Give Me 47 minutes, And I'll Fix Your Small Business

Businesses making less than $10 million per year cannot afford to make this mistake. And it's a problem that limited me in my ability to sell my company. When I fixed it, I was able to sell it for $46.2 million. And there are four steps to solving this problem to avoid this calamity and lots of blood and death. And it all starts with number one, key man risk. A single person that is vital to the operations of the business. And if they were gone, the, the business would decrease materially in the amount of money that it makes or disappear altogether. And so think about it like this. You've got these functions that occur in the business on a regular basis and there may be multiple people that can do these functions. And so the opposite of key man risk is redundancy. Meaning if one of these people disappear, we still have a flow for, let's say, dollars to go across this bridge. It can still keep, kind of make its way through, but all of a sudden, if you've got one here, and it doesn't matter how many different redundancies you have in the rest of the system, if this goes away, there is no way else for the dollars or the customers to move across and hopefully into your pocket. That's my little pocket for you. Why this matters is that if you have keyman risk, you don't have an asset, you have a high paying job. And I don't say that to insult you. I say that so that you can be aware of it, so, so that you can actually fix it. And to be clear, if you are fine just working and not necessarily owning an asset, that's great. There's nothing wrong with trading time for money. Big fan. And so I'll give you an example. When I had gym launch, I was kind of the innovator of the product and the service. And so I came up with the solutions for the gyms. And so for an acquirer or a private equity firm who wants to buy this business or whoever else you might want to sell a business to, having one person, especially if it's the person who's going to leave when the business is sold, is a huge, massive red flag for them. Because they're like, wait, we're buying this production? But it's with this key cog in the machine and you want to have us buy this thing and remove the cog. Now in a situation where you raise money, for example, it's not as much of an issue because those people, those pieces, those cogs are still in the machine. If you wanted to see, sell a company and you own the company and you leave, and all the people who are still key man remain within the business, then what they're going to do is try and incentivize those people to stay. But it still makes the company sellable. So this just counts double if it's the owner or somebody who's going to leave as a result of a transaction. Is the key man risk in any of the functions of the business. So I was key man in the delivery, and so I did a couple things to solve the problem. So, number one is that I created a department called the R and D department. And so the way it worked was simple. I thought about the process that I would go through when I wanted to innovate the product. So I'd say, okay, what can we do for our gym owners that will help them generate more leads, make more sales, whatever the issue was? And so the first thing that I did was that I would say, okay, I have a way of identifying problems. And so I would ask the customers. And the nice thing is, if you listen to your customers, they will shout at you, and they will tell you exactly what their problems are. And so I'd say, okay, number one is that I had these problems. Now I have to solve those problems. And so I'd have them rank the problems. They say, okay, this month, lead generation is the biggest issue. They want more leads. And I'd say, all right, now, the next thing that I would do is I would deploy resources. So this would be time and money that ideally my customers couldn't deploy, but I could fractionalize that cost between all of my customers to create a much bigger individual investment that any one of them could afford. And so lead, let's say they pay three or four thousand dollars a month. I would spend $50,000 a month on this test. And so I'd say, okay, go hire a bunch of models, go out to a really good gym, film some great ads, then test those ads. So number three, I would test the ads in representative markets. So I'd have 20 markets or so that would represent different demographics. So black, white, Asian, Hispanic, poor markets, rich markets, large markets, small markets, with good operators, with poor operators, with mediocre operators. That way I had a true sampling rather than just saying, I'm just gonna send this to my favorite customers, because that's not gonna work. And so we test it, and then what I would do is hand off winners. And so what that meant was I would say, okay, these ads of the 30 that we ran and we spent $50,000 on this whole thing. These two or three were the ones that generated the highest returns. And then I would give all of those to the gyms in our distribution base so that they could run those ads. They just wanted the inputs to feed the system. And those inputs were required on a regular basis. In order for me to hand this off to someone, I said, this is fundamentally the way I do it. I look at the problems that they have. In this instance, it was lead generation. I would dedicate time and money to solving this problem in a way that they couldn't do it so that I could create a better solution, that they could do it on their own. I would test to validate that the solution that I had was superior. And then we roll it out. And I followed this process for, for my R and D so that I could replicate the person with a system. And so typically, key man risk will occur in three primary areas. So number one is that it can occur in marketing. So how do we get leads in the door? The second big place that it can occur is sales or conversion. How do we get prospects to hand us money for our goods and services? And then third is the actual goods and services themselves, which you can consider product, etc. This happens at any level. So if you're a service and you just happen to be the best plumber, the best electrician, or you're the best coder, or you're the best advertiser. Now with marketing, for example, if you own a marketing agency, you probably are key man on marketing for yourself and marketing for your customers, right? Like it can happen in multiple places, even if it's one person. And the more places one person is keyman, the more the riskier the business is overall. Now I want to be clear. Key man risk is a double edged sword because the more valuable you become, more of a key man you are. And so the idea is that as soon as you learn a very valuable