How the top 1% make their money

The majority of millionaires are made in real estate. The majority of billionaires are made in private equity. And the point of this video is to walk you through the money-making process that they use to make tons and tons of money for themselves, tons and tons of money for their investors, and most importantly, accelerate value in a business. So let's walk through an example that everyone probably understands. So if you were to buy a house and you wanted to use this as a real estate investment, then you make money on this in two main ways. One is that the value of the house goes up. So let's say it's worth $1 million, it becomes worth $2 million. Great, we had appreciation. The other is that you get checks for $1,000 a month from the tenants, right? But the point is, is that you're gonna get paid every month for some sort of production from a renter, and the house is gonna go up in value. Now, if you just did your own house, then you're just not paying this, or you're just paying the bank for your mortgage and whatnot, and you're pretty much just gonna make your money in appreciation. There are some things that you can have appreciation that just happens over time, and the other's kind of forced appreciation, which is where, You fix the stuff, you clean the windows, you add a kitchen, you, you know, you do work, right? And then it increases the value of the thing because somebody else might be more likely to pay for it or buy it. All right. Very, very simple. Now, the thing about real estate and why I think it makes so many millionaires, it's a really simple business model. Like you buy the house, you put a certain amount down, you take a loan for the rest. As long as you put a tenant in that can cover that. Now, I'm obviously simplifying this, but that's because that's the point. I'm simplifying it for the point of a video. Plenty of people have lost their asses in real estate, but because it is a reliable thing, they're not making any more land and they do keep making more people over time, as long as population growth continues, real estate will be a really good investment. Okay? Now that is a big fucking asterisk because of how population growth has been happening. Look at Japan's real estate market, for example, because their population has declined. We take some of these things to be true. We assume that humans are going to always have more humans, but that's not always the case. Okay. Now, our second example is let's say that we have a business. So let's see if I can make a really simple business storefront. All right. We'll make that my little business storefront. Right? Is that kind of businessy? No? All right. There's my business. If you don't like my drawing, deal with it. So the interesting thing with private equity is that there's more ways that you can make money. Number 1 is you can buy businesses with a much wider range. Like, a house isn't going to go for sale for a dollar. But businesses do sometimes get given away for free, more or less. And that's also because there's no debt. A lot of times people buy houses, they have debts that they have to pay back. And that kind of fixes pretty hardcore where people's kind of bottom is. They're like, I'm not going to lose money on my house. Like, fine, I won't make money, but you have to at least pay the bank back. Of course, the market still dictates prices. But I think there's still a strong line that people will hold in negotiations. Which slows down crashes in real estate. Whereas a business can go from being not valuable at all to 12 months later being worth hundreds of millions of dollars. Let's say it's a technology or let's say it's a patent that goes through or some sort of pharmaceutical thing that— I'm giving you extreme examples because you're like, wait a second, how does this apply to my business? Well, if you didn't have a way to reliably get customers and then all of a sudden you find a channel that reliably brings you customers, that makes something that isn't valuable incredibly valuable. Or you hire one key person in the business that expands a new territory for you, makes something that was once a risk. And the thing is, is that a lot of times businesses accelerate in value, kind of like the forced appreciation here when you build in a kitchen or you build in a bathtub or something. The forced appreciation in business sometimes takes a negative and then turns it into a positive. And so what was once a risk then becomes a pillar of value. And so when you're thinking about accelerating value in a business, and this is what we do at acquisition.com, is that we think through what are all of the negatives, what are all of the risks associated with this business. And then if one by one we can flip the risks into pillars of value, then we kind of get counted twice. So instead of a negative discount on our value, it becomes a pro and adds to that multiple. And so this is kind of the big difference with private equity versus the house. With a house, you can't change the neighborhood. Maybe the neighborhood can slowly change over time, but you can't take it and then put it in Manhattan. It's just going to be where it's going to be. You can fix a couple of things. So there's kind of an upside limit to real estate. You're not going to get a 100x deal in real estate. You can get a 100x deal in private equity all the time. And that's why the people who amass fortunes, the richest people in the world, know how to reliably create 10x, 50x type returns. And at least in their careers, especially the best ones, have had multiple of these 20xs, 50xs. In big, big bets. And so let me walk you through how that would actually happen. So let's say you've got a business that's doing $3 million a year, all right? And let's say it's doing $1 million in profit. This business is not going to be valuable, like not that valuable, all right? So no institutional investor is