I Reverse Engineered the Perfect Business

This is your business. It's a masterpiece, right? I call it the Mosulisa, but it has a few imperfections. Let me show you. Like this one. Diverse customer base. And when we want to reverse engineer building the perfect business or a masterpiece business, we have to take all these pieces that something's missing and then put them back in the right place. For example, automated metric tracking high cash flow. Profitable and growing with a good story. Multiple rival acquisition channels and. And a lot more. So you might be wondering how I know all this. Well, a long time ago, in a galaxy far, far away, I started a company called Gym Launch. And Jim Launch basically turned Gyms around and then eventually became a licensing business that licensed over 5,000 locations. But here's the crazy part. We went from $0 to $4.4 million per month in 20 months. And it also sucked. And that's what people won't tell you. It got so bad that Layla and I, my wife, were walking one day and she says, let's just shut this thing down. I was like, wait, hold on. This might be worth something. So I banking friend of mine, and I said, hey, if I were to sell my business, like, do you think I could get anything for it? He's like, oh, you could get millions of dollars for this business. I was like, wow, that sounds amazing. He said, wait, but not right now. There's a ton of things wrong with it that you have to fix in order to get an institutional investor to want to invest the kind of money that you would want to make an exit. And that's what began this journey of figuring out how to take something that just makes money into an incredibly valuable asset that can change your life forever and your family's life forever. A financial perspective and everything about to show you in this video is something that we developed@acquisite.com called the value acceleration method. Now, you've probably heard of big companies like Netflix and Amazon and Microsoft being worth 2 trillion, 5 trillion, 1 gazillion dollars. How does that even come to be? Like, how can something be worth a certain amount? We talk a lot about value, provide value to people, make valuable content. But when we're talking about value within a business, the person we're providing value to is the investor who's going to buy a share of it. So there's only three variables that are really going to affect how much a company is going to be worth. One is increasing the number of customers. If all else remains the same. If you 10x the number of customers, you will 10x the value of the business, sometimes more. The next is something I call lifetime gross profit, which means the amount of profit that you generate from these customers over the lifetime of their stay with your business. And so if I want to make more money, I'll either have to get more customers or, or make them worth more. So then what's the third variable? Because this is pretty much all it takes to grow a business, which, by the way, is what it is. You divide that by risk. How likely is it that this will continue in the future? Those are the three variables that you have to increase or decrease the value of a company. And all these three things put together equal a term called enterprise value. So take out your notepad, because each One of these 10 things unlocks another level of enterprise value in your business. And you, when you get them all right, you, you make a lot more money. So let's start with piece number one, Leadership team in place, running the day to day. So for each one of the 10 that I'm about to go through, I'll explain what it actually is, how I learned it, and then how you can tactically execute and fix these things so you can increase the value of your business. So leadership team in place, running the day to day means that the person who owns the business can leave the business, and the business can not only maintain, but also grow in their absence. Now, the thing is that most small businesses, the business owner is the reason the business even exists. And if the business owner leaves, so does the business. The problem is if you leave and the company goes down, then it means that no one else can buy it. And as much as this is uncomfortable for a lot of entrepreneurs, many people own businesses that are worth nothing. I mean that not as an insult, but more so because what they did was they created a job that pays well, that they have other people who help them, and, and they pay those people to help them, but they haven't created an asset. And so always remember the saying, you get paid for what you do. You get returns on what you own. If you wanna become rich, you increase your paycheck. If you wanna become wealthy, you get wealthy from owning assets. All right? And that's the big difference. So let me give you a tale of two different businesses that we have in the portfolio that tried to solve for this risk. The first one ended up just saying, hey, I've got this buddy of mine in my network, he's never run anything like this. He's just run little like, odd job type businesses. And I'm going to have him come in and be the operator of my significantly larger company than this person has ever run. And we were very vehemently against that. But we sit in a minority position. And so we say, listen, if that's what you want to do, I'll support you. But I want to voice the fact that I don't agree with this, but once the decision is made, we will support it to the best of our ability. Now, I'm not going to tell you what happened yet. Second scenario is a company where we've continued to grow it. It had plateaued at a point where we saw we really needed to help the two founders and bring in more seasoned operator. And so this is brick and mortar chain. We took somebody who had taken a brick and mortar chain from 100 to 2,000 locations open over a span of 10 plus years, had a lot of experience opening locations, negotiating leases, managing build outs, getting vendors in line on timelines, managing capital allocation so that we can actually roll out at the same pace, making sure profitability across all of them, ensuring quality assurance. I won't get into any more of it, but somebody who knew what he was doing, guess what happened. So we've got our sad operator and our great operator who come into the business. So with the first instance, what happened afterwards? The business plateaued. Costs continue to rise because this operator didn't understand how to manage cash flow, manage profitability. Basically got more people into the business without increasing any kind of revenue, which then basically ate up all of the profit in the business. And this business was not profitable for nine months. It literally just broke even for nine months. And this was a very profitable business prior to this. In this scenario with the more seasoned operator, this business continued to grow at the same pace, but the profitability increase expanded at a dramatically faster rate with this new person in there. And so they even had a period where he said, hey, I think we should just focus for this entire quarter on making all of our locations just more profitable. We don't even need to open more and dramatically increase the profitability of the entire business overall. And that's the difference between having an experienced operator and an inexperienced operator. And if I'm a buyer and I'm looking at the business and I say, okay, these founders are going to disappear. Imagine the founder disappears here. I'm like, I have no desire to buy this thing. Right. Versus here. I say, well, gosh, I can see when this guy came in, I could see what it increased based on his decision making and his experience. Wow. I feel like there's way less Risk, which means this is more valuable. So let's talk about what you can do. Number one, let me tell you, one of the mistakes that I've made so many times early on in my career is that I thought an operator was someone who managed systems and organization. That's not what it is at all. An operator, somebody who can lead the business. It has to be someone that you aspire to be like, that you admire in different ways. And it should be people that everyone on your team could look up to, because that is what is going to allow you to step out of the limelight a little bit, so that they can actually take some of the load off of you. And let me give you the litmus test for knowing if an operator is good or not. If you feel like you have more time now and you have way more bandwidth, they have helped you. If they try to tell you to do all of these new things that you weren't doing before, they are arguably hurting you. So the way that you have to look at this as a business owner is the difference between local and global. Meaning if I tell the sales team that they have to put notes in the CRM that actually increased how much stuff they do on a local level, but by them doing that, I decreased all the work in the rest of the company globally. And so if an operator comes in and says everyone has to do all these things, you have to zoom out as the owner and say, does this decrease work globally or is this just giving us more stuff to do? And a good operator tries to use as few systems as possible to decrease work across the entire company. Whereas a bad operator will feel entitled and saying, why aren't these people filling out their checklist? They're not finishing the task that I gave them to do. It's because they add things without removing them. And so from low to high, you'd have a manager, you might have a director of ops, you might have a VP of Ops, and then eventually you'd have a coo. All of these fundamentally do the same thing, just at different levels of an