The Game with Alex Hormozi - Active Business to Passive Income | Ep 329

Episode Date: September 9, 2021

Wealthy people own the right things. Today, Alex (@AlexHormozi) talks about his experience and what he learned in regard to turning an active business into a passive income. Listen in as we learn the mental framework that is needed in order to take two steps forward in the field of business.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:(0:41) - Make anything passive or active: what's the better choice?(2:08) - Walkthrough: how and when to do it(2:59) - Mental framework Alex discovered after some time(6:48) - Turning active business into passive income: big pictureFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

You want to take your passive things and make them more active in order to increase your returns. And that's a very tempting thing to do because we're entrepreneurial and we can see where the margin is getting lost. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. In this video, I'm going to show you how to take an active business and make it into passive income, right? So the goal that most of entrepreneurs have, right, is to have freedom, right? So we want to not work or not have to work and have money coming towards us.

And the thing is, what I have learned is that you can make anything passive and you can make anything active. And one of the difficulties for entrepreneurs when you switch from entrepreneur to investor is that you want to take your passive things and make them more active in order to increase your returns. And that's a very tempting thing to do because we're entrepreneurly and we can see where the margin is getting lost, right? But if you always chase time, then you'll always be able to make whatever it is. Like if you chase time always, then eventually you'll end up with all your time and you should have some left over that is coming towards you. And so I'll give you a quick example. So Jim launch two years ago, I think it made 17 million, I mean, according to our quality earnings, we made 17 million in profit in 2019, 2018, 2018, excuse me, 2018. And this year we'll probably do 8 million-ish in profit.

So you were like, whoa, you cut in half. Here's the difference. when we did $17 million, I was the business. It was 100% Alex's face wrapped with a monetization structure wrapped around it. I was taking calls. I was doing all of these things. I was definitely CEO. I was definitely in front of the marketing.

I was also the product. I was doing all those things, right? Right now, the business basically generates half the profit, but it involves me for about 90 minutes a week. And so my dollars per hour is significantly higher because now I also have all these other things that I can do with the time that has earned back for me. And so what I want to walk through is. through in this video is kind of the process in how to do it and when to do it.

And so one of the issues that I see people starting out, and when I say starting out, making a million, three million, et cetera, is that I'll get messages from them and they're like, dude, I think I'm ready to outsource my business. And I'm like, but why? Like, I don't think you've gotten to the, I mean, maybe somebody who's at a zillion, you know, says to me, like, why are you doing that now? But I think for me, my answer would be like, I've achieved the wealth that I, that I want. I don't need to gas it anymore. And now it's really using a different metric for success, which is like how much can I spend, you know, how much time can I spend with my life? My wife, how much time can I spend whenever I want in the gym, working out,

eating this stuff I want to eat, et cetera, right? How can I have other metrics for success, spending time, you know, meeting people, et cetera, and doing stuff like this, which I never did while I was growing the business, not in this way, right? And so anyways, the thing that I see people do is they try and jump out of the CEO seat too soon. But what I want to do is give you a mental model for how to do it when it's right, right? Because, ultimately, if you can turn your active income into passive income, I just love this quote. You get paid on what you do. You get returns on what you own, right?

Gym launch as an enterprise is far more valuable, or my fitness companies, because there's a couple there, are far more valuable now than they were when it made $17 million in profit, because then no one would ever buy it, right? Because no one's going to buy me, right? It's just a, it was a personality brand. Whereas now it is an enterprise that generates revenue by providing value to customers on a consistent basis, and I have nothing to do with it. And it has a management team at place, et cetera, right?

And so as we make these transitions, going from CEO to owner, you have to go from active to passive. So this is the mental framework that it took me a really long time to discover when figuring this out. So think about your trajectory as an entrepreneur. So first you do everything, right? And then all of a sudden you start delegating out the things that are the lowest value time-wise. If you can pay someone $10 an hour or $15 an hour to do, you know, 10 hours a week of your work, then you get 10 hours back. and then you can put higher value skills in those 10 hours and then make more money. And then fundamentally, that's literally what entrepreneurship is,

just arbitrageing time over and over and over again, and then leveling up your own skill set so that with the time that you get back, you can provide, you can do more valuable things. And that's, I think, one of the bigger issues that I see a lot too is that people will outsource their time and then not fill their time back up with higher value skills, right? Now, if that's what you want to do for lifestyle walls, that's cool. But like in terms of the game, if you seek to grow, then you need to re-put more things in your stack and take the extra.

10 hours and do something even more valuable. Maybe it's marketing again or learning a new channel or improving the product or whatever it is. It's more valuable than maybe frontline support, right, or whatever. And so the idea here is going from active to passive. And so as I was saying, when you replace that role, right, what you did is you got time back, right? And so if you do that enough times, you're always, you know, doing the next thing. But here's what's kind of funny. And this is the mental framework that I want to give to you. Imagine like, let's say you look back at what you were doing a year ago and it probably should look different than what you're doing today, right? Hopefully if you're growing in your business, what you're doing then versus what you're doing now is different.