going to want to buy this. It's too small. I mean, it makes money. Maybe it requires the founder, so there's key man risk. There's a bunch of other things. But like fundamentally, this isn't going to be a super attractive business. Now, a retail investor, meaning like some doctor or lawyer who's local, might want to buy this business as a retirement asset for themselves, not knowing what the fuck they're doing, and then lose their asses. So someone could give you money for it because they don't know what they're doing, but it doesn't mean that it's actually worth anything. It just means that you pulled one over on someone. All right? So the thing is, is that a good private equity investor realizes that this is not worth much to a potential acquirer today, but could become very valuable with a few small moves. And so if all of a sudden this business starts doing, let's say, $12 million a year, which would be $1 million a month, and then it gets to somewhere in the neighborhood of, call it, $5 million in profit. Okay, this is now a much, much more valuable business. And so here's— this is the magic. This is how it works, is that you could pick this up for almost $0. You wouldn't have to pay a lot to get a business that does $1 million in profit. Depends who you are, but fundamentally, like, you might do some seller financing, put some money, a little bit of cash in. If it does $1 million a year profit, you might put $500,000 down, like as a show of good faith. The thing is, this thing's riddled with risk, right? A $3 million top line business probably has, I don't know, 10, 15 employees, like not a lot of people. And so it's not very reliable, it's very volatile. And so it just screams risk. And so risk means fundamentally the multiple that you ascribe to a business's profits is a direct correlation to the risk you ascribe to the business. So saying that in the opposite way is how likely you think it will continue to make money if nothing happened. And so if the owner leaves, that's a material change to the business. How long do I think this business will keep making money once this person leaves? If I think it's absolutely guaranteed, there's no way this business doesn't make money even after the person leaves, then he's going to get a high multiple on the business. His revenue and profit are very valuable because they're really secure. On the other hand, if it's like, I think this could maybe burn down in 6 months, then it might get a 0.5 multiple or just realistically a 0 multiple on the business saying, I'll just take it over for you. I'll take it off your hands for you. Now the thing is that sometimes the difference between these things doesn't actually take a ton of work. It takes some expertise, but not necessarily a lot of time. And so if a company is doing these numbers, it's like, all right, well, we probably need to hire a CEO. We hire a COO, probably need to have, bring in some sort of director of marketing to run some of the day-to-day for it. We probably need to update sales ops in the business. We'll probably update pricing because they're probably mispriced, right? And because we update pricing, we can now spend more on marketing, which gets us more sales, right? And we run that little gambit. And sometimes something like this can happen in like, I don't know, 12 to 24 months, not a very long time. In terms of time periods. But here's the crazy part. Here's the crazy part. This business is basically worth nothing. This business, and let's say that it's moderately risky. So it's not like this is not a bank, but it's like, they're probably not going to go out of business. I'm not even going to cover that. But like 95% of banks, banks are actually a very, very stable business and they make a lot of money. There's way more restaurants go out of business than banks. I'll just put it that way. All right. But let's say that this business gets an 8x multiple, And this would be a $40 million business. Okay? So in what world do you know that you can go from something that costs you no money to 12 to 24 months later having something that's worth $40 million? Not many. And so fundamentally this arbitrage that exists here, because it doesn't take many steps or much time to create huge step-ups in value, That is where private equity investors make their money. This is where business owners who know how to play the game get filthy rich. And the thing is, is that a lot of people are just very intimidated by this word and these concepts. But this is all it comes down to, is that 99% of transactions are going to be some sort of multiple. When I say multiple of EBITDA, EBITDA is just a fancy word for right now, just call it profit. But in the private equity world, it's earnings before interest, taxes, depreciation, and amortization, which is just the earnings before. This is the part that matters. Earnings. How much money you make before all this other stuff. So if you made money and then you get taxed in different— differently in different states, would you say the business is worth more or less? Well, I could incorporate a different state. Okay, well then I want to know the earnings before the taxes, right? Well, I just bought this piece of equipment and like, if I didn't buy the piece of equipment, we'd have more profit. Cool. Well then I want the earnings before the the depreciation that you're going to apply. That's the idea here. And so that means that there's two big variables that we can influence with a business, the multiple and the EBITDA. So basically, if we can increase how much profit a company makes and how reliable that profit is and growing, then we're going to get a higher multiple. All right? And so let's say we have two businesses. All right, we'll say two businesses. Business number one, let's say they're both the same size. Let's say they're $10 million in top-line revenue and say they're $3 million in profit. So let's say we have two