organization. I would always prefer to start lower. Most people over title. It's one of the biggest problems that small business owners have. They over credentialize people and then people beat their chest and get their ego involved and then you don't have room to bring people above them. Because if you have somebody, you're like, oh, this person's been with me since day one, then realistically, they're probably not a coo, right? They're probably a manager. Or maybe a director of operations. And one of the sad truths, and this is just data, is that if you 10x in size, the likelihood that you have the leadership team you had at 1x when you were at 10x is virtually non existent. People develop skill sets and those skill sets are good at certain seasons of the business's growth and then they don't fit anymore. The only way for that person to stay on the ride, you have to have a growth mindset. And many people don't have a growth mindset. You do, because you're watching this, but most people don't. It's a much smaller percentage of people who are willing to do that one. And then also just because of the churn and burn of business in life and moving locations and families and drama and whatever that they actually are there with time. You have to always prioritize the business because the business is what feeds everyone. All the wealth that you want in your entire life is on the other side of a few hard conversations. And so it's a skill you're going to have to develop. Number two is hire for a purpose. All right, so you should have a clear idea of why this person is coming in. You want someone to come in with a clear goal or a clear problem to solve. And this makes the interviewing process a lot easier. You don't have to give hypotheticals. You can just say, hey, this is my business. These are the stats, this is the problem. How would you attack it? And if you ask that to 10 people, the way someone answers the question and the way they talk through it logically should give you some insight into how this person's going to work with you. A lot of times entrepreneurs just hire people that they think they would be friends with. But then you hire a lot of people like you, and then you still need the people who are not like you to actually run the business. Look at track record and experience and how comparable or relevant the experience is as one of the number one predictors that they're going to be able to help you go to where you want to go. So this applies for a cmo, a cfo, a cpo, meaning head of product, all of those C dash O's, all of them, you still want to think this way, which is like, can they do the thing more than are we going to be best friends? And when we're thinking about replacing the day to day got risk, you've got getting more customers and you've got making them worth more. So you can actually think about that in terms of Leadership. So you say, okay, if I were to leave, would we be able to get more customers next month and the month after if I weren't here? Well, if the answer is no, then all of the leaders that would make that happen would be Checkbox one. The second checkbox would be making sure customers stay and continue to pay and maybe increase how much they pay over time. If I leave, is there somebody or multiple people who are going to make sure that that happens? If the answer is no, then you need to check that box off. And for us, at Gym launch, for example, my litmus test is always, if I step away, does the company continue to grow for six straight months without me jumping back in? Which means that if they come to you with a problem, you have to say you have to solve it. They probably already know what you would do and they can just make the guess. And a lot of times I would ask, what do you think I'm going to tell you? And they're like, well, I think you told me to do this. I'm like, so what do you think? I think we should do that. Great, do that. Right? And so that's how it can develop over time. So number three is that A players know their value and a player costs 25% more than a B player. But A players produce five times more than B players. And so being willing to pay a little bit more to get way more value is one of the single best investments you can make in business. That being said, if you are bringing A players on, expect them to want more. Also expect some of them to negotiate pay. Some of the best people I've had have, have tried to negotiate pay when they came in and that's okay. Actually had to have a conversation with one of our bigger portfolio CEOs cause he had amazing talent person that we found. He was like, dude, she's trying to negotiate. If you said, if she loves this job, why doesn't she just take the job? I was like, a players know their value. And it's now, he said, the all time best hire he's ever had. And he almost didn't hire good. Founders know that it's about the size of the pie, not the shape of the slice. The founder of the company, when they go public, has on average 12% of the equity in the business when they go public. All right, now most people would say that if you founded a company and then it went public, that you probably are very, very wealthy. So those founders understood something that maybe you didn't and definitely something that I didn't when I was earlier on, which is that it's about how big you can make the pie. And the more people who are incentivized to grow the pie, the bigger the pie gets. Jeff Bezos doesn't have 100% of Amazon. Warren Buffett has 30 something percent of Berkshire Hathaway. Elon has 20% of SpaceX. I'm going to ask you a visual question. Would you rather have this slice of pie or that slice of pie? So it's not about the shape of the pie, it's about how big it is. And that's what we ultimately care about. And that was a big belief that took me a long time to break. As a small business owner, I wanted to not give anything away. But it's amazing how much more discretionary effort you can unlock when people feel like owners. All these things put together go to create the first part of the mosi Lisa. So let's talk about piece number two, marketing without the founder. So this is me marketing thy business and sometimes even being in the ads and the videos and making the content, whatever it is, that is not an asset. That is a job. This, if I still own it and still happening is an asset. That's the difference. And this is what the investment banker friend of mine was explaining to me. He said, well, number one, you don't have a leadership team in place because it's just you and your wife. Number two is that urine's every single ad. If you leave, how do we know we're gonna still get customers? I had to step by step fix this with my own business so that somebody else could own it. I started filming ads with my general manager, so we'd film ads together. And he told me later that the first time we filled ads, he was like terrified because of course he wasn't gonna be as good. Because I've been doing it for a decade, right? Like I've been recording ads for my gyms five years before that. And then I'd been recording ads for gym launch for another five years. So, like it been a while that I'd been on pitching stuff and so I would record all the ads and then he would follow me and do the exact same ones. And when we started running them, surprise, surprise, mine still did better, but we still ran the ads and he still came with me to do the ads in every session. And guess what happened next? He got better. And over time he would start having ads that outperformed mine. And the way that we transitioned it was I did them and then I would do some with him. And then those were the ads we ran in the beginning. Only Alex, then Alex, plus Kale. Kail's my CEO. He's still there. To Alex Kail, separately to Kale. So that was the transition we went through. Think about this from a branding perspective. Brand is about associations. And so if people associate me with this brand, what I need to do is transfer that association to someone else. And so I say, hey, we're in this together and we run ads together. And so people are like, the brand, Alex, this person. Brand Alex this person. And then eventually you, you can remove Alex and you have that person in the brand. This process, just from here to here took about 12 months. And you might be like, well, Alex, like you have a personal brand. Why are you doing this? Well, there's a couple things. One is that you can separate your personal brand from your business. For example, you've got Andy Frisella. Has Andy Frisella and he also has Firstform. And they are somewhat different, right? You've got Vaynermedia and you've got Gary Vaynerchuk, you've got Alex Formozi, you've got acquisition.com, but I actually have another level of removal because all of how I actually make money is not ads for me. It's companies that we own. I can sell the assets that we have in our portfolio without it affecting me. Like, somebody who buys one of our companies isn't going to be like, well, Alex doesn't come with a deal. Well, I don't actually influence the business. I influence how I get deals. You're always going to be you, and so your personal brand is always going to stay with you for the rest of your life. You should want to make sure that it's not intertwined with your primary source of making money. Mind you, that's if you want to sell. If you don't want to sell, then don't worry about it. Just go make money. It's fine. Not a big deal. So I don't know about you, but I think we got the corner of my hat done and Mosulisa getting a little feisty. So the third part of the mozulisa that my investment banking friend said that I didn't have and needed to fix was delivery without the face of the founder. Okay, so you're