← Afford Anything | Make Smart Money Choices
Afford Anything | Make Smart Money Choices
Codie Sanchez: From Wall Street to Washing Machines
01:47:00
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- [00:00]
A
Lets talk about building wealth, but not by climbing the corporate ladder and not through unicorn tech startups. Let's talk about building wealth through ownership of the businesses that you and I interact with on a daily basis. We're talking dry cleaners, plumbers, electricians, ownership of Main street businesses. These aren't glamorous, they're not tech sector, they don't have a whole bunch of intellectual property. They're not necessarily interesting cocktail party conversation, but they can make you incredibly rich. Welcome to the Afford Anything podcast. The show that understands you can afford anything, but not everything. Every choice carries a trade off and that's true not just for your money, but also your time, your focus, your energy for any limited resource you need to manage. So what matters most and how do you make choices accordingly? That's what this podcast is here to solve. We cover five pillars. Financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia and I help you set priorities and build wealth. Today we're joined by Cody Sanchez. Built a nine figure holding company by acquiring these types of businesses. Now she's sharing her framework how to spot them, buy them and scale them, even when you're starting small. Now who is Cody Sanchez? Well, she started out just like I did. Like me, she holds a journalism degree and like me, she did her undergrad at a state school. In her case Arizona State University. In fact, we both graduated early. Like me, she started her career in print journalism. She went to Juarez, Mexico where she covered stories about human trafficking. And then similar to me, she pivoted to the world of business and entrepreneurship. She went to Georgetown, got an MBA and spent some time working on Wall street for companies like Goldman Sachs, Vanguard State street and First Trust. Today she is the founder and CEO of Contrarian Thinking, a financial media company. She is also the co founder of Unconventional Acquisitions, focused on acquiring small businesses for the everyday person. She has over 8 million followers on social media and more than 750,000 subscribers to her newsletter, Contrarian Thinking. Her book is called Main Street Millionaire. In this interview, Cody breaks down her framework for building wealth by acquiring small local, everyday businesses. Those Main street businesses we're talking about, the plumbers, the construction companies, the porta potties, the dumpster companies, the businesses that make up the backbone of America. We talk about why this is the perfect time to acquire these small businesses. And she shares how she built a nine figure holding company by buying these very often overlooked businesses that make a deep Impact in our communities. Enjoy this conversation with Cody Sanchez. Cody, tell me about the first laundromat that you bought.
- [03:29]
B
I was working a 9 to 5 at the time, and a lot of hours, 60, 70 hour weeks. I was in finance. I call it my little midlife crisis, because it was the point in which I realized I didn't want to work for somebody else forever. But I. I wasn't smart enough or I wasn't able to take enough risk to think about just jumping to start my own thing. And so instead of buying some fancy car, whatever most people do in midlife crises, I was like, God, where's my golden parachute? How could I ever get out of this thing that I'm doing right now? Because when I look into the future and I see my boss, my boss's boss's boss's job, I don't want to be them. I don't want to be anything like those guys. And so instead I bought a laundromat, which might sound weird, except I was in private equity and investing. And so I didn't know how to start a company. I didn't have a brilliant idea. I didn't know how to make money from zero. In fact, I didn't think I was very good at that. But I did know, well, you can take money and leverage and expertise and you can buy somebody else's prior 20 years of work, which is what I did for the Laundromat. This laundromat was a small business, less than six figures in purchase price, and it wasn't going to replace my salary. But I needed to learn if I could make like my first five figures by myself, can I do it without a huge corporation? Could I do it without a ton of cash? And that laundromat proved that to me. And I bought it with a guy who was in real estate. He knew how to operate slightly. He knew how to go around to different places and collect cash, which we had to do. And he knew about location, like geography, what really mattered demographically to buy a laundromat. And so I took the plunge and that first laundromat became mini laundromats before we sold off all of them.
- [05:10]
A
Okay, so a few follow ups to unpack there. First of all, a laundromat specifically is a very cash based business. A lot of people use cash when they're paying. How do you know that the numbers that you're looking at are accurate when you're dealing with a business that handles that much cash?
- [05:27]
B
Yeah. So there's something called coin Counting. So when you go and you analyze a laundromat, you definitely look at their balance sheet, you look at their profit and loss statement, but you really want to look at their tax returns. And there's probably some discrepancy between the two because the owners aren't paying the tax man everything they should, especially when the business has been around forever. And then also, they might just have things that weren't really business expenses, but they put them through as business expenses. Those are called add backs. In this particular business, you want to do something called a coin count the first time that you do a laundromat. And that basically means for like a few days, randomly, a week, you're going to go in there and you're going to see how many people actually do laundry. So you're going to count the daily averages, and then you can multiply that to the weekly averages, and you can see if there's a big discrepancy between what they've said and what the actual numbers are. And that can help you bridge the gap between the number the seller wants and the number that you're actually going to give them. Yeah. So I counted quarters in a bucket is how that work worked. And at the end of the day, you're pulling all. Well, multiple times a day, depending on how busy the laundromat is, you're pulling the quarters out and actually manually counting them with a little coin counter.
- [06:31]
A
Wow. So I have a friend who lives in upstate New York who did a stealth version of that, where for an entire day, he just sat across the street and counted the number of people who walked into the laundromat.
- [06:43]
B
Yeah.
- [06:43]
A
So he didn't know the. The actual quarters themselves, but he saw just the volume of foot traffic that walked in.
- [06:50]
B
Yeah. I love it. You could do the same thing.
- [06:51]
A
Yeah.
- [06:52]
B
This is, like, pretty similar. For most businesses, which is the first deal, you're at such an information disadvantage. Right. You've never run a laundromat before. I hadn't, at least. And you don't really know how to judge if the person's lying to you or not about the business or if they're lying to themselves or not. They might not even be sure of their own numbers. And so when that happens, you kind of got to ask yourself, okay, how could I get comfortable with the level of risk that I'm taking? And so that might mean doing secret shopper, like your friend did, that might mean doing a coin count that might be going around to all the other laundromats in the area and saying, how much do you guys do a day? Or doing a secret shopper or a coin count at some other competitors so you can compare the two. And then after you've done a lot of deals like I have, you could look at a laundromat and go, huh, they're saying they have a 30% margin or 40% margin. That's pretty high. I'm not sure. I believe that. I'd probably discount that to 15 to 20%. Then you get these reps that allow you to see rhythms.
- [07:44]
A
Right? So let's back up a little bit and anchor what we're talking about into a wider framework. Fundamentally, what you're talking about when you talk about laundromats is that's an example of a Main street business. How do you define a Main street business?
- [08:01]
B
A Main street business is what I call a mom and pop business. These are businesses that exist all around you that you probably spend money on right now, but you don't realize. They're businesses like landscaping, roofing, laundromats, car washes. These are businesses that don't have to have a moat so you're not doing the neck, the Uber of X, you know, the Tinder of Y. These are businesses that really. There's a ton of competition. And that's okay because there's a massive demand for the services as well. And I call them Main street businesses because a lot of these businesses used to exist on the Main street of small towns all across the US So you used to have, you know, your diner, you'd have your hardware store. You might have your home services and professional services, like a bank or accountant on that Main Street. And the idea is that we take Main street back. And the reason that I'm so big about this is I actually think that the rich know a secret. And the secret is that there's no way to get rich without ownership. And if you want to get rich, you have to own things. And you might say, well, where's the data to back that up? And I'd say, well, 68% of all millionaires own a business. And on top of that, I might say, well, here's the real problem. When America started in the 1800s, 80% of us owned a business. Business ownership was normalized today about six. And, you know, we're not doing it well because Canada has about 7.8% business ownership. So even the Canadians are beating us. And then on top of that, your next question should probably be like, well, who's stealing ownership from us? Where did it go, who took it? And I would really say two words typically private equity. Private equity owned about 4% of businesses in 2000. In 2020, they own about 20% of businesses in the U.S. and it's not just private equity. It's also big corporations and the big government that allows through tax incentives also lower interest rates, also big money pools, these bigger institutions to keep buying up Main Street.
- [09:52]
A
The stat that you just quoted that private equity owned 4% in 2020% 20 years later by 2020.
- [10:00]
B
Right.
- [10:01]
A
So that 16 percentage points growth in a very short period of time. My question is why now? Because private equity existed in the 1970s, the 1980s, the 1990s. So what happened specifically in this century that caused that acceleration?
- [10:21]
B
It's a great question. I think there's multiple things, but it comes down to three in my opinion. First, everything is incentives, right? And so we have something called carry, which is the most tax advantaged way to make money. And carry basically means that if you give a private Equity Company a dollar, they take 20% of the profits over what's called a hurdle rate. But we don't have to get into that in too much particular. Just imagine you give them a dollar, they give you a dollar back, they take 20 cents of every dollar. Well, what's interesting about carry is that it is tax advantaged because of the government in a way that almost nothing else is from long term capital gains to also the distribution and the way that you can do write offs against fund structures. And so private equity has gotten a lot bigger because one, they're tax incentivized to buy things, profit off of them long term and sell them to each other. I would say two, private equity has gotten a lot bigger because we've allowed for huge pools of capital to go into these private equity funds, the like of which we've never seen before. So we've just seen this accumulation of wealth and PE funds and that's been because the returns are really great. Private equity averages 15% annual returns. The next closest thing is the stock market at 10%. That 5% is material for pension funds and endowments. So they're giving more money to private equity. Private equity fund is leveraging our capital to buy our businesses.
- [11:41]
A
Did the laws change in the early 2000s to accelerate that?
- [11:45]
B
I don't know when the carried interest rule was created. That's a good question. I'm sure the Internet will tell us, but it was certainly within this last generation, this last hundred years that you talked about. And then the other thing that's changed is because of the massive amount of capital these companies have. And also the banks have these asset managers that are either private equity or public equity. They basically think about it this way. You invest your money in a 401k. That 401k has some allotment to private equity, but also to big money managers. BlackRock, Vanguard, State Street, Blackstone. I should know, I worked at a few of those companies. That money that you give them, then they take that money and they buy things with it. They could buy companies with it, they could buy individual homes with it. So they're already kind of advantage in them because you're investing your money and their ability to compete with you. But it's actually worse than that because their interest rates are, are so much lower than ours because of the fact that they have these big, huge money pools. So if your my interest rate is 8% right now, theirs might be two and a half or three, which means that they can pay much more than you can. And then they also have something called securitized loans, which means that if they have $100 million, they might be able to leverage that security loan they have. So your money up to 90%. And so there's really these three ways that they have an unfair advantage against the little guy buying things.
- [13:07]
A
And the fact that they're able to access interest rates that are that much lower is a big portion of why they are gobbling up so much residential real estate right now.