identical businesses here. This business is purely transactional, meaning it's one-off transactions. There's no recurring revenue. There's no annual revenue retention. It has one way of getting customers. It has a founder who's integrally involved in delivery and marketing and operations, so all three aspects of the business. So running the day-to-day, the running, making sure the product's good, and making sure we're getting more customers. So one guy's involved in all of it. And they're going down. They used to do $20 million in '06, and now they're at $10 million in '03. Alright, so this is our $10 million business. So is this growing? No. Would you say that this is reliable in the future, that it's going to continue to happen? Well, the thing is, is that this business is basically unsellable. Like, it's not that it's worth nothing, it's just that it's worth nothing to someone on the outside. The thing is, to the, to the guy on the inside who's making $3 million a year, there's value to the business. There's just not value to anybody else. And so that's the key here, is that when you're thinking about building the business, It's I want to make this valuable for anyone, not just valuable for me. So if you own a barbershop and you make $200 grand a year from your barbershop, but you're involved in the day-to-day, there's nothing wrong with that. I mean, you're meant to work. We're all meant to work, right? But it's just that I haven't built it so that it can be worth $200,000 a year to somebody else. If you can build it like that, then now you own an asset that has intrinsic value to the marketplace. Now let's go through this other one. So this one, this guy's worth zero. I don't know what that was. This is worth $0, unsellable to this guy. So this one, last year they did $5 million, this year do $10 million, and they're pacing $20 million for this upcoming year. They'll do $3 million this year, but they'll probably do $6 million or $7 million next year. It's all annual recurring revenue. We think that the margins are going to expand as they get better because they're going to have economies of scale. And so we've got profits going up. We don't think the market's going anywhere. It looks reliable and it's growing. Well, this thing might get a 12x multiple. And so then this thing might be worth $36 million. And so then you're like, wait, how can these two businesses with the same size and the same profit be worth such dramatically different amounts? Because fundamentals of value creation. How reliable is this money that I'm going to be making and how much of it is there? So if you have a lot that's not reliable, then you're going to get a small multiple on a big number. If you have a small amount of profit, but it's super reliable and it's growing, then you're going to get a big multiple on a small number. And if you've got a ton of profit, and it's super reliable and growing really fast, then you're going to get a monster multiple. Like, fundamentally, that's it. That's how it works. And here's one of the other big things that people don't get with private equity is that with a house, you can't build a house from scratch. I mean, you can build a house from scratch, but it's going to cost you money. But a business, you can start with nowadays almost nothing. You start selling your time and you start making some money, you start paying other people all off cash flow in the business, which the business can start for free. And so you can have something that literally costs you $0 that becomes worth billions. And there is no piece of real estate on earth that you can build for $0 and then it will someday be worth billions. And so the reason that private equity makes more money than real estate at the highest levels is because it requires more skill. Because there are more skills required in order to do it. Now, to be fair, this is in some ways just as strong as an advocate of real estate is that it's a simpler business model. Now, people still lose money in real estate all the time. Just got to look at the forums. People lose money all the time in real estate when they get greedy. But in terms of reliably giving people returns over years and years and years, it has worked provided population continues to grow. So if you are going to buy real estate, try and buy it in areas where people are continuing to either move to or have more kids. So fundamentally, there's only 3 ways that you make money in a business or make a business more valuable. Number 1 is you increase the number of customers. Number 2 is you increase their value, which I'll just say is LTV or LTGP, depending on how you say it, which is how much they pay you over time. Third is decreasing risk, right? Which is increasing the reliability of the business over time. And so whenever you're allocating money or time in your business, it has to circle up to this is gonna get me more customers, this is gonna make them worth more, or this is somehow gonna decrease risk. And if you can't very clearly state how you know it's going to get you customers, how you know it's gonna make them worth more, how you know it's gonna decrease risk, then you have to ask yourself, is this the best use of my time, money, and effort? And this is where I think most people do this instead. Is that they then spend money on stuff that's worth nothing. And that's why a lot of people don't get rich when they try to, is that they don't know where value gets created. And so you either have to make more money or you have to make the reliability of that money more valuable. And you make money by getting more customers, making them worth more, and then you decrease the risk associated with that in the future. So you're like, okay, well, I want to have that big amount of profit, but I want a massive multiple associated with my business. So let me just give you a couple of kind of like the big leaguer ways that people think about