not in the ads anymore, but if I'm the one delivering service to customers or I'm key to the delivery. And so you can think about this in two different ways. One is I'm literally there doing the thing is, if you are the face and people come for your expertise in some way, then this can be difficult. Now, sometimes it's just your expertise is innate in why the product is good. So, like, if you're a software designer and you're just a genius software designer or you're like an amazing editor, even though your firm may sell this and it doesn't actually have to do with you, if you own the customer relationships, for example, like, they only work with it because they love you or they love your way of designing things, those are all different examples of why a founder would be used in delivery and a risk factor for somebody else coming in. So what do we need to do? Rip my head off. We need to make this with cool, man. There you go. A lot of people think that when they're going to replace themselves, they need to find one person to replace them. But finding another human being who has lived your exact life is impossible. But it's much easier to find two or three people or five people who've lived portions of your life in different areas so that together we're going to make this look even weirder. You have a hydra of people who can deliver value to the customer. Now, here's how we did it. I started edifying different people. Now, how I did it was we called them subject matter experts. So I found people really good at one component of what I did. I might say, this guy is my subject matter expert of sales. This might be my subject matter expert of retention. This might be my subject matter expert of marketing. And so what happens is people will identify that person as an expert in that particular area, but not necessarily overall. Now, they still could be good overall, but how you brand them within your world matters. Number two, the people that I did put even more edification into had equity in the business, which also means that non competes hold weight if there's equity. And to give you an idea of how involved I was in the beginning to give you some hope if you're like, man, what? Easy for Alex, right? The first 400 days of gym launch, I did a Q and a for 90 minutes every single day. So I just said, hey, if you want my help, I'll hop on with you. But I say this to say that, like, I had a huge amount of demand to show you how much of a contrast this was from day one, today, whatever it was, and put yourself in the shoes of the buyer, the investor. Why would I want to buy a business where the guy who's literally delivering all of the value is like, hey, can you just pay me for the next six years of value? I'm not going to provide. No, of course not. Right. It wouldn't make sense. I will pay you for all the value that your company will provide to customers in the future if it doesn't require you. And that's why this affects the risk factor within the business. Remember this little variable, we got customers. Because remember, if you lower the risk, the lower you make the bottom fraction, the bigger the overall value. So a mistake that a lot of founders will make is that they'll start selling kind of time with them one off things. Now, mind you, if you're in the beginning and you need to make money, do what you got to do to survive. Don't get me wrong, I'm just talking about how to maximize enterprise value. It's really just more you doing a job and getting paid for it, which is fine. It's just not wealth creation, it's income creation. So point number one is that it might not be one person, but many people who end up fulfilling your role within the company. Number two is that you want to edify each of those people to the customers in their respective places. Number three is that you want to transition me less than them and then eventually just them. And then number four, if they're high enough up, then you can consider giving them small slices. Now, mind you, when I'm saying giving equity, I'm not saying like give 10%, I'm saying you can give a half a percent or 0.1%. These people said that they're still tied into the business delivery without the face of the founder. Boom. Next up, we have this part of the background of the Mosulisa, but incredibly important multiple reliable acquisition channels. So right now, if your business looks like this, if one day someone comes in and this just snaps and you have no way to feed your family over here, all your family, they all die because you can't eat. Right? Very sad. So we don't want to do that. What we want to have is multiple lines in the water. That's, you know, a fisher with lots of fishing pole sticks. All right, so there's two elements to this. You've got multiple and you've got reliable. And both of those make up the fact that you have a more valuable business. The idea here is that you want to know that you are not going to have your line snap because you get a ban on some platform if all you do is run Facebook ads. If for some reason tomorrow Facebook says, I ban you, because I'm the God of media and I don't want you to make money anymore and your entire business dies. That's a significant risk. The same degree, if you make content on YouTube and that's your primary way of getting customers, YouTube can cancel you. Or let's say that you have a emailing method that gets customers in the door. If you're doing outbound. Well, yet again, if for some reason you have, you know, your whole domain gets shut down and then your deliverability tanks. Now mind you, all of these things have solutions. Entrepreneurs are problem solvers. It's like, well, then I create a new alternate YouTube channel or I create a new Facebook account under my wife's name and that one we were able to run. Or I spun up a new domain so that I could deliver emails. Like, there's obviously solutions around this, but the more of them you have that are consistently getting customers, the less likely an investor is going to think, wow, this can go from 100 to zero overnight. All of these things decrease the risk of the business. And so for us at Jim Wallets, I had Instagram paid ads, I had Facebook paid ads as my only two channels, right? But what ended up happening, believe it or not, was that during COVID these actually didn't perform super well for me. And so I had to find another way to start marketing. And so I actually had a guy from a competitor company approach me and he's like, oh, I work at a gym company that I hadn't heard of. And I was like, huh, that's weird. I was like, well, if you don't mind my asking, like, what kind of revenue you guys doing is like, oh, we do about 10 million a month. And I was like, okay, so you're telling me that there's another person in my exact space that's doing more than we are and I don't even know who they are. I was incredibly intrigued and I was like, well, how do you guys get customers? He said, oh, we're all outbound. And so of course I was never getting cold calls from them because I'm not a gym owner, right? But he had a team of 30 plus guys who were cold calling cold emailing to get customers. And I was like, well, do you think you could build out the outbound system here? And he's like, yeah, I'm pretty confident. He's like, it would take me like, you know, some time, but I think I could do it. And I was like, alright, well here's the deal. I'll give you the job offer, but you're going to start your own department and it'll just be you. And you're going to have to start everything from the ground up. And so the long story short is that 12 months later, it was 50% of our revenue. By doing that and by mending this, we had outbound as another method. And because we had three different ways of getting customers, the acquiring company was like, okay, I feel good. And it wasn't just like, oh, we get 5% of our customers from this. Half our customers came from outbound, half our customers came from inbound. And they were like, this looks stable. And the thing is, is that over time this has been a lifesaver because sometimes stuff does happen. Ads get disapproved, one of your top setters goes on vacation or the manager is not doing a good job who you just put in there. Like there's things that can break on either of these. But the more that you have that are reliable, the more reliable the entire business is overall. And that decreases risk, which increases the value of the company. And doing this, provided you don't drop on your main channel because of your split focus, also increases the number of customers you get. So this having multiple acquisition channels both increases number of customers and decreases risk, which is why it can be incredibly valuable. It is however, one of the most time consuming and focus draining things you can do as a business owner. And if you think about timing. So I'm going to give you tactic number one is that 1, 1, 1, 1 offer, 1 avatar, 1 channel, and that's until you hit $1 million per year. If you're not there, don't worry about this. You're not trying to build a valuable enterprise yet you're trying to make money, which is fine. Once you're here, I still would say just increase how much you're doing of these. Once you get to about here, you can consider getting another channel going. And oftentimes if you do it right, you can have the other channel support the primary channel. If I said I want to start making content, if I have content, content supports outbound, content supports paid ads, and sometimes content itself can become paid ads. And so these things do work together synergistically. It just takes resources. And my recommendation is if you're going to start it, start with someone else doing it so that you don't stop