- [13:15]
B
Yep, that's exactly right. And you know, we've also seen that it's hard at scale to invest in enough things that are semi similar to make it matter for them. And what do I mean by that? Like, we as normal people kind of can't, we can't conceptualize what it means to invest multiple billions of dollars. It's actually quite hard. It's hard to allocate that much capital or invest that much capital. So they have to do it in these big swaths or pools. They're not even buying up individual homes. They're saying to groups of smaller investors, hey, put together a portfolio of 10 or 50 or 100 million homes. Those investors are going out and compiling all those homes together into a portfolio. They're then selling it up market to blackrock or a Blackstone or name your single home company provider. So what does that mean? It means that like two people are making money on those homes and the markups are 2x for that same reason. And the last example I would use is like car washes. I started investing in car washes years and years ago. And when I was investing in car washes, Maybe I'd get 3 to 5x my profits on a car wash plus the cost of real estate if I owned the real estate. Well, when we sold a bunch of our most recent car washes, some of those offers were like 12 to 15x revenue, not profit. And that happened after this One company called Mr. Car Wash went public. It's the largest car wash compilation out there. Multi, multibillion dollar company. But they had sold to tell me if I'm off on this, but I believe it was four private equity companies before. So private company, one private equity company buys them and then another, and then another, and then another. Each one of them cash flowing and making money on Mr. Carwash before they eventually go public. And so these small businesses, they cash flow. And that is what private equity likes. They like material appreciation, but they also like cash flow.
- [15:06]
A
If it gets levered up to a company that trades at a higher multiple, does that mean that it inherently creates paper value by virtue of now being acquired by a company that has a higher multiple? And so therefore you can just arbitrage that.
- [15:20]
B
Yeah, I mean basically the whole is greater than the sum of any of the parts.
- [15:24]
A
Right.
- [15:24]
B
And so this is one of the benefits too, to buy in small businesses. If I have a business that I buy for $100,000 that, let's just simplify it really easily, that does $100,000 in profit. Let's say that I got a business that does that. Okay, well if I take that business and I buy it for 100k and then I get that business to grow to 200 or 300k in profit, I can actually sell that for 2 to 3 to 4x its profit. You can buy a business, grow it 2 to 3x and sell it for 5 to 6x. That's the premium you get for current cash flow. And so the private equity companies know that and the bigger the companies, like, as soon as your companies hit $10 million $20 million in revenue, you're kind of in private equity territory, depending on sector, and you can sell for a lot more. And so the biggest deals used to be done by strategics. So if you were going to sell, I don't know, a grocery store, a little grocery store that you had, you would, if you wanted to get the biggest price for your little grocery store, you would try to go to sell to one of your competitors because they understood the business, they had economies of scale, There was an ability for them to lower costs overall and pay a premium for you. So you would sell to your competitors. Well, now, because private equity has so much money, often they will pay more for the company than what's called strategics or your competitors. So that's kind of a newish phenomenon, too, that didn't exist to the degree that it does today. Let's say 100 years ago, your uncle.
- [16:50]
A
Ed, when your uncle Ed didn't go to sell his company. I'll ask you to tell that story in a moment. But when he thought that his company wasn't sellable, he was probably thinking about his competitors and saying, well, none of them are going to buy this, so who would I sell it to?
- [17:05]
B
Yeah, that's right. So Uncle E.B. owned a company called E.B. homes Plumbing out of Phoenix, Arizona. And I was just with my aunt actually at Thanksgiving this past week and talking to her about him and reminiscing on stories. But he was probably netting, like taking home in his pocket a million bucks a year. Maybe not every year, but a lot of years. And when he exited that company, when he got cancer, if I knew that today, I would have. I would have told him how to sell the company. And I would have said, there's no reason why you can't take a company that's making you a million dollars in profit and doing millions of dollars in revenue and you can't sell it for millions. That would be crazy for you to not do that. I mean, imagine you own a house. The house isn't to your liking anymore. You want to move for whatever reason, and you just go down a light on fire and just like, leave it there. That'd be ridiculous, right? You would never do that. And yet that happens with businesses every single day. Because it is work to prep a business for sale. There are things that you need to do if you want to optimize it in a world in which not everybody knows how to sell or buy a business. I think in the future, 20 to 30 years from now, that's not going to be the case, especially if I have anything to say about it. And everybody who creates some sort of asset, which is what a business is, will be able to drive value from selling that asset, which is as it should be. I mean, that was, you know, 25, 30 years of my uncle's life building that business, and he shut it down and it cost him money. And that is happening every day in our country and around the world. And I think you can make a lot of money by helping them sell instead. But it's also really Helping that individual have a pension and a future annuity for their family that they otherwise would not. Right.
- [18:43]
A
But why was it that he felt as though he wasn't able to sell it? And not just him, but any person who's over the age of 65 who has run a profitable car wash or laundromat or plumbing company or murder cleanup site is one of the Main street businesses. You know, anyone who's run some type of a Main street business but feels that they can't sell, you know, their kids don't want it, they're going like, look, I've got three employees. What am I going to sell? Me, Joe and Fred.
- [19:18]
B
Well, that's exactly why, I mean, one, because only one in 11 businesses sell in any calendar year. It is actually not normal to sell your business. You would be outside of the norm right now. Second is, you have to realize that, you know, most of these small business owners, they were trades workers. They're not financial professionals. They've never bought or sold a business before. They think that buying or selling a business means that you have to have some sort of really large, profitable business. Also, you could play a fun game. Go ask any business owner if their business or industry is like, easier than other ones. Like, how is it? They're going to be like, it's awful. Never come into this business. You don't any other business but this one. It's the hardest one. And that is the phenomenon of us as owners. We have grass is greener. We think that we live on parched earth and the grass over there is somehow better. But every business is really a series of like, carefully avoided disasters held together by band aids. And so they don't think that they can because numerically most of them don't. And then simultaneously, it's scary. So imagine you own a business right now and you have employees, they rely on you. You're busy, you have a lot going on and you're getting sick. What do you do to sell a business? How do you know who to go to? Who's going to rep you? Most small business owners with businesses below $10 million in revenue, they don't have an investment banker that's going to help them with that. The people that might help them with that are business brokers. But even business brokers aren't going to help them prep the business for the most part under that amount. They might list it, but then what are you going to do? You're going to take a bunch of one off people asking you how much money you make, request after request, after request, put it together in a data room. All of your files are located in invoices in a back room somewhere, not on the Internet. So that is a daunting task to ask. And it's much easier to just say, you know what? I'm tired. I don't want to prep for a sale for a year. I don't want to go through a thousand people combing through my business and asking me all these questions. I don't have time for that. And also, when they see all the problems that we have, they're never going to want to buy this thing. And that's how most business owners think. And they don't realize that it's a little bit like that show, like Garage Treasures or whatever it is, where, like, they go into the storage units and people are like, just take it. Just give me like 1000 bucks and take whatever's in there. And the buyer goes, oh, man. Like, this chair is worth this. This chair is worth this. So I think every business is a sellable business and a viable business. It's just, can we find the right buyer for it at the right price and the right terms?
- [21:51]
A
It's all about finding the right match.
- [21:53]
B
100%. It's almost like dating. We bought a company called Bizkout that we're growing, and that is the idea. Can we be a marketplace where not only we list all businesses, but can we use AI 21st century technology and the massive amount of data we have from our company, contrarian thinking to part and pair together the right buyers and sellers? We're not there yet, but that, I think, is going to be the future. It's going to be like, this business might be right for you in the same way that Zillow starts recommending houses that might be right for you.
- [22:21]
A
So let's talk about why an ordinary individual, somebody listening to this show, might want to buy a business. Because most of the people who are listening to this show already have busy nine to five jobs. What would be the point? I mean, is it a side hustle? Is it something just to bring in some added revenue? Is it something that would only apply to people who want to quit their 9 to 5? Like, who should buy a business?
- [22:43]
B
I think no matter where you are, you're never going to regret learning deal making. So if you learn to buy a business, you can apply that to every area of your financial life. And in fact, you probably should. You're going to know how to negotiate salary better. You're going to know how to negotiate equity with your boss or partners, you're going to know how to sell a business that you work in right now or maybe when to bring in a competitor or biz device, etc. And so I would say I don't think everybody should buy a business. That's not what I'm saying. I think everybody should learn deal making and the language of money, which is acquisitions. If you look at it, there's not a billion dollar company that exists that hasn't acquired businesses. There's not one they have acquired, they've at least done an acquihire, AKA hiring talent or they've acquired straight up competitors, the biggest companies in the world like Google. I mean they've done. Google's done more than 200 acquisitions, so has Amazon. So anyway, I think you should learn to do deal making. Second is do I think that it's perfect for somebody who wants to quit their job. That's a natural one for me. It's like if you don't love what you do, but you don't have a brilliant startup idea that you like, can't sleep for the want of maybe buy a business because what you're actually looking for is cash flow. And the fastest path to cash flow is a business that has already existed for a long period of time with a history of cash flow. Because the two main reasons that startups fail, 60% of startups fail because they don't have a product market fit. So they never actually get somebody to want to buy a thing that they have created. And the other 20% of businesses that fail run out of cash, which is basically just they don't have time to find product market fit. And so if that's the case, then buying a business totally changes the game. So I think if you want to quit your job, it makes a lot of sense. I think if you want to side hustle, it's interesting. But you got to pick the right business. Because running a business, I don't think it's easy. I think it's simple, I think it's worth it. But I do think it's hard work. And so this isn't throwing money in the stock market, passive investing, sitting waiting for mailbox money. I've never liked any of those terms. There is going to be work involved. But I think for a lot of people, if you work at Google and you have an incredible job right now and you love your job and you never want to leave, that's great, you should just then buy parts of business. You should buy things so that when Google does Its next layoff, you have a backup plan. And your backup plan isn't going to be the stock market unless you have millions, because it just won't pay you enough in equity dividends. And I think the same thing is true for employees across the board. I mean, 20, 24, 519 companies did about 149,000 layoffs this year. So in the year prior, it was about 180,000 people were laid off just in the tech sector. And so I think this idea of only having your 9 to 5 is relatively dangerous.
- [25:32]
A
People who are listening to this right now might be thinking, wait a second, I have a medical degree. Why should I own a Laundromat? Or I'll even ask you. You have an MBA from Georgetown. That doesn't strike me as someone who would have a Laundromat.
- [25:47]
B
Yeah, my parents weren't thrilled. You know, they were like, wait, you work at Goldman Sachs. You have this MBA from Georgetown. You got a PhD and you want to own Laundromats? Like, what's wrong with you? And I don't think it sounds as prestigious. Right. You know?
- [25:59]
A
Yeah.
- [26:00]
B
So the corner office and the suits and all of that sounded much better to my parents until, you know, I had to explain to them how much money we made off of them, and they still kind of, kind of don't believe it. I was with my grandmother this weekend at Thanksgiving, and she's 99, she'll be 100 in May. And she was pretty funny because she was like, but how much money do you really make? You know, because she had kind of seen a few things on YouTube. And so I showed her some of the places that we make money and the bank account accounts from some of the companies. And she was like, whoa, car washes.
- [26:28]
A
Make that much money?
- [26:29]
B
And I'm like, well, when you own a lot of them, they do. So I think we have to reestablish this idea of what is a good way to make money and what is a bad way to make money. And in my mind, we were sold a lot of lies. And that is like, I think this way of making money is more prestigious than another one. Being a garbage man and owning a garbage company is just as good as being a corner office guy. Being a private equity investor is just as good as owning an education company. Who's to say that you, some random person, get to say, what is the perimeter for a good or a bad way to make money? As long as it's legal, who cares? That is not up for you to decide. And so I mean, Artie Moreno made billions from billboards from outdoor advertising. You know, Wayne Huzinga made billions from trash collecting. And so I get a little fired up when people try to say that one way of making money is better than another. I think that is a great way to keep people poor because you keep them chasing credentials. And I think you probably. What's your background? Where are you from, your family originally?