skill, the most valuable thing that you can do next is learn how to transfer that skill to another person. And I think this is a skill that I've spent a tremendous amount of time trying to hone so that I can build companies. And I think about it like this. Assemble companies, assemble people, and then transfer the skills around whatever area has some sort of bottleneck where there's too few people who know how to do the thing. And this is so important because whether you want to sell a business or not, making a business that is sellable makes it better for anyone. Here's the best Analogy. I have say that you've bought a house. Now if you've never bought a house before, then this may be news. But when you buy a house, what happens is that after a certain amount of time and the average American is like three to five years, they change where they live, alright? So you buy a house. Now, over time, you got some wear and tear on the house and the house kind of degrades in your mind, right? Like you get a little crack on the front porch, this door kind of squeaks a little bit. And when you go to sell, what do you do? Well, you fix the, you fix the little path in front of the house, you put some oil on the little hinges here. You know, you're like, you know, maybe I'll put a little patio out back. I feel like that would increase our home value, right? And then all of a sudden, and this is the crazy thing, right? When you're about to sell the house and you fixed all the things that are wrong with it, you're like, you know, this house ain't so bad, right? And so the same exact thing happens with the business. If all of a sudden you remove yourself as keyman in marketing and sales and product, all of a sudden you're like, huh, this business almost runs without me. This ain't so bad. Now the last area that you can have key man risk that can occur. And this is kind of like the glue between all of these is operations. So if you have a key leader, for example, who has tremendous influence over the entire team, then the operations connects the people to their functions. And so think of that as kind of the glue that runs the organization. Like if Layla were to leave, she would leave a huge vacuum@acquisite.com. now, she's not specifically over marketing, sales or product. She just has all of these leaders that are rolling into her. And so if the leadership was gone, and that in and of itself would also be somebody who's key man. And to be clear, key man is key human. So it doesn't have to be a founder, it can be an employee who can be key man. And if you do have someone who's key man in your business and it's your business and not theirs, then it would behoove you, if they're truly key man, to incentivize them in some material way to stay. So if you're thinking to yourself, okay, this is me, I'm definitely key man, or there's somebody in my business who's key man on marketing, sales, operations, product, then there are two major ways that you can solve this. So the first is through process and people just like I walked through earlier where I said, okay, what are the actual steps that I do in order to solve this marketing problem? What are the actual steps that I use to think through? Creating new products? What are the actual steps that I use to think through? Creating sales process, driving sales results, et cetera. So it's process and the people who will then do those processes within the business. The second way, and this really only applies if it's not you who is the person who's key man is incentives. And so if it's you, you only have option one. If it's somebody else, other people, you have option one and option two to solve the problem. And so, for example, if I said, hey, I will incentivize you to stay in this business by giving you some vesting of shares over a three or five year period, then that would make it less likely that the person's going to leave and disrupt the business. I think through it in both of these. Now, which of these is the valuable, like most valuable to the business to do? Well, the most valuable to do is this one. But the higher up the skill set is, the more unique the individual. Like, think about Elon Musk. He's key man in almost all of his businesses, but the reason that it's okay is that he has no desire to sell them. And so people bet on Elon and the companies. They bet on Jeff Bezos and the businesses because they are inseparable entities. Like, they go one together and no one's leaving. They get public and all of their shares are still theirs and they're still incentivized to continue to grow it. Now, if you're watching this and wondering, well, okay, process and people, what does that actually mean? So inside of $100 million leads, I break this down. So in the employee section, which is a chapter in the book in terms of how to help, how to get people to get you more customers, you have the functions that an employee would do. And so there's two aspects. One is like, how do I get these people? And so you can use warm outreach to ask your network. You can do cold outreach, which is basically recruiting. You can post content, which is basically post posting job openings that you have available, doing paid ads. So promoting job postings on like a Craigslist or an Indeed or a monster or a ladder, getting employee referrals. Right. So rather than customer referrals, you're getting employee referrals. Affiliates would be like associations, guilds, listservs that already have a huge amount of people who want this specific type of role or job agencies. So think like staffing firms and then obviously employees themselves could be the solution. Now how do you get them to actually do this? And so the step one is that you document, which is basically saying, hey, here's our checklist of things that must occur in order for this process to be deemed complete or sufficient. The second D here is demonstrate, which is that you do it in front of them, right? So you do it on your own and you create the checklist, then you do that checklist in front of them and you only stick with that checklist because if you do anything off the checklist, then you have to add to it. And then finally they do it in front of you, so they duplicate it. So you document checklist, you demonstrate it in front of them, then they demonstrate it in front of you, which is basically duplication. And so that three step process is fundamentally how you can teach anyone to do anything. And in order to make a process more teachable, you simply have to break it down to more and more steps based on the skill of the person you're teaching it to. If I wanted to teach an advanced marketer how to do email marketing, for example, I wouldn't say, hey, turn on your computer. Step two, pull