BigDeal - #91 Seven Finance Terms You Need To Know To Get Rich

Starting point is 00:00:00 You do not take enough risk for the amount of money you say you want. And small business acquisition is also the fastest, most overlooked way to build wealth in America. I want you to visualize yourself in this because this could be you, you could be Cody. And not this, Cody. He bought a business where he was with what he had. Then he took it to grow it. Hi, I'm Cody Sanchez, and welcome to the Big Deal podcast.

Starting point is 00:00:24 You want to get rich? Build relationships with people in finance. They understand the game of money. I'll give you seven acquisition terms you should know to speak their language. But before we get into that, I want to share this quote with you. Michael Jordan didn't wake up early because he loved mornings. He did it because mediocrity felt like a personal insult. He wasn't chasing balance, but meaning, discipline is dragging your half dead body to do what you hate.

Starting point is 00:00:47 No one writes about the semi-committed. And with that, let's jump into these seven terms that will make you some money. And you got to stick with me, even if you hate the word finance. The first one, free cash flow or FCF. If you're going to be obsessed with any number in your business, it's just a lot. should be this one. It's the cash left over after you've paid all operating expenses and capital expenditures. Another way to say that is building improvements, vehicle purchases, anything you buy. So we're going to take your operating cash flow minus your cap X. Net profit, aka net income.

Starting point is 00:01:17 It's the total earnings profit calculated after subtracting costs from revenue. Costs here equal costs of goods sold. So depreciation, interest, taxes, and all other expenses. This is the true profit like this. There are two types of businesses. A cash suck business and a cash flow business. Here's the difference between the two. Cash suck. You provide the service, then you get money. Cash flow, get the money, then you do the service. You only make money maybe one or two times a year. Cash flow business, lots of little checks continuously, ideally subscriptions. So you have two big clients. If they leave, you're in trouble. Cash flow business, you have lots of clients which diversifies your risk. You use RFPs and companies.

Starting point is 00:02:00 product so that every time you deliver a service, it looks different, a lot more work for you. Cash flow business to your service is productized, so you deliver the same thing again and again and again. This business that does $1 million in revenue and this business that does $1 million in revenue are not worth the same thing. You want cash flow businesses, repeatable, predictable, de-risk businesses, not cash suck businesses. Working Capital. See this as the cash you use to fund daily operations. Current assets minus current liabilities. Current assets equal cash plus inventory plus money owed by customers. Current liabilities mean accounts payable plus wages payable plus money owned to suppliers.

Starting point is 00:02:45 Accounts payable equal the things that you have to pay. Wages payable equal the money you have to pay your employees. And money owed to suppliers is for things you have outstanding, maybe like vendors. EBITA, the gold standard for talking about true operating profit and dealmaking. It stands for earnings before interest, taxes, depreciation, and amortization. It ignores non-cash expenses, financing, and tax deductions. It's used to calculate what a business is worth. Let's break it down like this. What are the three things you need in order to value a small business?

Starting point is 00:03:17 First, profit and loss statement. How much money is coming in? How much money is going out? I care about net income, how much money you make that goes in your actual pocket. Two is tax returns. You want to match up what the owner says they make, aka their P&L with what they pay the tax man. Because guess what?

Starting point is 00:03:33 They're probably not overpaying the IRS. So you know at least that business makes what they said that they make. Third understanding of the market. What do these things trade at? Small businesses typically trade at anywhere from two to let's say six X profits. So if your small business has 100K in profits, you should be buying it for 200 to 600K. With those three things,

Starting point is 00:03:55 you're about 80% to where you need to be to know how to value broadly a small business. The devil in the detail is the 20%. Valuation. You'd use this to determine the sales price of a company. It's often calculated as a multiple from EBDA or SDE, seller discretionary earnings or profit. Let's say the multiple for auto shops is three times EBTA.

Starting point is 00:04:16 The business has an EBITA of $50,000. Then the valuation is $50,000 times three, that's the multiple, equals $150,000. Next is... Okay. When I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime.

Starting point is 00:04:39 I wonder if my out of office has a forever setting. An IG Private Wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. Visit BetMGM casino and check out the newest exclusive. The Price is Right Fortune Pick. BetMDM and GameSense remind you to play responsibly.

Starting point is 00:05:06 19 plus to wager. Ontario only. Please play responsibly. If you have questions or concerns about your gambling or someone close to you, please contact Connects Ontario at 1-866-531-2,600 to speak to an advisor. Free of charge. BetMGM operates pursuant to an operating agreement with Eye Gaming Ontario. LBO, aka leveraged buyout. It means using money borrowed mostly from other people to buy a business or do a deal.