- [27:31]
A
Nepal.
- [27:32]
B
Okay.
- [27:32]
A
Kathmandu, Nepal.
- [27:33]
B
So I don't know what Nepalese culture is like. Did I say that right?
- [27:36]
A
Yeah.
- [27:36]
B
Oh, okay, good. But Hispanic culture is like very credential based. So it was like, hey, you know, your family did this for you, so go get a degree. Degree. Big company, big company. And that would make like your parents proud. And I love that. I understand why that is. But I actually think that that is really bad to do to students, students and to young people today. Why would we put them in debt with degrees that cost them six figures that they can never get out from underneath? Because you can't use the bankruptcy process that does not materially increase their job at the same rate of inflation of the university system. Instead, go and buy businesses to get you cash flow and then use optionality on top of it. But if you were a doctor, I would say to you, don't buy a laundromat. Buy the practice, own the whole doctoral practice. Instead go buy one of the companies that is a supplier for a product that you like that doctors use. Go buy the advertising agency that does all the advertising for the doctor's office that you work for, maybe the staffing agency. But get a piece of skin in the game. And the thing that you already know is where I would say that's like level 202. I started with a laundromat because none of these ideas about how to do this as a normal person existed when I was doing this back in the day. Like I never knew anybody that just bought businesses one off by themselves that seemed crazy. There were private equity funds, but those were like big and lots of people in them. They were holding companies, but they used other people's money like a Cody by herself buying laundromats and car washes and spinning up my own entity was like nobody was doing that that I knew. If I was to go back and do it again, I would have probably bought financial advising practices. I would have like bought RIAs instead because I already knew that business. I would have bought like investment distribution businesses. I would have played in my zone of genius, but I just wasn't that smart on that then and so what.
- [29:30]
A
You just said about Zone of Genius answers the follow up question that I was about to ask, which is, I think a lot of the premise under that myth of prestige is that we're taught that we need some type of unique advantage, some type of essentially personal economic moat, because it's only by virtue of specializing in something that we're able to distinguish ourselves from others.
- [29:54]
B
Yeah, I think, I think you're right. And I'm not sure that that's true really at all. I think often the richest person that you know probably got there from something so boring, they've never even explained it to you. Like one of the richest guys I knew growing up, he owned a equipment rental business. So they rented out tractors and trailers, et cetera, to construction companies. And they had this huge house. And then I knew many people that like, they worked for the Phoenix Suns. That was a sports team. I thought that was a much cooler job. Right. You just rent out equipment. That's not very cool. And this guy, his name is Robert, he not only made millions and then sold his business for tens and tens of millions, but when the company didn't work out, that bought it from him. A private equity company bought it, he bought it back for pennies on the dollar. Then he built it again, then he sold it again, and that time it worked. I think we have to reevaluate the way that we make money and if the business is profitable and if we like it and if it's fun for us to run, who cares about prestige?
- [30:52]
A
Yeah. So the private equity firm that bought it ran it into the ground. How do you run a business into the ground? What is it that people or that companies do to screw it up?
- [31:02]
B
Yeah. Well, here's why I think private equity is bad for society by and large. One, they do financial arbitrage typically. So what private equity companies do is they come in, they got a bunch of costs and expenses in the business. They overlay a bunch of debt on top of the business. The business then has to make the money that it makes, plus the amount that it has to make to cover the debt service. So the interest to be paid on the debt overall, they take cash flow out of the business and give it back to investors. So you can kind of think about it as like a guy who's like walking along, he's pretty chill, he's going, he's walking, but you just, you saddle him with like three 30 to 50 pound kettlebells and now he's having to walk with like these kettlebells. On top of him. And it's hard, it's a load and at some point something's going to drop. And so I think private equity companies have an incentive to over lever and they have an incentive to squeeze as much profit out of the company as they can because they have investment term limits. So when you run a private equity company, as I have before with some partners, you can only hold the assets for like seven to 10 years, depending on what your terms were for your investors. So that means for that seven to ten year period, you're like squeezing the juice out of a lemon as much as humanly possible while trying to keep it afloat so you can sell it to the next guy. But you've got to distribute cash flow because that's typically how private equity funds work. And so one, I just think they have perverse incentives. They're not bad people, they're actually brilliant. Most of the people I know in private equity are so dang smart, I just think they're selling themselves short. They could instead hold these companies forever and make really profitable legacies as opposed to short term squeezes. But that's how private equity does it. How you up a company if you own it yourself and if you buy it, is one, you pretend like you know more than the guy who's run the business for 20 years. You gotta come in with a massive sense of humility. Two, you assume a bunch of positive projections. Oh man, this business is doing 100,000 this year. When I come in, it's gonna be doing 200,000. So you buy the business for too much. You don't allow enough cash flow in the business to cover volatility. Three, you don't start with the worst idea in mind. We have something called a COA analysis, a course of action analysis, which basically means if the business is doing 100k right now, what happens if it drops by 25k? Can I still pay off my monthly nut the amount that it costs every single month? Okay, cool. So they don't have a co analysis on them. And then four, I feel like they often move too fast to make changes before they understand the business. Fire, fire, cut, cut, fire, fire. Or they move too slow on the few things that matter when they take over the business, namely cash collection cycles. This is a little technical, but like most businesses, for instance, they provide a service and then they get paid in some sort of future timetable. So that's called like net 30, net 60, net 90.
- [33:53]
A
Right.
- [33:53]
B
The problem is when you're brand new in the business and you don't have a bunch of cash, you might think, wow, I'm making all this money every month because I'm closing all these clients. But actually it costs me money before I get the money in my pocket. And so when we take over a business, one of the very few things we change right up front is from the moment that I say yes to selling a service, how can I make sure that I have cash day one to at least cover my cost of goods? That's one of the killers for small businesses.
- [34:20]
A
And you see, I think a lot of times with ordinary individuals when they're buying businesses, if we're knowledge workers, okay, I'll speak for myself as a knowledge worker whose experience is primarily service based businesses that don't have a whole lot of upfront cost freelancing, consulting, things like that. Whether I get net 30 terms or net 60 terms doesn't really matter because primarily I'm selling my time and my expertise. That changes when you go into a more capex intensive business.
- [34:49]
B
That's right, yeah. Well, I mean you basically right now have a job, not a business. Right. Like if you die, the business doesn't really continue to exist.
- [34:57]
A
Correct.
- [34:57]
B
Okay, so, and that's a lot of people now you could have a business if you took a year from now and said, all right, for the next year I want to diversify. Key man risk, key woman risk in this case. And I want to prep the business so that eventually I could sell it. That might mean bringing in new talent, that might mean bringing in new assets, that might mean having like a back catalog that continues to pay you. That might mean having a productized service where it's not time constrained, it's just it makes you money because you've already created it continuously even if you're not around, then you have a business. Right. And so a lot of small businesses are actually jobs. But that's okay, you can still sell a job as long as you have a transition plan with them. So that might be like, you could be like, hey, I'm going to sell 40% of my service business to XYZ Company. That's a strategic who wants to partner with me? And I'm going to continue to work with them for three years. So milestone based buyout or what's called an earn out. Right. And so over the next three years you might say, okay, if I do X, Y and z thing, like I productize my service, I bring in new talent, I have a back catalog that pays, then you're going to pay me 100k this year. Another 100k this year, another 100k the third year until you take over the business overall. And so there will be this transition period and if I hit those milestones, I get paid and off we go. And so you're right. You right now have a service based business that is likely a job. You could turn that into a quote unquote real business. Not that it's not real. Now it is, but a sellable business would be a better way to say it. And then when you do that, you will actually have upfront costs. You'll have some capex because you'll have to pay your salaries for your employees and maybe you'll have to pay for continuing server costs or whatever on your productized services. But you're right, it's a big jump for knowledge workers who think, oof, why would I pay $500,000 or $1,000,000 for an asset like a car wash with all these machines and stuff when like, I might be able to just do this by myself? And the pushback I have there is like you have to imagine that you get sick or you die. Do you want to work until you die forever and ever? I kind of do. I don't think I'll ever quit. You're probably the same. But I don't want to have. Yes, I want to want to. If there's any point in time where I'm sick or a family member is and I want to take time off or I want to do something totally different, I want to have an asset that continues to make me money that's not dependent on my time. And I also want an asset that I could sell and go on to the next adventure. And so if there are business owners listening right now, maybe what you're thinking about is how do I read this book so that I can see what a buyer wants in a business? What does it take to buy a business? Then I can reverse engineer that into what do I need to do to my business to have a sellable asset.
- [37:44]
A
Right.
- [37:44]
B
And I always. It's kind of like getting married. It's like, start with the end in mind, like do your prenup upfront. Because we know that 50% of marriages end divorce in businesses. It's like 100%, you know. Really? No. But no business continues forever for its whole duration.
- [37:59]
A
Right? Yeah. The Dutch East India Company was once the most powerful company in the world and that doesn't even exist anymore.
- [38:05]
B
You're right. You're right. And you know Amazon, Jeff Bezos, it exists without him, but he at one point wanted to leave, too. Wanted to leave a business that made him hundreds and hundreds and hundreds of millions of dollars a year. Why would he want to do that? You want to hang out on a yacht a little bit? Give yourself the option.
- [38:27]
A
When you think about businesses growing their sales beyond forecasts like feastables by Mr. Beast or even a legacy business like Mattel, yes, you think about a product with demand. You think about a focused brand. But there's also an overlooked secret, which is the business behind the business that makes selling and buying simple. And for millions of businesses, that business is Shopify. Nobody does selling better than Shopify, home of the number one checkout on the planet. And the not so secret secret, which is shop pay, which boosts conversions up to 50%, meaning fewer carts going abandoned and more sales going. So if you're into growing your business, your commerce platform needs to be ready to sell wherever your customers are scrolling or strolling, whether that's online or in your store. Because businesses that sell more sell on Shopify. Upgrade your business and get the same checkout that Feastables by MrBeast and Mattel uses. Sign up for your $1 per month trial period@shopify.com Paula all lowercase go to shopify.com Paula to upgrade your selling today. Shopify.com Paula Here's a reality check. Your whole life is online. So it's not a stretch to say that protecting your life means securing your digital life. And that starts with getting one password. Stop trying to remember random usernames. You know, it's good to create a unique password for every site, but you need a way to manage all of that without writing it on a piece of paper. 1Password takes care of all of that for you. And let's be honest, your passwords aren't always just yours. Some of them you need to share with your family, with your spouse, or with anyone else, right? So if you're tired of family members constantly texting you for the passwords to streaming services, 1Password lets you securely share or remove access to logins. You know, about a year ago, I went to a presentation at Columbia about personal digital security, how to keep your accounts locked down and free of hackers. And one of the things that I learned was about the importance of using a unique password on every single account. And the reason is quite simple. If someone gets access to one of your passwords, they can't use it on your other accounts, right? That's why you need a unique password for every single account. Well, that's incredibly difficult to track, so you need a very, very secure password manager in order to be able to accommodate that. 1Password helps you secure your digital doors and keep yourself and your family safe online, and you can access it from any device anytime. You can securely switch between iPhone, Android, Mac and PC. Right now my listeners get a free two week trial for you and your family at 1Password.com Paula that's two free weeks at 1Password.com Paula 1Password.com Paula.
- [41:25]
B
How high is the interest rate for the new Laurel Road High Yield Savings Account? This high?
