Podcast Title: The Prof G Pod with Scott Galloway
Episode: How to Build Wealth — with Codie Sanchez
Release Date: December 5, 2024
Host: Scott Galloway
Guest: Codie Sanchez, Founder and CEO of Contrarian Thinking

Introduction

In the 327th episode of The Prof G Pod, Scott Galloway welcomes Codie Sanchez, a former Wall Street investor and the founder and CEO of Contrarian Thinking. Codie brings her expertise in building wealth through acquiring ordinary, profitable small businesses—a strategy she elaborates on in her new book, Main Street Millionaire: How to Make Extraordinary Wealth Buying Ordinary Businesses. The conversation dives deep into the mechanics of building wealth outside the traditional startup ecosystem, emphasizing financial literacy and strategic acquisitions.

Defining Wealth and the "Rich Method"

[19:38] Codie Sanchez:
"I think the biggest thing is that you kind of get to do what you want to do to some degree. And life still sucks. And it's hard in many ways, but it sucks a lot less when you have a bank account that allows you to kind of work where you want, live where you want, and build what you want to."

Codie defines being "rich" not just in terms of monetary value but as a state of freedom. This freedom allows individuals to live life on their own terms, reducing the stresses and limitations that come with financial insecurity.

She introduces the "Rich Method," a four-step approach outlined in her book:

1. Research:

   • Understanding the ten steps involved in buying a business.
   • Conducting due diligence to determine if a deal aligns with personal financial goals.

2. Invest:

   • Allocating time, expertise, or capital into a selected business.
   • Emphasizing that investment inherently involves some level of risk.

3. Command:

   • Gaining control and improving business operations.
   • Learning from initial investments to make better, more informed decisions.

4. Scale:

   • Expanding the business portfolio through acquisitions or scaling existing operations.
   • Building a holding company or integrating additional businesses to amplify wealth creation.

The Opportunity in Main Street Businesses

[25:54] Codie Sanchez:
"Ownership leads to wealth most often if that ownership is sustainable."

Codie highlights the undervalued potential of Main Street businesses—plumbing, construction, cleaning, electrical services, and similar sectors. These businesses are often recession-resistant, have consistent cash flows, and are less susceptible to the volatility seen in tech startups or other high-risk ventures.

She points out the declining rate of small business ownership, noting that only about 6% of Americans currently own their own businesses compared to 80% in the 1800s. This decline presents a significant opportunity, especially with the impending "silver tsunami" where baby boomers retire, leaving many businesses up for sale without a clear successor.

Identifying and Acquiring the Right Small Business

[29:52] Scott Galloway:
"There's not a real liquid market here. Is this market getting more liquid?"

The conversation shifts to identifying ideal small businesses for acquisition. Codie outlines key indicators of promising targets:

1. Profitability Over Potential:

   • Focus on existing profitable businesses rather than those with potential but uncertain futures.

2. Established Management:

   • Look for businesses with a capable managerial layer to ensure smooth transitions post-acquisition.

3. Recession-Resistant Industries:

   • Prioritize sectors that remain stable or even thrive during economic downturns.

4. Simplicity and Scalability:

   • Choose businesses that are straightforward to manage and have room for growth without excessive complexity.

[31:21] Codie Sanchez:
"I have two methodologies if you're going to buy a business. First thing is we buy realities and profits. We don't buy hopes and dreams."

Overcoming Market Challenges and Financing Acquisitions

[34:02] Scott Galloway:
"Valuations have gone up, but you still feel there's a lot of opportunity."

Despite rising valuations in the small business market, Codie remains optimistic about opportunities. She emphasizes the importance of understanding financing options to mitigate risks:

1. SBA Loans:

   • The Small Business Administration (SBA) offers loans covering up to 90% of the purchase price, requiring only 10-20% down.

2. Seller Financing:

   • Negotiating terms where the seller finances part of the purchase, allowing payment over time based on future profits.

3. Apprenticeship Models:

   • Transitioning ownership gradually by apprenticeship, where the buyer takes over operational responsibilities while making royalty payments to the seller.

[34:18] Codie Sanchez:
"The interesting part about the business landscape is the credit is not your own. When you go to buy a house... you can't buy a business based on how much you earn. Your earned income is whatever the earned income of the business makes."

Codie stresses that financing a business acquisition relies heavily on the business's financial health rather than the buyer's personal credit or income, making due diligence crucial.

