Designing A Company That Can Get Rich with Christopher Volk

There we are. We're talking about company value. How do we get great company value going? How do we build company value? That's the topic today. Maybe you're not thinking about it in the moment, but long term, we know it's got to be in the background for you. Maybe you've been entirely focused on the top line or just getting some cash through whatever it is. The ultimate goal is building company value. That's our topic today. Foreign. As always, I'm enjoying my own music.

Excellent.

Everybody. My name is Bill Gallagher, scaling coach and host of this scaling up business podcast. Our show comes to you every week with an author, a leader, a business leader, in this case, both, who's got something to share with you about building and growing your company, creating value in the world, and hopefully in your pocketbook too. So you'll find all of our shows and more@scalingcoach.com that is our website. And we have now a whole bunch of new things that are actually rolling out right now. But we've got workshops every month so you can go to work on understanding the tools of scaling up and getting your mindset right for scaling up, unsticking yourself where you might be stuck. We've got coming a free mini course on working through the stages of scaling up. So there's a whole bunch of things coming out soon and a membership, a monthly membership. So we got some cool new things to help you kind of get started and up level your work. We know we have a lot of loyal listeners who have been hungry and asking for some of these things. So workshops are out now. Go check it out, scalingcoach.com where you also find 500 episodes and more in our back catalog with all kinds of things, people, strategy, execution, cash, everything you need to know and to get your company growing. All right, now I'm joined by Christopher Volk. Christopher is a Chris on the screen. Chris is our author speaker. So he's taken three companies public. He's been founder of two of them, billion dollar valuations and he wrote a book, the value Equation, that he's going to talk to us about today and the stories and lessons behind all that. He's clearly masterful in this area and I think he's got a lot to share. So I'm excited, excited, looking over our notes in preparation for the show to have you on the show today. Chris, welcome.

Hey, Bill. It's just great to be here and thanks for having me.

Yeah. So you're. I'm in California, you're in Arizona. Our producer is in Spain, all over the world. We're thinking about growing businesses and creating value, and I think it's a great thing. How did you come to, like, you know, why this, why you? Why this book? You know, tell us a little bit of your. You know, we know you. You did some big companies and went public. But, like, how'd you even get into that?

Well, I've always had an interest in what makes companies succeed, what makes a good company from kind of an average company and. And success. And the way I'm talking about it is financial success. So what makes some companies just worth a lot of money and some companies not worth as much money? It's important because about two thirds of the millionaires in the United States, and I imagine the rest of the world, make their money in business. It's not just a function of saving money and buying stock. They're starting a business or they're owning stock in a business. And I learned early on that just not all businesses are created equal. I started my life in banking, and I started to look at all kinds of different companies and trying to figure out why some companies were just better than others. And ultimately I got to the point where I chose to work for a company that I thought had a pretty strong business model out here in Arizona. And when I was starting to lead that business, I took the concepts of business success and whittled it down to six essential variables and. And basically figured I could model almost any business with six variables. I mean, you're trying to reduce a company down to its raw parts. If you're running a company in a business, you're trying to limit what you focus on and make it just easier to run for you as leaders. Ultimately, those six variables turned into an equation, and they turned into articles, and they turned into the book. The book is designed to explain to people how companies create wealth. And that is really behind how the people on the Forbes 400 all got there. It's understanding how companies financially succeed is important for any business leader or even people looking for a job. If you were looking for a job, you want to work for a company that's got a nice business model, it can do something, because those companies are the guys that are going to give you the best opportunities and the best chances for personal growth and also to make some money.

You know what I like about this? I would say just anecdotally, the vast majority of our audience are business people, founders, owners who care about something, who have some domain expertise, they've built something, but they're not mostly Financial technically driven folks. So we look at the Warren Buffetts of the world and we're amazed at their sort of mathy, quant geek kind of focus on building something. And for the most part, I think our folks are like they're thinking about some product or service that makes the world a better place. And understanding a simple kind of repeatable formula from that banking technical background I think is really useful because many of them are very intimidated by the numbers and by the way the numbers work together.