doing your main job. So number two is what I just went over, which is the first thing that I'm going to do after I have something working is, is more and better okay, we have paid ads, can we do more paid ads? Can we spend more money? Can we make more ads? Can we make our ads better? Can we introduce different call outs? Can we introduce different hooks? Can we create different value? Can we get a more voluminous cadence of recording in place? That would be ways of doing more. If I was doing outbound, more would be more calls, more dials, more setters, whatever. Better is improving the scripts, improving the training, improving the offer we give them on the phone. This is the lowest risk way of growing the business. We already know it works. Let's do it more, let's do better. To the point where I think my team is probably tired of me saying more better. And number three is don't kill your business. In trying to save your business, if you decide to go after the second channel, understand that it's gonna take a long time. And so if your main channel drops while you're trying to start your other channel, you basically create the problem you're trying to solve. You want to one, be patient before you do it and be patient once you start. Number two is look at progress more than outcome. That's what I would highly encourage you to do. Cause it's gonna take time. So like, even if you're starting paid ads, the first thing would be is like, are we getting clicks? Great. If you're getting clicks, then it's like, okay, are we getting opt ins? Great. If we're getting opt ins and can we get scheduled? Okay, are they showing okay, are the people who are showing the right types of people okay? Yes. Great. If they're not okay, what do we need to do to tweak in the targeting or tweaking the messaging across the whole funnel? Okay, we're getting on the phone with the right people, but they're not buying. Okay, then we need to add some more friction, we need to add some more selling aspects, et cetera. Right. Look at the progress, not the outcome. Because if you look at that, you might think, wow, this took two months. We didn't even make any sales. But think about it this way. Let's say it costs you $10,000 a month to invest in a new way to get customers. And it takes you six months to make your first sale. Let's say a sale is worth $1,000. Well, that costs $60,000. But when you do get that first sale, you got a 10 to 1 return on that. Once you got all the tweaks done, well, in that next month you could spend 30 grand and make 300 and get 5x on your initial investment. Think about this as investing in a machine that prints money. Of course it's going to cost time and cost money to create the machine, but the machine will pay for itself over and out. Which is why business overall gets higher returns than anything else. Because there are very few other machines we can put a dollar in and get 10 back, or put a dollar in and get a hundred back in a month. But business, you can, but it costs money and time to figure it out. My third point here is that I would say use others. And of course there's examples where you could say, okay, I started this one channel, I got a leader in place and I'm going to figure out this next channel. That's a way of doing it as long as that person continues to run the thing without you. The way that I have preferred to do this over time is that I will bring someone else in to start the thing and I will consult and give feedback, but I want them to own it so that I don't just create another problem that I'm going to have to solve in the future, which sometimes means that it's going to take longer. And I have to make sure I'm focusing on the progress. As long as every week we're moving towards this, we'll get there. And if you're looking at, well, okay, well, which one would I do next? Which is a great question. All right, which is number four? My recommendation is look at where people in your industry already acquire customers. So if you are a direct to consumer brand and you sell something that is weight loss focused, well, then paid ads is a huge source for people in that industry. And you can be confident that if it's paid ads and it's in this media type for businesses of your size, like don't look at Weight Watchers and be like, well, Weight Watchers is running super bowl ads, so I should try that. Probably not the best first step, right? But if you're looking at other people who run local gyms, then you could say, okay, well, companies of my size in the space are able to acquire customers here profitably. So if they can do it, so can I. And that's kind of how I look at it. Until you've like done this multiple times, just look at what other people are doing and you can iterate off that, hey, real quick, guys, if you're a brick and mortar chain, you've got two, three, five locations and it's a working model that's doing at least a million dollars a year Profit maybe two, three, five million dollars a year. We're super interested to partner with you and help you scale and take it to the moon. So if that's you, go to acquisition.com, we'd love to talk with you, provide some value and if it makes sense, invest and take it to the moon. So with that being said, enjoy the rest of the show. Multiple reliable acquisition channels like content tile number five is reliable recurring revenue. So let me illustrate visually why this is so important. In a normal business, what might happen is you would sell a customer this month and they're worth a thousand bucks. And the next month you sell another customer's worth $1,000 and make another thousand dollars this month. And guess what? Month three, you do the exact same thing and make the exact same amount of money. That is what most businesses do, which is why they are not valuable. Now, let's say the exact same scenario, except in month one, you sell a recurring customer. A customer buys this month, he buys the next month, he buys the month after that. Well, in month two, we're still going to sell another customer. So we're going to sell that customer and guess what he's going to do? He's going to pay the next month too. In the third month, we're going to sell yet another new customer. Boom. Now, if you're comparing the before and after here of old way, new way, this is just three months. Now imagine 36 months or 60 months, this thing would be this high and this would just still be the same. And so when you see a business that's plateaued, it's because they sell the same amount of customers every month and those customers are worth the same amount to them. And they do not grow. They've hit a point of homeostasis. Recurring revenue businesses, if designed properly, will continue to compound. And so this is why it takes time to build big things. And so one of the biggest breakthroughs that I had in my business career was understanding, not that you should have a subscription and why it's not just about having a subscription. Because let's say you get a subscription, everyone cancels after the fourth month. So this is the fourth month, but every month after this, we're going to have the same revenue. So this is going to stay the same because they're all worth four months. So I'm going to stair step up to four months and then I'm going to plateau again. What you really want is something called net negative churn. That's a fancy word, but it basically means that every single month if you acquired no new customers, you would still make more money. So an example of this would be something like Salesforce, which is a company that's valued at a gazillion dollars. And the reason for that is, let's say that this month they have a hundred customers. Now, they may lose one or two customers this month, but the remaining 98 customers become more valuable to them the next month than they were that month because those businesses grow. And the better designed a business model is, the more aligned your customer's outcomes are with your own outcomes. And so for Salesforce, they're like, okay, well if you have more seats or you have more email contacts or more revenue that's flowing through the software, we get a bigger percentage of that. And so the remaining growth that they tie themselves to, they get their claws in you, allows them to continue to grow. And so when they acquire customers, think about this, if a customer to them might be worth a million dollars, how much can they spend to acquire customers unlimited? That's the difference here, is that we want to have revenue that will not only stay, but also grow. And that's kind of the two levels of this. Like Netflix doesn't really have a lot of expansion revenue besides you getting add ons for your family or whatever. Right. But they just hope that you never cancel. And that's more common in consumer businesses, in B2B businesses, because you have way fewer customers, you want to usually have much more expansion revenue opportunities tied in and in a way that not only gets them to not cancel, but actually buy more. So remember earlier we talked about enterprise value. So enterprise value is the value of the business, but usually the value of the business is measured by a multiple on earnings. Meaning how much money did this business make this year or the last year? And what is the multiple that we'd have? So if I made a million dollars in profit and I said the company was worth $5 million, then it would be a 5x multiple, right? And so in public companies, they call them price to earnings ratios. Let me show you some companies that you may have heard of. So you've got Netflix here, we've got Amazon here, little Jeffy B. And we got a little Billy G, little Microsoft. And so you might be like, oh, all of these companies are super