profit of the EBITDA at the end of

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the year, which is earnings, before interest, tax, and wordization, right? And depreciation,

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and extrapolating that on a multiple. So it's like, if I'm doing a million dollars a year in EBITDA,

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and I might say that in my particular industry, let's say we're growing, so we'd get a higher multiple,

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because they're buying discounted cash flows of future earnings, let's say that on that multiple,

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I get 10 times, right? So I might say I have a $10 million company, one in fact I'm only doing a

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million dollars a year in profit, that's not necessarily incorrect, it's just a different way

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of measuring the value that you've provided to the marketplace, all right? The fourth way

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of doing this is the actual yearly revenue, right? This is starting to get a little bit closer

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to reality in my opinion for most people, because remember, only like 1% plus of businesses

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actually sell, all right? And so 99 times out of 100, they're not going to sell, all right? So

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getting a little bit closer to reality here, we've got yearly revenue, which is how much

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actual, and again, the difference I said earlier between revenue and cash collected,

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for me, I look at cash collected, revenue in a lot of times is just dreams of what they think is

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going to happen versus what actually will happen, but yearly revenue, how much cash is being

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collected on a yearly basis in the business, all right? So if a company collects $30 million

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a year in revenue, then that is, you know, what they might describe their business as, all right?

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The fifth in this little equation here is yearly profit, all right? So it's yearly profit.

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That's how much in excess, or even at the end of the year, so I'd say profit even,

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these aren't perfectly exchangeable here, all right? I recognize that, but for the purposes of

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this video, this is what's left, what's the top at the end of the year? Now, what's important is

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that this does not take into account the fact you may reinvest a lot of that stuff in the business,

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right? So if you have good returns on capital in your business and you want to expand,

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et cetera, which many businesses do, right? As long as the return on capital in your businesses

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in excess of what you'd get in the passive marketplace, which it should be because this is your

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active business, then this is how people grow. Well, right? This is how you grow. This is literally

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how entrepreneurs make money is by reinvesting a certain percentage of the profit into the business

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because the growth of the business exceeds the growth that they would be able to get passively

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from the marketplace. That is the whole entire idea. And so when people describe how much they make

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as we're measuring value in the business, how much profit they're making per year is one of those

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ways, all right? Again, I'll tell you at the very end where I rate these and the pros and cons of

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them, all right? The sixth one is owner earnings, all right? So this is the extraction.

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So how much was I as the owner or the shareholders of the business able to take out of that yearly

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EBITDA or yearly profit? What kind of distributions am I personally taking, right? Because this is,

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you know, Warren Buffett is famous for measuring net free cash flow, which I'll put right here,

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net free cash flow, all right? He's famous for measuring businesses not on this, but on this,

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which is, well, sure, what if I have a manufacturing business that's making lots of profit,

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but every three years, I need to invest three times my earnings into buying another machine.

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It's like, well, that's not a very fun business because it means that every single, I've never

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actually get to make any money because I consistently have to buy a new machine to stay updated with

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advancements in technology, et cetera, right? And so that is why this one can be somewhat deceiving

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versus how much am I able to take out as a business owner every single year because that, to me,

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is the value of the business if I want to reallocate the capital in other places, all right? And then

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finally, we've got the good old fashioned net worth, all right? This is how much me as an owner,

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and the reason that you're like, wait, some of these are kind of different from another,

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and the answer is you're right. They are very different from another, but when you see YouTube

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videos and you see thumbnails and you see people describe their business, or as they describe

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themselves, which most entrepreneurs have merged their identities with their business, which I'd

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encourage you not to do for other reasons like logically, but people do merge those things,

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which is why net worth somehow also gets conflated with all of these different things, all right?

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So let's get to the measurement of, you know, ascribing values to each of these things,

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all right? So if I'm looking at a business, a business itself, I don't care about the lifetime

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revenue of the business, right? I don't care about this very much at all. It does make really,

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it makes for great headlines and sexy numbers. There's one of my other videos that said we did

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122 million in revenue over three or four years, and that is because it definitely sounds

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sexier than saying we do $32 million a year in revenue, right? Which is kind of this guy.

