The Game with Alex Hormozi - 99% of Businesses Fail Over a Long Enough Time Horizon | Ep 644

Episode Date: January 25, 2024

“I think most people miss is that they don't even know the hats that they are wearing.” Today, Alex (@AlexHormozi) talks about the importance of transitioning from selling your services to selling your business and making your business a sellable asset. He discusses the key aspects of focusing on people to scale up the business, the need for operational independence, the relevance of high-quality talent, and the understanding towards the importance of continuing the learning process.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:02) - Understanding the value of a business(2:08) - The misconception of being a business owner(3:20) - Importance of replacing yourself in the business(5:19) - Journey of entrepreneurship and scaling a business(7:41) - Role of leadership in a sellable business(10:52) - Importance of making your business sellable(14:05) - Transition from business owner to investorFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was on February 22, 2022)

And the thing is, is you're going to hire somebody who you think is going to be good at marketing, and they're not going to be. And you're going to hire another person, right? And if you're like, man, that sounds tiring. That's the reason most people who own big companies are like, it is hard to do this. This is not easy. This is not for the faint of heart.

You must have a long-term vision that you are committed to because you will burn out if you're only doing it for the money. The wealthiest people in the world see business as a game. This podcast, The Game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a billion-dollar portfolio. My hope is that you use the lessons to grow your business and maybe someday soon, partner with us to get to $100 million and beyond. I hope you share and enjoy. 99% of businesses end up closing down over a long enough time horizon. Only 1% of businesses

ever get sold or trained chance. And the reason for that is not because what you might think, right? You might think that it's because business owners don't know how to sell their business or don't know how to market the business to get sold. But that's actually not the real reason. The real reason is because most businesses are worthless. And so what I want to talk about today is how to go from a worthless business to a business that has actual value. Right. And so right now, if you're a small business owner, which, you know, there's 30 million small businesses or whatever it is a lot, most of these businesses don't actually have value.

And the reason for that is because they are not businesses, they are jobs, right? And so if you remember Robert Kiyosaki's wealth quadrant, I think it goes employee, self-employed owner and an investor. I believe that's the quadrant. I could be wrong, but I'm pretty sure that's what it is. Or at least that's how I would draw it in my head in terms of some progression. So most of us have, you know, most people have jobs first, right? And then they make a certain amount of money. They're relatively skilled and they think, you know, I could do something like this on my own, right? Or I could do something else on my own. And so then they switch to self-employed. And what they don't know is that switch from box one to box two is that you actually take a decrease in pay. And the reason for that is because you actually aren't that good yet. You know how to do one thing well here. And because of that, because you fit into a larger machine, you're able to earn higher pay because as a sum of parts, you can actually provide more value. Right. But when you actually have to be each of the parts, you're not. not that good at it yet. And so you become self-employed and you actually make significantly

less for a long period of time. The thing is, is that most people who are self-employed have an LLC, right? And so they consider themselves to be business owners, but the reality is that they are not business owners, they are self-employed. And even if you have other employees that work for you, you are still self-employed. Here's the litmus test for this, right? What happens is, and I have these conversations all the time because there's companies that apply to become portfolio companies with us so we can invest in the companies and help them grow, consume it. The thing that happens, though, is that they stop doing the actual fulfillment of the thing, whatever the widget is, whatever they're selling, whatever the services, they're not actually doing the fulfillment. And so in that moment, they're like, I now own a business and I am a business owner.

And now I can sell this business. And that's so far from the truth because there are so many other things that must happen, right, in order for a business to be sellable. Because for a business to be sellable, it must be an asset that can run without you. Now, you might think, again, here's the fallacy, that your business can run without you. and that's because maybe you don't do the actual thing, but you are still involved in maybe the marketing and the sales, right? If you can't get someone to replace you in that, then you can't sell it.

Now, you might think, oh, I'll just sell it and then somebody else would do that. It's not going to be a sellable thing. No one's going to do that because they're like, well, you haven't done it. Well, why would I believe that someone can do it besides you? Because you haven't proved it. And so what you have to do is prove to what a future buyer would be that this business can operate on its own without you, right? And so the next step, right, is that you replace.

the acquisition. So first you have the services that you're not doing, then you replace the acquisition process to be something that is reliable. Pick one of the channels you want. You could pick referrals. You could pick affiliates. You could pick manual outbound, which is cold calls, cold emails, whatever. You could pick owned media, which is like all the people that you already have contact with that you can message. You could have earned media, which is that you start creating a channel of your own, that a platform will distribute your content. That's how you generate business or you can do paid traffic, right? You could do paid media and start running ads on a consistent way to generate sales, right? No matter what it is, you have to have a consistent process where you know, if you put

X effort or X dollars in this side, that you will get Y outcome on the other side, right? And if you don't have that, then you don't have a sellable business. Now, here's what happens next. So first, you productize your service. It's a consistent thing that you deliver it over and over again. You're not custom. If it's custom, it's going to be terrible and it's going to be, it's going to be valued as a service-based business, which is going to suck and you're not going to be able to sell it. You're going to have a massive earn out, which basically means you're going to work for the next five years to earn the exact same pay, except you no longer own the business and the person who gives you the earn out, has all the upside. And you take all the risk and they got all the upside. So no Bueno there.

