Ryan Deiss (3:42)

Would you describe this as individual investment advice that we're offering here?

Roland Frazier (3:46)

I would say it's specific financial advisory advice. No, definitely none of those things. We are not RIAs or any other licensed professionals. This is strictly for entertainment purposes only.

Ryan Deiss (4:00)

Yeah.

Roland Frazier (4:02)

At your own risk, consult a licensed professional. How's that?

Ryan Deiss (4:05)

I like it. I like it. So I'm gonna, if you're okay with it, I'm gonna operate under the assumption that we're giving advice to entrepreneurs or at least people who are open to, they're entrepreneurial minded. Because I honestly don't know what to tell somebody who is merely a wage earner and they have no interest whatsoever in, in alternative investments. I think that's because I just, I don't, I don't know what to do.

Roland Frazier (4:33)

Yeah, I guess that's a really good point. And the, the best advice I've ever heard there is the magic of compound interest and take your money and get into S and P index and, you know, hope things continue to go well there and you'll probably do great.

Ryan Deiss (4:48)

Yeah, exactly. Like if, like you probably should, should do that. And I'll tell you, like, if, if you're at a job and the job offers a 401k then, and there's matching, that's Called free money. So you should do that. You should take that. That's tax advantaged, you know, fill all those suckers up.

Roland Frazier (5:05)

Don't do that. It just boggles the mind. You'd almost be better to do it like if you needed the money. If you're like, I can't do it because I need the money. I bet if you did the math, this actually be fun math to do. I might do this. If you did the contribution, took the match, and then took the penalty to take it out early, I bet you'd be ahead.

Ryan Deiss (5:25)

Yep.

Roland Frazier (5:26)

Never thought.

Ryan Deiss (5:27)

You probably would. And if you just contributed the money, you probably would adjust your lifestyle.

Roland Frazier (5:33)

Yeah.

Ryan Deiss (5:34)

So that you just learn to live without it. Because that's kind of what everybody does. So that. So, yes, if you've got a job, if you're, you should be doing that and then, and then you should be figuring out how do I set aside at least 10% into investments? I mean, we're talking about classic financial investing advice. Yeah, exactly.

Roland Frazier (5:54)

10% to do good, 10% to save, 10% to treat yourself, because otherwise you're living a miserable life and then the rest of what you live off of.

Ryan Deiss (6:03)

Treat yourself. Yes. So I don't know how to offer anything better than that for just kind of your standard person. So as we think about entrepreneurs, it really.

Roland Frazier (6:13)

I did not, I did not think to make that distinction and because I think so much like an entrepreneur that I'm like, of course everybody would want to do this, but it's absolutely true. And it's okay if you don't. So if you're listening to it, you know, to this, the rest of it will be, you know, for your amusement of crazy people like Ryan and me and most entrepreneurs. But that's actually a really good. I'm glad that you mentioned that.

Ryan Deiss (6:34)

Well, you know, this is business lunch, so if you're not an entrepreneur and you're listening to this, welcome. I don't know why, but I'm glad you're here. So as an entre. So as entrepreneurs, how do we, how should we approach investing? Because I do think it's different for us. We can approach it from a, from an entrepreneurial mindset. And I'm a big believer in the barbell concept. So I like the idea of ultra no brainer, mega super conservative. For me, what that does mean is I do still put money in, you know, stocks and have to have some in the market. I'm, I'm fine with that. I keep a lot in cash. But then what I'm Looking for. And I. And I also will take outsized bets on crazy stuff. Like, so I will take some percentage, and it could be 2%, it could be 4%. But I have what I call a FOMO fund. It is my fear of missing out fund. It is my. I'm just going to. And if I've got some extra money, I'll take a percentage of it. Like I said, it could be 2%, could be 4%, kind of however I'm feeling. And I'll throw it in my FOMO fund. And so if there's an opportunity where a buddy comes along and he's like, hey, you should throw some money at this thing called bitcoin, which thankfully a buddy of mine did back in like 2008, and I'm like, what Bitcoin? He said, don't worry about it, just throw some money at it. And I did, because I happen to have some money that worked out right now. There's been other times where people have said, you should throw some money at this, and it went immediately to zero. But now I'm never worried about, like, that fund has actually made me money in the stupid decisions I didn't make because I was able to kind of just scratch that edge. Yeah, yeah. And I think as entrepreneurs, we need to have just a little bit aside where we let ourselves scratch that itch, but only to a certain extent. So I've got the little bit of stuff that goes over here. I've got the bulk of my stuff that goes into cash equivalents and stocks. I've got the little tiny bit, 2 to 4% that's going to go in the FOMO fund and then the rest of it. I'm looking to make investments into private companies. That's what I'm looking to make. And I mean. And we can. I mean, we can go into that. I'll just kind of stop there and we can get into the details of these. But that's my general investment mix.

