The Game with Alex Hormozi - Analyze your business | Ep 340

Episode Date: October 28, 2021

Fools don’t use tools! Today, Alex (@AlexHormozi) shows us the variables and equations you need to analyze your business and how he got the two hardest numbers not everyone is able to have.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:(0:22) - Deep dive into business analysis framework(1:17) - Understanding key business metrics(2:15) - Case study: Analyzing a hypothetical business(6:40) - Strategies for increasing business value(10:41) - Final thoughts and encouragementFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

If you are good at something, you need tools. 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. Mosy Nation, two days ago, I was speaking with some business owners that approached me about becoming portfolio companies and acquisition.com. And I want to talk to you about how that conversation went. And I want to give you one of the most useful frameworks that I use in analyzing a business that you can use today to analyze your own business and instantly two, three, exit, which is exactly what I do. I'm looking at the portfolio companies that we're considering on investing in.

All right? So the beautiful thing about this equation, and as you develop as an entrepreneur, at least as I have, and just so if you guys don't know who I am, my name is Alex Ramosey on Acquisition.com. Our portfolio companies do about $85 million a year. And so the reason I make this channel is because a lot of people are broke and I don't want you to be one of them. And Mosy Nation is not going to be one of them. All right. So everyone needs, if you are good at something, you need tools.

All right? This equation is one of those tools that you have as an entrepreneur. If you have to rely on your systems, if you have to rely on finance, to get you get to the reports to make general directional decisions, then you're going to be weak as an entrepreneur because you have to be able to do these calculations in your head back of napkin. All right? And so I want to show you the most valuable equation that I use in analyzing my own businesses and potential portfolio companies.

All right. And it requires five variables. And I'm going to show you what they are. And then I'm going to show you how I got the two hardest numbers that most people don't know how to get within their business. All right. So I can even give you the sixth number, which will be a bonus one. number one is gonna be number of new sales per month all right most people know this number all right

the next one is current revenue so that's most people also know this number right the next number is price most people know this number the next number is going to be churn most people do not know this number the next number is going to be lifetime value most people do not know this number the next number is gross profit. So I'm going to show you how in a simple conversation, we can figure out all of these things and extrapolate where a business is going to cap out, where the weak points are, and how we can see the size of the opportunity. So I'm going to give you a hypothetical example that I just had. So I was talking to a business. They were doing 100 new sales per month. All right. So that's number one. Now, I said, cool, what are you guys doing in revenue right now? They were doing 400K,

in revenue. I said, okay. And I'll do this here, current clients. This is really important. You will want to pay attention to this video. All right. So, they had 380 clients. All right. Their current price was $1,000 per month. Turn, they didn't know, lifetime value, they didn't know. All right? So I said, okay, well, the first thing we have to do is figure out where hypothetical max is going to be. All right. So if we know the current number of new sales, because they're like, well, I have to get you these numbers later. I don't have them on me. I was like, if you know these numbers, we can do them live together. And they were like, oh, I was like, yeah, so let's walk through it. Okay. So, $1,000 a month is the price, right? And I said, okay, well, how many customers are canceling every week?

And they said 13 people per week were canceling. I was like, okay, so roughly 50 per month. Okay, makes sense? Everyone good here? Now, they said they have. 380 active clients. So what we do is to take 380 active clients. We divided by 50, oops, sorry, 50 people canceling divided by 380 active clients. I already did the math for you. It's 13% churn. All right. So now we take our price, all right, which is $1,000 per client per month. We divided by that 13% churn and we get 7,700 bucks. All right. Right. Right. roughly. So now I know that $7,700 is going to be the LTV per customer, all right, which means that this business is going to cap out a 7-7K per month, all right, which is about

$9 million a year. Now they were currently doing about $400K. Now the thing is, there's a lot of business and they were growing really rapidly, right? And it makes sense because they were because they had this kind of sales velocity. So with this kind of sales velocity, they're going to keep growing pretty quickly and then it's going to become an asymptote, which looks like this. So an asymptote is you have a hypothetical max and it and it approaches it but never gets there. All right. So the asymptote here would be 720K. The thing is, is that the growth rate would slow down because churn is going to start eating a bigger and bigger and bigger percentage of the new business that is coming in. Right? Right. Okay. So we know the current clients. We knew the new sales. We know the

current revenue, right? We know the hypothetical max, which for me helps me analyze the potential opportunity of this business, right? We know the churn now, which is 13%. We know the lifetime value of each customer now, which is 7,700. And I asked them, what kind of margins are we running on this? And they were running over 90% gross margins. All right. And the easy way to do that is how much does it cost to fulfill a customer? So for them, for that $1,000 a month customer, it costs them less than $100 to fulfill on. All right. So it was very, very, very low cost business, which means all you do is you multiply this by 0.9. And then you get, let's see here,

let's see if I can do my own math really quickly. All right. So now you get roughly, let's say, $7,000. Okay? So the lifetime gross profit per customer is $7,000, which means as long as we're spending less than $7,000 to acquire our customer, we are going to be a profitable business, right? For the most part.