And so you've productized the service. You have a predictable acquisition process, right? And you're like, now I can sell the business. Ah, wait, there's more. Because the thing is, is that you still own all the hats. You still might be managing the sales team. You might still be managing the marketing. You still might be innovating the product. You still might be making all the chief decisions, right? You still might even be operating the business, just not actually doing any of those things. And so to say that, like, I'm now a business owner and this, this works without me is not true. You were just, you were doing higher level skills, which, believe it or not, are more expensive to replace, believe it, you know. And so now you have to go find someone who's going to become your VP of sales so you can take that hat off.

And who's going to become your director of marketing so you can take that head off? And then who's going to become the chief product guy who's going to be consistently innovating the product and improving it so that it delivers, you know, delivers excess value to your customers. Right. So you have all these hats on. And so the process of entrepreneurship of transitioning from self-employed, where you literally have 100 hats, right, to transitioning to business owner where you take all the hats off your head and you were just a shareholder, which is how I prefer to see it, is like, you have to think of yourself not as the owner, but as the director of the board, as the chief shareholder in the company, right, rather than the owner. Okay, even that change in language, I think is helpful and it was for me. What we have to do here, and if you're like, man,

that's going to take a long time for you to do that. Duh, that's why most businesses don't get sold. And that's why sometimes it takes years to build something that's great, right? It might take you three years. It might take you five years. It might take you 10 years. right to get the business at that point and if you're like man if i only just had xyz insert person i could do this welcome to entrepreneurship like the game is about people right once you have the model and you have some of the tactics in the beginning so you can get some initial traction like the rest of it is people right people are the thing that are going to run this machine for you and that means you have to learn how to recruit have to how to hire how to manage and how to lead right and those are the soft skills that are

harder to they're less tangible but they're just as important if not more so right when you look at the the biggest billionaires and multimillioners out there, they keep their space around them very clean. They know what they stand for. They know and people are attracted to them because they have admirable qualities and traits. And that is how you get the higher level people. So think about this. So let's say that you've got somebody who's a brilliant marketer who can generate demand like crazy for you, right? Well, that person isn't going to work for someone who's lower skilled than they are, right? You have to have more skills to attract the type of people that you want who are going to help you run this business and grow it because they have to believe in the vision, they want to do something

that's meaningful. And so the journey here is understanding, and this is the piece that I think most people miss, is that they don't even know the hats that they are wearing. You making decisions is a hat. It's an important hat, right? And so selling it without the person who can make decisions isn't a business, right? If you're selling it and you're still the chief marketing officer, you're the one who's controlling the messaging and the branding and all of those things. It's still like that rule still exists. Hey, Mosin, a nation, quick break just to let you know that we've been starting to post on LinkedIn and want to connect with you. All right, so send me a connection request and note letting me know that you listen to the show and I will accept it.

There's anyone you think that we should be connected with, tag them in one of my or layless posts and I will give you all the love in the world. All right, so let's get back to the show. And so there's typically far more leadership that has to occur in order for the business to be sellable. And here's the thing. Now, all of a sudden, all of these roles that you've been doing up to this point, you've been taking. profit, sell discretionary earns, SDE, from the business, when in reality, a lot of that profit must be allocated back to the roles that you're doing, but you're not choosing to pay yourself for it, right? What happens is a business will become more sellable as you replaced all of the

pieces that you're doing, and oftentimes the margin will drop. But that is okay because now you have 100% of your time back and then you are truly a shareholder in the company. And this takes years, not months, not weeks. And the thing is, you're going to hire somebody who you think is going to be good at marketing and they're not going to be. And then you have to hire another person. and then you think they're going to be good at marketing and they're not and then you got to hire another person right and if you're like man that sounds tiring that's the reason most people who own big companies are like it is hard to do this this is not easy this is not for the faint of heart you must have a long-term vision that you are committed to because you will burn out if you're only doing it for the money you will because once you've satisfied your personal needs you'll just stop being

you'll stop being inspired by the reason that you're doing this right and the thing is is your employees will be even less inspired because all of it starts with you and then gets diluted down and so if you are not extremely potent Right. You are not extremely distilled down in terms of your vision of where you want to go and why you're doing this, why this business even exists, then other people be even less so and less committed to that vision. And you will attract lower quality people and they will turn out and they will not be skilled, et cetera. What happens is, the small businesses become big businesses because you need to slowly grow them so that you can accommodate more people, right, who can actually do all of the things that you do. And the reality is that you're not going to find, because right now you're like, well, there's one of me, so I just need to hire one more person. But that's not, that's not reality. Right? You might be doing six things and you might have to hire six people to do what you are doing. And of course you do and that sounds unreasonable, but welcome to business. And so for businesses to be scalable, oftentimes they have to have significant enough gross margins and volume to be able to pay for high quality talent to be able to actually do these things to take decisions off your plate. And where you get into the point of kind of like hyper growth and hyper scale where you're starting to talk 10 million, 20 million, 30 million plus per year, right? is when you have people who come with solutions preloaded,