Strategies for Casting a Wide Net and Deal Clarity

[37:34] Codie Sanchez:
"We call it deal clarity. So you gotta really make sure you know what you want in a business."

To effectively search for and acquire businesses, Codie recommends the following strategies:

1. Deal Clarity:

   • Define the ideal business profile based on personal skills, industry knowledge, and investment goals.

2. Satellite Acquisition Strategy:

   • Acquire businesses related to one’s existing skill set or industry for strategic growth.

3. Deal Box Framework:

   • Categorize investment criteria into 15 components, including desired returns, location, sector, and operational involvement.

4. 100 to 50 to 10 to 1 Rule:

   • Review 100 businesses to shortlist 50, narrow down to 10 for serious consideration, and finally select one for acquisition.

Financing Options Revisited

[34:18] Codie Sanchez:
"There are three ways that we buy businesses that people don't think about..."

Codie elaborates on unconventional financing methods:

1. Diversified Investors through SBA:

   • Recently expanded SBA loans allow multiple investors to partake, reducing individual financial burdens.

2. Creative Financing:

   • Structuring deals where payment terms are flexible and aligned with future business performance.

3. Apprenticeship and Transition Models:

   • Gradual ownership transfer, ensuring continuity and reducing immediate financial strain.

Operational Excellence and Talent Management

[46:57] Scott Galloway:
"There's a lot of research showing restaurants where the owner is there just do tangibly better."

Operational efficiency and effective talent management are pivotal for scaling small businesses. Codie emphasizes:

• Hiring Reliable Managers:

  • Seek individuals who are dedicated, require minimal supervision, and align with the company's culture.

• Simplifying Operations:

  • Focus on businesses with straightforward operations to minimize reliance on specialized talent.

• Retention Strategies:

  • Foster a positive work environment to retain competent managers over the long term.

[47:16] Codie Sanchez:
"The one good thing about a lot of these businesses is the word talent is so different here than it is for a media company."

Selecting Profitable Sectors for Acquisition

[50:13] Codie Sanchez:
"I think rehab, individual rehab homes... there are all these small little rehab... subsidized by the federal government."

Codie identifies high-potential sectors for acquisition:

1. Rehabilitation Centers:

   • Addressing the growing addiction crisis with steady demand and government subsidies.

2. Clean Communities Services:

   • Services like landscaping and cleaning that maintain consistent demand regardless of economic fluctuations.

She notes that these sectors not only offer financial returns but also contribute positively to society.

Personal Insights and Reflections on Education

[43:19] Codie Sanchez:
"If you want to be a business owner, the best business school is business and it pays you."

Codie shares her critical view of traditional MBA programs, asserting that hands-on business acquisition provides more practical knowledge and financial returns. She regrets the substantial investment in her MBA, emphasizing that real-world business operations offer more valuable insights and outcomes.

Conclusion

Scott Galloway wraps up the episode by commending Codie Sanchez for her efforts in democratizing wealth-building through small business acquisitions. He underscores the societal importance of her work in providing alternative pathways to financial success beyond prestigious corporate careers.

[52:27] Scott Galloway:
"I think you're sort of destigmatizing it. I think you're actually playing not only an economically important role, but a kind of a... emotionally and psychologically important role."

Key Takeaways

• Wealth Equals Freedom: True wealth provides the liberty to live life on one's own terms.
• Main Street Businesses are Goldmines: Profitable, recession-resistant small businesses offer substantial opportunities for wealth creation.
• Due Diligence is Crucial: Comprehensive research and understanding of business operations are essential before acquisition.
• Flexible Financing Options: Leveraging SBA loans, creative financing, and apprenticeship models can mitigate financial risks.
• Operational Efficiency Matters: Effective management and streamlined operations are critical for scaling and sustaining small businesses.
• Alternative Paths to Success: Practical business acquisition often outweighs traditional educational pathways like MBAs in building real wealth.

Notable Quotes

• Codie Sanchez at [19:38]:
  "I kind of have the words rich and more free as synonymous."

• Codie Sanchez at [34:18]:
  "Your earned income is whatever the earned income of the business makes."

• Scott Galloway at [43:19]:
  "If you want to be a business owner, the best business school is business and it pays you."

• Codie Sanchez at [52:27]:
  "It's fun. I wish more people realized garbage men have good times."

This episode was produced by Jennifer Sanchez and Caroline Chagrin, with Drew Burroughs as Technical Director. Thank you for listening to The Prof G Pod from the Vox Media Podcast Network.