- [41:34]
A
The air is really, really, really thin up here.
- [41:37]
B
The Laurel Road Very High Yield Savings Account Variable Annual percentage Yield APY is subject to change at any time. No minimum balance required. Fees may reduce earnings on the account. For full terms and conditions, see laurel road.com savings Laurel Road is a brand of key bank member FDIC.
- [42:01]
A
You mentioned it's scary for a knowledge worker to think about spending 500,000 or a million on a car wash or something that has a whole lot of capex. And I can imagine a bunch of people heard that and went, wait a second, I don't have $500,000 sitting around in my bank account. One of the elements of buying a business is learning creative financing. Other than seller financing, which is probably the first element of creative financing that comes to mind, what other forms are there?
- [42:29]
B
Yeah, well, we teach 21 different ways to finance a business, largely stolen from my time at private equity. It's like, how can we kind of use their processes as normal people? One thing important to note is that 60% of all businesses sold are sold with some aspect of seller financing. So don't get talked out of the idea that seller financing is bad or rare. Now we want to be thoughtful and that it's you're never going to be able to like I bought a business with no experience in 30 days, no money down, and became a millionaire and now I don't work at all. Like, that's not realistic.
- [42:59]
A
Yeah, exactly. And I lost £50 while doing it.
- [43:02]
B
Yeah, exactly. And that's often how like seller financing is labeled. That's not the case. But you can use it for some percentage of your business. There's also lots of others you could use factoring, which means using future invoices. So like let's say right now, for instance, you have a catalog of podcasts and every single podcast is a sponsor. So over the rest of the year you have like $300,000 in future podcast sponsorship. Well, you could use those invoices and get a loan on the invoices. Because you're like, listen, Amazon has promised me the rest of this year they're going to pay me 300k. A third party bank would go, Amazon's promise is pretty good. Okay, cool. I'm going to give you a loan to buy her podcast based off of your invoices. That's called factoring. You could also do equipment loans. And a lot of my businesses there are loan providers that will do laundromat equipment loans. So they specialize in what is the value of these types of machines. Those machines can be worth like 30k. So if you're going to go buy a laundromat that has 10 machines worth 30k each. Yes. You could shell out the 300k for the laundromat, or you could go to them and say, hey, I want a loan on the equipment. What percentage would you give me relative to the 300k that they're worth? And they might say, we'll give you 150 for it. And then you buy your future machines from us when they break. You could also buy a business using third party capital. I think this is really underdone by, like, us normal people, not the private equity guys. When a private equity company goes to buy a business, the head of the private equity company isn't shelling out millions. What is he doing? He's gone to all of his friends and buddies and connections over the last 10 years. He's compiled basically a bunch of IOUs and said, like, when I go and buy this company, I'm going to use your money, your money, your money, your money to buy it. And now the sba, Small Business Administration even allows loans for small businesses that have diversified investors. So it used to be if you were going to take 10% of any SBA loan, there could only be a few of you and you had to do a personal guarantee. Now the SBA is saying, hey, if Paula, Cody, you know, Ryan, Brian, Steve, Matt, whatever, all want to give capital to buy this business using an SBA loan, that's okay, actually. And not everybody has to personally guarantee it. Every case differs. But those are just three ways that you could use other people's money to buy a business.
- [45:21]
A
Now, another thing that you mentioned earlier that I want to ask about in a moment, but I'm going to put a pin in it, is you talked about essentially, whoops, I just bought a job. You have an acronym rich, where you walk people through sort of a framework around how to think about businesses. And the whoops, I just bought a Job. I know that that's part of the C command, but before we get to the C, I want to start with the R because it sort of pertains a little bit more to what we're talking about now. Conducting the research. R for research. Conducting that research for a person listening around. All right, I'm convinced that it's a good idea to own a business. I want to diversify my revenue streams. I have a 9 to 5 job, but I want multiple sources of revenue. How do I, the person listening, assess my interests, my talents, my type of working relationship that I want with my company, with the company that I buy? Like how properly research all of that? And where do I even know where to begin?
- [46:21]
B
Yes, well. So the most important question you can ask yourself is what the oracle of Delphi says, which is know thyself. So there's a whole portion in the book where I obsess on this idea. I call it deal clarity. So before you go and buy a business, most people will say, well, what type of business should I buy, Cody? What's the best type of business to buy? And that's how I know you're not ready to buy a business, because there is no one type of business to buy. It's not H Vac, even though that's on the COVID of Wall Street Journal right now. It's not Laundromats even. That's where I started. It is. What is the perfect fit business for you? Cinderella Slipper. Right. We're looking for the business that kind of fits you uniquely and perfectly. So I again stole a bunch of homework from private equity days, and they have something called an investment thesis, which is basically, if you go to most private equity firms like ours, Main street holding company, we have a deal box and we say, hey, we invest in businesses that do somewhere below $50 million in revenue, but do at least a million dollars in profit that are service based businesses located in the US that are in these sectors. So that's. So I narrow down my scope. So the goal in the book is that we help you guys do the same. So you go through this deal box and deal clarity worksheet and you kind of check off like, you know that song. It's like, you know, looking for a guy in finance. Six, five blue eyes, right? We want to do that exact same thing with the business. It's like, I want the business to make $100,000 at least a year. I want it to be based here. I want it to be worth this much. I want to spend much. I Want them to be open to seller financing. We put together a little wish list. And then I think tools really limit mistakes. That's one thing I learned a lot in finance. You and I kind of joked about this, like, I hate creating formulas in a fight in a spreadsheet. I love getting handed a perfect spreadsheet. And so as much as I can put in my spreadsheet, okay, I said that I wanted him. Six five Blue Eyes Trust fund. Anthony over here has none of those things. So is Anthony what I want? If that's what I said. And if this instance, I think the 65 trust fund things a little ridiculous, but. But theoretically, let's say we know for sure that that's what we want, our deal box will make sure that we don't choose an Anthony over a Chad. And so the deal box really helps you stay true to the things that you want.
- [48:32]
A
Right. That sounds very much like just for an ordinary investor, how they would choose equities that go in their 401k. Right. You form an investment thesis and use that to choose your mix of index funds and individual stocks.
- [48:45]
B
Yeah, I think that's right. This one's going to be slightly more personal because it's about you. So I think a lot of times when you invest in stocks, it's about what you think the market can do. Your belief in what's going to happen in the world, maybe some of your risk profile, for sure. 60, 40, 80, 20 bonds versus stock in this instance, you're kind of looking for, huh? What do I want the business to make me and what am I going to be happy in making? And let's pair together. We have this thing called the Perfect fit Business. It's like three circles. So a Venn diagram between your passions and obsessions, your network, people that can help you make a better decision on a deal and operate the company, and also your skills. And so we want to factor those in in a way that you might not in a stock portfolio because it's not really about you unless you're really sophisticated and saying, well, I can only analyze emerging market bonds because I'm really good at that.
- [49:37]
A
Right. What would you say to somebody who has a lot of, if not passion and at least curiosity about a given topic, but they don't yet have skills or a network in that area?
- [49:48]
B
One, I think you never lose money on the education, you always lose money on the implementation. And so I think there is no downside to learning as much as humanly possible about the things that interest you plus the things that can make you money. And that's why I run an education business. That's why I believe intensely in the future of education, being highly tactical and like 1/100th of the cost of what the traditional education system does. Because I think that if I learned to do deals way before I wanted to do deals, that would be a lot richer today. And I think about it like this. I have a friend, Josh, who works for one of our companies. He's worked with me for about three years now. Before he worked for me, he'd been in business for 11 plus years. Smart guy, highly skilled, specialized worker. In the three years that he's worked for me, he's done three or four deals. So he owns a couple different companies. And I remember saying to him, well, what do you think changed? He said that he had a very wealthy mentor that said something to him that stuck. Which is your opportunity will always be limited by your ability to recognize it. It's not that there weren't other companies that I could have bought over the last 11 years. Of course there were. Do you think it's reasonable that there were no companies around me that I could have bought 11 years before I met you? No, it's just that I didn't know what to look for. And then once I met you and we started doing deals, now I've bought a bunch of them because I recognize the opportunity. I recognize when I'm in a mine and we're mining for diamonds, what a rock looks like when it's holding a diamond and what one doesn't. But I think until you learn deal making, you don't turn on your reticulator activating system that starts to recognize the deals in front of you and all around you. And then once you do, it's a blessing and a curse because then everywhere you're going to see a deal.
- [51:24]
A
Right. And that reticular activating system, it not only recognizes deals, it also filters out unnecessary information.
- [51:30]
B
Totally.
- [51:31]
A
So what are the things that you say no to? How do you have a framework around that?
- [51:35]
B
Yeah, we call it. It's the hundred to one rule. So in order for you to get really rich doing almost anything in life, you have to say no way more than you say yes. You say yes a lot more in the beginning of your career to the things that will teach you something and where you can learn something. And then as you get older, you say no to a lot of things where they ask you for your money. Warren Buffett famously said, the best deals you'll ever do are the Ones that you don't do. So right now we look at about 100 companies to investing in one. And what does that mean? We kind of break it down like 150, 21. So we'll look at 100 deals, kind of broad based enough to dig into them a little bit, look at the financials, see a little bit high level. We'll go for 50 deals to go a little bit more in depth. Can we get into the data room? Can we see the back of the businesses? Then for about 20 we'll do pretty deep due diligence. Do we actually like this company? Is this the one we want to invest in? We'll cull through those and we'll end up doing one deal. And so most of investing is saying no to things. And that's why I think it's important that people learn to do deal making early and they don't do the biggest thing that I think you can do. If you want to make money. The biggest thing you need to do is you need to move faster on the education process. If I could change one thing, I wish that I had learned about M and A sooner. I wish I had started applying some of those practices sooner. And if I had done that, I think today I'd be sitting a lot differently even than where I am. And so that seems to be the case for just about everybody. I've never met somebody that was like God, I wish that I didn't learn deal making when I learned it. I have met people that said I wish I didn't buy this business or that business. But often I think that's because your education process wasn't fully done and you pulled the trigger too fast.
- [53:10]
A
How long do you think it takes to learn deal making?
- [53:13]
B
We have data now. We've taken about 3,000 people through buying businesses. The data tells me that on average it takes people about a year to buy a business somewhere between 12 to 18 months. Now do we have people that do it in 60 or 90 days? Sure. Do we have people that do it in 24 months? Sure. I don't think there's really a good or bad. It's really depending on how much experience, relative experience they have prior the way we think about it at contrarian thinking and our business buying academy is your first year is for education and learning deal making. You're going to look at a bunch of stuff and you might start investing in one off deals like to a small degree not buying the whole company. You're like, I'm going to invest in a little Bit of this business, I'm going to invest in that business. I'll be a partial investor and I'll learn some lessons without bankrupting. Then the second year is for your first acquisition plus scaling. You talked about scaling being a different skill set. It's really true. So once you buy the business, the real work starts. And so then you got to scale the thing if you want to, or at least scale it to a point where it is working for you as opposed to you working for it. And then the third year, I like people to think about their exit. So you don't need to sell the business, but prep the business for sale eventually. So I like people to think about coming with us like a three year mba. You're basically going to be with us through your acquisition process, your scaling process, and then finally, how do we prep a business for sale? And then it's really hard to be poor once you know those three things.
