The Diary Of A CEO with Steven Bartlett - Moment 137: Finance Isn’t Rocket Science! The 2 Simple Skills Billionaires Use Everyday: Codie Sanchez

Episode Date: November 24, 2023

In this moment, investor and financial educator, Codie Sanchez discusses the first steps in understanding the game of finance and deals. Codie says herself that she is no financial genius, however with her background as a journalist, she is able to right the ask right questions to the right people in order to get the right answers. Through this she was able to infiltrate the world of finance and saw behind the curtain. Codie realised there is no difference between a $100 million deal and a $100,000 deal, all were just slight larger steps up the ladder. To see behind the curtain, Codie believes there are 2 key skills people need to realise: firstly, learn how to do deals, which is not complex but only made to seem complicated through financial language. Secondly, understanding the importance of connecting with the right people, online or IRL who can give you all the information you need about the business you are entering. Finally, Codie believes that we never actually sell anyone anything or convince them to do anything, but instead you connect with what people are already truly feeling. Listen to the full episode here - https://g2ul0.app.link/gOvSMoV4XEb Watch the Episodes On Youtube - https://www.youtube.com/c/%20TheDiaryOfACEO/videos Codie: https://www.codiesanchez.com https://www.instagram.com/codiesanchez/ https://www.youtube.com/@CodieSanchezCT

Quick one, just wanted to say a big thank you to three people very quickly. First people I want to say thank you to is all of you that listen to the show. Never in my wildest dreams is all I can say. Never in my wildest dreams did I think I'd start a podcast in my kitchen and that it would expand all over the world as it has done. And we've now opened our first studio in America, thanks to my very helpful team led by Jack on the production side of things. So thank you to Jack and the team for building out the new American studio.

And thirdly to Amazon Music who, when they heard that we were expanding to the United States, and I'd be recording a lot more over in the States, they put a massive billboard in Times Square for the show. So thank you so much, Amazon Music. Thank you to our team. And thank you to all of you that listened to this show. Let's continue. I'm fascinated by the first step people take, because the first step seems to be the hardest that first step to buying that first business and you're stepping out into uncertainty and the unknown there you know if I could give one thing to the audiences that have listened to me for the last 10 years on social media and on this podcast it would just be the answer to

taking that first step like out into like you did at 29 30 to buy that first step, like out into, like you did at 2930 to buy that first business. Talk to me about specifically that first one. What were you looking for? What was your thesis? And I guess, how did you learn? How did you learn about buying, as you call them, boring businesses? Yeah. Well, I had a benefit, which is as a journalist, I sort of infiltrated finance. I'm not technically as intelligent. I'm not a financial modeling guru. I'm not a lot of things that people are in finance, but I'm pretty decent at asking questions and then figuring out who are the right people that could get me the answers. And so what I realized pretty quickly is we were doing a bunch of deals. I was doing deals that were tens of millions, hundreds of millions, and billion-dollar deals. And I don't know why it took me so long,

but I realized there's no difference materially between a billion-dollar, a hundred-million-dollar, a ten-million-dollar deal, and a one-million-dollar deal. And if that's the case, then I bet if I have a couple hundred thousand or ten thousand dollars, I could do a much smaller deal. Wouldn't I be able to do the exact same thing? So I saw behind the curtain, like at the Wizard of Oz, and realized that the Wizard was actually pretty short. And because I saw that, then I just said, well, now we just work backwards. And just like you would buy a $100 million condo unit or condo building, you could see how you could go all the way back and buy your first

studio, right? It's the same thing with businesses. It's just stair-stepping real estate. And so at the time, my biggest constraint was not knowledge. I knew how to do deals. It was time. I was working 60, 70 hours a week. And so one of the first deals I did was a laundromat deal because I figured, well, you don't need somebody to run it full time. And it was a hundred K transaction. And so that wouldn't bankrupt me. And, you know, I could buy a little business like this and that business could keep running even while I wasn't there. And I could have an operator that could probably help me with anything that went sideways. Where did you find a laundry mat to buy for 100K? Was it a website? Did you know the guy? No, no, the guy. So basically what happened for my first deals, I didn't have a framework.