Roland Frazier (9:05)

Yeah, I like it. As you know, I'm very similar. One thing that I think is good to talk about with respect to these private investments is my suggestion, and my philosophy is to only go into existing companies that are already successful. And if I was, I did a lot of turnaround work where I went into companies that were faltering and turned them around. And if you want a giant challenge and have a lot of experience and are okay with, you know, with that, that is a way to go. But if you don't have that experience, I'd recommend you stay away from turnarounds as well because there's so many businesses that are already existing, already have a history, have already proved themselves, have product market fit, have profitability, have sales teams and employees and everybody else suppliers in place that to me it makes no sense to, to go into a turnaround situation. The other alternative would be venture capital. And I had a dinner here at my house. My wife was out of town on a girls trip last week and I had a dinner with three friends, all of whom, you know, and they were talking about a couple of different investments that they'd made in like venture startup type things. And one of them was a, you know, space thing that was going to use giant rubber bands to basically sling satellites into space. And it was this amazing technology and had all this great proof and everything. But it was a startup and several of them invested in it and they were talking about other investments and you know, there were a lot of losses in almost all of the things. And I've seen that so many times where people are betting venture bets. Venture bets, you know, they don't work out most of the time. I think it's lower than it.

Ryan Deiss (10:55)

When they do. It's like a 10, 10 to 20 year payback.

Roland Frazier (10:58)

Yeah, exactly, exactly.

Ryan Deiss (10:59)

That's my FOMO fund. Just so you know, venture bets, venture capital, VC. For me that goes that, that is just like I'm going to buy the latest meme coin for funsies.

Roland Frazier (11:10)

Me too. Same thing. I have, I have an amount I put every year into that and, and then to me it's already lost when I do it and if it shows up, it's kind of like, you know, let's put it all on double O green and see what happens. But, but so I would go there to make that distinction. No turnarounds, no startups, no venture things in your primary investing fomo. Yes, love it. Whatever you have to do that with. But if you don't even have enough to do the fomo, then be disciplined enough to think about these existing businesses. I do want to talk about a couple of potential startups in the knowledge and networking business. But you know, or niches. But like to me there's just no better investment than going into a business that already exists, that has a proven track record because your return on your capital is going to be exponentially higher than anything else that I've ever found. That's not just a bet that hopefully you get lucky. Have you. Yeah, look.

Ryan Deiss (12:22)

Yeah, no, let's run the numbers real quick. So let's say that you find you come across a business that's doing a half a million dollars in revenue. So this is not a gigantic company. It's doing half a million dollars in revenue. But what it has is proof of concept. So it's not, it's not a startup. If it's doing half a million dollars in revenue, it's probably doing between 100 and $150,000 in profit.

Roland Frazier (12:43)

Yep.

Ryan Deiss (12:43)

Right. And that profit's like SDE. So if you invest seller discretionary earnings. So if you invest in this company, then, and you're generous with your valuation, you're probably buying in at a 3x multiple. Right. And I'm going to assume, by the way, that you're bringing cash to the table, which, which I don't have to tell you this, Roland, but you don't even have to do this the majority of the time. What, I don't know if you've heard of it, but let's assume you are going to treat it like a traditional investment. So you've got some money and you're going to put money in this business. I'm further assuming that you're not necessarily directly adding value, because the other nice thing about these small businesses is if you can add value, not only can you quickly improve the value of your investment, but you can also get into the deal at a better valuation. So, but we'll just, we'll assume that you're not adding value. You're just coming in as a standard investment. So you're investing at a 3x multiple. So it's about a 3 to $400,000 valuation. Let's say you come in, you're buying, you follow my math based on, okay, let's say you're buying 20 to 40%, you're letting them have, have the majority, you're letting them have a fair and reasonable salary, and you're getting everything over and above their fair and reasonable salary you get to take as distributions. This is the nice thing about small businesses, is they can kick out cash, unlike venture investments. Now, if you can ride this thing up to 5 million in revenue and about a million dollars in profit, which is not absurd, companies go from a half a million dollars in revenue to $5 million in profit all the time. And this can happen in a coup like that rate of growth at that level, a 10x if you're doing $50 million a year. 10xing is hard. 10xing when you're at half a million dollars. I'm not saying it's easy, but it happens all the time. If you've got, it's pretty easy if you got three or four years to do it. So now at this point, you've got a business that's doing 5 million in revenue. Let's say it's only doing about a million dollars in profit. You now can exit that thing at a 6 to 9. Again if there's just, I'm talking like the most standard kind of thing.