- [54:32]
A
Right. And you have the 3912 framework also, where it sounds as though that three months you're learning, you're reading, and then nine months of your finding your first deal, that is that first year.
- [54:42]
B
Yep, that's exactly right.
- [54:43]
A
So the first year is three months of learning by textbook. And then the other three quarters of it is really learning by doing, but actively learning.
- [54:52]
B
That's right. Yeah. I mean, what I basically found is that when I looked at the biggest private equity funds in the world, the people who do more deals than anybody else and make more money doing it, they really have three things. They have what's called an investment committee. So a group of people get together, they beat up deals every single week. So we replicated that in our community. That's Monday Night Live. People bring their deals for deal review and you have a bunch of people beat them up. I like this. I don't like this. Do these terms, don't do these terms. Nobody else gets that. That's a very rare private equity thing to do. So I was like, let's replicate that. Okay, investment committee then typically you have your deal team. So your deal team and private equity is going to be your attorney, your accountant, and a subject matter expert. So, like, if you're going to buy a laundromat, you're going to call me, right? You're going to be like, cody, hey, I got these numbers. What does this sound like? Can you take a look at this? And so in the community, we label everybody. So it's like, oh, if you're selling a landscaping business, you're going to talk to Robert or You're going to talk to Carl because they've already done that. And then you have your accountant and your attorney so that you do it. Tax advantage, because remember, that's why private equity guys are so rich. They think about taxes a lot, lot. And we're going to make sure we structure it as smart as possible by having a good attorney. And then the third thing that they have is usually called a buy side advisor. Right? So in private equity or investment banking, that would be your investment banker. The problem is for us, little guys like investment bankers don't want to work with us. You know, they're too busy. If they're really good, they're going to work on big deals. Because doing a big deal is really just as hard as doing a small deal to some degree. After you've done a bunch of reps, you'll see that. And so we put together a team of quote unquote buy side advisors who basically are like former business brokers or current business brokers and people who can help you think through a deal on office hours. So my idea is that we compete head to head with private equity firms, except we don't take an equity percentage of any business. We don't take any investors money. This is just an education platform where they get to keep all of the equity and all of the ownership and we simply teach it. It's better if we own our community businesses and not if I own all the coffee shops everywhere and then I never go in the one in your community and then that one doesn't have a soul anymore.
- [57:02]
A
Do you think then that people should buy locally where they live?
- [57:06]
B
It's my preference. I think if you want to make your community better in a place that you want to live, you need to have skin in the game and ownership there.
- [57:14]
A
What should a person do if they're nomadic?
- [57:16]
B
Well, there's a lot of online businesses. You also probably have people in your life that are local to an area. So even if you're traveling around the world, is there somebody that you can have and work with who is local to the area, who can work with you on the deal? And I think for the most part, most of us are not going to be nomadic forever. And so where do you want to eventually put your roots down? Where do you have family and friends? Where is the city that you care about? Where is an industry that you care about? And maybe make it slightly more about purpose as opposed to only profits. I think you can have massive profits while also being purposeful.
- [57:55]
A
What does the future hold for business. If you ask nine experts, you're going to get 10 different answers. Is inflation going to go up or down? Will we go into a bull market or a bear market? You know we don't have a crystal ball, but over 40,000 businesses have future proofed their business with NetSuite by Oracle, the number one cloud ERP bringing accounting, financial management, inventory and HR into one fluid platform. You have one unified business management suite giving you the visibility and control you need to make quick decisions with real time insights and forecasting so that you're closing the books in days, not weeks. If we needed something this robust inside of Afford Anything, this is what we would use. Because whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities. Speaking of opportunity, download the CFO's Guide to AI and Machine Learning at netsuite.com Paula this guide is free to you at netsuite.com Paula netsuite.com Paula Paula Hiring with Indeed, your search is over. Indeed is your matching and hiring platform with over 350 million global monthly visitors. And you can use Indeed for scheduling, screening and messaging so you can connect with candidates faster. In fact, 93% of employers agree that Indeed delivers not just faster results, but also the highest quality matches as compared to other job sites inside of Afford Anything. When we're hiring, we're doing so because we're already busy. We have more work than we can handle, so we need more hands on deck. And yet hiring is just added workload on top of already busy workload. So it's great to have a matching engine that is both fast and high quality. Indeed's matching engine is constantly learning from your preferences, so the more you use it, the better it gets. Join more than three and a half million businesses around the world that use Indeed. And listeners of this show will get a $75 sponsored job credit. To get your jobs more visibility@ Indeed.com Paula just go to Indeed.com Paula right now and support our show by saying you heard about Indeed on this podcast. Indeed.com Paula Terms and conditions apply. Need to hire, you need Indeed. We've talked about how to do that research and that preparation. Now what about the actual investment? The I in the rich acronym?
- [60:32]
B
Yeah, so eventually you gotta get in the game, right? And so I think the way that we really learn the best business school is being in business. And so eventually you want to put some money on the table. You want to put some expertise or experience or time on the table, whichever One you got. And so my idea is we learn, learn the researching and then we start to allocate capital. So that means that you're going to maybe get together with a group of investors and invest in a small business. It might mean that you are going to buy a business yourself. It might mean that you become an operator for somebody who's got a lot of money, but they don't have any time. And you could be the solution to that. But that's the second leg of the stool is basically, let's start getting skin in the game. Because I think that is the only way that you can start to really care about your outcome. Nicholas Nassim Taleb famously of Black Swan, has a whole book about incentives called Skin in the Game with this idea that part of the things that are wrong with society is that we don't have a correct incentive structure, that politicians do not have downsides for bad decisions because there's no scorecard, there's no ranking system. And so they can stay forever spending our capital without having any issues. And so this invest portion is important if you actually want to become an owner.
- [61:46]
A
Are there any heuristics that we should use when we think about what percentage of our own capital we should be putting in versus other people's, how much of our time we should be putting in, particularly when we have other obligations?
- [61:59]
B
Yeah, well, when it comes to your percentage of capital, I think that's super personal. I always say you want to make sure that your first deal is good, otherwise you'll think that deal making is bad, not that you are bad at your first deal. So we want to protect the house. House. The second thing I think is that you don't ever want to do a deal that can bankrupt you. It's. I think Warren Buffett again says, I never go to invest or buy in a thing that I want to sacrifice a thing that I need or have. And so we want to make sure when you're doing your first deal that you're not mortgaging your house, you know, that you're not going out and overextending yourself. And I push on that hard. A lot of people don't agree with me on that point, by the way. So potato, potato. A lot of people in startup land will spend their last dollar, talk about it on the Internet and think that it's really good that they had to slee on couches, that they almost went broke. I don't think that you have to go through that hero's journey. And I want to try to help a lot of people avoid that, because I think it's hard to get back the money that you've lost.
- [62:55]
A
Right.
- [62:55]
B
And so if it was up to me, I'm going to invest an amount of money I feel comfortable losing. You never feel good losing it, but that you feel comfortable losing. You want to have some skin in the game where it's going to hurt a little bit if you lose, but. And that lets other people know that when they invest alongside you, you're not looking for them to take all the risk you're willing to take risk. In fact, who was I talking to yesterday? It was on Twitter, and it was the CEO of Shopify, CEO of one of the big multibillion dollar e commerce companies. And I want to say it was Shopify, but I'm not exactly positive. And it was funny because one of the tweets that he put out was basically this, that it's not your knowledge that's lacking. It's your knowledge plus your willingness to take risk. And so one thing that I've learned is you really can't spell rich without risk. You are going to have to put at risk some amount of capital or some amount of time if you want to make money. And it sucks, but it's true. And so only you can determine how much. I say just don't let it bankrupt you and just don't let it take your house. And anything beyond that is sort of up to your level. The other thing that I would say is, like, be very confident in one thing, that there is more cash sitting on the sidelines than you could ever imagine, that there is almost an infinite amount of capital for people to invest in good deals. We do not suffer from not having enough money. We suffer from not knowing how to get money and from not having deals attractive enough to attract money. And I wish I knew this earlier. You know, I remember talking to one of the partners at Sequoia back in the day, and he was doing a deal. And I kind of said, what's the hardest part about what you're doing right now? Is it finding this deal? Is it raising capital for investors? And he looked at me funny and he was like, it's not raising money. He goes, money is infinite and everywhere. In fact, so much so that we only take nonprofit dollars. We don't even let everybody invest in our deals. The deal is what matters. And if the deal is what matters, well, then deals are democratized. You don't have to have money to get a deal. In fact, we're going to Buy a company and we're going to invest in it with, with the operator of the business. And one of the biggest private equity guys in the world on an individual basis wants to buy this company. It's a multi, multimillion dollar a year business, but it's also, it's a cool business. So the PE guy wants to buy his company. He's been bothering the founder forever. Founder doesn't want to sell to him. He doesn't want PE to own the business. The only reason we're going to get the deal is because the founder's son is buddies with the operator that we know. And he wants the business to go to somebody who really cares about it, wants to operate the business forever. And so this guy has way less money than the billionaire, but he's going to get the deal. Because deals are Democrats.
- [65:32]
A
When we think about those deals, would it be accurate? Because so many the deals that you're talking about are, they're deals at cash flow, right. These are not tech unicorns. These are Main street companies or companies that don't have a whole bunch, if any, intellectual property. Right. So these are deals that are made for that cash flow. It's made for that bottom line. Would it be accurate to compare them to a, if you were to use a public equity analogy, a value stock?
- [66:01]
B
I've never thought about it that way. I always think about buying businesses that cash flow, like buying bonds, because you really buy the bond for the cash flow. Like you analyze the company to make sure that the company is not going to go under. Right. But you're not really looking for appreciation of the company. You're just looking for that coupon to be clipped every single month.
- [66:23]
A
Month.
- [66:24]
B
And I think about a lot of my businesses that way. I don't come into all of my businesses and go, hey, here's the laundromat doing $300,000 a year. How can we make it do 30 million? That's really hard. That's not the game that laundromats were meant to play. They were meant to make somewhere between 100 and maybe $500,000 a year with 15 to 30% margins and to service a small community. And you could buy 50 of them and get to a company that's worth hundreds of millions. Or you could just own a you. And those could be bonds that you clip every single month. And you take care of them just like you would a property, a single family home that you manage. But it has much higher cash flow. And so that is the way that I think about Them is that ideally, if we're doing deals right, there's a lot less volatility in them. You're not having 200% potential upside, but you're not really having 200% potential downside, at least if we're doing the deal right. And so I think of them as bonds.
- [67:19]
A
Interesting. I kind of think of residential real estate as bonds as well. Yeah, but bonds with a much bigger payout.
- [67:24]
B
Right.
- [67:25]
A
Much, much bigger payout.
- [67:26]
B
Much bigger payout. And also great for taxation. I think that's the other thing that I think about a lot with businesses. Real estate is incredible for capital preservation and for tax manipulation. I think businesses can be actually quite useful for tax manipulation and capital preservation, but more so for cash flow. I think businesses are like first and foremost cash flow, then tax advantage and then capital preservation because there's just more volatile and you need a lot less of than them. Like the average single family home in the US sells for $400,000 right now, which is very high. And that single family home makes on average about 100 to $200 a month profit. So you are taking a $400,000 loan or piece of leverage for 100 to 200 bucks a month in profit. That is a terrible trade. Honestly, the only reason you do that trade is if you have a massive amount of cash and leverage, if you have built in buyers with some sort of premium, or if you don't really understand risk reward, in my opinion. And I think a lot of us don't realize that that type of leverage is actually riskier in some ways.