this. Acquisition.com is a family office that functions like a private equity firm, and we look at lots of different businesses. And one of the easiest ways that we have for companies to get into the portfolio is that we can meet you at one of our workshops. And so we run workshops occasionally at our headquarters here in Vegas. And so if that sounds interesting, my team will be there. We can give you a whole bunch of things that you can do to make your company more valuable and maybe someday become a portfolio company. In the meantime, you can go there, acquisition.com, click scale, and maybe we'll see you here. So number 1 is how much debt your company— that looks like pet, doesn't it? How much debt your business can carry. And so that's going to be a function of cash flow. All right? And so if you have a lot of cash flow, meaning that you could take distributions in huge amounts every month, then it means that your business can support a lot of cash flow, which means it can support a lot of debt. So unlike, you know, with your first home, there's like these fixed amounts that banks will say you have to put 20% down. And if it's commercial real estate, you have to put 35% down, whatever it is, right? There, there are these fixed amounts. That they say you have to put down in order to limit their risk. But the thing is, is that with businesses, it's varied based on how much cash flow a business has, right? And so a business that has almost no cash flow, like, is going to be able to take on almost no debt. And one that has tons of cash flow can take on tons of debt, right? And a disproportionate amount. The second thing is organic growth. So this is the stuff that I teach on this channel, right? Which is like marketing, sales, pricing, all these things that we do. This is all considered organic growth. Inorganic growth is when you buy other companies in order to grow and you combine balance sheets. All right? But if you are growing as a business, that's going to give you a bigger lever on your multiple, meaning you're going to get more for it because if they know or they believe that you're going to consistently grow 20% a year, no matter what for the next 5 years, then they know that the business is going to double in 5 years. So if they did nothing, they're going to more than double their money because they're not going to buy 100% with cash. They're going to buy it with debt. So if you double a business and you put 20% down, then you could 4x or 5x your money on the business because of the leverage that debt gives you. This is all why these multiple levers increase how much you get paid. So the third one is categorization. It's appropriately for letter C here. If you are a business that is categorized as, let's say, a traditional service business, right? But you're able to build some technology into your business that allows your staff to get 10 times more done or handle 10 times the customers,, then you have something that would be called tech-enabled service, right? Or sometimes even a true SaaS business. And so tech-enabled services have higher multiples than traditional services, and SaaS companies have higher multiples than tech-enabled services. And so how you categorize the business, if it's just moving one step over, which is, okay, let's just look at our delivery. Let's just invest in a little bit of technology so that we can get categorized differently. It might cost you $100 grand to get some streamlined processes and tech in place to help 5x, 10x the delivery? And if that's the case, then you got a $100,000 investment that might give you 3 more turns on your multiple, 3 more turns being like you go from a 5 multiple to an 8 multiple. And let's say you make $1 million a year. It's like, well, that adds $3 million to your enterprise value for $100 grand. It's a 30x return. So like, this is how you have to start thinking about it within the business. It's like, oh, this is totally worth it. So should I take this $100,000, put it in my pocket, and then put it in the S&P 500? Well, if you're a business owner, you can put it right back into the business in a way that you know you're going to get a good return on capital. So categorizing what type of business your business is really in. Next one is a size premium. So this is one that a lot of people don't understand. When you buy wholesale in your real life, if you buy 1 roll of toilet paper or you buy 20 rolls of toilet paper, the 20 rolls of toilet paper are going to be cheaper because you bought bulk, you bought wholesale. Businesses are actually the opposite. If you put a ton of profit together, you get a size premium. So a business that does $100 million a year in profit is worth a hell of a lot more than a company that does $100,000 a year in profit. And a big part of that, believe it or not, is that the people who have the most money in the world have so much money. And this is very hard for you to probably grasp if you're not familiar with this, but the people at the top, BlackRock, Blackstone, like all the big guys, all right? State Street, all that stuff. They have so much money that they have minimum check sizes. So I was talking to a friend of mine at one of the banks, I'll just put it that way. And their minimum check size now is $150 million. So not enterprise value, that's just the minimum. So if you have a $300 million company, they have to buy at least half or they're not interested. 