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And in case you're curious at the time of this video, actually, I'll share at the end of this

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year what we did, but I'll say that I was stuck at mid-30s for three years in yearly revenue cash

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collected, and this year will be all breakout years. So look, stay tuned for that video. Anyways,

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the next one, and this is probably the most BS of all measures entirely because it's completely

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made up, right? Now, the only time this matters, the only time this would be of any value whatsoever

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is if you have a type of contract that's 100% enforceable and you have negative turn or there,

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or these contracts only go up in value, right? But the vast vast vast majority of businesses

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do not have this because people do not consistently follow the contracts that they sign up for,

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or they do not have enforceable contracts or they are not secured by anything. And so that means

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that these contracts are barely worth the paper that they are written on, which means that they are

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completely fictitious value and only there for your ego. So I would say this is probably the worst

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way of measuring value. I would say the second worst way of measuring value is revenue of

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his lifetime revenue, revenue. All right, so let's work our way down this ladder here.

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The next one, business valuation. I actually think that's a pretty decent measure,

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but the question is who's valuing it, right? And how are they measuring the value? And someone

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says, yeah, we're going to get 20 times top line. It has to take an extremely, extremely

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unicorn special business with crazy growth competitive modes in a fast growth market that has

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some sort of unique technology that people think is going to become a monopoly or category king

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in order to get that type of valuation. But when people ascribe that type of valuation to their

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business, most of the times they're just doing it completely subjectively and making it up because

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it just makes them feel better. All right, and so I would not get duped into believing something

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like that. Now, if someone says, I believe our business is reasonably valued at five or six times

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EBITDA, which is this number, right? In most cases, that is a pretty accurate assessment if you're

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looking at businesses. And if you're looking at smaller businesses, it might be two to three.

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If you're looking at middle market businesses, you're looking at six to eight. And if you're

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looking at, you know, publicly traded companies, well, I mean, if you look at the stock market now,

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that's closer to like 30 times and it's nuts right now. But for the most heart, you'll get into

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the kind of the 20s ranges is kind of more, more common in kind of the public markets. And you're

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like, well, why is that? It's usually just because there's so much capital and they're so easy to

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invest in. And that's like the ease of access to liquidity and other people's money also increases

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the valuation because it's so much easier for people to purchase shares of the company, right? But

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from a true value standpoint, like the recent business valuations, even interesting is that like,

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you have to think about as return on capital. If I'm going to buy a company that's doing $10 million

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or let's say a million dollars a year in profit, well, if I put, you know, if I say that the

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company is worth $10 million, if I put $10 million in, then I'm getting a 10% return on the money,

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right? Where this gets all thrown to the craziness, which I'll make in a different video,

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is the reason people do a 10x multiple and still make tons of money on it. And it's all based on

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leverage. So how they can use other people's money to fund these deals at lower interest rates

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than it costs them that they're going to make from the business, which is called covering debt,

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which I won't even get into, all right? So first, we have contract value, which I think is most

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of times BS. Revenue lifetime is really good for ego, but not really good for valuing a business.

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Business valuation, if done properly, is an excellent measure of a business, but it has to be done

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fairly with the third party that doesn't have their ego invested in it. The fourth way is yearly

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revenue. The nice thing about this is that I think it just, this is a top-line measure. This is a

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measure of how much revenue or cash is being collected this time, defining it over a period of time.

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Now, the reason that I think this is somewhat nice is it gives you an idea of what kind of volume

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someone's doing, right? Now, because that is why profit, which is the next one, these ones you

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want to kind of report on these together, right? Because let's say someone's saying, you know,

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I'm doing $500,000 in profit, it might be like, oh, it's a small business. But if you says,

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well, we're growing and we're doing, you know, 100 million a year and we just continue to plow

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the profit into the business. And that's because we have lots of founders and we want to grow this

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as an asset because we think we're getting superior returns on capital. Then in that case, then you're

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like, oh, it paints a very different picture saying we're doing 100 million and we're,

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and we're quote, profiting 500,000, right? Versus versus, you know, a million dollar business

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that's doing 500 million dollar in revenue business that's doing 500,000, all right? That's kind

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of the difference here. Now, again, I'm trying not to, I'm trying not to, because there's lots of

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different terms for this, right? Because if I can take out 500,000 dollars in an effort cash flow,

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but there's, you know, 40 million in EBITDA in the business, but we're plowing all that into growth,

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then again, the numbers can be a little bit more confusing. And if this sounds confusing,

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that's okay. You'll learn it over time. But the entire point of this video, and I'm going to get

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to the last two in a second, is that you should understand what each of these are so that when

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someone says a number, you can push back and say, well, what are you talking about specifically?