That's totally true. And the interesting thing about the number is when it comes to business is that the business math is all middle school math. It's stuff that we Learned in the 6th, 7th, 8th, 9th grade or something like that. So it's not, in terms of math, it's not complicated. You don't have to be a rocket scientist to do it. But you can't escape math if you're running a business. I mean, if you're leading a business, you're having to have accountants, you're having to focus on detail. There's a lot of detail just in running a business. And, and so I think that business people should take the time to focus on the detail of what their business models are. Because if you're providing a good or a service to a customer, which is where all companies start, then the question is, how do you build a really great business model around that that's going to guess what generate the most money you can or the most value you can for the investors in that business?

Yeah. Why don't we talk about real estate business and what you grew, what did you actually do? How did you grow it? Tell us that story.

Sure. Well, the companies I did, I did, I took three companies public on the New York and all three of them did the sort of the same thing. So they were a succession of businesses. And what we would do is go out and buy freestanding pieces of real estate. They started off with chain restaurant properties. Eventually we went into automotive parts and services properties, truck stops. We had veterinary clinics, early childhood education, fitness clubs and manufacturing facilities. Eventually we had, we had ski mountains, we had ski hills. And we would buy the real estate and we would rent it to the businesses that were actually running that location. So we were just a landlord. And I would go around and convince businesses and people that worked with us would convince businesses that they were much better off having a landlord than a banker, for example, I mean, and that they would be making more money and having more flexibility in how they ran their business by having us as a Landlord and us being a very key member of their capital formation, where they were getting their money from to create their business. And so doing this, not only did we build a business, but we saw tons and tons of other companies as well.

Pause there. What is that equation? How do you convince somebody that it's in their interest to be a renter to have a landlord than it is to be owning a building with a bank? Cause that's not the way that business owners think about it. They think, wow, if I could buy my building, my facility, then I could create a second business and then I'm building some equity in something.

Right, Right. So I'll start off this way. That is a common perception. And business owners should really take a look at becoming a renter as opposed to becoming an owner of real estate. And if you're a business owner, and if ultimately, let's say a private equity firm comes to buy your company, you sell out, you monetize your value, understand that that private equity firm will almost invariably sell the real estate and they'll sell it to a company like the one I created or the ones that I created. And it's important for business owners to understand this because how they run their capital stack or the way that they run their debt and equity mix is going to be different from how other people would do it. Doing a sale leaseback tends to be really more efficient because what you're doing is two things. You're lowering your cost of capital. So the cost of capital in a business is a big blend of what I call other people's money, and other people's money is debt. But it's also leases and it's also equity. So you have this cost of other people's money. And part of how you get rich is trying to make that as low as you can. And in the case of a sale leaseback, why that helps you do this is because a sale leaseback is not a debt substitute. It's not like I have a choice of going to the bank or renting a property from Chris. It is if I rent the property from Chris. Chris is giving me 100% of the money for the property. If I go to a bank, the bank's going to give me 60 or 70% of the money. So I have to show up with 30 to 40% of equity in the real estate that I own. And by the way, that equity is just going to be trapped in that piece of real estate forever. Therefore, what Chris is doing, what I've been doing, is being able to substitute not just the debt, but also the equity that goes into it. And the equity is not cheap. Anybody who's in private equity, for example, is looking to make a return in the 20s somewhere. If I can take my capital solution and make the cost of capital less, then I'm going to make the private equity investor, or in this case the private business owner, much wealthier. By doing that, I'm going to give them at the same time free cash. Instead of having to put down 30 to 40% in the real estate, now they could take that and, and expand and go to two locations or expand their plant facility and make more money. And so that's basically the simplicity behind it. I would say there's more to it than just that, because borrowing money for real estate is not a free lunch. So a lot of times companies have prepayment restrictions. They can't modify their loans, they have covenants on them. I mean, so our big thing too was not just to lower the cost of capital, but to make companies easier to operate by having a good business partner.