Roland Frazier (15:02)

And you're probably under that at that level still, I think you're probably closer to like a five, you know. Okay, four to six. Yes, probably, but still. Great.

Ryan Deiss (15:13)

Fair enough. So let's say, yeah, so let's say you're, let's say you're at a 5 at a 5ish multiple. So if you're coming out at a 5, even if the business doesn't sell, you can go out there and get, they can go and get growth capital. You can recap and take some of your money on, off the table or you're just getting big fat massive distributions. I just don't know of another way that you could invest 50 or $100,000 and get that kind of return over that short a period of time while you're also earning cash flow.

Roland Frazier (15:45)

And, and think about like, like from a, you know, a little bit more return numbers on it. If you're buying into a business that is 500, 000 in sales, that's at a. Operating at a 30% margin and making 150, 000 because that's 30% of 500, then it's a 30% return on the valuation at, at if you like, if you owned the whole thing. Right. But you're going to effectively give, you're going to reduce that by 2/3 because you're paying a 3x multiple to acquire it. So you're paying, let's just call it 500. It would be 450, but let's call it 500. You're paying 500 to get it and you've bought 40% of it. So you're going to get 40% of the 150 that it's making, which would be what, 60,000. So you're going to get 60,000 on your investment of 200,000. That's a 30% return. I mean it's, it's a great return on your money even if you could do nothing else. Warren Buffett, you know, would kill to get 30% returns. And the only reason he can is he has too many dollars that he has to invest so he can't find, you know, ways to Deploy it enough, but you can. And even if you only bought one of those businesses and it never did anything else, compounding at, you know, your money coming in at a 30% return on your initial investment and then compounding because you're taking that money and assuming, you know, put it in S and P, you know, put it in another business, you know, put it in that business to grow the business. It just, I don't know any way to make, to make money faster. I really don't.

Ryan Deiss (17:24)

Yeah, I mean, and I know that there are people, we haven't talked about real estate. I know lots of people who, their thing is I want to buy one property per year and like that's, that's kind of the thing. I want to take my money. And the nice thing about real estate age, you can get leverage. But I don't, I, I don't know how to add value to real estate because I'm not that handy.

Roland Frazier (17:44)

But it's also really hard now because, yeah, the prices have gone so, so crazy, you know, so right now, to me this just trumps, you know, it does really trump real estate. And, and, and now we get into, to me, the fun thing. So you talked about it already. We just talked about cash on cash, your return. But when you exit, you're able to get significant, you're able to realize that multiple. So like everything that is added to that business in profit, as Ryan said, you know, let's say that you, let's just say, let's not even say you get to 5 million. Let's just say that you get to a million five and you're still maintaining that roughly 30% margin and you're making a half million in profit now and you get a professional manager so that it's not owner operated, you're going to jump from a 2 to 3x valuation to between a 4 and a 5, most likely. And, and you know, just that jump, that's a crazy jump. You know, your, your business that you know, was worth 200,000 in your hands, you know, is now worth a million or 800,000. Like that wealth and that wealth is not taxed until you sell. So that wealth is compounding like a Roth IRA where you know, it's just, well, not like a Roth ira, like an IRA where you're not paying any taxes on it until you actually sell it. Now if you actually put that investment in a Roth ira, you wouldn't pay any taxes on the entire gain. So it's an amazing how much you can accumulate just with the buy into a profitable business that already exists at a fair market value, all cash. We're not even talking about leverage, because when you leverage, you get way more. If you're paying, use an SBA loan and acquire the whole business. And you're paying around 12% interest right now, but you're earning 30. You're making an 18% interest spread every single year on the government's money, which will finance up to 90. What is it, 97.5% if you structure it. Right. Of the purchase price can be done with, you know, with the SBA. So you're in for 2.5. You get into $1 million business for 2.5%. I mean, that's crazy. 25 grand to get into a business that's $1 million, that's now returning you 200,000 a year, like you're starting out with a return of 800%. It's. It's just crazy when you get into all that. So I hope it's not too fast, because we don't have slides and pictures and graphs and stuff. But, man, the. The return that you can get on that money, and then you go to sell it. Even if the only thing you did was buy in with SBA money, if you're in the United States that's available to you and you. And you hold on to it and replace the owner with a professional manager and sell it. You're, you know, every couple years, you're just. You're millions of dollars ahead. It's hard not to be. Right?

