How the top 1% make their money
Summary
TLDRThis video script delves into the wealth creation strategies of millionaires and billionaires, highlighting the distinct paths of real estate and private equity. It explains how real estate investments can appreciate in value or generate rental income, while private equity offers diverse ways to increase business value, such as forced appreciation and risk mitigation. The script emphasizes the importance of patience, focusing on organic growth, leveraging debt, and categorizing businesses to maximize enterprise value, ultimately leading to generational wealth creation.
Takeaways
- ๐ Real estate is a simple business model that can lead to millionaire status, with appreciation and rental income as main profit drivers.
- ๐ฐ Billionaires often make their wealth in private equity, which offers more diverse ways to make money, including buying undervalued businesses.
- ๐ Forced appreciation in real estate involves making improvements to property to increase its value, while in business, it can involve turning negatives into positives.
- ๐ The potential for wealth in private equity is higher due to the ability to transform businesses with relatively low initial investment into high-value assets.
- ๐ Key to increasing business value is mitigating risk, which can lead to higher profit multiples and thus greater enterprise value.
- ๐ผ Private equity investors focus on identifying and flipping risks into value pillars, which can significantly increase a business's worth.
- ๐ข Businesses can be more volatile in value compared to real estate, with potential for rapid growth or decline, affecting their market value.
- ๐ The value of a business is directly related to the reliability of its profits and its growth potential, influencing the profit multiple.
- ๐ Businesses can be started with minimal investment and scaled to be worth billions, unlike real estate which requires significant upfront costs.
- โณ Patience is crucial in business growth; sticking with a business for the long term can lead to substantial increases in value.
- ๐ ๏ธ To build business value, focus on increasing customer base, improving customer lifetime value, and decreasing business risk.
Q & A
What are the two main ways to make money in real estate investment as described in the script?
-The two main ways to make money in real estate investment are through appreciation, where the value of the property increases over time, and rental income, where you receive regular payments from tenants.
What is the difference between natural appreciation and forced appreciation in real estate?
-Natural appreciation is the increase in property value that occurs over time without any intervention. Forced appreciation, on the other hand, is the increase in value that results from improvements made to the property, such as renovations or upgrades.
Why does the script suggest that real estate is a simple business model for creating millionaires?
-The script suggests that real estate is a simple business model for creating millionaires because it involves buying a property, obtaining a loan, and placing tenants to cover the loan. The reliability of land scarcity and population growth contribute to its simplicity and potential for wealth creation.
How does the script differentiate between the risks in real estate and private equity investments?
-The script differentiates the risks by pointing out that real estate investments are generally more stable due to the finite nature of land and population growth, while private equity involves investing in businesses that can fluctuate greatly in value, sometimes becoming worthless or extremely valuable within a short period.
What is the potential for wealth creation in private equity compared to real estate, according to the script?
-According to the script, private equity has a higher potential for wealth creation compared to real estate because it allows for significant value acceleration in businesses through various strategies, potentially leading to returns that are multiples higher than in real estate.
What is the concept of 'forced appreciation in business' as mentioned in the script?
-The concept of 'forced appreciation in business' refers to the process of transforming negatives or risks into positives, thereby increasing the value of the business. This can be achieved by addressing issues within the business, such as improving operations or acquiring new customers, which can significantly increase the business's worth.
How does the script explain the potential for a 100x return in private equity?
-The script explains that a 100x return in private equity is possible due to the ability to acquire businesses at low values and then significantly increase their worth through strategic moves, such as improving operations, expanding into new markets, or acquiring other businesses.
What factors determine the value of a business in the eyes of private equity investors, as per the script?
-Factors that determine the value of a business in the eyes of private equity investors include the business's profit, the reliability of that profit, its growth potential, and the risks associated with the business.
How does the script define 'EBITDA' and why is it important in private equity?
-EBITDA, defined in the script as Earnings Before Interest, Taxes, Depreciation, and Amortization, is important in private equity as it represents the earnings of a company before non-operational costs are deducted. It is a key metric used to evaluate a company's financial performance and is often used to calculate the multiple for business valuation.
What are the three fundamental ways to make a business more valuable according to the script?