they come with experience of having done the thing that you need to solve already. So you'll notice the transition to business owner, and I'll tell you this right now, is that once you start crossing multiple figures, the people that you are hiring are better than you are at everything. And that's one of the, that's one of the weird things that happens. Because in the beginning, most people don't have the skills that you do, right? And so you have to hire people who are not as good as you are,

and then you have to train them, right? And then later on, you start hiring. hiring people who are okay at some things. You still have to train them on how you want it done. So they have, they've done the type of role in the business in the past, but they don't know how you want it done here. So you have some training, but there's less and there's some experience, right? The level above that is when people come in, they know what to do and they know how to do it better, better than you for your specific business. And when then that happens, then you realize how little utility you actually have in the business and how your really only role is to just recruit

people, right? Recruit people and cast the vision of where you want to make the bet for the company of where you want it to go. And so anyways, the reason that most businesses are worthless is because they sell entirely customized things. They sell it to everyone, which makes it completely unscailable. They're the ones who are still heavily involved in the acquisition in the rainmaking. And so because of that, and then even then, even after they've graduated from getting out of the selling and getting out of the fulfillment, the business still doesn't have value because they might still be the talking face. They still may be the spokesperson, which means that the business has no value outside of themselves because no one else could take it over, right? Unless the person

agreed to a three or five year earn out, which then means that you transfer the ownership to someone else. They get all the upside. And if you don't hit the milestones, they get your business anyways, and you get none of the money. Right. And so it may sound arduous to do this. And it is. But I can tell you that having now gone through this process, it is one of the most worthwhile things that you can do is look at the business as a true sellable asset. Because I heard this quote from MIT dude who spoke from John Worrello's book. But anyways, he said, all of you guys are busy selling your services. What you should be doing is selling your business, right?

You as the CEO or the owner, your job is to sell the business. The job of the salespeople is to sell the products, right? Once you can make the transition from your businesses are your products, rather than your services of the business are the products, you move up in a level of an order of magnitude, right? And so I'm not saying that you should immediately be selling your business, right? but you should be making your business sell a bull. And the beauty of this is that when you go through this process,

you end up having phenomenal leverage in any kind of negotiation that you want to have in the future. And this is a key hack for negotiating, FYI, is that don't need the deal. The guy who needs the deal, the less is the way that you negotiate. Like, that is, like, everyone wants all these tricks and tactics and things for negotiating. The way to have the best negotiation is to have the most leverage. The way to have the most leverage does not need the deal. Simple, right? Simple, not easy.

How about that? And so if you want to, sell your business someday for a lot of money, then the business must be sellable. And in order for you to do that, you must get to the business to the point where you don't even mind keeping it because it's still cash flow so much money to you and you don't do anything. That is the position of FU. That is the position where you'll get the most money because now you have something that people want. No one wants a business where the owners, you know, no one wants to buy themselves a job, right? And they don't want to buy themselves your job. And so you have to think, and this is the critical

self-awareness of thinking, like, what are the actual things that I do? Everyone else is going to think, oh, no, I don't do anything. This thing runs itself, except if you step away and didn't answer calls for two months, would the business still run itself? Probably not, right? So then we have to look at. What are we actually doing? And it might be little fractional things that we're doing all over the place, but we still have to quantify those things and we still have to put processes around them and then hand them to people and see how they do and then continue to improve them until eventually you get to that promised land where you don't actually have to do anything. And you can still own the business. And I mean, to prove this, like you can probably own shares of companies on the public

traded market, they have figured this out, right? And you can own a piece and participate in the upside without ever looking at what Apple is doing for their roadmap, right? And so we have to get to that point as business owners in order to make the asset that we own, the most valuable thing that we have, probably the biggest thing on our net worth balance sheet is all the equity that we have in our businesses. And to increase the value of that equity, we have to make it so that it actually a business and we transition from employee to self-employed to owner, right? And then the transition there goes from owner to investor because when you make that transition, that is when you start seeing your business for what it is, which is a sellable asset that sits on your net worth balance sheet.

All right. And so this is one of the hardest lessons that took me the longest amount of time to learn. I'm hopefully just translating this to you because I see so many people who are like, I want to sell my business, but the business is not sellable and it is worthless without them. And so we can't just say, oh, the next person's going to figure it out because they're not going to. I'll tell you right now they're not going to. You have to figure it out. And what most people do instead is they just start another business because they don't know how to solve a problem. And so we must confront the problems that we have, which is you have to articulate the thing that you don't know how to do as a problem that you can solve, which is I don't know how to insert, find hire direct a marketing director. I do not know how to find a VP of sales and train them and manage them and grow them.

I do not know how to find a chief product officer who's going to innovate the product on my behalf and make it better than I ever could and make a better product and make a better client experience around it and consistently improve it based on these metrics. Until we can articulate what the problems are, we cannot solve them. And if we consistently live in this world of like, I just want to sell my business someday, you're not going to be able to until you put these pieces in place so that the business is sellable actually has value in and of itself separate from you. And then when that happens, your net worth will skyrocket because now you have something that everyone wants, which is an asset that produces cash while you sleep.