valuable. And they are. But you might not know how much more valuable investors value them compared to their earnings. And that multiple is purely based on how reliable they think the future revenue of the company is and how likely it is to continue to grow. So Netflix right now trades at 44 times earnings, man, wouldn't that be nice? You made a million dollars in profit, someone paid you 44 million. What a steal. Microsoft trades at 29 times earnings. A little less. Kind of interesting. Good old Jeffy B is getting 310 times earnings. Now, there's a couple of things here. Part of the reason that this is 310 is because Amazon actually runs slim margins. And that's by design, because they continue to reinvest in growth and they look at their returns on capital. And so investors know that at any time, if they wanted to make the business more profitable, they could. They choose not to make it super profitable, which then compresses the amount that is being multiplied for this value. So there is a little bit of a game to this in terms of understanding why the multiples are so high. But when us as business owners, you're probably not going to be in any one of these scenarios. Realistically, you're probably looking at 1 to 4 times earnings if you're a small business owner that's doing less than 10 million a year. If you're doing over 10 million a year and over $2 million a year in profit, then sometimes that multiple can move up again. It depends on some of the other factors we're talking about today, which is, and you check all the boxes, then you do own an asset that's valuable. And that's the point of this whole thing. Part of the reason that Amazon also has a higher multiple is that Amazon has a lot more expansion opportunities. So think about this. They have Amazon prime and their whole marketplace, but then they also have like AWS and they've got Prime Video. They could literally sell everything. So they have tons of expansion opportunities. Netflix has significantly fewer expansion opportunities. And so it's not valued as highly. And that's mostly just because they only really have one core thing. And the other piece is, how defensible is this? How likely is it that another Netflix gets created? Well, we already have proof of that. You've got Disney plus, you've got HBO Max. They used to be this category king. They were the only person. Then everyone else was like, oh wait, we can just go hire production studios and stream stuff too. We need to get a couple big brands behind us. Disney was like, we'll get Marvel and Star Wars. And then they weren't the dominant, they were just a channel. Whereas Amazon, it's virtually impossible to recreate what Amazon's done. And so they also have this big competitive mode around them, which makes it almost impossible for anyone to beat them at their game. And so they have this base way of holding on to all their customers. And then all they're going to do over time is just add more and more and more ways, like buying Whole Foods, to make money from their customers. But there are nine Cs of recurring revenue. And when I think about this is like, how can I increase how sticky it is? Or how likely someone is to continue to pay me for whatever I have? Number one is consumption. Are they actually using the thing that they are paying for? Right. One of the interesting things I found out in the gym world is that almost everyone is willing to pay for a gym membership that they use. And almost no one is willing to pay anything for gym membership that they don't. The next is collateral. Think about a storage unit. They've got your stuff, like you have to keep paying them. A payment processor has all of your customer data and they process all of it. They make it very difficult for you to take your credit card info, which is encrypted from their payment processor, to somebody else's. And so they have collateral, they have some of your shit, and so they force you to keep paying them so that they keep making money. The next is cost of switching. Is there a way that I can make it difficult to leave? Don't think, how do I make my customers life harder? More think how do I make my thing so much better that they would lose all of these benefits if they left? If I have 10 friends in a community and I pay for that community and then I leave and I meet with them in person on a regular basis, I'm going to lose that. So there's a high cost of switching. Next is choice. I don't want many other choices like what I have available for them. If you have a patent or, or you have some sort of trade secret that makes it difficult for other people to clone what you have. So your N equals one of the only option that someone can have. Next is control the money flow. This is more in a B2B scenario, but if I have the ability to control the money flow, that's why like payment processing and software always tries to get the ability to process your payments for you. Uber processes their payments for their drivers, doordash does for the restaurants. If you can control the money flow, you have a lot more leverage for them to stay with you. The next is a softer one, all right, which is cause charities, movements, things that you associate with. If you have two different options and you're like, you know what this one does A lot of good in the world. I align my identity with their values. I want to continue to pay there. And I hinted at this one before, but community, right? Like community is a way to increase the stickiness around whatever the recurring membership you have is, right? Whether it's a gym or it's an online subscription. If there is a community now, you might be like, well, there's no community around Netflix. You're right. But do you think that there's a community around Stranger Things? Hell, yeah, there is, right? And you want to be able to say, on Monday morning, dude, did you see the new episode of Stranger Things? It was wild, right? And so you commune with other people about the content. Next is contracts. And that's the same idea as commitments, right? So if I say, hey, you're signing up for a 12 month membership, here's the contract, that's your commitment, then you're going to get stickier recurring revenue than you are. If it's just month to month, you can cancel whenever you want. And the last one I'll give you is communication, which is literally just talking to your customers more regularly. So in the gym world, we figured out that when we said we're going to run events on a regular basis, Belly Blast or Big Booty Boot Camp or whatever it is, our churn would decrease leading up to the event because they had something to look forward to. But then after the event, it would go up. And so what do you do? You just always have something for people to look forward to and you communicate that regularly. So I give you nine ways to do recurring revenue. There are more, but that's a good place to start. You think we've checked this one off? I think so. This looks like a nice green corner. That was anticlimactic. So our next one is part of my bicep or Moselisa's bicep. Diverse customer base. So having a diverse customer base, let's imagine that this is your customer base. You've got all these little fishies here, and then all of a sudden one day, boom, Mr. Whale comes along and says, I want to give you so much money because you're a small business owner. You're like, man, I got to win this whale. I want to make this money. And hey, don't get me wrong, by all means, go whale hunting. But the thing is, is that this actually materially changes your entire business and your business strategy. If you continue to acquire customers here and then you have to keep delivering on and hire more people to deliver for this whale, you've kind of got this weird business, and if I'm a buyer, then you really don't have this business. These are almost irrelevant. It's like having only one customer. And if that whale all of a sudden gets sick or just doesn't like you, or one of your reps say something rude and he says, I'm going to swim away, then you're sad, and then you're like, what do I do? And now I have all these people that are over hired for, etc. Etc. And so if you had the choice between this with a couple of little fishies underneath or a whole school of fishies, then as an investor, you're going to want this because it's more diverse. If I lose one fishy, it's not really going to kill me and I can go get another fish. But if you're thinking, what else could I do? Well, I'll tell you. If you decide that you want to do this whale thing and you realize that whales are worth more and you actually enjoy the process more, then go get a whole bunch of whales. You will still get a diverse customer base of huge clients. And these are some of the most valuable businesses is if you can get 10 or 20 or 100 whales, then everything's based on percentage of revenue. Whale is relative. If you get Google as a customer, they're a whale. But if you have Google and you have Amazon and you have Netflix, all the other big companies, then all of a sudden they're just little fishies too. It's just you have a way bigger pond for your fishies to be in. And so the idea is that you want to have no. 1 customer be greater than 20% of your revenue. Ideally, for me, I don't like Anyone more than 5% of my revenue as much as the short term revenue of having a whale come along. Sometimes these guys can cannonball and create too big of a wave in your business that might actually sink your ship. And so the risk that we're trying to address here is what if one customer leaves? So let's say you've got $100, whatever. You can put whatever zeros you want on this. All right? This is your business today and this is your profit. Cool. I told you