So in your case, you're buying out the property and then they close out whatever loan they have and then they're leasing it back from you in these businesses, but with maybe some agreement or some control over the cost over time.

Exactly. And we did over three companies, about $20 billion plus worth of these kinds of transactions.

That's a little bit. So if you're doing that, then there's a shift of risk and that's working for you instead of the bank and you're offering a different structure than some other landlord would do it. And is there something different about the way that you're operating as a landlord than other commercial landlords?

Yeah. So it's really important to operate yourself with a lot of flexibility. So a lot of landlords, especially if they're smaller, are financing every single piece of real estate. They buy one off. So they're going, they buy a piece of real estate, they go to a bank or they go somewhere to finance it. What we would do would be to aggregate all of the real estate that we had under very, very flexible financing agreements. And we had anything from unsecured borrowings to asset backed, secured borrowings that allowed us to be able to sell properties, buy properties, add to properties when people wanted to expand them. We wanted to create a capital structure for ourselves that made it so that our flexibility could translate into flexibility for our customers or our tenants. And, and that's really important. And most people in the real estate business don't have that Kind of capital flexibility. So that's what we tend to focus on above anything.

Now, did all your companies do real estate business like this?

They did. We got better at it over time. You do something three times, you're just going to get better at it.

Yeah, you got refined with it. And are you involved with any of them? Today?

I serve as chairman of the board of a company that is run by some people that used to work with me.

Yes. Nice, nice. You also talk about outsourcing, legal and IT. Talk about that. What did you do? What's your belief there? Why is that important?

Well, it's not whether you outsource legal or it. I think the important thing is that businesses really have to focus on what their core competencies are, what they really want to be good at. And if they. And I think that's almost more important than coming up with a company values page or something. I mean, if a company can sit there and say, these are the four things that really define our business and what we want to be really good at, then that by itself tells you that maybe you shouldn't focus on anything else. I mean, you should be outsourcing stuff that is not a core competency. And. And that's what I decided for ourselves, going back sometime. In our very first company, we had 250 employees. We had almost a full legal firm. We had four or five attorneys. They all had paralegals. And I learned pretty quickly that I had no business to evaluate how a law firm was running. When. When attorneys would come to me and tell me how great they were and how much money they'd saved us, I would nod my head, but I wouldn't be able to know. Is that really true? Because it's not something I knew about. I wasn't a core competency for me. So in future companies, when I started the future companies, I just basically had one lawyer and outsourced the entire legal department. And that way I didn't have to worry about managing attorneys. Over the years, it has been somewhat similar to that. In the early companies, you had to have an IT department, and we had a whole computer room with an array of computers and a raised floor and halon fire extinguishers and all that stuff, which you had to have because the cloud didn't exist and the kinds of technology we have today didn't exist. But today, of course, we outsource all of that stuff.

I have nightmares about those days. Run your own servers and the army of people it took to keep everything running and going. Oh, yeah, we had an army of people. Yeah. You know, it's funny, even if you think about like the expense of, you know, and you look at it like running stuff on Amazon web is not terribly cheap, but when you think about the hassle and expense of running it yourself, you start to really appreciate the ability to turn up servers on demand and.

Well, and you're turning a fixed cost into a variable cost. Right. So, I mean, so instead of making this huge investment and so much equipment and so many people, and by the way, the office space that they take up and so on, you don't have to do that anymore. So it's. It's magnificent. It makes it very easy to run a business.

Yeah. You know, I think like, theoretically you're legal, your IT costs are variable. Like, I add more servers, I add more attorneys, I add more space. But you don't go in like tiny chunks. You go in big chunks. Like, oh, we have to add another facility, we have to add, you know, additional headcount and versus incremental kinds of things. So the variability of it is much finer when you've got it outsourced and then you could shut it down entirely if you don't need it.

Exactly. I mean, the business I'm in right. Today, for example, that I chair today, there's a question as to how many people you add from, from a staffing perspective, if business really takes off, if you have a lot of transaction flow, how many bodies we have to add, and to the extent that you decide to outsource, you're taking that concern and you're kind of getting rid of it because you're able to outsource. And so everything becomes a variable expense and you no longer have to get ahead of increases in production. And so, yeah, I tend to like that. It just makes life a little bit easier if you can do it.