Mosy Nation, real quick, if you are a business owner that has a big old business and wants to get to a much bigger business, going to $50 million plus. We would love to talk to you. And if you like that, we would like to hear more about it. Go to acquisition.com. You can play anywhere on the page and talk to one of our team and see if we can help you get there. So if you look back to what you were doing then and you see the progress that you made to what you're doing now, then rather than saying, okay, well, in 12 months I'm going to be doing all these things and all these things are gone, if you can actually jump two steps forward, then your business could be 100% growing at the same pace as now with somebody doing both of these things that you were doing and then you're just owning it.

All right. And I know you're like, wait, what does he mean? I'll try and explain this again. So this is like, if you can understand this concept, it will set you free and allow you to turn your active income businesses into passive income things that you get returns on. These become assets that become sellable. One of the number one issues that people have is like you can't sell personality brands. You can't sell their own businesses because they're so integrally involved in them. Right. And this is one of the mistakes a lot of people make, especially smaller entrepreneurs is they're like, you know, my business makes, let's say, $3 million a year, right, in net profit. Well, if it would cost, you know, a million and a half to get all of the leadership and executives in order to do all

the stuff that you're doing, which is very realistic. You might need four or five high level leaders to do that stuff, then your business is actually making a million or a million a half in profit. So it's actually half as valuable. So you're doing a million and a half dollars a year of payroll work because you're getting paid for that. And then your business is returning you an extra one and a half million. So your total as a person are netting $3 million, but the business is generating $1.5 and you

are generating $1.5. If you can delineate that concept, it will serve you very well in business, and especially with the concept I'm saying right now. So the idea is, what we want to do is take two steps forward from where we're at right now, not one. Because if you take one step forward, you delegate what you're doing now and then you start doing the next thing, right, that you need to do. But if you delegate what you're doing now and then you get someone else to do the thing

that you should be doing next, then you can take a step back and now you're owning the business while this person now does the thing that you were doing before. And that is ultimately how you can take your active thing and turn it into passive. And now you're an owner who looks at the enterprise and then what's crazy about that you're this is that you can actually see the weaknesses of your own business far better when you're outside of it looking in and see you can see the marketplace better you can see what your customers are saying better it's you just get so much more perspective and then you really become the chairman of the board and then you're

really meeting with the CEO and you're talking to the CEO about their direct reports how they can improve as a leader and what they need to do in order to kind of like and help them cast the vision for the company that's really it and the thing is the vision doesn't change that frequently and so you need to be smart about why you're choosing to go in the direction you are. But once you've made the decision, there's not a lot of change that has to happen. It's really like, how can we execute consistently to get there? And so, big picture to wrap this puppy up, if you want to go from business running to business ownership, one,

don't do it too soon. And this is probably the number one mistake that I see people make is that they do it too soon. Two, if you are going to do it, then if you can think about what you get paid on versus what you returns on, then you can separate what you do versus what you own within the value that you have in your own net worth. Like you are valuable because you have skills. I own value. Like, I love this quote and I'll say it again. Poor people do the wrong things.

Rich people do the right things. Wealthy people own the right things. And so if you can think through that within your own life, it's like, well, I need to, right now you're probably doing the right things and you own some of the right things. Right? But you're doing both of these things. You're getting paid here and you're getting returns here.

So we want to put someone in place to do the things that we're getting paid. for and then continue to keep the things that we're getting returns on. Now, mind you, at some point, that means that you might lose half of your income if it's 50-50, right? If your business makes you a million dollars a year and then you make a million dollars a year working in your business and the business nets you two million, then you quitting, right, quitting and hiring somebody else to do this thing because you take two steps forward. If you do that, then all of a sudden you'll get a pay decrease, but your dollars per hour will go up, your enterprise value go up because now it is something that is sellable, that

that operates without you. All right? And so that actually means that your net worth increases, even though the quote profit of the business decreases. And then here's what's cool is that once you've done this, right, once you've eliminated this step and now you just own the thing that you get returns on, now you can focus on how can I increase revenue here? Trying to put more fingers on my revenue, right?

How can I increase the revenue that I'm making here without me being involved? Because it's all about the constraints that we can put on ourselves. So if I can increase the revenue without me doing anything, how would I do that? And then you ask better questions and then you get better answers. And then that is ultimately how you can grow the wealth of the business without you spending more time or making more tradeoffs that you don't want to make because you got it in this game for freedom. Right. And so anyways, hope this is valuable for you. Hit subscribe as it was. Check out the next video that comes up because I'm sure it's sweet. And if you hated this, then I would ask that you can

you can also tell me that you needed it and I will send you live away. So anyways, keeping awesome. Lots of love to get you the next video. Bye.