up Internet Explorer. Step three, sign up for a Gmail account, right? I wouldn't have to go through all the steps because there's an assumed level of proficiency. This is why when you go to college or whatever education system you went through, there are prerequisites for moving on to the next level so that they don't have to teach you with arithmetic and then teach you calculus later. They just assume you know it. And so your checklist that you create is going to depend on the level of the person that you're teaching the skill to. And the lower the level, the more checks are going to be on the list, the more you need to regress it. And so let's say you brought on somebody for sales, right, who's going to be a director of sales. This might be a higher level role. You would still follow the same thing as, hey, these are the activities that I spend my time on. This is what I actually do. Then they're going to watch you do it. You probably are running teams, you're probably doing one on ones, you're probably looking at data to look for key outpoints so that you can address them and solve them within the team. And then they are going to take over those responsibilities, do them in front of you, and then when they have done them to the satisfactory level, you can then delegate it. And so the easy litmus test for good delegation is that after you've given the responsibility away and someone else is actually doing the actions, then the performance of the department or function either remains neutral or goes up. That is, when you have successfully delegated. It's not that you give something to someone that that makes it delegation. You can give something to someone and completely abdicate or basically get rid of responsibility, but with no feedback loop to determine whether or not you did a good job or that they're doing a good job. And so it has to be the performance of the function after you've handed off that determines whether or not you have successfully delegated. And sometimes you have to repeat the cycle multiple times with the same person. And that's okay because you need to learn too on how to teach better. And quick pro tip. If you're a smaller business and let's say that you do some sort of service and it's just you or just you and a couple people, there are three options that you can do when you have too much demand and very fixed amount of supply. Like you can't, you can't, you're completely maxed out, you can't take on any more customers, you barely can't. So option one is that you can simply raise your prices. And if you do that, you'll absolutely make more money, so you'll get paid more for the same thing, which is my favorite way of getting paid. Now the second thing that you can do is you can increase the service ratio. And so that means instead of doing one on one, for example, I would do one on five or one on ten. Now, alternatively, you can think of it with a team the same way, which is, let's say I have four people who work in my agency and they do different functions to serve one type of customer. Then if I can change it from those four people together can handle 20 clients. I could have those four people together handling 40 clients. And so the ratio still shifts towards us. So you get more efficient, which is either process or some sort of technology or training that allows you to get more from your existing talent. The third, and this is the most valuable one, is that you do this process and people is that you actually get somebody else to do the work for you, which typically means you have to organize this stuff, make sure they, they did it successfully, and you can hand it off. Now, these two things both make you more Money. This one helps you eliminate the actual problem of key man risk. And if I had to do this in sequence, meaning in what order would I do this? First is I would raise prices because that requires the least amount of work and can immediately make money if I'm supply constrained. Second, I would say, okay, well, people are saying yes to these higher prices. Well, I don't want to raise prices again, which you obviously still can. I can shift my service ratio at this current price to fundamentally dilute down the service that I have because it's so good. And as long as my value still exceeds my price without raising the price with the second implementation, I would still have people who want to give me money. Now, if I've done as much of these two things as I can, I can then say, you know what, I want to not have to do any of these things at all. I want someone else to do them. And then that transforms this particular job that you have, because as an entrepreneur, you'll have more than one job. It takes this job takes the hat off your head and puts it on someone else's. And then that shifts you towards owning an asset rather than owning a job. And to be clear, I'm all for maximizing the amount of money that you're making. And some businesses lend themselves more to kind of the people and process stuff than others do. Taylor Swift, for example, is going to have a hard time being like, hey, this is my blonde double and she's going to sing for you guys today. Because look, I've delegated the responsibility. Now it's very unlikely that that would happen. And so there are situations where you just have unicorns in a business. And so that's where you just have to align incentives like crazy and try and take it all the way, which is either you're just getting paid a ton of money, which Taylor Swift does, or you create liquidity, meaning you, you get paid for the equity shares that you have via a different vehicle than selling. So when you go public, you don't. You sell a little bit of the company. But the vast majority of the wealth that most of those founders have is that they have shares that they can take loans against the bigger business gets. If you don't have any desire to sell, you can take debt or other instruments where people will lend you and you can collateralize or back it up with the stock that you have in the business. And so if you don't pay them back, they get to own shares in the company. If you are key man in your business or someone Else in your business is Key Man. Help me spread the word with this because these mistakes cost me so dearly that I hope that it prevents everyone else from making them. That way we can all ride into the sunset, into our amazing businesses that are risk free and making all the money in the entire world. So if you could hit the share button and send it to friends and family and even enemies for, you know, I mean, like hey, they need help too or frenemies, maybe a little bit safer, then it would mean the world. Otherwise, enjoy the rest of it. So now that we cover Key man