that. What if a whale is 30% of your business? Here's Mr. Whale. It's like a worm. Anyways. Now Mr. Whale leaves, so does your profit, and then all of a sudden you're breaking even. So even though the customer was only 20% of your business, it might be 100% of your profit. And so if you can lose 100% of your profit by losing one customer, that's super risky. And so that is why I prefer to keep it at 5% or less of all my revenue coming from one specific client or customer. I think there's two big decisions you have to make when you're thinking about diversifying customer base. One is, do you take the whale on to begin with because it may create too many waves in your business, that you basically have to create a business around the whale that if the whale leaves, you then are left with all these costs that would sink the business if you didn't have them. So you become really reliant on them. So decision one is whether you take the whale on. Decision two is that if you take the whale on, are you going to then go get more minnows or are you going to go get more whales? Because it might make sense if you say, hey, strategically I think it makes sense for us to go upmarket, go after higher value customers and have fewer of them. And so I'm willing to build this infrastructure for this one customer so that I can have 10 more of them. That makes sense. And so if you said, this is my business, this is my avatar, this is my niche, this is who I'm going after, then a big part of focus means saying no. And sometimes a big shiny whale is just another woman in the red dress who's trying to distract you from your ultimate goal. Because fundamentally, if you had a business that just served that one avatar, you should just go, 10 exit. This will create all of these difficulties that will distract you from the main thing. I don't think there's anything else to add here. So let's stick this puppy on diverse customer base. Forearm. That's my forearm and my bicep looking good forearm piece. In reality, number seven, automated metric tracking. Every business needs to have metrics because if you don't have data, you can't make good decisions. And you'd be amazed how much smarter you seem if you have data to support what you do. It's one of the first things that we do when we bring on a portfolio company is get this stuff in place so that we can make better decisions for the future and ultimately give that data to an investor who might ultimately want to buy it for a significantly higher multiple in the future. So what I'm going to do is demonstrate this in the real world to give you an example and call my director of brand. This could go horribly wrong. What's up? All Right. Pop quiz test number one. How many registrations do we have right now for the book launch event? We have 291,734. Almost 292,000. That sounds nice. Thank you, guys. How many, how many affiliates? How many people are promoting the book on our behalf? It's over 10,000. I think it's 10,800 and something as of yesterday. As of this morning. As of this morning, Yeah, I can get it. So 10,800 as of this morning. All right, that's, you know, we're two hours away from that real time stat, so 10,813 to be exact. There you go. 10,813. Okay. Thanks, man. I appreciate you. So that idea is automated metric tracking. And so he would only be able to say that if he actually had dashboards in front of him that would allow him to answer those questions. If he didn't, he'd have to be like, I'll have to get that to you tomorrow. And I'll have to look at three different Google sheets and then count manually how many people are doing X, Y and Z. Right. And the thing is, is that the more difficult it is to collect data and report on data, the less data you end up reporting on, which means that you have fewer and fewer pieces to make decisions off of. And so I'm often amazed by how little data is collected in most businesses because I'm like, how are you making any decisions? And for the most part the answer is they're just guessing, which is a terrible way to make decisions. So one of the best things you can do is switch from a big conglomeration of Google sheets to actually fully integrating some sort of CRM into your business. And this is where the things like Salesforce and HubSpot and some of these other platforms exist, is to help small businesses become medium sized businesses. It's worth paying well to get it implemented in the business so you know data of what's going on in real time so you can make real time decisions. Automated metric tracking affects how many customers you get, lifetime gross profit per customer and the risk associated with everything. Because if you don't have tracked metrics, you won't know what your lifetime gross profit is. You won't know where your customers are coming from or what percentage of revenue each customer is worth or what your cost per lead is. And so if you don't know what the basics are, then how can you make the advanced moves? If you don't even know what the basics are, how do you improve them? And so the first thing if you want to do a grows business is know what current state is. But again, I'm amazed at how many people don't even know what's going on in their own business. If I'm like, hey, how much profit you make? That's something. They're like, I don't know. I'm like, that's Friday. You should know these things. You can tell how skilled someone is at anything based on the number and quality of the metrics they track. A lot of, like, marketing founders who are really good promoters are like, oh, our product's amazing. And I'm like, cool. What's your time to value? What's your churn? What's your onboarding? You know, process? And I start collecting, you know, asking just for stats around product. And they're like, we have a low chargeback rate. And I'm like, that is not what a good product means. If I said, hey, what's your cost per impression? What's your cost per lead? What's your conversion rate? And they're like, oh, I got that. You need to be as in depth about your product and your delivery as you are about your acquisition. And if you know the quality and quantity of stats on the front end, you should be paired in terms of how nuanced you are on the back end, because the people who are really good are that nuanced. And that is my biggest indicator. If I'm interviewing for roles by the way of knowing if somebody's good or not. If I'm interviewing for a sales manager, for example, and I say, hey, you know what metrics you'd be tracking? He's like, I like to go by feel, you know, manage the vibe of the team. I'm like, that's not bad. That's fine. But like, what metrics do you track? And they're like, you know, closing percentage and, you know, cash collected. I'll be like, okay, cool, that's a great start. Versus I have a guy who comes on and says, show rates. I like to count offer percentage. I like to count what types of objections were getting on our nose. I like to count number of calls required to close. I like to have cash collected. I like to have cash as a percentage of total ticket value. I like to know what my speed to contact is. I like to know what my speed to close is in terms of first contact until they close. All of a sudden, I'm like, okay, this guy gets it. He's looking at a number of different variables that are highly quantitative. So that he can then make far more targeted improvements in the process so that we can make more sales. This is actually supposed to be for another video, but I'm going to show you this in real time. So this was actually a before and after of one of our portfolio companies. And so what we did, we said, hey, let's track data. And so then we started tracking data. And then they were like, oh, gosh, these are our stats. And we're like, okay, cool, now let's improve it. So to make these improvements, for example, for the show rate, we have a huge checklist of, like, 22 things that we do. Many of them are automated that we can do to increase show rates. And boom, 50 to 70%. Now you might think, oh, that's a 20% improvement. That's not a 20% improvement. That's a 40% improvement on the original number. So, like, wow, that contributed a lot here. From close rate, we then started going through our drilling process to train closers and our scripting process so that we can get to the sale faster so we can close a higher percentage people. And that showed in the numbers. So from an improvement perspective, this was 14%, but 14% of 27 is a 50% improvement in sales. And then the bottom is the end result. So one of the things that I have is no silver bullets, many golden babies. It's a game of incremental improvements for us@acquisite.com because we work for the same types of companies, we know what it takes to improve show rates. Like, we have all the best practices and we just say, here's the 22 things we do, and we're going to implement all of them one by one. And. And that's the result with close rates. We're like, these are all the things that we have to do in the business. And one by one, we tick them off. And so it becomes very clear what the next step is. Because, you know, if you do all of those things, the numbers will go up. Why do we feel that way? Because we have evidence. So, number one, pick the platform that you want to start tracking the data. Number two, pick the data. Like, what data do you want to actually track? Some people call it KPIs. I don't really care. Pick the data that you want to track. Number three person. So you're usually going to have somebody who's going to be implementing this platform in your business. Someone needs to own it. You need to have one chest to poke or throat to choke or whatever way you want to say it. And then Four, game plan. And the way that we do this is we operate off the theory of constraints, which is we look at these numbers, right? So let's say that we had just collected. So we picked our platform, we picked the data that we wanted to pick, and we had somebody who's making sure that this is happening. Okay, cool. Which of these do I feel like we have the highest likelihood of improving the fastest? Right. This is going to be the constraint of the business. And the way that you see what the constraint is, you can add 5% or a fixed percentage to any of them and see which one of those will actually yield the most throughput. Meaning if I had 5% here, 5% here, 5% here,. 