Ryan Deiss (20:50)

Yeah. I will say, if it's me, I prefer. And I'm telling somebody else, you know, if I'm giving recommendations to somebody else, which. That's what we're talking about, I would rather do a couple of minority deals as opposed to going out there and buying all of. Of a company. Because the thing about buying all of a company is now either you bought yourself a job, or you now need to go and recruit an operator, run that business. Because unless it already has one, if. If it already has a professional operator and not the owner, because I'll tell you this, if it's the owner that you just bought out, they're unlikely to continue running it with any degree of enthusiasm. Let's just say.

Roland Frazier (21:32)

Yeah, yeah, I have run across. It's definitely the minority of deals, but there are owners who just don't want to be entrepreneurs anymore. They are the accidental entrepreneur that stumbled into being a business owner and find that they like doing the thing they're doing, like baking the pies or Fixing the cars. But they just don't want to deal with hiring especially. They'll do it just to not have to manage the people, which is amazing. Right.

Ryan Deiss (21:58)

And those are the people who I'd rather get in and do, you know, a 20, 30, 40% deal on make sure that I like it. And then just as it's working, buy a little bit more and a little bit more until you get, you get a majority stake. Because I would just want to make sure that they're, that they're good to go, that they're actually going to be a good deal.

Roland Frazier (22:17)

I don't think I'd do that without an option to acquire more in the, you know.

Ryan Deiss (22:22)

Yeah, that's what I'm saying. Yeah, yeah, I agree. But the idea, the nice thing about the minority, if you have a solid operator, because my whole thing was like, what I would be looking for is ideally, this is somebody that you've. That you know, through your network. You know, maybe this is a client. You know, you talk a lot about consulting for equity. Maybe it's a past employee or staff member.

Roland Frazier (22:48)

Maybe they're in your Vistage group.

Ryan Deiss (22:50)

Yeah. Not that that was the best deal in the world, but yes, it could be somebody like that. It, it could be a vendor that you're already paying.

Roland Frazier (22:57)

Right.

Ryan Deiss (22:58)

Like let's, you know, let's kind of invest in your, in your existing P and L or something like that. I would want to see that they've got at least three to five years of business experience. Right. Like, do they have something going on? Maybe not in this business, but like, do they have some, do they have a personal track record of like, do they personally seem like a successful person? Like, they're not just an absolute, you know, bum. But what I would want to see if I'm going to do a minority investment, are they clearly just sold out to the, to that business? Like, are they passionate and enthusiastic about that business and they want to see it be a thing. You really don't want to invest a minority position in somebody who, they're burnt out about the business and they're looking for a savior.

Roland Frazier (23:43)

100%.

Ryan Deiss (23:44)

Now that's the thing. You want somebody who, they're like, they see value in just getting some help and in getting some cash infusion.

Roland Frazier (23:52)

Yeah. Or they're looking to the second bite. Right. That, that you're doing it kind of like private equity, where you're saying, hey, I'm going to come in. And again, I probably wouldn't do a minority for this, but I'm going to buy a majority and you're going to be in for, you know it's interesting the trend. It used to be like 80, 20 deals. The trend currently is much higher on the retained roll in interest of the entrepreneur. Like private equity is looking more for it to be 70, 30 or 65, 35 their way. So, so the entrepreneur gets a bigger bite of the apple but there's less risk to the private equity firm and there's more buy in because a lot more is riding on the line for the entrepreneur that's staying in. But they're willing to stay in because they're, they're being sold on the bigger picture of look, we're going to come in and buy controlling interest now and then three to five years from now, you know, we're going to be growing this organically and through additional professionals and professionalization and through acquisitions and then you're going to have 20, 30, you know, 35% of this way bigger thing that we sell. Probably that's going to be worth more than we pay you up front because it's going to be, you know, it's going to grow so much. So I do like that as a pitch if they're excited about that future vision. But 100% if, if the reason they're selling and you should always ask what your reason for selling is. I'm just burnt out, I'm so tired. I just want to quit and sit on my porch. Then you know, you got to know they're not going to be there. So that's, that's, that would, that would be a challenge.

Ryan Deiss (25:29)

Definitely don't do a minority on that one. Maybe, maybe you buy out the whole thing. And those, those are the deals by the way, where you, you might not have to put any money in it because God, they just want out. That's one where it's like I can pay you very slowly so that you don't have to show up tomorrow. How does that sound? But yeah, I think if you can do one of these deals a year, just do one of these deals a year and you start to stack them and they ladder. I mean you, you absolutely can build up quite a portfolio that is both cash flow and future exit value.