risk, the next mistake that business owners under $10 million make is single channel risk. Now that's just a fancy word. So let me tell you what it means. If more than half of your customers or leads come from one place, you have single channel risk. And the concept behind this is that if that were to stop, it would materially affect your business on a long time horizon. So quick illustration. One of our portfolio companies, which is the teeth whitening chain, got a lot of business from outbound. Almost all customers were coming from that specific source. All of a sudden the rules on that platform changed based on the way that we could message. Almost overnight we had 50 to 70% fewer sales coming in from that primary channel. That is single channel risk. Can you imagine as a business owner overnight you're like, oh my God, this rule change. If your ads dependent, let's say the way that you get customers is on meta ads and then you lose your account, boom. All of a sudden your business almost goes to zero. Or if you have an organic content following and you're only on one platform, for example, and that platform bans you or restricts you or shadow bans, whatever, and then boom, all of your lead flow disappears. Or you have, let's say a domain or a server that you send your emails from when you do outbound and all of a sudden that gets whacked with some sort of. You go into the promotions tab on email, all of a sudden all your response rates from your domain go to almost nothing. In each of those scenarios, you have single channel risk. Now, thankfully for this particular business, I had spent the last six months or more building out a recurring revenue stream. And I detail that in a different video where we went from like 5% of revenue being recurring revenue to over 60% of revenue being recurring revenue. Even though we decreased the amount of new sales coming in by over half, it didn't actually change our overall revenue because we had so much compounding that had started to Become unlocked. Which is why there are multiple ways to stabilize a business. But for the purpose of this video, if want to you, if you have only one way to get customers, then you have one way to lose them. So if you have Facebook ads that are running in this boat and this is how you get your little fishies, Boop, there's our little fishy from Facebook. And then this thing breaks, all of a sudden you've got no fish. And then you would be very sad, and then you would jump overboard and die. Very sad for you and your family. And peace and blessings be upon you. Now let's say that you're this other guy and you said, you know what? I have seen this happened before because I've had accounts shut down from organic, from paid or domains that don't work out anymore for cold outbound. But you know What? I've made YouTube organic. I've got ads, I've got email outbound. Let's say we also have Instagram content organic. Okay? So let's say that our same issue happens with Facebook. Boom. This guy loses the fish here. Now this fish is very happy because he's not going to die and get eaten. But we still have all these other fish that are coming in from the other channels. And so this guy is still like, you know what? I still do have a little bit of a tummy here from all the fish that I've been eating. Maybe it's good for me to tighten the belts a little bit and then I can go home and feed my family. And they've been a little chunky as well lately. And so you know what? And farm fishing is bad. And let's talk about all sorts of political things. Anyways, back to it. You can see the problem here clear as day. If you have one source of getting customers, you've also only got one that needs to break in order to fail. And to show how these lessons stack together, if we only had one key man and then this guy dies. Very sad, right? He's little double X's here, All right. Dead, all right, because he had no fish. If we had a second fisherman who was on the deck, he might say, you know what? I'm going to throw another line out and maybe I'm going to catch some of these YouTube fishies over here, and at least you'd have a shot. But if you have single channel risk and key man risk, you're double fucked. If you wanted to buy this fisherman business, would you? Well, it's like, well, shoot, there's so many Ways for this thing to fail versus this one. This guy's got a crew of people that are all manning each of the poles. And so even if they that looks bad. But if any of these guys went down, so this guy jumps overboard, right? Then these guys are so like, yay, I'm going to get a pay raise. Hey, can we get his payroll? Those greedy bastards. But this is fundamentally a fishing boat that I would have a much larger likelihood of buying because it has a larger likelihood of producing fish consistently. So first off, who needs to worry about this? Well, it's more important. The bigger your business gets, the more important this is. And let me explain tactically how this works, because let's say even volatility from a single channel is something that could rock the boat for figuratively. If you have a small business and let's say the channel goes down by 20%, then let's say you've got one sales guy and his calendar goes from 100% filled to 80% filled. Not a huge deal. If you have 100 sales guys and their calendars go from 100% right to all of a sudden 20 of the guys have completely empty calendars. That level of volatility that can occur when you only have one channel makes it much more difficult to do business on a regular basis. There's a variety of solutions that I will walk you through. So number is that if you're a tiny business, you don't need to worry about this yet. But my biggest advocate for being a small business is that you're going to have one primary method for getting cold people, which is usually going to be outbound, number one, which is you're reaching out to prospects who don't know who you are. Two is going to be affiliates. So again, you've got third parties that are sending you traffic. Three, you've got ads that are ways that people are coming into the business. And you've got organic. So this is going to be likely how you're going to be getting customers. Now, I would recommend that you do one of these three. And then plus this. Now, this may seem like a little bit of a departure from some of the things I've talked before with one channel, one avatar, one product, up to a million dollars a year. And that's true. It's just that I've seen like so many people be able to manage this. It's such high return for such low effort that the organic that you put here, not really to acquire customers, it actually functions more to amplify what you're doing with these other channels. And so if you are doing