So it was just, hey, I do these really big deals. Could I do a smaller deal? And if I could do a smaller deal, what would be the easiest small deal to do that would be the least risk? And so at the time I knew a guy that was running a couple of laundromats. So I basically said to him, hey, if I find one for you, will you help me operate it? And he knew how to do that. So the very first one we had was in California. And that's one of the secrets to this is two things. First, you have to learn how to do deals, which is not really that complex. We just make it sound complex in finance because financial lingo is like the moat around how we make money, right? The less people speak our language, the more we can charge them, which is the secret. And then the second aspect was how to run a laundromat,

right? Like, I don't know, machine breaks, what am I going to do? And so then I had this guy who knew how to run these and I could just find the deal for him, close the deal for him, and be the cash for him. Why did they sell to you? Old. These are 68-year-old owners of a business that have been running this laundromat plus a bunch of other small businesses in the vicinity for 20, 30 years. And so can you imagine running your podcast for 30 years? It would probably be fun.

But by the end, you might be open to selling. Now, imagine you had a laundromat for 30 years. You're dealing with broken machines, or there's somebody who's homeless messing around with some stuff. At a certain point, you don't even want to continue with a profitable business. And this is where people get it so wrong. All the time on the internet, people love to tell me, no way would anybody sell a business. That business made $67,000 in profit. So I bought it for 100K a year, did 67,000. And people on the internet do one of two things to that. They go, no fucking way it didn't happen. And why would somebody sell? And like, did you give them a bad deal? And the second group of people go, that's a terrible deal. I'd never do that deal because

you don't have enough profit in that for that to be a business, not a job. So those are the two things. And to the first one, I'd say in the US right now, there are tens of millions of small businesses for sale that will never sell. And I tell a story about my Uncle Eb who had a small business that was exactly that, that he closed down, which by the way, costs you money as opposed to selling because he had no idea his business was sellable. Like many businesses that I had before I did this, I shut down instead of selling them. I didn't even realize that even though I was in finance. And then to the second group, I'd say, you start with a small business that probably isn't the greatest business for you to own long term, but businesses are like real estate. You can turn around and sell them after you get in

the game. But I think of these businesses, I call them gateway drug businesses. Once you learn how to do a deal, you'll never see the world the same again. It will change your entire perspective on everything. You will walk in everywhere and you will realize that business is full of masochists like you and me who do this despite it being awful many times, but we love it in some way. But at some point, we're going to want to sell our thing and move on to the next. And so everywhere around you right now, wherever you are, somebody sitting next to you wants to sell their business. And what if you could figure out how to buy that business, put in an operator in it, and then do it again and again and again? And that's the only difference between you and Warren Buffett or

Blackstone or these big, huge companies. Is it important to have competence in the area and the industry that you're trying to buy these small businesses in, in your point of view? Not really, no. Not at all. But it helps, right? Oh, of course it helps. More important than anything is it's sort of like real estate. It's really about the deal. Can you understand, can you read a balance sheet? Can you understand profit and loss, which is not that difficult to understand?

And then can you figure out how to get to the person that can get you answers? So for instance, I didn't know anything about laundromats, but I knew a guy who knew laundromats. Often what I tell people these days is I'm more old school, like I would go knock on doors and I would shake business owners' hands. But you could also go to Reddit where there are platforms with 100,000 electricians on them. And so if you wanted to buy an HVAC company, which is like heating, air conditioning, and often electricity, I would go on there and I would try to find electricians in my local area and I would ask them questions. And I would pay them for an hour consult to figure out how to run this business. I think we forget in this day and age how easy it is to get the information that we want. And so we listen to the fear of the fact that we don't know what we're doing.

And I actually think that's irrational. I think it's really easy for somebody to tell you why things won't work. It's actually quite hard to convince somebody that they're capable of doing something. What if I don't have 100K? You had 100K, right? Yeah. Say I'm working a job. I've saved up only $5,000. Yeah. Well, I've bought a business for $3,000. I've bought a business for $8,000 and I've bought many, many, many businesses for $0. And I'm not saying this in a way that's clickbaity. Will you go out right now, talk to somebody tomorrow and be able to buy a business for $0? You're going to need to do a little work. Just on the structuring of the deal, right?