- [68:38]
A
Yeah. The price to rent ratio, just by looking at that straight average doesn't make sense.
- [68:42]
B
Right.
- [68:43]
A
There are pockets where you find much more attractive price to rent ratios. You need to know how to find those pockets or create the pockets.
- [68:50]
B
I think that's right. And commercial real estate could definitely be more interesting and different than that. But again, it's really hard in these real estate assets to have a lot of growth too. You're just not really going to have a single family home that you can grow aggressively. You're going to make 3 to 4 to 5% returns every single year. Potentially with a mixture of your rent and also capital or and also home appreciation. In a small business, the average small business, you're shooting for somewhere between 3 and 10% annual growth and that's with no additional levers on top of it. Plus when you sell, you typically sell for that 2 to 5x profit. So you get paid this premium for growing the business. Not necessarily. While you're running it, but certainly while you're selling it, you don't get paid a premium for selling a home that has a rent premium on it.
- [69:43]
A
Not a single family home. No, for multifamily you would.
- [69:46]
B
Yeah, multifamily you would. If it is a investor that is actually buying the property and if that investor can get a loan that bakes in its investment income, which is not always the case, and commercial real estate, you would get it, but again, not always, because often the real estate itself is worth so much more than actual the income is. And so there's, there is some premium, but it's just not as aggressive as it is in buying businesses. And this isn't to say, by the way, I own plenty of real estate. Real estate totally has a purpose. I just think there are enough people talking about the benefits of real estate and not enough talking about the benefits of business.
- [70:21]
A
Yeah, actually, that's one of the things that caught my attention about you is because, you know, the people who do talk about the benefits of business often talk about starting a business from scratch and myself included, because I, I personally have only ever started a business from scratch. So I talk about what I know and that's what I know. It's rare to find somebody, and that's what I enjoy about your content. Who talks about acquiring businesses?
- [70:44]
B
Yeah, well, it's one, it's new. I mean, this really. When I got on the Internet three and a half years ago or something like that and started talking about acquisitions, people weren't really doing that. One of my bosses, who was one of my favorite bosses and a billionaire multi times over, said when I wanted to start speaking on the Internet way before this, this, that we get rich quietly here, he's like, we don't, we don't talk about this publicly. We get rich quietly. And, you know, if you go and look at the comments section on, you know, many a video of ours, there's a lot of people that don't want you to know this stuff. And it's.
- [71:16]
A
Why, why does that ethos exist?
- [71:18]
B
I don't know. There's something that happens where some people think money for me, not for the I can run a business, you can't. You know, it's great for me because I'm an owner, most people can't handle ownership. It's a real superiority complex. I found it often in finance and in private equity. You'll find a lot of these guys are like normal people can't buy businesses. And, you know, the only businesses that they're buying aren't good ones. And they have a huge failure rate. And I just think it's gatekeeping and I think it's people who do not want you to win and think that they are the only ones that can. I think it's people who sometimes lost and they think because they lost, you're going to lose too. I think it's also people who think this is so hard and miserable. Sometimes times it's got to be hard and miserable for everybody. And I don't believe that. And the numbers don't show it either. I mean, my favorite response to these is like, all right, 90% failure rate for startups within a 10 year period. We all pretty much know that statistic and believe it to be true. Well, let's look at SBA loan failure rates, which are the main way to buy a small business. How many SBA loans where people go out and get an SBA loan to buy a small business. How many of them fail at the peak? 25%. The average, 15. The lowest level, 5. So we have a success rate somewhere between 95 and 75% in small business acquisitions. And you could take that down and say, maybe that doesn't account for workouts where there's like a business that's not doing so well, but they're still paying off the SBA loan, but it's kind of miserable. Okay, well then let's say we have an 80 to 65% success rate. That is a singularly better success rate than starting a business outright. And so I kind of think, how dare you tell a bunch of people that they aren't capable. It's not rocket science running a business. It is hard, it is gritty, it is hard, it takes longer than you think, it will be harder than you think. But it is not impossible. And it is not rocket science.
- [73:19]
A
Isn't there? There's a concept, it's called the Lindy Curve, that the longer a business has been in operation, the longer it is likely to continue to be in operation.
- [73:26]
B
That's right. Yeah. Lindy actually was started here in New York based on a deli downtown. And the idea is essentially this, that we think as humans that an AI company is less risky to start today because there is this big flood of movement to it than a laundromat. We look at a Laundromat and go, who uses those? Not New York, they kind of get it. But in other cities they go, does anybody even use those anymore? That doesn't make any sense. Those things have to be obsolete. And we give A price premium to the new and we give a price discount to the old. It's somehow how our brain works. The lending effect. When we go to the data, which is where I like to go back to. The data says, hey, if I have a business that's existed for five or six years, I have already decreased my failure risk by 55% because most of the fail happens inside of those first five or six years. And so if I can buy a business business 6, 7, 8, 9, 10 years or longer in existence, it's more likely that thing will continue to exist.
- [74:21]
A
That was the reason that I wondered if it was akin to a value stock. Exactly. Because it's not that sexy growth AI company.
- [74:28]
B
Yeah.
- [74:29]
A
It's that little undervalued gem. It's that laundromat.
- [74:33]
B
Yeah. Well, I mean, you are right technically in that small businesses, if we look at them on a size premium, they trade at 2 to 3x profit on average. So 100k in profit, 200 to $300,000. What you're going to pay for that business, once you get past $10 million, a lot of times they start to flip to some percentage of revenue or EBITDA, or they might flip to like 5 to 6 to 8x profit. And so there is a value discount to the smaller businesses, which is good for us because private equity firms have a really hard time aggregating all of them. Putting them together is harder than it seems. And so that's good for the little guys. That means we could actually buy those small businesses and own them and profit off of them. And then simultaneously there is a value discount to sexy versus boring businesses. And Scott Galloway and I have both talked about this quite a bit, that there's a value discount to jobs that sound more boring and there is a value premium to jobs that sound sexier. They make less money, but they sound sexier. And that would be like acting, for instance. Right?
- [75:39]
A
Yeah.
- [75:40]
B
Podcasting. Lots of people podcast. Very few people make the entirety of their living off of podcasting. In finance. Lots of people are in finance. Most of them make their living off of finance. And so again, it goes back to that thing we talked about in the beginning, which is just because somebody says that it is a good way to make money or a prestigious way to make money, has no bearing on how much money you're going to make. In fact, it might mean you're going to make less.
- [76:06]
A
Right. The millionaire next door, which originally came out Back in the 1990s, the researcher Dr. Thomas Stanley and William, they found the same Thing. They did a massive survey of American millionaires and found that the vast majority of them were business owners. And also that of those businesses, the vast majority of them were boring businesses.
- [76:29]
B
Get out. How do I not know this? I gotta go back and read this.
- [76:32]
A
Book, the Millionaire Next Door. It came out in the 1990s.
- [76:35]
B
I remember the name, but I don't think I've ever read it.
- [76:37]
A
Yes. Yeah. Two researchers, Dr. Thomas Stanley and William. William Somebody.
- [76:42]
B
Okay.
- [76:42]
A
Thomas Stanley recently passed away. He passed away a few years ago. And his daughter, Dr. Sarah Stanley Fallaw is now like carrying on that research in his honor. And so they published a follow up study like roughly 2015.
- [76:58]
B
Okay.
- [76:59]
A
To kind of take, hey, 25 years later. Let's look at the data and see what's consistent. And it was still consistent from the 90s through 2015 ballpark years. It was still consistent over that 25 year time span.
- [77:11]
B
That's fascinating. I gotta go find that study. I'll talk to his daughter too. That's a good idea.
- [77:14]
A
Yeah. She's based in Atlanta.
- [77:16]
B
Interesting.
- [77:17]
A
But I distinctly remember reading that as like a high schooler and being like, okay, so they're pest control companies, they're H vac companies, they're janitorial services. And one of the points that they made was because, you know, if you run a janitorial service, you don't want to be spending a lot of money on fancy suits with dry cleaning and driving a BMW. Even if you have that type of disposable money, you want to fit in with all of the guys that you work with. So you're going to be drinking Bud Light, driving a used Ford.
- [77:52]
B
Yeah. You know what's fascinating? Now, I get a lot of texts, obviously about different people who are Main street business owners. And one of the ones I got yesterday was, I'll have to show it to you after this. It was like, he's like, look at my plumber. And the guy was pulling, he pulled up in a Maserati and I was like, I told you. But I do think, you know, I think that we're starting to have a societal shift where people are realizing that these businesses hold real value and that it is really valuable to be able to build something and to do it with your hands and that maybe we are actually happier when we are in vitamin D, when we are outside of cubicles with padded walls. Walls. When we are doing things with our neighborhood, in our local community, as opposed to staring to a zoom screen all day.
- [78:37]
A
Right.
- [78:38]
B
And I think we were sold A little bit of a pipe dream there. And a lot of youth is waking up. And a perfect example of this is we. We own a window cleaning company called Pinks. And these two gents that run this window cleaning company, good looking, young, super smart, former white collar, really successful careers for young guys, and they left to go start a window cleaning company. When that happened, you know, a lot of people are like, wow, why? And now they have this movement of a hundred locations across the country opening up with a bunch of young men who are like, I want to be outside. I remember what it means to be a man. And for me, that means I want to do things with my hands. I want to clean up my community. I like being strong, and I'm okay with that. And I think we're going to see a big movement of that, and it's actually fun. Not all boring businesses are fun. I did one. I was in a plumbing. No, I was in a porta potty cleanup business. Holy hell.
- [79:33]
A
We're number one at number two.
- [79:34]
B
Oh, yeah. Like, man, that is a gnarly business. Now, the guy who runs it is a former NFL linebacker. He's a stud now. He's an NFL wide receiver. I don't know. He does something with football, but started a porta potty business. And when I told him, because we were cleaning the porta potties and, like, you know, using this hose to fill them up, and I was like, oh, my God, I'm gonna vomit. I don't think I could do this. And he just looked at me and said, it smells like money, doesn't it? And he winked at me. I was like, maybe. Maybe it does.
- [80:02]
A
When I lived in Atlanta, I was investing in real estate there. There were some great dumpster companies there. I would watch the business model, and I was like, you know what? It makes so much sense. You have a yard where you keep all of your dumpsters, and then you're hauling it to the site. You leave it there for a week or two weeks or however long the project is, is, and then you haul it away. And I'm sure there's more to it than that, but it seemed like if you could really nail the operations. That always struck me as if I were to have some type of a quote unquote boring business, I'd probably have a line of dumpsters.
- [80:36]
B
Yeah, I love that. I love that. For you. We'll have to add that to the logo.
- [80:40]
A
Yes.
- [80:42]
B
Afford anything. Dump truck.
- [80:43]
A
Exactly.