outbound and then people Google you and then they can find a little bit of content, then it's like, oh, this guy has a pulse. Or this is a real business, someone is an affiliate or affiliates are sending you customers or you're trying to sell affiliates, then just knowing that you have some sort of presence increases the likely they do business with you. And same thing with ads. And so if you're a small business, this is going to be one of the big ones that you're probably going to use. But the organic is just something that you can do, even one post a week. It doesn't have to be a ton just to look like you have a pulse. Now if you're a bigger business, then this becomes a much bigger deal for you. The way that we solve this is a standardized process that I've now had to jump through with a lot of companies. So the first thing we do is we shore up long term nurture. So long term nurture means a combination of making more content and email specifically follow up. Because a lot of people, a lot of businesses don't do a good job following up with leads. And so they have this list of 10,000 or 20,000 or 1,000 people that have done this with them over a long period of time or at least given them their information. If we create a cadence or some sort of schedule around reaching out to those people, providing value and then occasionally presenting offers, we're going to have another stream of customers that's coming in. So think of this as, in a way, another customer stream. But it's an incredibly low risk customer stream that is the most profitable of all streams. And so email marketing, for example, has, depending on the source, a 42 to 1 to 36 to 1 return on dollars. It's like, oh my God, like why would we not do that? So we do this to decrease our risk, increase our cash flow in the short term to get that engine going. The next engine that I like to make sure is very strong is my referral engine. And so if I haven't put a strong referral system in place to get customers to send me more customers and made sure that I'm asking multiple times in different and creative ways throughout the customer journey, then I implement that next. Again, we're getting more for what we put in and if we get more, that's going to increase our cash flow without adding cost basis to the business. So it's basically think about it as like decreasing risk and increasing Our ability to make bets after we've got the long term nurture firing and we've got the referral system going. This should give us a little bit of padding to then invest in the second channel. Now, when I say invest, the way that it typically works is that you will see no outcome for an extended period and then all of a sudden it will start working. And you may get frustrated in the short term that you're not seeing immediate results. But welcome to business. You have to think long term about the value of what a second acquisition channel or third acquisition channel means to you. So number one is that when you do the second acquisition channel, you can immediately double sales or more. And if you double revenue, you typically far more than double profit. So that's number one. Number two is that the business itself becomes less risky. So not only are we adding revenue and profit to the business, the revenue and profits itself is more likely to continue. And so the business itself becomes more valuable. And you can sleep much better at night knowing that if one of these things goes down, my team is still fed. And so when we make this investment, here's one of the big no nos. And you don't do two news. So what does that mean? Well, if you're going to start a new channel, that's one new. What you don't want to do is put a new person on a new channel because then you don't know which new is the problem. Because even if you take you and maybe you're really good or your best person and you put them on the new channel, well, there's already the newness of the new channel and you won't know. But if it's somebody you know who's really good, then at least we're working through the channel itself. Otherwise you could be stuck paying lots of money for a long period of time, not knowing if you're solving the right problem. Which is why I'm such an advocate for founders to have deep understanding of the core processes of the business, which for me are understand how you get customers, which you mean marketing and sales, and understand how you deliver value. Now, if you wanted to outsource it, if you wanted to outsource accounting, if you wanted to outsource, you know, HR or payroll processing, those are things that I don't see as core to the business. You can of course bring them in house when cost makes sense. But in terms of the core economic engine of the business, those are the things that you, the founder, the entrepreneur, want to understand intimately. If I am Going to start a new channel. I do these two things. First, in order to give myself some breathing room, I get a little more cash flow, I get a little bit more from what I'm already doing. And then I have one new, which is the new channel. And then old person. Now it doesn't actually have to be old, but it's somebody that I know, alright? And so this can be tough because you're like, wait, wait, I don't want my original channel to go down, which is the most common thing that happens in the situation. And so my recommendation is transfer the skill on the first channel first to someone else. Make sure that they can handle that without decreasing performance. Ideally it goes up then and only then you can then make the investment into the second channel where you're the old guy and the channel is the new thing. Now if you want to bring somebody in to help you with this, I think that's a great idea. Like if you're a larger business and you're like, I can't actually just like figure out cold outbound, that's fine. But you basically have a thought partner and you guys are working through it together because you'll have more context on the business overall and maybe they have more context on the methodology that you're going to use for the second channel. But that merger, those things coming together where you learn a lot about the method, they learn a lot about the context of the business, both people get better. This is how I've been able to successfully use all of these different methods of getting customers in different companies. Now that we've covered single channel risk, the next mistake that business owners make under 10 million is key customer risk. And we're almost there. I mean, you can see this tiny little gap here. I guess we could fall down here to our deaths. But we're going to assume that we've got some pretty good ups here and we can, we can make this little