5% here, which of those 5% increases actually change this number the most? And the answer in this instance would be this one, which is the lowest number. So if I'm looking at this, and my, my next lowest number would be cash collected, and the number after that would be show rate. And so I would usually attack it in that order so that I could have the biggest bang for the buck for the things that I do. Which one of these is the smallest? That's the one where if I, if I make an incremental change, it'll actually yield the most outcome. Forearm we're getting close. We've got ourselves a nice corner piece of the Mosi Lisa, which is high cash. Profitable, growing with a good story. So let's do a little physics lesson. Sir Isaac Newton's first law of physics was an object at rest will remain at rest, and an object in motion will remain in motion until another force is acted upon it. And so it's much the same with businesses. You want one that's already in motion because you know that it's more likely that a growing business will continue to grow than a business that's not growing will start growing. Because you have to exert force to a business that isn't moving in order to get it to move. Stay. A business that has high cash flow means that it kicks off cash in excess of what it needs to reinvest in the business to remain competitive and grow. The second is that it is profitable. Now you can have a profitable business that doesn't create a lot of cash flow. For example, if I deliver services and I have to wait 90 days in order to get paid, then I might be profitable on paper, but not produce a lot of cash, because by the time that cash hits, I have new liabilities that I'm incurring and growing. Is that a Business gets bigger every month or every year, right? Pretty simple there. And ideally with a story, because if you have a story, investors like anybody else, are customers and they like to hear stories as well. So let me give you a very complex visual of what this looks like. You want a business that goes like this and not like this. I'm not saying that a company cannot be valuable if it doesn't have high net free cash or it's not profitable. HubSpot, for example, I'm pretty sure isn't profitable and it's a public traded company worth hundreds of billions of dollars. I also try to cater my content to my audience, which is 99% of business owners aren't Netflix or aren't HubSpot or aren't venture backed with tons of money that are hyper scaling. Most of them are like us, are self funded in one way or another, or have friends and family who invested in their business to help them grow. And those people have lives. And I will say this is that we hear all of the Netflix stories and the HubSpot stories, but we don't see the graveyard of the many others that didn't make any cash flow for six years, seven years, and they never quite became HubSpot. And so the founder spent seven years of their lives, never really took a paycheck out of the business and then ended up with nothing. And so for me, especially if I'm investing in a business, I'm a cash flow investor. I want to see how much money does this thing kick off after we have to reinvest in the business to keep it competitive and even with companies that have high demands on capital. I'll give an example. Like we, we love brick and mortar businesses. So like, by the way, if you have brick and mortar chain, we crush those. Those have very consistent returns on capital. Meaning it cost me $100,000 to open a facility and I make $500,000 a year in profit back. And then I would say, okay, cool, well that's an amazing return on capital. How can we take that 500 and then open 5? And even in those situations with an insane return on capital, I would still usually recommend that the founder take a fixed amount out of the business on a monthly basis to de risk them. Now it's a 100% personal choice because risk and how much you're willing to expose yourself to is personal. But for me, I'll tell you a quick story. When I had my gyms, I invested 100% of all my profit into opening locations. I then decided after A few years that I didn't want to be in the gym business in that way anymore. And so then I basically fire sold my gyms to then start gym launch. And so I could have made a lot more profit during that period of time, and I could have sold them for a lot more than I did, but because when I wanted to sell them, I wanted to get rid of them. And so I think in total, I think I made like 250 or $300,000 from the sale of six gyms, which is not a ton of money. I'd put way more than that just into building the gyms. I encourage founders to take cash out. I still prefer to put human first and say, I am willing to sacrifice a little bit of growth for you to like, take care of your family. For example, we started talking to a company which is a teeth whitening chain in 32 locations. By the time we actually ended up closing the deal, I think this is probably like four months end to end, which is actually pretty decent in terms of timelines. They had grown by 30% in that period of time. Right. And this is what made them attractive to us as an investor is that they had. They were high cash flow, they were profitable, and they were growing. And they had a cool story about how they wanted to continue to see growth. And this is my bread and butter. And I will be excited to tell you what happens in 12 months with these guys because I'm very confident about our playbook. But it doesn't cost a ton of money to open a teeth whitening studio relative to the amount of profit that they kick off. And so because of that arbitrage, we get really good returns on capital. Meaning instead of investing in the stock market and putting, you know, $100 in and getting $10 back, I could put $100 in here. And because of also how quickly they become profitable, like, how quickly can I pay off a new location? Well, I could pay off a location in two months. Okay, well then that means that I can compound six times in one year off of one location. Now, when you have 32 locations, and that's why they have so many so quick, it can get really big really fast. So when you're building a story for a company, you usually want to track the story to a trend. Meaning, like, AI is a trend right now, here's how AI will help us or how AI will not affect us is a great way to demonstrate a story around why somebody should expect to continue to see growth in the business. So, like, if I have A haircut chain. I could probably make a strong argument that people are going to still need to get their haircut. Now, if I'm in a design firm, I might have a harder time arguing that AI is going to not affect my business or flip side. I am going to try to put myself out of business and say we're fully leaning into AI and we've already cut headcount by 50% and 10x productivity using these tools. And so now we're even more profitable than we were before with higher cash flow. So the idea is you want to track the trends that you align with. That will give you tailwinds to get one of these stories and not one of these. I'm going to give a little. A little nug here. One of the first things I'm going to give you a little insider secret that I do when I go into a brick and mortar chain, which is probably my favorite thing to invest in, is I look at their whole product suite. So that means the products and services that they sell out of the facility. And I'm going to look at two things. I'm going to look at absolute gross profit and I'm going to look at gross margin. So what's the percentage? Right. Those are the same thing. Once a percentage, once an absolute amount. And in general, I look at what percentage of our sales are coming from each of our products. And then I think, okay, this one has the highest gross profit and the second highest gross margin, but we sell it the fifth most often. How can I recombine these things so that it becomes the first thing that we sell most commonly in the highest volume? And sometimes just making these types of tweaks can make massive differences in the amount of profitability and cash flow the company generates. And so this is just one golden BB that we do in the process. If you don't know what your gross profit is and your gross margin is on every product you sell and what percentage of your sales come from each, do that and then reorganize your sales process to emphasize the ones that give you the most gross profit and gross margin. And maybe consider down regulating some of the ones that don't. Weird green tile. High cash flow. Profitable story of growth. Lockett in next tile. Audit ready financials. So exciting. I'm going to make this one a little bit short because I know this is where people's eyes glaze over. But if you think about audit ready financials from a risk perspective, if I'm a buyer and you say this is what your profit is And I have no way of proving that that's your profit. You could just make up a number of. If you have an audit ready financial, it means that a third party will come in and go through all your numbers. They will calculate their own measure of