-The three fundamental ways to make a business more valuable, as stated in the script, are by increasing the number of customers, increasing the value per customer (LTV or CLV), and decreasing the risk associated with the business, which enhances its reliability.
How does the script relate the concept of 'size premium' to the valuation of businesses?
-The script relates the concept of 'size premium' to the valuation of businesses by explaining that larger businesses with more profit are worth more than smaller businesses with the same profit margin. This is due to the perception of stability and growth potential, as well as the ability to command higher multiples from investors.
What is the significance of patience and longevity in building business value, as discussed in the script?
-The script highlights the significance of patience and longevity in building business value by emphasizing that a business becomes more valuable each year it operates successfully. The longer a business operates and grows, the more it is worth, and the greater the potential return on investment.
Outlines
๐ Real Estate vs. Private Equity Wealth Creation
The script introduces the wealth-making processes of real estate and private equity, emphasizing how millionaires and billionaires are made. It explains that real estate investments typically earn money through appreciation and rental income, while private equity offers more diverse ways to generate profit. The speaker simplifies the real estate model, highlighting its reliability due to population growth, but also notes the risks associated with market fluctuations, using Japan's real estate market as an example. The paragraph concludes by contrasting the fixed nature of real estate with the dynamic potential of private equity businesses, which can appreciate significantly in value over a short period due to various factors such as innovation or market demand.
๐ Private Equity: Turning Risks into Value Pillars
This paragraph delves into the private equity strategy of acquiring businesses with potential for growth and high returns. It discusses the concept of 'forced appreciation' in businesses, where identifying and addressing risks can transform a business's value. The speaker illustrates how a business with low initial value can be turned into a highly profitable venture through strategic improvements and risk mitigation. The paragraph also touches on the potential for 100x returns in private equity, unlike the capped potential in real estate, and introduces the idea of value acceleration in businesses through addressing negative aspects and turning them into strengths.
๐ค The Art of Private Equity Investment
The speaker discusses the private equity investor's approach to identifying undervalued businesses with high growth potential. They explain how a business with low initial profit can become valuable through strategic moves, such as improving operations or market positioning. The paragraph highlights the importance of assessing a business's reliability and potential for profit growth, and how these factors influence the business's multiple. It also touches on the concept of 'EBITDA multiples' and how they can be leveraged to increase a business's enterprise value, concluding with the idea that private equity investors aim to create significant value in a short time frame.
๐ Building Business Value Through Reliability and Growth
The script contrasts two businesses with identical revenues and profits but different growth trajectories and reliability. It emphasizes the importance of building a business that is valuable to the market, not just to the owner. The speaker explains how a business with recurring revenue, scalability, and reduced risk can command a higher multiple, making it more valuable. The paragraph also discusses the potential for businesses to start with minimal investment and grow into billion-dollar enterprises, highlighting the difference between building value in a business versus real estate.
๐ก Strategies for Increasing Business Value
This paragraph outlines various strategies to increase a business's value, such as carrying more debt based on cash flow, focusing on organic growth through marketing and sales, and leveraging inorganic growth through acquisitions. The speaker also discusses categorization, where redefining a business's sector can lead to higher multiples, and the concept of size premiums, where larger and more established businesses command higher valuations. The paragraph concludes with the idea that patience and consistent growth can significantly increase a business's enterprise value.
๐ฐ The Time Value of Business Growth
The speaker emphasizes the importance of patience and time in business growth, explaining how the age and consistency of a business contribute to its value. They discuss the concept of 'size premium' and how institutional investors may pay more for larger, more established businesses. The paragraph also touches on the idea that a business becomes more valuable each year until it stops growing, at which point its value plummets. The speaker concludes by advocating for long-term focus and commitment to a single business as a path to wealth creation.
๐ Creating Generational Wealth Through Focus and Growth
The final paragraph reinforces the message of focus and the long-term commitment to a single business as a means to create generational wealth. The speaker argues that sticking with one business and executing it well over time will yield better results than constantly switching between opportunities. They summarize the key points discussed in the video script, including the importance of cash flow, organic growth, risk reduction, and the value of patience in building a successful business.