Interesting. Shout out past show. It's been some years now, but we interviewed a guy named Tim Danley about starting his business and he had only four people on staff. He took that company over 200 million at the time that I spoke to him. And it was a great example of this. We see many today who are outsourcing all kinds of things, various services. Now there becomes complexity in managing outsourced services and, and SaaS, apps and things like that. Like having these companies that do things and operate can become complex, but the cost advantage and the ability to turn them up quickly is undeniable.

Right. So one of the biggest things we outsourced was our servicing group. And what a servicing group does is when you have lots of pieces of real estate or lots of income streams and they're coming in, you have a group of people that are getting all the rent checks in. They're looking at them, they're making sure the property taxes are paid on the property. They're looking at, making sure the insurance is always paid and it's up to date on the real estate. And so we had a pretty large staff that just did this and then produced, of course, reports in terms of portfolio performance on this stuff. And so we started our first company. Our first company started 1980, but then in 1990, people started to securitize commercial mortgages on real estate. So it was a new thing that happened in 1990, and when that happened, it gave birth to all these servicing companies. So there are a lot of banks and other people that started servicing mortgages. And so by the time we started our second company, which is in 2003, I was saying, why are we doing this? There are servicing companies out there. This is what they do. They collect rent checks, they collect the tenant financial statements, they monitor the insurance. We can outsource the whole thing. And in fact, we did. And it was much less expensive than it would have been for us to do it internally, but also turn a fixed cost into a variable cost. So what you're doing is taking a company where we used to have mix of professional and administrative staff, and we got rid of a big chunk of administrative staff. We outsourced almost all the administrative functions, not to India or something, we outsourced them to Indiana and Kansas and stuff to other people that did this and did a magnificent job.

You know, as I hear you speak about that, the first thought I have is many people look at it, many business leaders think, think, well, they're making a profit off this. So if I internalized it, I can absorb the profit that they're making off providing that service. But the other side of it that you're pointing to is the inefficiency. And you don't know it's not your core competency to run the servicing business or to run the IT or to run the law firm law function or anything else. So you don't know if you're doing it well. On the other hand, if you outsource it, what you're asserting is that the gains in efficiency outweigh the loss of profit that they're earning on the process because they're just getting much better and they operate in a very competitive environment where they have to become more efficient at Delivering value over time. And the profit that they're making on that is less than the loss that you get by having an internal function.

Right. So the last company, when I left the last company, we had roughly110,115 employees running $10 billion worth of real estate. And that's just an extraordinary number.

Yeah, it's not insignificant and you can see a whole army of things like that. But when you think about if you've ever worked in and around or if you ever even called a big company, you realize there are some things they do really well. And then you're like, wow, they just mismanaged the heck out of this thing. And this is a completely inefficient area of their business and they can't handle anything. Right. Which I think is a good segue to the other thing that you mentioned at the outlet and you talked about not putting as much focus on your values. We love to have companies create cult like companies with a real feel to them that's rooted in values. But what are you actually good at? Like, what are your competencies? Right. Not just core values, but core competencies. So talk about that. How do we know what we're really good at? How do we get better at what we're good at? And how do we get out of the things that we shouldn't be doing in the first place?