jump. So here's a visual to kind of make this make sense for you. If any customer or associated customers left tomorrow, would your revenue drop by 20% or more? Now the reason 20% is kind of the number I choose is that most businesses run at 10, 20, 30, 40% margins. And so if you had even a 40% margin, which would be a great margin, you lose half your profit. This would be material to the business itself and its value. So I'll give you a real business story. So I had a business owner come out to acquisition.com who is an agency owner and he had 10 customers and nine of his customers were small, like tech, SEO, like agency customers, and then one customer was Google itself. And he was a massive percentage of his revenue. So for him, for this example, this was actually 70% of his revenue. So if you actually look at the meat of this fish and you added all these little pieces of meat in between together, this is definitely the fish that has all the money. If I'm this owner, I'm like, oh my God, if I, if I lose this whale, it's going to kill my business. I'm going to, I won't, I won't be able to. I have to let go of half my staff, certainly lose all my profit. And so this is a huge risk to the business. So there are four proven ways to solve this problem. So when this business owner came out, I said, we're going to go through all four and you're going to pick the one that you think you have the highest likelihood of achieving. And so this is you, this is how you solve it. So the first way you can do it is that you simply go get more. I got to draw these fish because I have no idea. I have to think about how to draw these, these little fishies here. All of a sudden you get a bunch more minnows. And then all of a sudden, by percentage, man, these are ugly fish. By percentage. You know what? This whale isn't 70% of my business anymore. So you just keep adding minnows to your boat. And then all of a sudden you're like, you know what? My minnows way outweigh my whale. And so I don't have key customer risk anymore. The second way is that you lock this whale in to a long term contract. So just think about this whale as signing his life away. But you get Google or whatever this customer is to sign a three year, a five year or seven year commitment. And you can add some bonuses in there and say you're going to have some dedicated reps or you're going to have some sort of discount that might be associated with that kind of commitment. But when they do that, then it makes it more stable because it's unlikely that they're going to leave. And if you want to be smart about this, just a little pro tip, add a little breakup fee, because some people are still going to back out on their agreement and you don't want to get into a legal battle, so you want to just give them some way in the future, but just knowing that there's this nut that they're going to have to pay will prolong how long they'll stay with you. And so I would probably charge somewhere in the neighborhood of 10 to 20% of the contract. Now all the stuff's negotiable as a breakup fee. So if someone has a five year deal, then I might say you got to pay a year if you're going to break up beforehand. Another way of thinking about it is saying, whatever discount I gave you, you're going to have to pay to make up that discount for the entirety of the contract in order to leave the contract. Another one is that they have to give you six or 12 months of heads up. So there's a lot of ways that you can write terms around this with a whale to decrease the likelihood that they leave and disrupt the business. Now that's path number two. The third path is, and this is my preferred path, is you just get more damn whales. And then all of a sudden you realize, you know what, dude, I'm in the whale business, right? Why was I hunting minnows? Look at the meat on these guys, right? And so all of a sudden you don't try to outnumber with minnows. You make all of a sudden you just go get five, six more whales. And this isn't 10% or 20% of your business. So path four is a nasty one. And for many of you, if this is your situation, it may actually be the right path. And I'll tell you a story to illustrate it. So there was a recruiting firm that I was talking to and they had grown a decent amount and they had this mondo contract that was on the horizon. And so they staffed for very specific types of engineering roles that were difficult to find. So they definitely had a niche that they had found. And they had some big whale come to them and say, hey, we want you to staff us with 20 new employees a month, which was a big, big contract for this firm. So this firm is probably doing six, seven hundred thousand dollars a month. And so this would be like an additional $200,000 a month that they were going to be able to contract through this new whale. When they were asking, how should we negotiate this deal, what pricing should we put in there? I thought about it for a long time and I was like, you know what, guys? I think the actual best move is to not do this deal because they were going to have to basically change the fundamentals of their business. Their pricing, their delivery. The wheel demanded so many, so many custom things that were only going to be a use case for them. And we're not going to service the rest of their customers and they had no way of reliably acquiring the whale. So I'll explain the difference. So if the whale comes in through a tried and true channel, then this might make a ton of sense. But if you just get a random referral or you just meet somebody, or you work from your network, building your entire business around an unsustainable or unpredictable way of getting this type of customer, probably not smart. Now, if that recruiting firm had said, hey, we just got our first whale, but we have a new way of getting whales, then I say, oh, this is the first whale of many, this makes sense. But if this is just a random lottery ticket that falls into your lap, you have to make the decision of what business do I really want to be in and what customer do I really want to serve. I think that this entrepreneur just saw dollar signs in his eyes, but didn't calculate the cost of what it would mean to his business and the disruption of the main economic engine that he had spent years putting down together. And so path four is you just realize that this whale might be someone else's customer and you let it swim on by. And the fourth one, and this one is a crazy one that I've got a story for you is single vendor risk. So this is where one vendor, so think about any person that's a business that you pay to help you do business, is responsible for a key function of the business. And so there's a ton of examples of this. If you