- [80:44]
B
Yeah. I mean, one of the happiest guys I ever met is a guy by the name is Spencer. And we went around and did trash collecting, the two of us. He's actually fascinating because he's an engineer. So he had built multiple SaaS businesses, like smallish SaaS businesses. He had even sold. Sold one. He did well for himself. And then one day, he got really annoyed because the trash bins in his neighborhood were under a private company. And they kept spilling their trash everywhere and breaking his trash cans. And he was like, this is ridiculous. They're late. They spill the trash. So he goes on Facebook group for his neighborhood and says, hey, are you guys as pissed off with this garbage company as I am? If so, respond back and here's a link, and it's for x, you know, 35 bucks a month. If 150 of you guys agree to sign up for this, I'll start my own trash company. I'll do it myself. He wakes up the next morning. There's like $35,000 in his bank account from a bunch of people signing up for the service, saying that they would use it. And so he's like, oh, my God, he had another job. He has a wife and some kids. And now one day a week, only one day a week, which is Wednesday, I think, Spencer gets in this trash truck that he bought with, like, fun logos and branding, drives around his neighborhood, collects the trash, dumps it off, and he's a trash man for a day. And he's hysterical. They're actually worth watching. If you go to Facebook. He has these trash ads that are hysterical. Remember that Sarah McLaughlin like, song that would, like the Arms of the angel song with the puppies, you know? And every time you saw that, like, sad, it was like a PETA commercial or something. I'm donating all the money because the poor cats. Yeah, well, Spencer changed it. And the whole ad is about how tragic it is what happens to these trash cans all around the neighborhood. And he's having a hell of a time as a garbage man. And I think we're going to see a lot more of that.
- [82:28]
A
I would have so many Oscar the Grouch, like, decals on my truck if I had one.
- [82:34]
B
He has a lot of dirty slogans on his stuff, actually.
- [82:37]
A
Oh, that's awesome. That's awesome. Well, that actually kind of leads us into the next thing that I was going to ask. So we talked about the letter R and the letter I, but to the letter C command. How do we prevent from oops, I accidentally bought a job.
- [82:52]
B
Yeah, oops.
- [82:53]
A
Now I'm doing this seven days a week.
- [82:55]
B
Well, First, I think you have to assume that you're going to get your hands dirtier than you anticipate the first time you do this. So let's be honest. That's a perfect lead in from the.
- [83:02]
A
Porta Potty Dumpster concept.
- [83:03]
B
Exactly. Imagine that you're going to smell some money and so there's going to be difficulty no matter what you do. No risk. No risk. I like to say that upfront because I don't want anybody to say, like you told me this was going to be easy. I'm going to be sipping my ties. I bought a business. I don't have to do any work in it. Can you do that? Eventually, yeah. That's what I do. I don't buy a business now and go work in the business ever. But when I first started out, I was in that Laundromat. I was cleaning it. I've seen multiple dead rats. I remember that now. That's not the case. So what I would say for command is we have a process now, our growth accelerator. That was what I use for all of our companies at Main Street Holding Company. So basically what you want to do is you want to put it on some sort of system that allows you to scale. It's called an operating system. A lot of businesses don't work like this. This is how private equity can have a portfolio of 100 businesses. And one is a airplane hangar business, one is a commercial cleaning business, and one is a lipstick business. None of those are related. How can they run all of those? They put them all in the same operating system. So if you're Vista, one of the world's largest tech private equity companies, they have the Vista Way, which is a playbook that they run all of their tech companies on. And so we do the same thing at Contrarian Thinking. So the idea is you put in place an operating system that allows you to oversee the company but not run the company. And so Charlie Munger famously said, you know, when you get a dog, don't do the bargain for it.
- [84:26]
A
And so I haven't heard that one. That's a good one.
- [84:28]
B
That is the goal in these companies is. And we have a process in the book that I outlined, but, like, two things that I think are useful. One is Financial Fridays. So I have a belief that money is a cruel mistress. If you don't pay attention to her, she's going to leave you for somebody that does. And so every Friday in my companies, we're analyzing the finances of every single company. We use something called the 13 week rolling cash flow. It's very simple. Once you put it into place, no businesses use it except PE businesses. It's just like check in every single week. Where's the money go? Going to make sure that I understand how the business is operating. That'll make also make it hard for you to run out of money in a business without you anticipating it. You like, you'll see what's happening. The second thing that I like people to do when they run business according to my methodology is every single company should have some sort of dashboard system. So basically, when you're the CEO of a company, in order for you to not do the work all the time, you got to think like a sea captain or a pilot. It you're looking at your dashboard with like five or 10 indicators of like, are we going to crash? Are we doing really good? What's going on? And so this dashboard, and you saw one for the media company, the dashboard means that I get a really good eye on my business without having to go check in with everybody individually. And so we run a very specific dashboard on our businesses that have weekly, monthly, quarterly and annual check ins. And so none of this stuff again is rocket science. They just don't really teach you this.
- [85:55]
A
Right?
- [85:55]
B
And so I like being able to steal other people's homework. So I stole lots of this from different private equity companies.
- [86:00]
A
Right. The dashboard that I saw for your media company, like I've never seen anything that sophisticated that, I mean, I took a look at it and I was like, wow, I am playing in the little leagues here.
- [86:15]
B
Well, you know what's interesting is I don't really like risk. I talk about it a lot, right? But I stayed in a job for like what, 12, 15 years or something like that. I worked for other people or with partners. I like didn't have the balls to do what you did. You know, you went out, you started a company and you were like, me against the world, I'm gonna do it. And I was like, what if I fail? I don't know about this. And so in order to get over my risk aversion, I have to feel like I have a lot of control in a business. And the way I feel like I have control is that I understand what we call the roadmap to making money. So every business has like five or seven steps where if you do these five or seven things, you make money. And so we map that. And so that might be like, for instance, let's see, what would be an example for one of my businesses? Pinks the Window cleaning business. It might be like I go door to door knocking in neighborhoods in my pinks uniform. And when I door to door knock, every fifth time I talk to somebody, they let me give them a quote and I get business. Right. So what do I want to do? So then I want a door to door knock. At least five houses. I want to give, let's say their average is more like probably like 20 to five. So you want to go door to door knock 20 houses, you want to get five of them to agree to an estimate. Out of those five that you get an estimate, one of them you close and then you make money. So they know door knock, estimate one close, they make money. That is their roadmap to making money. Most business owners don't actually know what their roadmap is. So for me it might be like contrarian thinking. Could be like create a piece of film something, post a piece of content, have that content lead to one of our products. Or companies have that go to a salesperson, make money. Right. So every company has like some sort of roadmap like this. You map out the roadmap app and then you have two dashboards. One is an output based dashboard, one is an input based dashboard. What does that mean? It means most people measure like, hey, how much money are we going to make this month or this, this year? Well, that's output based. I can't actually control it. I'd like to make $100 million this year. I don't know if we're going to. So you have your second dashboard which is input based. I'm going to make this many videos, I'm going to have this many sales calls, I'm going to reach out to this many people, what are my activities versus what are my outcomes. And if you have both those dashboards, you have leading lagging indicators to what could drive your company. And this is very like technical for people that don't run a business. But this is how every business runs, whether you are a widget, a podcast or a landscaping business. Right.
- [88:54]
A
I tend to think of it with the inputs. All right. That is firmly within my circle of control. Right, right. That is directly inside of my control. And the outputs are to a certain extent, they're a little bit outside of your control.
- [89:06]
B
Yeah, well, once you get really good at business, you'll be able to say for your own individual businesses, I know 20 doors knocked, five estimates, one close. So if I do 100 doors, I'm going to have around five to seven closes, which means I'm going to do, I don't know, 5,000 or $7,000 this month. So in the beginning you're not going to know that, so you're going to guess. And then eventually, if you dashboard everything correctly, you'll say, all right, we're actually going to do 200 this month. So I actually think we're going to do 10 to $14,000 this month in revenue and maybe there's like a variance of 10 to 20%. And that's when it becomes a game. Like it's just like a video game. I know if I go to this level and I have this many coins and I go beat up that wizard, like my likelihood of winning is X.
- [89:54]
A
Right? But then the question becomes, you know, how do you optimize that conversion rate? Are you up optimizing for more door knocks at the top of the funnel, or are you optimizing for like further down the funnel, improving the conversion rate on closes per 100 door knocks?
- [90:08]
B
Yeah, well, every business has quality or quantity metrics, right? And so that's what you're talking about. The easiest to control are quantity because quantity is fact based. 200 doors knocked. There's no way you and I can disagree on doors knocked, right? You're like, did you knock on the door? Did you not? That's the definition. Quality is hard because it's qualitative. So you might be like, I did a good job closing. And I might be like, no, you didn't. Here's six things that you didn't do a good job on. So I like to start with quantity metrics easier. And then we get to quality, which is like, I am the decider of quality because I have a higher close rate than you do. So the things that I say will close determine quality. Every business is really just a definitional business. So if you can't get people on the same page of what a door knock is defined as or what a quality close is defined at, you won't win. And so in business, your goal is one, what are my outputs and inputs that drive my business to grow? Two, how am I defining what those actions are? Three, does everybody understand what those definitions are? Four, do they agree with what those definitions are? And then finally five, do I have alignment? So if they agree that this is a quality close and 200 doors, have I given them incentive based compensation to get them to do the thing I want them to do? And that is where you get this virtuous circle of the perfect business, sort of operating in sync.
- [91:34]
A
Speaking of operating, and we talked about This a little bit pre show. How do you find a great operator? What makes a great operator, and how do you know when you found one?
- [91:44]
B
Yeah, well, we have an operator scorecard, basically, which probably surprised nobody if they've continued on to this podcast by this date. I think about. First, I start with definitions. So we call it a cheetah versus a house cat. So both cats. Right. But if you want to fight, a cheetah is probably better than a house cat, right?
- [92:04]
A
Yeah.
- [92:04]
B
So what does a good operator look like? We say one that has spots, not stripes. We don't want a bunch of house cats. We want a bunch of cheetah.
- [92:11]
A
Oh, my house cat actually has spots.
- [92:13]
B
Oh, well, now we're. Now we're in trouble. This is not going to beat my cheetah. So we're looking for something that has spots, and these things are just useful for your employees or team to remember. So it's like, is it a stripe or is it a spot? And you're like, it's kind of a stripe. They're like, chill. They don't do that much. Maybe that's not a right fit. Okay, so then we define what is a cheetah versus a house cat? For us, we have a five rank scorecard. A high performer. One has already performed somewhere else that is similar to the role that we already have. So, like, I'm hiring a CEO of a Laundromat. They've already been a CEO of a LaundroMat. Okay, cool. Laundromat is the same size, $100 million laundromat, company CEO. Very different than a $1 million company CEO. Is it the same size? Is it the same sector? For instance, if it's a laundromat versus a dry cleaner, that could be similar, but not the exact same. The next is known talent. So that's like, do I know that person personally? Like, have I engaged with them? The second degree of that would be like, do you know them like somebody else that I trust? A referral. And then the last aspect of it is sort of a culture fit. So is this the same type of human that we would want in the company that we have? Because I don't know, let's say we have a conservative media company. They've worked at Vice. Oof, that's probably not great. They've worked at Daily Wire. That's probably a great fit. Vice versa, if I'm hiring for Vice and they're from the Daily Wire, ooh, probably not a good fit. Right? So those five characteristics are going to Tell me, is this person good or not at a high level? Then we got to go down and we got to measure hunger, we've got to mention drive, we've got to make sure capability. But we start at least with those levels and we give them a score, one through five on each of them. Five being incredible, one being not good.
- [93:54]
A
What's your feeling about in person versus remote?