Just on the structuring of the deal. So they get paid on performance. Exactly. Or they get paid on what's called seller financing. So you can go and most businesses, most small businesses below $10 million in revenue, 60% of them sell with some component of seller financing, which just means if let's say, you know, somebody manages your property here. Let's say that that property manager makes 100K a year profit. They want to sell their business. You're a terrible tenant. They can't handle it anymore. And they sell that business. They want to sell their business. You're a terrible tenant that can't handle it anymore. And they sell that business. They want to sell that business typically for two to five X profit. That's what these small businesses go for. And typically there aren't enough buyers. Like there's

not a bunch of people running around trying to buy property management companies. So what do they do instead? Well, you would come to them and say, all right, I'll buy out your property management company, but you're going to be my loan. I'm going to pay you a percent interest rate, plus I'm going to defer your tax burden. So you pay less in taxes. Nobody likes that. And I'm going to buy the business by giving you $300,000 with over five years, right? So I'm going to keep a percentage of the profits and I'm going to give the rest to you. And it's not really that complex. It's really what happened to real estate before we had Zillow and Redfin and all of these sites that made it super normalized to sell real estate. As you said a second ago, the real key here is knowing the art of the possible as it

relates to deals, the way you construct your deals so that you win. Yeah, 100%. Basically. Well, I think the truth of deal making that people forget about is that it is one of the very few things where it's never a zero-sum game. So if I go to sell a stock, I hope that when I sold the stock, I sold at the right time and you bought at the wrong time, right? Like that's what we hope. In buying and selling small businesses, that doesn't have to be the case.

You know, I could buy, I could sell my property management company to you. You could pay me three X profits and I could say, but if the company increases revenue by X amount, which I think it will with these tweaks and I kind of help you a little bit, how about you pay me 400,000 instead of 300,000? And you would go, great. If you hit those metrics, no problem. That'd be an awesome deal for me. So there's plenty of ways to make sure it's a win-win. But to your point, this is why people are poor, because nobody teaches us the language of deals. And if somebody taught us not how to negotiate our salary, that's fine, but how to negotiate for equity and ownership, the world would look a whole lot different. But that's not in the big picture's incentive. It's really good for the

little guy, not so good for the big guy. The other thing when you're approaching a business and trying to get them to knowing how to structure a deal is one thing, but then there's an element of persuasion and saleswomanship involved in this. How important is learning to sell and how can we be better salespeople in your view? What is the key to being a great salesperson? Because you must be, to be buying businesses, you must be able to figure out what someone wants and present it to them. I truly believe that sales is a fallacy. I don't think sales exists. I think you find people who are already predisposed to want what you are quote unquote selling. And I learned that very early on from one of my mentors, actually at Goldman, that you don't sell anybody on anything. You're never going to change

somebody's mind. And if you think I'm wrong, go try to convince a Republican to become a Democrat, right? Or a Tory to become, I don't know, what's the other side? Okay. It doesn't really go very well usually. And so my belief is actually what you're looking for is just who are the people who are, you're finding trigger moments. Like if I was to have a conversation with Steven about selling your business, I would try, I would be asking questions like, you know, how's it going running? Wow, 20 years? That's a long time. If their answer is, fucking love this business. I am never selling. This is amazing. You're like, cool, awesome. No problem. So lovely meeting you. But if you meet the person that's like,

yeah, I'm ready. I'm ready to retire. I've got this vision of a ranch in my head out in the countryside. But my kid doesn't want to take over the business. You're not gonna get them to think something different. You're purely discovering what they truly feel. And then you are gonna be the person that enables them to have a retirement in a way that no government can. Like you are the retirement plan. And so that's maybe what you need to learn

is just curiosity for another human. And then you need to understand what a motivated seller looks like. And a motivated seller looks like. And a motivated seller looks like somebody who's ready for their next adventure, whatever that may be. And if you can find those two things, then you find the people that actually, yes, they want what you're selling. Now, what you actually do have to convince somebody of, and I hope you're true about it, is that you are going to be a good shepherd. If you are going to

be their retirement plan, you better not go broke, right? You better actually be able to take this business and run with it. And so that is one part where you have to convince. Like, why should I sell this business to you, Stephen? How are you going to take care of my business? And that part really, again, comes down to curiosity, making sure that you're setting yourself up

and the seller for success, not rocket science. If I, I'm going to play, um, I'm going to play the role of a 25 year old. Okay. I'm working in a job. I'm, I've got a little bit of disposal income, but not a ton. Yeah. I'm listening to you, Cody, and I'm going, I want some of that. You've got a holding company, right? Yeah. You've got a fund as well? Yeah. How much, roughly, the revenue of the holding company? 70 million.