profit and it matches yours. If that's the case, then you have audit ready financials. A lot of times founders think that their profit is a lot higher than it really is. Their banker or their accountant oftentimes works for them. And as crazy as it sounds, if you make the profit look better for the founder, they are happier with you having a third party or making books that are third party ready for audit. And getting something called a quality of earnings allows you to say to an investor, these have been validated. This is like a blue check mark in terms of. This is really what I say it is. So let's talk about this in levels. Level one, have financials in general. All right, this sounds silly. And in the beginning, oftentimes you're just going to outsource it. You're going to have a third party who's an accountant or a bookkeeper in the beginning before you have an accountant who's just going to handle your books. Number two is you're going to actually upgrade to an accountant who's going to be doing this. And oftentimes this comes when you go from cash based accounting to gaap, which it just stands for Generally Accepted Accounting Principles. That's all it is. Right. Cash is just money in, money out. Like so if I sell a three month contract for 30 grand and I collect 30 grand today, cash based accounting shows that we had $30,000 in revenue today. GAAP says that we have $10,000 in revenue today as it's recognized over three months, and then 10,000 next month, 10,000 the month after. Right. And so GAAP smooths out a company's financials gap accrues for the cost and the revenue throughout the year. So that you can see over year, over year how much money is increasing. Right. It makes it easier to analyze the business. Level three of this is that you have audit ready financials. And this could be in house or out of house that you, that you get this set up. I've switched my perspective on this. I used to be all about in house accounting and in house financials. Now you do need somebody who's in charge of that function. But it just depends a lot on the business. If you have a service business that doesn't require a lot of capital expense, meaning you have to like invest Money and forecast cash flow thing like that, you don't need as advanced of a person for the business. If you have something that's like manufacturing, you need a very good financial arm because they have to manage cash flow out to collect goods, invoices that are coming from customers as things are getting delivered, payroll in between. And you're managing a lot of moving parts while also putting out orders for six months from now for stuff that you know you're going to need in forecast. So, like, it depends on the needs of the business. But I will say this. One of our portfolio companies scaled for three years. They went from, you know, a couple million dollars a year to a couple million dollars a month. And we got to this plateau point and I was talking to the CEO and he's like, I just don't know where the profit's going. Like, I just, I don't know if I have enough cash to open more locations or not. I just like, how many should I be opening? He's like, I'm just really struggling right now. And I was like, okay, I want you to pause. I want you to feel this feeling right now. I was like, it's because you don't know, you don't recognize this pattern. And I want you to recognize it for the rest of your life. Which is the feeling you have right now is a lack of finance. Like, you don't have the finance function built out and you don't have the support of finance leaders because if you did, then you would know what percentage of cash flow you could put towards it and how many locations you could have given the growth rate that you want. But since you don't know that lack of knowledge, that feeling of uncertainty is because you don't have that thing. It would be the same as like, I don't know where my next customer is coming from. It's like you have a lack of the marketing function. And I bring this up because you may feel this right now and if you feel that way, it might be because you're missing this. I know this one is the most boring, but it's important and you will literally not sell your business for anything that's material if you do not have this. Audio Ready Financials tile number10.5 million-plus in EBITDA. Damn it. The reason that this particular number is important is that most institutional investors do not want to buy companies that are smaller than this. And that's usually because to get to 5 million plus in EBITDA, and EBITDA is just a fancy word for profit for the sake of our video today, because usually to get 5 million plus in EBITDA, you do have a professional management team. It's not common to have a company that is doing that kind of profit and doesn't have a true management team that can run with that without the owner. This is more of a volume or size requirement. When you have a billion dollars, you're never going to buy a million dollar business. The time it takes for you to even analyze the business is not worth the time. And I'll tell you a fun secret. It takes about as much effort to help grow a $1 million business as it does to help grow a $20 million business. Same effort, arguably less, because you have more of an infrastructure, which is why people buy bigger stuff. Now, just to give you some stats around this, The S&P 500 has gone from 12x to 18x historically and then today it's 23. If you made $100 million in EBITDA, then you'd have a 2.3 billion valuation as a company. The reason I think this is so important is that a lot of small business owners overestimate the value of their business to them because their friends, amongst their friends, they're the richest people, they own a business that makes money. But in the world of business, when you're compared to Google, that's what they make in the first like minute of the day, right, is your entire year's revenue. And I share this stuff because I made these mistakes too. And I mistook the fact that I put years of time and effort into a business for it being valuable. You might be thinking, well, how long does it take to improve this stuff? Like if I'm at a million or I'm at 2 million, like how long does it take to improve? Well, if you have the right tools and systems and the right plan, the right who, the what and the how you can get the right outcome pretty quickly. Actually, have my team print out our stats for this. So our portfolio company, on average within the first 12 months, we increase revenue by 1.8x. So if you're making 10 million by the end of 12 months, you're making 18 million. Not bad. Profit increases by 3.01x on average. So you're making $2 million in profit at the beginning. 12 months later you're at $6.03 million a year in profit. I'm going to show you a little something that I haven't talked about publicly. The reason that I look for companies that are at least a million usually Two at minimum is that most of the companies that I like taking on are in that 2 to 5, 2 to 6 range. The reason for that is because I can come in and do the things that I know I can execute our show list checklist, our closing checklist, our content checklist like this into a business we already know works and then go from $5 million to quickly plug these holes that I'm talking about and then unlock 50, $100 million of value maybe like. Well, is it like a one trick thing? Not really, because it looks like within the first 24 months, so two years, the average revenue increase goes to 2.8x on average, and the average profit increase is 4.7x on average, that $2 million profit company becomes a $9.4 million EBITDA business. Think about the value difference here. Maybe it was worth 6 million when we came into it two years later at 9, let's say it trades at 7, so that would be worth 63 million. That is fundamentally real data on context of how value can be unlocked. All that to say if you know what to do, then it just comes down to doing it. A lot of people spend a lot of effort on things that are not the bottlenecks. Now, this was an example of I think a month difference or two months difference. Well, it's like, boom. Well, that's a double great. What are we going to do for the next 22 months? Right. Well, we're going to work on other parts of the business. This is just the sales and show rate stuff. And we've become more and more disciplined with this. We only go after businesses that we're like, oh yeah, we know exactly what we're going to do so that we can mitigate our risk. Big picture zooming all the way back out. If you have a company and you want to make it more valuable, you need to sell more customers, you need to make them worth more, and you need to make it more likely that it continues to happen without you. Which is why when you're making your Mosi Lisa masterpiece with your business, getting a caps deltoid, aka getting big enough and having $5 million plus in EBITDA makes you a significantly more valuable company. And when you check each of those 10 boxes, you make the business masterpiece that can create the generational wealth you ultimately had. And it's not about selling more, it's not about making them worth more. It's about making sure that those never stop happening. And it doesn't matter if your business looks like this or like this or like this. And so if we see that this one and this one are missing, then we say, great, we're going to go unlock $10 million in value by putting these right back in. Whatever the holes in the painting are, the nice thing is that the end result always looks the same. We know what the Mosi Lisa looks like, and all we have to do is paint by colors to fill in the gaps. And that's how we made the company's law more valuable.