Roland Frazier (26:02)

I think, I think most people would feel comfortable retiring on 10 million. And I think that to get to 10 million in five years doing this would be pretty easy. You know, it's, it's, if you did a deal a year to at the end of the five years have that be worth 10 million. I don't Think that would be that hard?

Ryan Deiss (26:24)

Yeah, I mean, certainly we talk about doing, starting off at a half a million dollar deal. As you get used to this and you start getting exposed and start getting more confident to larger deals, you tack a zero on the end. And it does happen just a whole lot faster. And the ultimate multiplier on this is when you're able to get into these deals without having to put much, if any cash, any of your own cash into them. And I know again, you talk about that all the time. I'm sure there's resources galore that we could drop on folks, but that is the thing that can rapidly accelerate this. And people say like, oh, you know, this like a nothing down, like real estate. That sounds like a scam. These deals happen all the time in businesses, especially if you have any value whatsoever to add. Because at this level, what companies, typically companies don't need cash, but they're not nothing down.

Roland Frazier (27:17)

That's the thing. They're, they're not having to come out of pocket. Like, you don't have to have, like I said, you can. On a $5 million, you could do, you can buy a 6.1, I think it is million dollar company. If you can get 10% seller financing, then you can buy that company with 125,000 out of pocket. And if you can't find 125,000, that just sounds impossible to you. I guarantee you you've got friends, family, 401ks, Bitcoin, home equity, helocs, you know, or private investors, plenty of them out there, angel groups that you can, they're. Go to a meetup, group of angels and you'll find like 125k is, might sound like a lot, but it's really not in the investment world, to get 125k to buy a $6.2 million business is pretty phenomenal. And that's where we are right now. So now I'm talking, they're using SBA, which means you need, I think a 680, you know, is that, what is 680 credit score or something like that? It's.

Ryan Deiss (28:19)

I think it's 680.

Roland Frazier (28:20)

It's, it's relatively high. But if you can't do that, I have lots of companies that I'm, I'm an owner in that got SBA loans that did not use my credit to do it. And as long as you own 19% or less, you don't have to guarantee the SBA loan. Even so it's like it's absolutely doable. And, and you don't need a lot of cash to do a deal that gets the seller a lot of cash. That's the cool thing. So, so it's, I truly don't like this, to me is the magic carpet ride to whatever you want. You can do it as many times as you want. And if you were looking like, if your horizon is longer, like 10 years, that at the end of that 10 years your SBA loan is paid off and you own everything free and clear. And if you bought a 1 million, you know, dollar business to start with, to have that be, you know, up there at the 10 range, I think it's kind of hard not to do. And then if you can invest that in a combination of, you know, of things to get a 5% return, you're at a half million a year. Even at 5%, you know, like to live off of $500,000 a year with $10 million in the bank to draw on if you wanted to that. I think it's hard not to get there.

Ryan Deiss (29:42)

Well, I mean, there's lots of ways to not get there, but in terms of the path to get there, I don't know of a better path. So if somebody is going to, going back to the original question, what is the fastest path? I don't know of a quicker one. I just don't, I don't like. What I know is that simply investing in the stock market is not going to get you there. I don't see the opportunities in real estate today. I guess if you get lucky on some of like the crypto type things, then maybe, just maybe. But also a lottery ticket, if you get lucky will get you there. This is the only thing, and we're talking to entrepreneurs, if you're entrepreneurial, if you're a business owner, if you got any chops in this area at all, where you also have the ability to dictate the outcome to a certain degree because you can go in and you can add value, you can roll up your sleeves and that's the thing that I like the most. Yeah. Because you can't do that with, with truly passive investment. So let's make active investing cool again. Let's make active equity cool again. And you know, let's, let's leverage that to go out there. And, and you know what? When you do hit that number, decide that you're not going to freaking retire because this stuff is just too much dang fun.

Roland Frazier (30:49)

It is, it is. I love that. Awesome. Well, there's lots of other advice we could give, but so we don't run way too long and we're not giving advice. Actually, there's lots of other entertainment we could share, but so we don't run too long, we'll, we'll call this an episode. And if you have thoughts, questions, comments you enjoyed it, please let us know. If you have questions, hit us up on social and we'll see you next time on Business Lunch.

Roland Frazier (31:28)

Hey, Roland Fraser here.

Roland Frazier (31:29)

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Roland Frazier (31:30)

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