Mindmap
Keywords
๐กMillionaires and Billionaires
๐กReal Estate Investment
๐กAppreciation
๐กPrivate Equity
๐กForced Appreciation
๐กRisk
๐กMultiple
๐กEBITDA
๐กOrganic Growth
๐กInorganic Growth
๐กKeyman Risk
๐กGenerational Wealth
Highlights
The majority of millionaires are made in real estate, while billionaires are predominantly made in private equity.
Real estate investment appreciation can be natural or forced through improvements like renovations.
Private equity offers more ways to make money, including buying businesses at low or no debt costs.
Businesses can experience drastic value changes, unlike real estate, due to factors like patents or market demand.
Private equity investors aim to flip risks into pillars of value, thus accelerating business value.
A business's value is directly correlated to the risk ascribed to it and the reliability of its profits.
Private equity allows for the potential of 100x deals, unlike real estate which has an upper limit on returns.
Small moves in a business can lead to significant value increases, making private equity attractive for investors.
Businesses can be bought for almost nothing and, with strategic moves, become worth millions within a few years.
The reliability of a business's profit and its growth potential are key to obtaining a higher multiple.
Private equity investors look for businesses with potential for growth and risk reduction.
Organic growth through marketing, sales, and pricing strategies can increase a business's value.
Inorganic growth through acquisitions can also play a role in increasing a business's value.
Categorizing a business correctly, such as tech-enabled or SaaS, can lead to higher multiples.
Size premiums are given to larger, more established businesses with significant profits.
The age of a business contributes to its value, with older, stable businesses being more valuable.
Focusing on one business for an extended period can lead to significant wealth creation compared to constantly switching opportunities.
Strategic investments in a business, such as technology or rebranding, can provide substantial returns and increase its value.
Transcripts
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
moneymaking 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 one million it
becomes worth two 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 going to get paid every month for
some sort of production from a renter
and the house is going 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 what not and you're pretty much just
going to make your money in appreciation
there are some things that you can have
appreciation that's just happens over
time the other is 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 keep making
more people over time as long as
population growth continues uh real
estate will be a really good investment
okay now that is a big ass risk
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 that
looks is that kind of business no all
right there's my business if you don't
like my drawing deal with it um so the
interesting thing with private Equity is
that there's more ways that you can make
money number one 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 uh 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's 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 right 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 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 a
pillar of value and so when you're
thinking about accelerating value in
business and this is what we do at
acquisition. comom 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 take we
get we kind of get counted twice so
instead of a negative discount on our
value it becomes a pro uh and adds to
the multiple and so this is kind of the
big difference with private Equity
versus the house right with a house you
can't change the neighborhood right
maybe the neighborhood can slowly change
over time but you can't take it and then
put it in Manhattan right it's just
going to be where it's going to be you
can fix a couple things so there's
there's kind of an upside limit to real
estate you're not going to get a 100x
deal in real estate but 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 20 X's 50 x's 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
three million bucks a year all right and
let's say he'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 keyman 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 a retirement asset
for themselves not knowing what the
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
acquire 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 a million doar 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 this
is the magic this is how it works is
that you could pick this up for almost
zero dollars you wouldn't have to pay a
lot to get a business that does a
million dollars in profit depends who
you are but fundamentally like you might
have you might do some seller financing
put some money a little bit of cash in
just million dollars a year in profit
you might put five 00 Grand down like as
a show good faith but the thing is this
thing is riddled with risk right a $3
million top bu business probably has I
don't know 10 15 employees like not a
lot of people and so it's 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 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 when
this person leaves if I think it's
absolutely guaranteed there's no way
this business doesn't make money even
after the the person leaves then he's
going to get a high multiple in the
business his 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 zero multip the
business saying I'll just take it over
for you I'll take it off your hands for
you right now the thing is is that
sometimes the difference between these
things doesn't actually take a ton of
work it takes some expertise but like
not necessarily a lot of time and so if
a company's doing these numbers it's
like all right well we probably need to
hire a CEO we need hire a COO probably
need to have bring in some sort of
director of marketing to run s of the
some of the uh the datto day for it we
probably need to you know update sales
Ops uh 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 just we we run that little CIT
and sometimes something like this can
happen in like I don't know 12 to 24
months not 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 it's
not like this is not a bank it's like
they're probably not going to go out of
business 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 um 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 cost you
no money to 12 to 24 months later having
something that's worth $40
million not many and so fundamental 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 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 when I say multiple of
eida eida is just a fancy word for right
now just call it profit but in the
private 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 depreciation that you're
going to apply right that's that's the
idea here okay and so there's that means
that there's two big two big variables
that we can influence with a business
the
multiple and the iida 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 Topline revenue and let's say