Starting point is 00:05:34 Similar to how you pay 20% down and borrow 80% from the bank to buy a house. Private equity does this, but for businesses. Basically the same thing. The assets of the company are often used as collateral to secure the funds. Next we got seller financing where the seller access the bank in a deal. You pay them over time at a lower interest rate than a bank using the profit from the business you buy from them. It's rare, but possible to get a business for zero dollars using this method. And small business acquisition is also the fastest, most overlooked way to build wealth in America, owning boring, profitable businesses that everyone else ignores. If you follow me for a while, you know, I give away about 90% of my playbook for free 99. I make YouTube videos. I write books. I give talks around the country. I have a newsletter. I host this podcast, which you subscribe to,

Starting point is 00:06:18 right? Right. But there's a reason thousands of people in our community have gone from employee to owner. it's because they got access to the missing 10%. The step-by-step blueprint that uses all of these terms to actually get deals done. So for those of you interested in that last 10%, this September 19th through 21st, I'm hosting Main Street Millionaire Live. Three days, virtual,

Starting point is 00:06:39 where my team and I are going to walk you through exactly how you find, buy, and scale the right business for you. We've put in over 10,000 hours testing this stuff. And after helping more than 9,000 people become owners, we're opening the vault. This is the closest thing you'll get to sitting next to me while we do deals together. So as you listen to this episode, think about it as an

Starting point is 00:06:58 appetizer. If you want the full meal, the actual blueprint to financial freedom through ownership, go to MSM.Live. That's Main Street Millionaire. Dot Live, MSM Live, to reserve your spot today. If you click the link in the bio, you get 50 bucks off, that's 50% off the cost of coming to MSM Live. It's like less than a latte, which is ridiculous for you guys to learn how most people get rich in the world. Also, I want to end on this other thing. I just heard an acquisition. story that basically made my heart melt. I want you to visualize yourself in this because this could be you, you could be Cody. And not this Cody. This Cody was a six-year veteran, number two at a production company in California, runs the show while his boss lives in Utah.

Starting point is 00:07:37 Here's how he went from someone else's employee to becoming an owner of a business in 90 days. Cody landed on our content about ownership. He was 12 years building somebody else's empire. And he'd been leading operations at this production company. At the time, Cody and his wife had been saving for a house. So it wasn't like they had tons of cash line around. But after having a chat, they decided to use their house fund to buy a cash-filling business instead. Not an easy task. But this happened to be when I launched my three-day business buying workshop last year.

Starting point is 00:08:07 So he attended the whole event. And he shared that those three days gave him the tools and the confidence he needed to get to work. And not my words but his, that's how he bought the business. So as soon as the live event ended, Cody started hunting for deals. He looked at laundromats, a couple other business models, but none were prepared to offer seller financing what he needed. Props to him for not giving up and after tons of rejection and people telling him to pound sand, and it would be impossible to find this in Southern California. He eventually landed on pool routes. Now, pool routes isn't your typical business acquisition.

Starting point is 00:08:36 But for contacts, you only purchase the client base, not the whole business, which is cool. So this caught his eye and he reached out to the owner. The listing description was like 40 pool route generating 70K annual. seller asking 60K for it, 36K down, 24K seller financing, 0% interest. Guess what Cody's savings were? $36,000. So the seller was retiring and was looking for his next thing. He wanted somebody who'd actually take care of the business, not just extract cash and run.

Starting point is 00:09:07 Cody's military background plus genuine interest in learning the industry gave him this credibility. So in two weeks, the deal moved from handshake to close. Why so fast? Cody had a tiny window at his job where work was slow. So here's another smart move from Cody, not quitting his job. Don't go all in until your cash flow positive. So it took him a few months to figure out how to start making money in the business and now he has a business that's profitable. Three months into the business, here's what he has accomplished.

Starting point is 00:09:36 The root grew from 40 to almost 50 pools. Monthly revenue, 7K, monthly payment, 2K. Cody's take home somewhere between 4K monthly profit while learning the business, which is really impressive. The best part is Cody's already thinking like an owner, hired in training a pool tech, future operator, building systems so he can remove himself from operations.

Starting point is 00:10:00 He wanted to hit 150K ARR by the end of the year. Not only that, he has plans to own the entire pool cleaning supply chain. So he's thinking, all right, I'm going to buy some roots. Then I'm going to buy pool supply stores. Then he's going to add on new services like calcium, removal or reverse osmosis machines, those make a lot of extra income because they're bigger projects. Also makes his business more defensible. What I love about Cody's story is he had the guts to bet on himself and he didn't have to go huge and buy a giant business. He bought a business where he was

Starting point is 00:10:29 with what he had. Then he took it to grow it. I love this story because Cody did the thing that most of us just talk about. You want to know a hard truth. You do not take enough risk for the amount of money you say you want. So do the risky thing. And also, if you're not subscribed to this podcast, hit that fucking subscribe button. When a country's productivity cycle is broken, people feel it in their paychecks, their communities, their futures. What does this mean for individuals, communities, and businesses across the country? Join business leaders, policymakers, and influencers for CGs national series on the Canadian Standard of Living, Productivity and Innovation. Learn what's driving Canada's productivity decline and discover actionable solutions to reverse it.

BigDeal - #91 Seven Finance Terms You Need To Know To Get Rich

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