Transcript
A (0:00)
Yo, yo, what is up?
B (0:01)
Welcome back to another episode of the Action Academy podcast, Corporate America's least favorite podcast. This is the world's number one podcast that helps you replace corporate with cash flow through buying small businesses and large commercial real estate deals. For my new listeners, my name is Brian Lubin. In March of 2022, I left a six figure corporate sales job to travel full time around the world while building my own business from zero to $10 million per year in annual recurring revenue. And since that point, we have done a pretty good job.
A (0:26)
And that, ladies and gentlemen, is the.
B (0:28)
Topic of today's podcast episode. In today's show, we're going to be covering business underwriting, specifically small business underwriting. What are the metrics and what are the KPIs that we're looking out for to actually back of the napkin value a business. We also discussed the metrics that you can use to add value to a business once you already purchase it or for a business that you are currently running. And we also talk about metrics that subtract from valuation of the company. So today's podcast episode is basically a giant list of what to do and what not to do. I spent thousands of dollars learning this from a seminar where I had people that were much richer than me teach me this stuff and now I teach it to you for free.
A (1:10)
This is also a snippet of a.
B (1:11)
Much longer two hour long call within our Action Academy community. I was going over this step by step, in detail, answering questions, underwriting people's businesses with them. And in our Action Academy community we had like 90 people on this call. So it was a juicy call.
A (1:27)
And this is a clip from it.
B (1:29)
So if you want to be able to be on these calls, have full access. And you need a community of peers, partners and mentors to help you buy these small businesses. Buy the commercial real estate that is.
A (1:40)
The Action Academy community.
B (1:42)
Go in the show description, click the link, book a call. We are happy to speak with you for 15 and 20 minutes and see if it's a fit.
A (1:48)
This is the same spreadsheet that they use to analyze a hundred million dollar company versus a $10 million company versus a million dollar company, anything. So at the very top you have revenue and you have ebitda. So that is your top line, like how much money are you making and what is your net? So EBITDA is earnings before interest, taxes, depreciation and amortization. That's a freaking hell of a word. I hate that word. So I'll just say ebitda instead it sounds smarter. Five star rating and a review. So it's just basically a fancy word for net profit and there's a bunch of different ways that you can categorize it. So this is what makes your business interesting. If you were to post on biz by sell at your company, this is what people would first look at for the listing to click on your business and say, huh, that's worth looking into is your revenue and your ebitda. So your gross and your net. All right, then we go into the metrics that make your business healthy. These are the value adders that to add multiples to your revenue. So for people that are brand new, businesses are sold on multiples of EBITDA or multiples of what's called SDE seller discretionary earnings. So while Carly and Alex maybe bought a business for a multiple of sde, we would look at for a larger company would be a multiple ebitda. That's how private equity does it and that's how you do anything that's above $5 million is mostly a multiple of EBITDA. So all of these below here are going to be value adders and then the ones beneath are going to be value subtractors. So we have number one, revenue, number two, ebitda. The value adders are revenue growth percentage year over year. How much is your business growing? Is it growing or is it shrinking? Yearly revenue retention, how much of your revenue is kept going into the next year? So pretty easy, right? What's your churn for your business? Do you even have any repeat customers? Or is every single person that buys your product or buys your service done immediately after and they never buy from you again? The more you have on your revenue percentage, the higher multiple that you can add to your sheet into your business valuation. Your EBITDA margin, which is your net profit margin, LTV to CAC ratio. If you're looking at a business or if you are a business, your LTV is the lifetime value of the customer. Your cat is the cost to acquire a customer. So your cost to acquire a customer is how much do you spend in marketing and sales to bring on each and every customer. For example, since we don't have any paid ads and we don't have a marketing department and paid positions there, our CAC, our cost to acquire a customer is $500. So it's the amount that we would pay for a referral for that new member to come in for Caitlin or for one of you to refer them or talk to them. That would be our cac, your LTV is how much is that of that customer, how much is the customer worth to you over the entirety of your business relationship minus the cost of oper. So the LTV would be like if it was. If this was $10,000 a year for Action Academy and an average member stayed in for four years, then that would be $40,000 of lifetime value subtracted minus the cost that it would be to fulfill and deliver to that customer. So that would be whatever Caitlin's salary is, whatever operations the back end is, they would. You would divide that by the number of customers. So that's how you get it per customer. So what you're looking for is a high LTV to CAC ratio. So that means that the. You want to have your CAC as low as possible and your LTV as high as possible. This is the single most important business metric that they track. And I'll talk about this because they say this a lot publicly. So that's why I'm going into this sheet, like, really extensively. The LTV says making your customer more valuable and the CAC is getting more customers. These are the only two sales and marketing efficiency metrics that you can track in your business and any business that you're looking to buy. This is something that you need to be looking at that's not going to be on their P and L. Guarantee it. It's not going to be on their P and L. So, Carly, Alex, anybody that's on here that's buying companies. Jordan, LTV to CAC is what you want to look at. So a good. And I'll give you guys like their numbers for revenue. Don't even think about selling your company. This is for them. All right? This is for them for revenue. Don't even think about selling your company until you're $10 million plus in revenue, which is top line. You're $5 million plus in EBITDA. Your revenue growth is over 80%. Your yearly revenue retention is over 80%, which means 80% of your business is recurring revenue. Your EBITDA margin is over 30%. Your LTV to CAC is over 10 to 1. So that's what you're looking for in Action Academy. Our current LTV to CAC ratio is 27 to 1 because we have no marketing. That's going to decrease as we have marketing hires. And then you add all these multipliers. That's what adds to your business valuation. So you put your multipliers in the right column, to the far right, and then that's what you would add onto your business now, your value subtractors, for example, like this would be maybe like.