Yeah. So in the case of the companies we ran, you always think from the customer's perspective. So as you're selling a business, as you're creating a business, the customer is always number one. And in any company you create, the customer comes first and then the shareholder actually comes second. So you start off with the customer and you're thinking about what do I do for the customer that is valuable? Why are they doing business with me? They could do business with other people. I mean, what do I have to do for this customer that is going to make it so that they are valuing our relationship? And what you want to do is distill your company down to just probably a handful of things that give you the moat that your company has. And there are things that you're also doing for shareholders as well, where you're having kind of a shareholder mode. I mean, if you think about the companies I ran, we were kind of a middle guy. We were addressing the tenant on one place or the person who needed our capital to do their real estate. And we were also interfacing with a shareholder that was going to help capitalize this. And so we thought about what we had to do to really add value to both sides of this. And then we distilled that down to something that I wrote some values on the wall in terms of we had a big poster on the wall. These are the four or five things that we want to be good at. And when you do that, then you turn off everything else. You basically try to make sure you're not distracted. One of the things about running a company, especially if you're an entrepreneur and you're a founder, is that it's so easy to get distracted by shiny objects and by the latest and greatest ideas in certain areas. But it's important because our time is very finite. It's the most valuable asset we have. And if we can distill it down to these three or four things that are core competencies, then you can really affect how you staff your business and how you run it and where you focus your time.

So how do you, like in real practical terms, how do I figure out what I'm actually good at and where I should focus? How do I know that I've got a business, I'm working in an area.

Right, right. You know, I think it requires a lot of self awareness. I mean, self awareness is a key attribute for any business leaders. So one of the first things that a CEO or any business leader has to have is self awareness to know what they're good at, what they're not good at, and where they need help. And I think companies are just the same way where you have to have a lot of self awareness to know what your competitive advantages are. You're looking at your competitors out there or people that provide similar goods or services and you're saying, you know, here are the things that these guys do really well. And then you're trying to figure out where your niche is going to be in terms of what you're going to do better than they are. And so you're going to create your competitive advantage and that competitive advantage. And by the way, each startup companies have competitive advantages. I mean, it could be that you're just responsive, right? I mean, you're nimble. I mean, startup companies are nimble. I mean, so people think that you could be, you have to be a big company to have a moat. I think small companies have lots of moats. But you figure out what your competitive advantages are and then you focus on those and that becomes basically the seed for what your core competencies are.

You know, that's a really, really useful thing, right? The self awareness. I love that you pointed out that it starts with Yourself and then your company, like understanding what are you good at and what are you not so good at? What, what have you historically screwed up and what do you keep getting right? And I think about it in every situation when working with people, in the way that I sell, in the way that I design things, what's my Achilles heel, what do I get wrong again? And it' comfortable to look at those things, but you could also look at. I was talking to somebody the other day about a new venture and I'm like, listen, I can help you with that part because I can do that without thinking. And like that just is like the water I swim in. And that other thing, I don't really want to mess with that because that like, is hard for me. But I can do this and very few people can, you know. So that kind of self awareness is really good. But it's good to know, like, you know, hey, look, I look good from this angle and I don't look good from that angle. And I'm speaking metaphorically here, but, but it's true, like the way that I look, like literally I look at myself on camera here, I'm okay with this, but if you were to switch the camera around, like, whatever, I don't like that angle as much.

Right, that's good. Yeah. I mean, I think you do it not only with customers, but you're doing it with shareholders too. So when you're starting a company, and I think it's the best companies out there, the ones that create the most value and the most wealth for their investors, I mean, these are companies that could, if they wanted to, don't always do this, but they could if they wanted to raise capital from other people. And so if you're raising money from someone else, and I raised a lot of money from other people, they have choices just like customers do. And you have to look at an investor and say, why would they invest with me? What's so special about what I'm doing? Why should I divert their attention from other things they could be investing and have them buy our stock? So you mentioned Warren Buffett earlier, being sort of a business model geeky guy. And I sold him 10% of our last company. So he was actually our largest shareholder when I left. And, and it was very much of a selling a vision and selling what we did, right, what our core competencies were, understanding the cost of capital, creating a strong, formidable business model around a really good value proposition for our customers. And guys like Warren Buffett, that resonates with them.

He understands that I probably oversimplified and undersold Warren Buffett, who has always cared and spoken about good business fundamentals and creating value in the world and that kind of thing. The hedge fund guys are probably more guilty of the pure numbers games of playing things. And he's obviously a different animal than that.

He's a very different animal. I mean, Buffett has never considered himself even an investor. He considers himself an owner, which is a different matter altogether.