Hey, guys, love that you're listening to the podcast. If you ever want to have the video version of this, which usually has more effects, more visuals, more graphs, you know, drawn out stuff. Sometimes it can help hit the brain centers in different ways. You can check on my YouTube channel. It's absolutely free. Go check that out if that's what you are into. And if not, keep enjoying the show.

So when we had this little discussion, all right, let's go back to our little drawing, right? We know that they're going to cap, right, at 7,700K, right? Whatever you got what I'm saying here, right? So if we want to grow this business, we either have to, increase this one, or we have to increase this one. That's it. You can only grow a business by getting more customers or making them worth more, period. That's all we have to do. And within this particular business, I saw the opportunity here because I saw a 13% turn, right? Because check out how this goes. If we can just cut the churn to, let's say, 3%, ah, let's do some cool math. You

want to see something really quick? Sure, Alex, I would see. All right, fine. I'll show you. All right. So if we've changed this to just 3% churn, all right, the new LTV becomes $33,000 per customer. All right. Now, this business all of a sudden, without changing anything else, becomes a $3.3 million per month business. That will become the new hypothetical cap. And almost all of that would be margin. Ah, much more interesting, right? What most people do is they say, hey, I want to take this thing and see how we can get it to, you know, a thousand, right? Which would be, you know, awesome, because then that would get us to 7.7 million, right? Per month. But which of these do you think is easier to do? 10xing the acquisition are simply dropping your turn from 13 to 3%. Right? And there's lots of ways to drop churn,

and I've had a different video or said how I cracked Netflix recurring revenue model. There's eight Cs to increase your stick or decrease your churn, whatever way you want to say it, right, that we'd be going through to figure out how we can cut churn from 13 to 3%. And FYI, For a company to have enterprise value, most private equity firms want to see 80% yearly retention, all right? Meaning you keep 80% of your clients per year. So if you start at 1,000 at the beginning of the year, you have 800 at the end of the year. All right. Now, if anyone wants to venture or guess at what 13% monthly turn looks like, you're probably keeping less than 20% of your customers by the end of the year.

And so for them, they don't think that's an enterprise that's very valuable because what they're looking at, just in case, I'll give you guys a little nugget here. There's three main variables that they're going to be looking at, any kind of potential buyer, which is what's the growth, right? Number one. Number two is how likely stickiness, which is like how likely is the business going to be here, and then what's the profit, right? So you could pretty much multiply these things together, which is if I have a super fast growth company, all of the revenue is super sticky and we're very profitable,

then this is going to be a very, very, very valuable business. If I have a business that is mediumly growing, right, it is not sticky and I have low profit, then this is going to be a low value business. And so the objective for us at Acquisition.com is how do we take one of these guys, right, one of these businesses and turn them into one of these businesses? And so it's really looking at these fundamental metrics to figure out where the weak points in the business model exist. All right. So right now, if you're a business owner and you don't know what your hypothetical max is, with your current model and your current numbers,

you are fooling yourself. You don't know where you're going to cap out, which means you don't know where your weak points are. All right. And so right now, everyone should be able to do this math within their own business without any kind of complex recording

without any kind of, you know, Excel sheets that you're getting sent from finance. All you need to do is you got to know how many new customers are getting, which is this guy, how many new sales you're getting, how many current clients you have, where your current revenue is,

right, what your price is, what your prices are, you should know all that stuff. And as long as you can know how many people are canceling every month, then you can calculate the rest of this entire equation for yourself and figure out how you can de-bottleneck the growth of your business. Because I'm a big believer in the theory of constraints, which is a business will grow up to its nearest constraint. And so all I try and do is simply remove the constraints of the business to allow it to grow.

I see businesses, organic beings, they want to grow, and they're simply being constrained by something. And our goal is to find what the biggest constraint is and remove it. Most people try and do lots of things. I believe that the smartest people in the world try and find how to do the fewest things that get them the most returns. And removing the biggest constraint is the biggest one of those. All right.

And so, anywho, my friends, this is Alex Formosie reporting in from Acquisition.com. We're doing $85 million a year in our portfolio revenue, and I have absolutely nothing to sell you. Mosey Nation, keep being awesome. If you enjoyed this and you're new to the channel, hit subscribe if you liked it. If you didn't like it, I love you either way. Keep being awesome. I'll see you guys the next bit.

Bye.