have all of your customers from SEO, for example, and you have an SEO agency who does it for you, if you have all your leads from PPC or Meta ads and somebody else has all of that taken care of, but they're an outside company, that is key vendor risk. Unfortunately, I've had this happen a lot. Alright, so with Prestige Labs, I had one manufacturer who made our products. We found out that he ended up stealing about $400,000 in cash that I had sent. So and he kept asking for earlier and earlier payment on stuff to lock in greater discounts. And in general, if I have cash and I can guarantee a 10 or 20% return on that money, then it's almost like I could put it in the stock market. But I know for sure I'm going to get 20% discount for sure. Then it's like getting a 20% return on the money guaranteed. So I'll take those deals when they come, but kept asking for it earlier and earlier and earlier. And when we just said, hey, you know what? It had been enough times that we're like, why don't you just send us what you owe us in terms of product? All of a sudden he couldn't, because what he had used is he was using our cash to run his business rather than use it as an account for the products and raw materials that he needed to purchase for our account. Obviously that was a big no, no. And we were able to thankfully like bridge to another provider and not really create a disruption. But for probably a period of six months, we were running out of product on a regular basis and had like three month lead times where we had to basically make this transition. And we lost a serious amount of revenue. And that was a big hit, both to the revenue, but also just reputation, because Prestige Labs sold through affiliates. It still does sell through affiliates. And during that period, affiliates were like, dude, we can't sell half the products we normally do because you don't have them in stock. And so that was very tough. And I learned that lesson. Prestige Labs, which was a supplement company that I owned at about 20 million bucks a year, and I ended up selling that in that 42 million, $46 million sale to American Pacific Group in 2021. Allen was a third company that I started and sold in 2021, which was a company that helped brick and mortar businesses work their leads through automated messaging. And I didn't understand how software worked at the time. And so I just said, cool, I know this problem. I'm going to go hire an outsourced dev team to go build me this software stack. And they did. And lo and behold, here's the crazy thing. No one on my team was any bit technological or a developer. And so when one the development was happening in this outside shop, what do you think the outside shop owner did when all of a sudden this thing that he built is doing 500,000, 800,000, a million 1.2, 1.5, $1.7 million in sales. All of a sudden, magically, what was once a hundred thousand dollars a month in development became 200, 300, $500,000 a month in development. Because he could see how much money we were making. Which is why I'm such an advocate of if you are going to start a software company, you want that person to be in house. At least it'd be key man risk that you can control, right? But instead I had a key vendor who literally designed and built the entire product that I was selling. And so this guy had me buy the balls. There was nothing I could do. And so I Had to start building an in house team in parallel without trying to like, let him know that I'm doing this because obviously he could see the writing on the wall and then he was difficult to work with in transferring the knowledge over. And it was a nightmare. That was my second big experience with this. The third, you're like, you should learn this lesson. You know what? Sometimes it takes me a while. Another one was, and I've had multiple with this but payment processor. So in my first book, $100 million offers, I talk about how I lost my payment processor. And it was this terrible experience for me because it was the only problem I'd ever encountered in my life that I couldn't save with sales because no one would process the money. Tldr I was running a national business out of a brick and mortar store that I had in Southern California. So I'm processing payments out of Canada, I'm processing payments out of Mexico and processing payments out of the United States all over the country. And they're like, wait, how is this happening out of a little brick and mortar store in California? I didn't know how this worked. I was 25 years old. And so I broke the rules and was unaware of it. And so they held my processing after that happened. And you only need it to happen once for every single business that I've had afterwards. I always have redundancies in processing, meaning I have multiple processors that are approved, spun up, and can handle the entirety of my monthly volume at a moment's notice. This is also important from a negotiating perspective. Because I only had one payment processor, I had no ability to negotiate anything in terms of my fees as well. And so having multiple there that are approved gave me leverage with the relationship. I got better service. And if for whatever reason something goes down, I can switch it over in a heartbeat and not even miss an, miss, miss anything. Now, I had a second occurrence with this later on in my career where we did have redundancies. And here was the issue. I had a recurring revenue business and the payment processor acted a little bit shady, which is why I decided to shift away from that specific processor. And they said, oh, if you want to transfer away from us, that's going to cost $150,000. And I was like, what? And they're like, yeah, it's just a lot of work to transfer all those things over. I was like, I'm pretty sure it's a button that you click export. The thing is, is what was I going to do? I multiple millions a month in recurring Revenue across thousands of customers. There was nothing I could do. It was basically extortion. I paid the bill and then I got all my customer information and I transferred it to a more ethical provider. And so I bring these stories up because I hope that you don't have to live through each of these. Let's get to the tactics for how to actually solve against key vendor risk. And I think this one can be so nasty because it's one of the only times where like the person on the other side of the table has leverage. And if you don't have a good person on the other side, like they may use it and they may try to put you out of business or put you just as close to getting out of business as they. I mean, they basically can just blackmail you for your own business. And the amount they can blackmail you for is proportional to how much money