Yeah, yeah, yeah, different, different, totally different mindset. So I think that's interesting. So we consider who we are. I always have our clients go look at and talk to their customers and say, okay, what are we actually really good at and how do we compare to our competition at least as far as, you know, and, and, and further, we have them only talk to the customers that seem to really love them because it's like if you're going to be really great at something, then you have to be willing to suck at a bunch of other things if you're going to make any money. So what do we choose to focus on? We ought to lean into the people that probably are a good fit for us in the beginning. And in fact, this goes back to show number one, where I talked to Bob Bloom, the now departed former head of Publicis Worldwide, and, and he talks about like, figure out who your core customers and then what do you actually do for them that they value to focus in on that, like to really hone in on that bit.

That's just totally true. I agree with that.

Yeah. So talk about the evolution of your businesses. You, you said you went through three and largely the same world and you got better at it each time. So how did you hone that? Maybe share a little picture of that for us.

Right. So one of the advantages of doing something three times and getting to do it better each time is that you, it's almost easier to start a business well from scratch than it is to re engineer an existing business. If you've had an existing business and you say, yeah, I can really run this better. Let me change my whole staffing paradigm. It's, it's essential to do that in businesses and to adapt that way, but it's not easy. And in the case of our businesses, where I could take the same kind of concept of a business and do it three separate times, I was able to make business decisions about how we staffed each different time and do it differently. I mean, and the result was that I just ended up with kind of a better and better business model. So that by the end we were running a company really well with less than half the employees and twice the assets of our first company and with much better profit margins as a result of that. And, and I also changed how we financed the business. So with our first company we had financed ourselves with unsecured borrowings, which if you do that, it requires a certain amount of capital stack design. And by the time we did the last company, I had worked on creating an asset backed security structure. And these are not easy to create, but I mean you're basically adding assets to one another and creating this large secured pool of borrowings and issuing bonds to people. And I was able to do that and create a capital stack, basically a group of debt that was much more efficient than the first company we had. So it was both a balance sheet issue and it was also a management issue. And if you think about what it takes to make your shareholders rich, it's a combination of being able to be operationally efficient, which is sales and making money and profit margins, and its ability to be asset efficient, which is controlling what you invest in the business. I mean, don't just buy anything, make sure that your assets are as lean as possible. And then it's capital efficiency, which is how do you finance the business between debt, equity, leases, whatever you're doing. And so I basically focused on those three efficiencies and certainly nailed two of them. And we were able to make a company that had a much better business model and create a lot more shareholder value as a result.

I think it's interesting to hear this focus and evolution because very often if a company's at a strategic crossroads, they haven't been growing in a while or they, or their, their business model has been disrupted by some world event or technological innovation or whatever. Like, okay, well you know, what would, if you were going to start this business over, what would it look like? And then so we start like, okay, what have you learned and what would you not do? And I can think of almost every industry I've been in, I'm like, okay, if I was going to do that again with those radio stations, I would do it this way. And you know that the learning from the hindsight applied to compete with yourself. Okay, if I was going to compete with you today, here's what I would do. That kind of fresh thinking and looking at is what I hear happening across three businesses. Because you get back in and you're unconstrained by the agreements and the ownership and the funding of the whole thing. And now you can like, okay, well let's start with a fresh, knowing what we know now. But that's a really useful thing to do to your business today right now. Like take a pause mid year and think, okay, if you were to put yourself out of business, what would you do? If you were going to start this over, what would you do?

Completely. I agree with that 100%. And I think that for companies, especially companies that have been around for a long time, this is the kind of stuff that you really need to do. Because I've seen lots of businesses, I've helped finance companies that have been buying other companies over the years and invariably if they've been buying a seasoned company, they're able to run it more efficiently because they're able to find some low hanging fruit ways to run the business better that the prior owners hadn't thought about.

Yeah. You know, it's funny, I'm transported back to early in my career working for a big company. You probably know it's called Sprint. And it was a very different business in those days in the 80s, but in the early 90s. But I remember a number of conversations where I had some internal manager or product manager of one of our services or something going, yeah, we can't do that because that's going to disrupt this business we have over here. I'm like, yeah, exactly. And if we don't do it, one of our competitors will. Yes, yeah, but I run that business. Okay, good, well get unattached to it because it needs to evolve now or go out of business because it's, it's weak.