- [93:57]
B
The data seems to say across the board that in person companies outperform and people on the Internet hate this. And I get why. Because it's annoying to go into an office. And oftentimes when I'm alone, I'm like, I'm so much more productive. Here's the thing, it's not about you, it's about the team. Is the team more productive remote or are you more productive remote? And the answer is that teams need to be together. They have to have proximity. Proximity is power. And so when people say, but I'm more productive remote, I say, but are you a team player? Or if you want to be an individual contributor at another company, that's awesome, go there, but not here. And people yell at me at the Internet for this. And I was a remote employee forever. It is just easier if you are a new CEO. I highly, highly, highly recommend in person in order to do remote, which you can totally do well, you have to be a level 10 CEO, you have to be a level 10 communicator, and you have to have a level 10 team.
- [94:53]
A
Yeah. The reason that I ask is because from the point of view of an employer, from the point of view of somebody who's hiring, going, hiring only in person really narrows that pool of job candidates. And for me, I live in New York City, but for a lot of people who are listening, who live in a smaller town, that pool of job candidates is going to be quite a bit smaller in, you know, because they live in a small town.
- [95:14]
B
Yeah. There's a way to get around this, right? So if you can't have enough people in person, that is the default. That is the easiest thing to do. And you'll have the highest success rate within person as long as you don't have a terrible culture. But that's a whole different issue. If you want to or need to have remote, then you need to become a better CEO, a better communicator, and you have to have a better team, having low level performers, remote, really, really hard. Simultaneously, the more incentive aligned and the more expectations set, the more you can go remote. For instance, if you have a salesperson and that salesperson has to have 10 calls a day and they have to close 50% of those calls and that is their only mandate. Well then it's okay to have remote because it's very easy to track. Did you win, did you lose? What was your percentage? Okay, you don't hit that then this isn't a fit. The more they're knowledge workers and it is, it's hard to exactly define what they do. Like they lead a team. How do you define leading a team? That's harder. Then it's much easier to be remote. And so if you can't be in person, you better set expectations really well. You better stay on top of expectations and you better be sure that you have incentive, alignment.
- [96:24]
A
Right. So that's how you find great operators. But how do you harness those operators? What's that final H?
- [96:31]
B
Yeah. So when I think about harness, I think about this. Many people want to work in a business for the rest of their lives. And I think that's amazing. There are some people that want to harness the power of the business to create empires. And this last section is really about you thinking about your business and what you want out of it. And do you want to create a lasting legacy and something bigger. And I wanted to give people a taste of what's possible. Again, it's not that it's not, it's not that it's easy, it is hard. But this last chapter will show you what you can do if you build a holding company, if you build a multi fund strategy, if you have a company that is a strategic acquirer of multiple to pull other companies. And I think a lot of times like we can't be what we can't see. And so the idea was I wanted to paint a picture of like what's the unicorn of boring business? What could we really aspire to if we are really hungry and we want to own local businesses and we believe in purpose but we also want to be huge. And the reason why is because I called this originally I was going to call something the book something with boring businesses or small businesses. And then I realized that words mean things. And I don't want people to think that because you start with a small business, you have to end with one. You do not. I don't want people to think that because the business is quote unquote boring, their life will be boring. It is not and will not have to be. And so this chapter really can show you what the power is of acquisition at scale. And so in it we talk about what have the biggest guys Done to create empires using small businesses. I mean, I don't know if you knew this, but you know who the richest woman in the world is, what her background was?
- [98:08]
A
I don't.
- [98:09]
B
I would think it would have been like Walmart air maybe, which I could have seen or maybe, you know, Oprah, like I was trying to think of who. Who would this be? It is actually a woman who owned a roofing company, who built a roofing company right here in the US and when I saw that it made a lot of sense to me. I was like, when we look at the Forbes, you know, 100 list, most people on the Forbes 100 list either inherited it from people who started or built or bought businesses, got access to it from being an investor of active businesses, not passive ones. It's actually very rare for hedge fund managers who do purely passive investing to get on the Forbes list. That's not very common at all. It's like, could be a Carl Icahn or something, but it's not going to be an individual who only invests passively, except maybe the Renaissance founder. It's also people who bought businesses again and again and again. And so what I thought about when I was writing this chapter is like, how can we paint a picture of how many people have built incredible lives off of making their communities better through small business? And I mentioned Wayne Husinga and Artie Moreno, but there's so many more of them. We have the Koch family, which like them are not one way or the others, have built one of the biggest family offices and biggest multigenerational wealth centers in this country since the Rockefellers. And that was off of a mixture of, of certainly energy, but also home products and services like toilet paper and paper towels. We also have people in that chapter that I talk about, like the Kraft family, who are like the biggest coal mining company in the world. And if you were to talk to Joe Kraft, he's got that Kentucky twang. He started out in a mine himself. He was a good old boy from Kentucky. And he would say that he was blue caller all the way. And so I just think that this chapter should be like an inspiration to people about what you can do next. And then we do share some tactics in there about, all right, if you're serious and you're going to buy multiple businesses, here's what to do and here's what not to do.
- [100:08]
A
What's one major thing to do? Major thing not to do.
- [100:10]
B
Let's start with a not to do. Don't buy five companies at once. That's the most common thing. People go, okay, I'm going to buy this company, this company, this company, and I'm going to put them all together and I'm going to scale it up. This is like Harvard MBA 101.
- [100:22]
A
Yeah.
- [100:22]
B
They're like, if I could get a dollar for every time I have an ex Harvard grad or Stanford grad in my DM saying I've got to do a roll up of landscaping companies, I'm like, have you started with one? Why don't we try one? You see how you can run that thing and then we'll layer, take it easy. Yeah, but we've convinced these people that in order to be valuable they have to go huge from day one. I totally disagree. I think you're going to have a pretty high failure rate. So don't buy 57 companies at once. Start with one. Have some respect for what that other person has built. Built it up a little bit. Then you can start thinking about your empire.
- [100:53]
A
The irony of like to move fast, you have to move slow 100%.
- [100:56]
B
Move fast on learning, move fast on getting to be as expert level as you need in order to take action. Then move fast once you're at that level to do your first acquisition, then move fast to operationalize and scale that acquisition to full understanding. And then finally move fast to the quickest way to do growth, which is often acquisitions. But that's not step one. And so I think they misplace it and they put that step one often. So that's what not to do, what to do. Surround yourself with other people who already have the thing that you want. I think the most common reason why we invest in the stock market is that it's proximity to somebody else who had already invested in the stock market. So if our parents invested in the stock market, we have much higher likelihood of investing in ourselves. If they started us early, we have a higher likelihood of being rich. There's proximity is real power. And so I would say upfront you want to get in the room with other people whose Tuesday is your dream day. And I wish I knew that earlier. It's not necessarily the tactics, it's can you be around who's instead of how's that is like what a level two entrepreneur thinks like.
- [102:01]
A
Right. And that's how you operate the business as well. It's ask who, not how always.
- [102:05]
B
I really think there's three levels to entrepreneurship. First level entrepreneur has a problem and thinks how do I fix this? What's the answer? Second level entrepreneur thinks, who Can I go to to fix this? A third level entrepreneur thinks, how can I buy the solution to this problem with the highest certainty? And so that's like Jeff Bezos is like, huh, I want to get faster delivery service across the country and I want to do it as quickly as possible. Could he have gone and bought a bunch of warehouses and built it out and figured out the how? Of course. But instead he went and he bought Whole Foods, not necessarily for the grocery business, although that's nice too, but for the distribution capability that he got overnight through one smart acquisition. And so that is how I think really good entrepreneurs think. But we gotta go through the first two levels before we can get to the third.
- [102:52]
A
Cody, thank you for spending this time with us. Where can people find you if they would like to know more?
- [102:56]
B
Msmbook.com mainstreetmillionaire, book.com or codysanchez.com is where the book's at. And then I'm on all the socials as Cody Sanchez, and the only thing I ask is, you know, the main reason why people leave a job is a boss that they hate. So just don't become that.
- [103:12]
A
Right? Exactly, exactly. Be the boss you want to see in the world.
- [103:15]
B
That's right.
- [103:16]
A
Perfect. Well, thank you.
- [103:17]
B
Thank you for having me. Super fun.
- [103:23]
A
Thank you. Cody, what are three key takeaways that we got from this conversation? Key takeaway number one. Small business acquisitions have a higher success rate than startups. While 90% of startups fail within their first decade, small business acquisitions show a dramatically higher success rate. And that's because you're buying a proven business with existing cash flow and an established brand rather than starting from scratch, which is really freaking hard.
- [103:53]
B
Let's look at SBA loan failure rates, which are the main way to buy a small business. How many SBA loans where people go out and get an SBA loan to buy a small business? How many of them fail at the peak, 25%. The average, 15. The lowest level, 5. So we have a success rate somewhere between 95 and 75% in small business acquisitions.
- [104:18]
A
And so that is the first key takeaway. Key takeaway number two, you don't need a lot of money to buy a business. There are multiple creative ways to finance a business acquisition with 60% of all business sales, including some form of seller financing. Now, sometimes that can come from the sellers getting a cut of future revenue. And, you know, there are a lot of different ways that that unfolds, but what it means is that business ownership is more accessible than many people realize.
- [104:49]
B
One thing important to note is that 60% of all businesses sold are sold with some aspect of seller financing. So don't get talked out of the idea that seller financing is bad or rare. Now we want to be thoughtful and that it's you're never going to be able to like I bought a business with no experience in 30 days, no money down and became a millionaire and now I don't work at all. Like that's not realistic.
- [105:09]
A
That is our second key takeaway. Finally, key takeaway number three, Focus on systems and metrics from day one to avoid accidentally buying yourself a job, implement system and metrics immediately. And this includes tracking both input based metrics, meaning the activities that you can control, the activities that are directly within your locus of control, as well as output based metrics which are your results. Remember, your results are outside of your locus of control. They are within your locus of influence. You can influence your results, but you cannot directly control them. That's why it's essential to have metrics based around what you can control, which is your effort, your activity, and metrics around what you can influence, which are those results.
- [106:03]
B
Every business has like five or seven steps where if you do these five or seven things, you make money. And so we map that. Most business owners don't actually know what their roadmap is. You have two dashboards. One is an output based dashboard, one is an input based dashboard. What does that mean? It means most people measure like, hey, how much money are we going to make this month or this year? Well, that's output based. I can't actually control it.
- [106:29]
A
Those are three key takeaways from this conversation with Cody Sanchez. If you enjoyed today's episode, please do three things. First and foremost, subscribe to our newsletter afford anything.com newsletter we are reviving it. It is active. We are going to send to our newsletter subscribers fresh, insightful information that you won't find anywhere else. It's not on the podcast. It's not on YouTube. So to get unique, fresh insight delivered to you for free, zero cost, go to affordanything.com newsletter and subscribe to our newsletter which is called First Principles. So that's the number one thing that I ask of you. The number two thing is that you open up your favorite podcast playing app and make sure that you are following this show. Follow us on Apple Podcasts on Spotify. Go to YouTube, YouTube.com affordanything Follow us there. Hit the notification bell and while you're there, leave a comment. Leave a review. Let us know what you think that's the second thing I ask. And then the third thing, most importantly, is that you share this show with the people in your life. With your friends, family, neighbors, colleagues, your babysitter, your dog walker. Share this with the people around you. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.