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You're talking about, you're talking about lifetime revenue, are you talking about yearly revenue,

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are you talking about business valuation, are you talking about contract value of what's people

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sign? Like, what are we talking about EBITDA? Like, what are we talking about here?

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Real quick, guys, if you can think about how you found this podcast, somebody probably tweeted it,

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told you about it, shared it on Instagram, or something like that. The only way this grows is

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through word of mouth. And so I don't run ads. I don't do sponsorships. I don't sell anything.

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My only ask is that you continue to pay it forward. Do whoever showed you or however you found out

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about this podcast that you do the exact same thing. So if it was a review, if it was a post,

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if you do that, it would mean the world to me, and you'll throw some good karma out there for

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another entrepreneur. Right. And then I'll just give you another lens through which to see

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business so that you can, at the end of the day, the goal is to be able to describe your own value

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to the business. And so I'll show you what mine is at the very end of kind of what I think through.

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But these are the different ways that you guys will see on YouTube and on podcasts,

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when people talk about the values of their business and their own value, what they'll use.

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All right. This one, number six is net free cash flow. All right. So this is near and dear to my

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heart because Uncle Warren Buffett. This is what this is what he uses. It was good enough for him.

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It's good enough for me. This is how much money is this thing actually making me the owner, right?

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Where the shareholders, how much money is this producing an access of what it costs to run the

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business or reinvest in maintaining a competitive advantage? All right. That's why C's candy,

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one of his most famous companies that he acquired for $25 million. And over the course of its

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career has generated over $1 billion in net free cash flow for him as an owner, which is insane,

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right? Think about the return on that investment, is because there really was no

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additional increase that they had to spend to keep that business competitively

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advantage. It's chocolate, right? Or candies. And so there's not like new technology taste buds

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aren't really changing. And so they were able to consistently generate and pump out cash flow

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for the owners that they could reallocate into other businesses. All right. And the final one

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here is net worth. And the reason I'm bringing this one up is because as entrepreneurs like to

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measure each other's eggplants, right? And in their business success, which is a totally

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different thing from net, from self-worth, right? Net worth. Side note, don't make your

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self-worth into your net worth because if your net worth goes down, then so too will your

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self-worth. And on the flip side, if your net worth goes up and your self-worth goes up with it,

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then you will become an arrogant prick. So don't do that. Anyways, so the final one here

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is net worth, which is after taxes, after depreciation, after everything is said and done,

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what is my net worth, right? Now net worth is going to be somewhat tied to business valuation.

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If you're like, wait, some of these are tied together. The answer is yes. And if I could make

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everything neat into a single number, then I would. But the reason the business world works the way

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it does is because there's lots of different metrics that are used to measure value slowly,

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so that we can get at the intrinsic thing of value. What is this worth, right? And so a person's

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net worth is going to be a percentage of what the of the businesses that they own. Now, if you give

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a fair valuation to business, right? There's kind of two aspects to net worth. There's their

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investible net worth, which is how much do they have outside that they can put into investing

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into things? And then how much do they have in like their core business? And I'm describing

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this purely for founders and entrepreneurs. If you're purely an investor, then all you're going to

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have is investible assets that you have access to. And so with net worth, like I said, there's

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the two buckets. There's what you can invest in and what you own in terms of business valuation.

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And so when we're looking at that, I like this one a lot because it's BS-free, right? Because

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imagine a guy who says, I've done a McDonald's employee, for example, over the course of their

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entire career, would do a million dollars in lifetime revenue. Most of us would not consider

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McDonald's employees very well off, right? And there's nothing against being a McDonald's

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employee just saying from a purely income standpoint, it's not considered a very fruitful income

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producer, right? But if you work for 45 years and McDonald's, you'll make a million dollars,

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and so they could start selling advice on how to make a million dollars in McDonald's by being

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a frontline employee, right? And so that is why these things can be somewhat deceptive and make

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people think that they are doing better than they are. And the worst person to see is yourself,

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right? Which is what oftentimes people are doing with these numbers, which is why I try and be as

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open as honest about the numbers that we have. Everyone in my company knows what we make,

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and I choose to run our companies that way because I don't like to hide things,

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because to the same degree, if expenses go up and profit goes down, I want people to see that.

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If we have a downturn, I want people to see that I'm taking on risk here and I'm paying

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everyone's mortgages in the meantime, basically out of Uncle Alex's pocket. And so understanding

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this is important. And so for me, the measure that I do, as promised in the video, I'll separate

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the final two things here. So in terms of personal, I measure people not on revenue over lifetime

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or their yearly revenue or their yearly profit or their contract value or any of that stuff.