Right. You know, and sometimes you see this, you know, I've likened this to a train in a tunnel where you, you see the technological change, it's coming at you, you're in a train, you're in a tunnel and you see the light at the end of the tunnel and it's coming towards you. And some companies, you know, work to fix this and they, they know that basically they can see the handwriting on the wall, they understand that things are going to change and they end up killing a perfectly good company or perfectly good business because they know it's just not going to be around for a long time and they're going to shift. And there's a cost to doing this. I mean, there's a real financial cost. I mean, when Netflix decided to go to streaming at the time it had been mailing out DVDs to people, right? So it had a business model that actually had to stop and discontinue and had to shift to something else. There's a cost to doing all this, but the cost of not doing it is to not be there. And then you end up being like Blockbuster Video, which is their competitor and they didn't make it.

And on and on and on. Like, the biggest disruptive thing today that we're hearing about and people are freaking out about and figuring out what to do with is all matter of AI, AI, everything AI, generative AI, predictive AI, like, all of it. Like, how do we use and apply that? And people are terrified about being disrupted by that. But probably more than anything else, you need to figure out how to use it. And yes, you know, I'm deeply connected and infinitely familiar with it. My son's one of the leading developers in the world, and. But I look at a lot of it. It's. It's. All of it is a lot of it really crude. Today. I had somebody at a conference recently tell me, oh, I just wrote this book with AI I'm like, oh, but that's an interesting book. Why don't you send it to me? I'll have my AI read it. I went back and I'm like, that's a really interesting thing. I spent a lot of time working on a book last year with an editor and of some skill and that kind of thing. And then we had to totally go back and rethink it after talking with my agent. And I'm like, oh, that's a really interesting challenge. So I took this guy's idea and I'm like, all right, well, let's see what happens. So I'm like, okay, well, here's the topic and here's the work and what we've done. And so AI gave me a really great kind of chapter outline and description for this book. I'm like, great. So now I've seen that I could kind of level up and speed up, and simple. I'm like, okay, great, write me that first chapter. And here are the stories and the things like that. Oh, it was awful. And so people are like, well, you just need to work on your prompts. So I tried prompting and like, yeah, this is not getting better. And it's getting. It's getting more and more weird and mediocre. And I'm like, so don't try and write a book with AI at least in the current world today, that. That would want to be read by a human. It's pretending to do thing like that.

Right, right. And so I don't know if this is. This is sort of a metaphorical story, but years Ago, I'm listening to Warren Buffett talk and he was talking about the most seminal inventions of the 20th century, and those being the invention of the automobile and air transportation. And he had a list of public companies, they were both airlines and car companies. And the list was so long that on a PowerPoint slide, there were eight point type or something like that, really small, just stacked like piles and piles of companies. And he basically said, if you had gone long, these industries, if you'd gone long, you would have lost money, you wouldn't have made any money at all because there were only a handful of winners out of all this stuff. And it turned out that the real winners weren't necessarily the car companies, they were the trucking companies that distributed goods, or they were the people that were the tourism companies, the hotel companies that were depending on air travel. And so that when it comes to AI, AI is not an industry, AI is a technology. And so the industries are oftentimes very old school industries. And, and the question is, how is it going to make you better?

Right? So how can you use this? How could you improve? How could you, like, if you were going to start over whatever business it is today, what would you do differently? Right. When I think about every single industry that I've worked in, all of those things have shifted so dramatically over time. The way people extract value, the way people produce and create and deliver value for their customer, whether it's a product or service, all of that has shifted dramatically. And if you think, think you can start something and just stay with it, you're kidding yourself. Right? Like it's got to change and evolve over time.

And when it comes to disruptive technologies, you know, one of the things I am entranced with is that over here in Arizona you've got Waymo that'll give you pick you up and drive you around town. And it's covering almost all of Phoenix at this point. I mean, a big chunk of Phoenix.