'Cause they need to be able to write checks of $150 million or greater because they have so much money that they can't waste time writing checks smaller than that. And so they pay a premium for operators to go in and gather a bunch of assets together so they can write one check. I know this sounds insane, but this is how people make gobs of money, is understanding this other world. All right? And so this is why people are like, man, I've got key man risk in my business. I'm like, dude, you make $1 million a year. Of course you have key man risk. It's a tiny business. This isn't where you solve that. We solve that when you're at— once you get to an institutional level, which by the way is about $5 million in profit per year is where institutional investors begin to really take notice of a business. Below that, you're not really going to get much. And at the $5 million mark, you might get somewhere in the neighborhood of like 25 to 40, somewhere in there. But if you cross $10 million, it gives you a size premium. You get a little bit more on the multiple. So not only do you have a bigger amount of profit, you also get more for that profit. So it's like a double multiplier effect. And this is why people talk about patience all the time. It's like, you could sell today for $25 million, but maybe if you waited a year and got your $5 million to $8 million in profit, and you shored up a couple things, you go from having a $25 million sale to a $75 million sale for one more year of work. So $50 million of enterprise value, 3x what you would've gotten paid for one more year of work. And this is how that compounding unlocks these huge numbers in private equity. E is age. So to further on my little speech there on patience, the age of the business also makes a business more valuable. And so think about this way. Imagine there's a business that's 1 year old that's doing these numbers, and then a business that's 10 years old and doing these numbers. Well, you'll probably feel more confident buying the 10-year-old business because you're like, it's been around for 10 years. It's not going anywhere. So the managing partner at APG said this to me, and I never forgot it. He said, a business always becomes more valuable every single year until it doesn't, and then it's worth nothing. And it was such a profound statement, which is basically like, as long as you keep growing, no matter how slowly, or even maintain and the business stays around, the business is more valuable. So $10 million business at year 5, and then $10 million year 6, it's a little bit more valuable at year 6 because it lived another year. But the moment it goes down a little, it's worth nothing because no one wants to touch it unless you have distressed asset experts. And I'm not going to get into that. All right. And so when you're thinking about your business, it's like, okay, I want to create lots of cash flow in my business. I want to have lots of organic growth. I want to grow, I want to sell more. I want to market more. I want to make sure that my price is good. I want to get efficiencies within my organization so that I can get categorized as a better type of business that has generally higher multiples. I want to get it big enough that I get a size premium so that I get more for each dollar of profit in terms of enterprise value. And I want to keep doing this for a long time. And if I do all this stuff, I can make generational wealth in a number of years. And so no, this is not the get rich in 6 weeks stuff. This is like get rich in 6 years-ish. But the thing is, 6 years, at least for me now, is like not that long. 6 years is not that long. Like you're still pretty much, you're in the same decade that you're currently in. Right. And so when I think about it like that, I'm like, most people simply can't wait 6 months for anything. And I was telling one of the, one of the business owners here the other day about this is like the woman in the red dress. I talk about it all the time because it's this, it's been the hardest thing that I've struggled with in my entrepreneur career, all the things that's been the hardest. And once you stick with something for 5 years, You get it. You're like, oh, I understand now. Now it's not just saying you had a business for 5 years, because some of you guys, I'm fucking looking at you, do 6 other things all the time, and you have the one business that makes you money, and you never paid all the attention you should be paying it to because you're always busy thinking about these other opportunity vehicles that could be better. When in reality, think about the logical extreme here. One guy starts a new business or a new side hustle every 6 months. Think about the other guy, does one business for 50 straight years, never does anything different. Who makes more money? You already know. Let's say you're 4 years into your business, okay? And you say, man, I have this opportunity that I could be doing so much more money. Okay, that's fine. But for you to do that, that means you're gonna miss out on year 5 of your current business. All right? Now what you're really missing out on is not only are you missing all of this, right? But the new business has to, be able to do that year 1. Now maybe the new business does half of that year 1, which is great. But again, now year 2, let's say you're a little higher there. That's okay. But this is what you're also missing out on. The line that would have been off this fucking graph right here is that this is the second year and this is the second year from when you made the decision. And this is what people miss out on. This is what people don't get. This is why people stay poor is they can't stick with stuff. Because a mediocre opportunity executed to infinity is going to do better than an inferior opportunity that you consistently switch to over and over again. And so the reason that these things create more enterprise value is that most of these take time. Even in the recategorization would take work and time. Almost all of these take time. And so if you just think about the logical stream of what your actions lead to, You can reverse into the present of what actions will I get the most return for my effort? And that is how you can create a lifetime of generational wealth. And if this stuff about focus is hitting for you, I made a whole talk on this at my headquarters here in Vegas to a group of business owners about it. Check it out.