you got or at least how much money they think you got. So number one rule, always have backups for just about everything that's important. So you want to think about this in terms of acquisition, conversion, product. And then the layer on top of this obviously is processing banking. Anything that you do that facilitates transactions with customers. And so the big solution, and we're going to put this in big green letters. So solution number one is redundancy. Right now, I want to be clear about redundancy. Sometimes redundancy looks like waste, but is actually insurance the day you need it. Think about it this way. If I pay for fire insurance and my house never catches on fire, if I knew for a fact that my house would never catch on fire, then 100% of that money is completely wasted. I literally just flushed the money down the toilet because I didn't get anything for it. If my house does catch on fire the day it catches on fire, every one of those payments was 100% worth it. I see redundancy the same way, which is that it is insurance against existential threats to the business. And these are the things that I'm telling you now that I have these things in place. It's like one, I have leverage in negotiations, which is probably the more reasonable thing that you get in terms of short term benefits of having redundancy. The second is that you sleep great at night knowing that your business can't get taken down at least from the things that you know about. Like, listen, you can't control the unknown unknowns, but at least control the knowns. If the chickens do come home to roost and you do have that bad day and the bill is due, then you will be grateful that you had this redundancy in place. The second way of doing this is having mutually insured destruction. So what does that even mean? It basically means that the bigger you get, the bigger you are as a percentage of their business, the more they need to keep your business and not let you go. Because basically you shift from them being key vendor risk to you becoming key customer risk for them. And so it's the shift in power. Basically, the bigger you get, the more important you are to them. And so there's this saying in the finance world where it's like if you owe a bank a million dollars, they own you. If you owe a bank a billion dollars, you own them, right? Now obviously it depends on the size of the bank and things like that. But the saying kind of, kind of carries, right? And so you want to understand what percentage of the business, their business you are. And that way if they fuck you, they get fucked too. So this is where the size of the person that you're working with can be kind of a double edged sword. The small guys are probably the guys that are most likely to do the shady stuff. On the other hand, if you become a huge percentage of their business, you have some leverage back towards them. And so redundancy number one, mutually insured destruction number two. And here's a big one, covenants and terms. All right, so I'll just say, which are just fancy ways of saying, what do we agree to? Kind of like key customers, because key customer, key vendor are kind of opposite sides of the same coin. All the terms that we asked from our customers before in the last section for mistakes. We also can ask now as the customer of the vendor. So we say, hey, if you want to stop doing business with us, you have to give us a 6 or 12 month lead time to letting us know that that's going to occur so that we can find another vendor. So that's, number one is lead time. Number two is you can have a breakup fee associated. Now you can imagine on the other side, as a vendor, you're like, this guy wants to put a breakup fee on me. My God, this guy's going to be sticky. But at this point, when you have key components of the business that are outsourced, which I fundamentally don't do this anymore because I have been screwed so many times, which is why I think that marketing sales delivery should be in house to a business because it's just too important. But like payment processing, it's unlikely you're gonna start a payment processing but just to be able to process your own payments, right. There are some things that are going to be outsourced. You have to have trust. One is give the heads up. Two is the breakup fee. Third is that you have fees or fines associated with service level agreements, meaning you're going to respond to us on this timeline, you're going to ship to us products or raw materials on this schedule, you're going to get us leads or run this amount of ads on this cadence. And when we think about it that way, that allows to say if you don't do those things, then you hedge the amount of money that you would have lost as a result of them not doing the work with the fine associates. It's basically a hedge. Now if you have a vendor, they're going to try and decrease what that amount of money is. But them also having transparency into understanding how important their role is is again a double edged sword. One is they'll understand leverage. On the other hand, if you get the term inside the deal in terms of the cash required from them to make sure that they're doing their job, you cover your downside. Finally, and this is a bit of like a advanced move, if you become significantly bigger than they are or you're a huge percentage of their business and they're still important to you, that's where things like Aqua hires and acquisitions can be very strategic. So you say, hey, under what circumstances would you like to do what you do inside of our company? Is there a way that we could work together more permanently? And then you permanently align the incentives if they're doing a good job now, if they're doing a terrible job, then you obviously want to to do that. But this is how I think through reducing risk with key vendors who are core to how we make money. And if they were to disappear, so too would our business. And so once this happens, you get your Superman cape and then all of a sudden this becomes a fist, a fist of fury, if you will. And then you can, this is a dotted line because you can fly. And you realize that you didn't even need the bridge to begin with because you're such a good business owner. And then you go take the money and save the world or do whatever Superman would do with $46.2 million, which would probably be, you know, try to double down and make a lot more so that he could actually make a difference in the world rather than just his own life. I have talked to over a thousand business owners in person this year. I compiled the six most common mistakes that prevent small businesses from becoming big, big businesses. And I made a whole video about it. So if you're stuck, this is for you.