Have you written in one?

I have to. I mean, I've got it on my iPhone, so I've got, I've got the ability to do it. I just haven't done one yet. But I'm like really reluctant to get.

Into them at this point.

Yeah, but, but when you see it again, it's sort of that train light in the tunnel thing, you know, how is this going to affect how many cars people own? And I mean, it's quite affordable. I mean, if you're getting around town.

No, it could be really great. Look, if you think about the inefficiency of owning your own car, garaging it of having garages in city areas and things like that to store store cars versus just using them to move yourself around like it wants to be done, like it is an improvement on something. It is a vastly more efficient place. I would love to turn downtown garages into housing. You know that like repurposing could be dramatic when in fact if ever there is some self driving. But listen, why don't you give us a little peek. I know that an equation doesn't lend itself to a conversation but talk us through a little bit the equation before we run out of time in our show here.

Right. So the equation is six variables and I, I think I'm going to just say go look at the book for the six variables. But I'll give you a hint here. You know, I mean, I mean it's designed to make it simple. You know, I used, I've modeled out a zillion different businesses and you sit there with an Excel spreadsheet and you put in all these inputs and basically what I've done is said you don't really need a spreadsheet, all you got to need is six variables and you can do this kind of, you can figure this out pretty fast. But it revolves around these three efficiencies. You've got your operating efficiency and so obviously sales is a big piece of it. So sales is going to be a variable. Operating profit margin is going to be another variable. So that's basically your operating efficiency piece of it. Then you've got your asset efficiency and the asset efficiency is keeping your business investment low. Right. And business investment is anything you fund with equity and other people's money, whether it's debt or leases. And that could be anything from inventory to receivables to real estate. I mean whatever you're funding and you want to keep it low. And so basically that's what I refer to as business investment in the model. So business investment is that number and then maintenance capex, like how much do you spend every year just sort of keeping things up. Right. One of the things about the model is it's a finance model, it's not an accounting model. You know. So when you're talking about operating profit margin, there's no non cash stuff in that. It's no accounting conventions, that's just pure kind of EBITDA kind of cash number. And so you're focusing on what's the real maintenance capex. You got to keep plowing into the business just to kind of keep the Doors on, you know, the lights on and the company running. And then the last two variables just relate to your capital mix. You know, so it's capital efficiency, so it's the percentage of OPM and the percentage of equity. And that basically gets you to the six variables. And when you string them all together, what you're going to get is a current equity return. And you know, my goal in running a business was to maximize the current equity returns and the best I could, and, and then the difference between your total return to investors and the current equity return is just growth, you know, so you're going to funnel growth into that and add it to that and, and make a strong business model. And, you know, the, the benchmark here is, is interesting because you're not just trying to. When you're creating wealth, you're creating a company that's worth more than a cost to make. You know, so the company now, you know, you paid a million dollars for it, you could sell it for 2 million. I mean, you've actually created wealth above what it costs to put in place. Believe it or not, most companies actually don't even get to that number. I mean, they cost a million dollars and people are lucky to get their million bucks back. They bought themselves a job for a while, but the people on the Forbes 400 figured out that there's a better way. And if you can create a great business model around a good idea, then you can really create some wealth. And that's how the richest people in America got there.

Wise words on a topic we don't cover enough. The Value Equation is the name of the book. You can go get it at Amazon or wherever else you're getting your books. The Value Equation. It's worth looking at your business in the lens of these variables and it'll be best and easier if you pick up the book and go look at it. Thanks so much for joining us today, Chris, and talking about and sharing some of your wisdom. Clearly you've learned some things along the way. Thank you for sharing with us and our audience. Thanks again, everyone. Thanks to the folks at Storeon who get our show produced and our guest prepped and things out every week. To my friend and mentor, Verne Harnish, who created the Scaling up framework and the Rockefeller habits that came before it. Thanks again to everyone for watching, for listening, until we talk to you next time, keep Scaling Up.