we're 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 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 operation 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 and six
and now they're at 10 million and three
all right 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 a barber shop and
you make 200 Grand a year from your
barber shop but you're involved in the
DayDay there's nothing wrong with that I
mean you're meant to work forment 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 SE this
other one so this one this guy's worth
zero I don't know what that was there
this is worth zero dollars
unsellable to this guy so this one last
year they did five million this year do
10 million and they're pacing 20 million
for this this upcoming year they'll do
three million this year but they'll
probably do six million or seven million
next year um it's all annual recurring
Revenue we think that the margins are
going to expand as they get B because
they're going to have economies of scale
um 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 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 and 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 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 so 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
can 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 Zer that
becomes worth
billions and there is no piece of real
estate on Earth that you can build for Z
doar 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 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 three ways
that you make money in a business or
make a business more valuable number one
is you increase the number of
customers number
two is you increase their value which
I'll just say as LTV or lgp depending on
how you say 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 going to get me
more customers this is going to make
them worth more or this is somehow going
to decrease risk and if you can't very
clearly State how you know it's going to
get your customers how you know it's
going to make them worth more how you
know it's going to 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 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 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 leager
ways that people think about this
ais.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. click scale and maybe we'll
see you here so number one 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 they're they're 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 it's
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 get you're GNA 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
five years then they know that the
business is going to double in five
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 fourx or
five extra 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 which
appropriate 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
handled 10 times the customers then you
have something that would be called Tech
enabled service right or sometimes even
a true SAS business and so Tech enabled
Services have higher multiples than
traditional services and SAS 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 p technology so that we can get
categorized differently it might cost
you a hundred 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 three
more turns on your multiple three more
turns being like you go from a five
multiple to an eight multiple and let's
say you make a million dollars a year
it's like well that had three million to
your Enterprise value for a 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 in my pocket and then put
in the S&P 500 well if you're a business
owner you can put it right back into the
business 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
premiums this is one that a lot of
people don't understand when you buy
Wholesale in your real life if you buy
one 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 right businesses are actually
the opposite if you put a ton of profit
together you get a size premium so a
business that does a hundred million
dollar a year in profit it's 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 like you to probably grasp
if you're not familiar with this but
like the people at the top black rock
Blackstone you know like all the 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 um 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
because 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 you know keyman risk in my
business I'm like dude you make a
million dollars a year of course you
have ke risk it's a tiny business like
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 five million in profit per year is
where institutional investors like begin
to really take notice of a business
below that you're not really going to
get much and at the five million Mark
you might get somewhere in the
neighborhood of like 20 to 40 somewhere
in there but like 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 a day for 25 but maybe if you
waited a year and got your five million
to 8 million in profit and you shorted
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
have 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 uh my little speech there on uh
on patience the age of the business also
makes the business more valuable and so
think about this way imagine there's a
business that's one year old that's
doing these numbers and then a business
that's do it'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 like it's not going
anywhere so the managing partner APG
said this to me and I never forgot 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 even even maintain and
the business dayss around the business
is more valuable so $10 million business
at year five then $10 million year six
it's a little bit more valuable year six
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 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 in a number of
years and so no this is not the get rich
in six weeks stuff this is like get rich
next six six years is but the thing is
that six years at least for me now is
like not that long six 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 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 all the things that's been
the hardest and once you stick with
something for five years you get it
you're like oh I understand now now it's
not just saying you had a business for
five years because some of you guys I'm
looking at you do six 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 new side hustle every
six 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 four 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 going
to miss out on your five of your current
business all right now what you're
really missing out on is not only are
you missing all of all of this right but
the new business has to be able to do
that year one now maybe the new business
does half of that year one which is
great but again now year two let's say
you're 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 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 in time
almost all of these take time and so if
you just think about the logical exam 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 e
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