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I look at net worth. And net worth is what is left after everything is done at the end of the day,

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because this is the thing that you are trying to build. This is the nest egg. This is the wealth

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that hopefully will continue to grow. And if you do it properly, it will grow tax-free,

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because you're buying smart and buying for long-term holds without having any intention of selling

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them. And if you buy that way, then the tax system is incentivized for you to buy in that manner,

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so that you can grow tax-free. And so another way of thinking about the tax system is thinking of

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it as an incentive system that the macroeconomists of the government have set in place to grow the

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economy, right? The tax system is a penalty system, but it also means that if you're not being

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penalized or you get right officer, you get ways of getting tax-free, it means that those are

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things that are going to benefit everyone. And so if you play the game, the way they set up the

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rules is because they believe that those things should be the things that are going to grow the economy,

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right? Trying to arbitrage two things doesn't necessarily grow the economy and so they take

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percentages of that. If you buy things with the intention of investing long-term so that you get

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something that builds infrastructure within the economy makes everyone's life better off and they

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do not tax you on that. And so if you buy things that are going to grow slowly over time or just

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grow over time in general with no intention of selling them, then your net worth will grow disproportionately

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again tax-free. And so this is what I look at when I look at entrepreneurs in general as I look at

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their net worth, which is a combination of their investible assets and the businesses that they own

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percentages of, which is the business valuation. And as long as that is being done in a truthful

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manner, which is usually going to be a multiple of this guy, right? Time six to eight, you know,

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if you're mid-market, mid-market being, you know, 10 to $100 million a year in revenue, then these

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are that is a fair valuation for most people, all right? And so next time you see someone who's,

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you know, who's got, I don't know if you can even see this in this, let's see if I can turn this

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camera real quick. So I've got this fancy little award here, boom, that's for doing 100 million

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in sales through our businesses. And we got that I think November of 2020 is when we cross that

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that line since then we've done, I don't know, another 30 or 40, it doesn't matter. I'll just,

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I'll give you guys the year on numbers later. But the point is that that seems really impressive

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and it's a good idea for the business that gives those because it makes everyone seem more successful,

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right? But what I'm trying to warn you against is don't read too much into this stuff,

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try and put the pieces together so you can describe your own value to both the entrepreneurs

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contribution to society and also the value of the business itself. And lots of things to look at are

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especially these three numbers, four, five and six, which is what are they actually doing yearly?

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What's the EBITDA in relation to that? And then how much money can they take out in net free cash

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flow or earn earnings after reinvesting in the growth of the business? And a lot of times we hear

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the Silicon Valley stories of, you know, these companies that are worth these crazy amounts. But 99.9%

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of the times, you know, it's a, it's a guy who owns five dry cleaning shops, right? Or it's somebody

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who has a digital marketing agency or somebody who has an education business of some sort, or it's,

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you know, and those types of businesses are not going to fetch the crazy valuations that, you know,

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sales force does because there's CRM that will never, you know, people once they get on it,

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they never leave and they increase in revenue over time and their contracts are enforceable, right?

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And so when you're thinking about these things, you need to basically make up your own darn mind

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by combining these things and not being fooled by people who will try and exaggerate their numbers

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in order to impress you. All right. And so I've said before, you know, we did 17, I think 17,

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four in EBITDA in 2018. I think we did cell three or four the year before that. But I almost take

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100% of my EBITDA as personal income. And that's because in the, by the nature of the businesses

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that I own, those businesses do not require huge capital investments to maintain a competitive

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advantage. We do have things that we have to do to maintain a competitive advantage. They are

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just not capital intensive. It means it doesn't cost a lot of money for us to say the best at these

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services to continue to grow. And that's because that was how I chose to get into business. That was

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the game that I wanted to play. There are certainly other ways to play the game. This is just the way

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that I've played it. Right. And since then we've done, I think just under, just under 50 million

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in owner earnings that I was able to extract just in the last four years. And so you can do

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your own back of napkin math. I'll give you our 2021 year end number soon. So stay posted for that

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video. But otherwise, measuring value, don't be tricked. Look at these numbers. And at the end of

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the day, the chop of all chops is how much is the net worth of the shareholders and the owners of

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the company growing in a tax-free environment. Stay cool. Hit the subscribe button. I'll see you in

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the next bit. Bye.