70 million. So your holding company does about 70 million revenue. You've got a fund as well? Yep. How big's the fund? Small, 10. Okay. So 80 million combined. I want to get to where you are, but I'm currently working in a job. I'm 25 years old. I've got, I don't know, $7,000 in the bank, 7,000 pounds in the bank, whatever. What would you recommend my first step be, Cody? How do I get out of this job? Yeah. Well, the first step, if you're going to do it like a pro, I'd say this, which is tell me what you do for a living. I do content. Perfect.

So if you do content for a living, what I'd say is don't buy a laundromat. I talk about laundromats. I actually need to change that. I need to like tell somebody I bought a different first business because it's a terrible business to buy. It just was my first one.

And it's very easy to understand. So I'm like, if you can't understand quarter, machine, clothes, clean, don't buy a business, any business, just forget you heard me talk about anything. And so that's why I talk about laundromats. But if I was going to do it the pro way, I would say, you should use your unfair advantage. And if you're in the content business, don't buy a boring business in the traditional sense. Look around you. It's something I call my personal P&L review. So I'd

basically look at what do I spend money on already? If you're in content, you probably spend money on ad purchasing, right? You'd probably spend money on video production. You'd probably spend money on maybe you rent a set space. You have all these expenses around you. And what if you could turn one or two of those expenses into an asset, not a liability, thing that makes you money, not a thing that costs you money. And so, you know, I did a deal back when I was doing more video production in my last company, where I bought a podcast and video production company. And I did that deal basically for $0. I think I put $10,000 down for that deal that ended up doing about $300,000, $400,000 a year because I just said, I know like five or six other people that could use your service.

I'm going to like double your revenue by introducing you to these people. And I pay you, let's say $3,000 a month now. What if we're just going to wipe that out if I can hire these other people and you're going to give me 25% of the company or whatever percentage it was. That's what I would do if I was you. So if you're young and hungry, look around you and see what you pay for and what you currently utilize already, and then try to get a percentage of that business if not buying the whole thing. And that's sort of the pro way to do it, as opposed to car wash, need to go learn, totally different market. You can do the second. It's just a little bit riskier. So I'm working in content, 25 years old, $7,000 in the bank. I realize what you've

just said. And I go, you know, I'm a marketing agency. We book a lot of studios. So what I'm going to do is I'm going to approach a studio space, try and do a deal with them, and then I'm going to send clients their way? Yeah, you could totally do that. That'd be a sweat equity deal or a rev equity deal, revenue equity deal. So for a studio space, I mean, I think the probably pro way to do that would be one, you'd approach them and you'd kind of get an understanding for their business. You'd be like, how much revenue do you make? Like, how big is this? You'd figure out if you were material to their business. So me doing 3K a year with my video production guy, I was material to his business. He was only doing, I don't know, you know, $100,000 a year or something like that.

And so if my 3K went away, that was, you know, that's like 20% of his business right there over a yearly basis. So if you go to a studio production company and they're like, yeah, we're doing $7 million a year and you're paying them 3K, you're like, all right, cool. Anyway, nice to chat with you. Or you could say, who's the owner? How long have you been doing this? And you could dive into it. And the other side of the coin is you might find out that the owner is 70 and you become buds with the owner. And the owner loves when you come in because you're kind of like young and you learn about what he does. And then you ask who's going to

take over the business. And then you might say, hey, you know, I do this other thing, but I would love to sort of be an apprentice to you in a way and potentially buy your business using future profits. And you can sort of like stay on and we can stair step our way into this. But would you be open to that? Like leaving your legacy to somebody like me? And so you could do it that way too. But I think it goes back to kind of the smart question you asked, which is like the two avatars are who's listening to this right now? And then that's the same question to the people listening that you're going to ask the owner, what sort of avatar is the owner? And how can you become the

solution to what that avatar is looking for? How can you become the son to the father? How can you become the buyer to a really anxious seller? And then you can get your deal done.