The Game with Alex Hormozi - How to Build a Valuable Business You Can Sell Someday | Ep 707

Episode Date: June 19, 2024

"Keep the Goose, Sell the Eggs." Today, Alex (@AlexHormozi) shares a valuable framework for understanding if your business is sellable, and if it has multiple components of it, which could be the most valuable aspects of it to sell.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(00:24) - Story of someone trying to sell his business(01:16) - The Golden Goose(03:24) - The Big Picture You Have to Understand(06:21) - How to Verify What Your "Goose" Is(9:56) - Mrbeast Holdco Example(14:38) - How Rollups Work(18:42) - Closing RemarksFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

A lot of times the thing that I thought when I started building the business that I was going to sell wasn't actually the thing that the ultimate investor ended up valuing. I've built and sold nine companies. The last one I sold was $46.2 million. And so I'm just drawing on my experience from selling those to different partners, competitors, private equity, strategic buyers. So that can tell you the things that I've learned so that you can get there much faster than it took me. There was a guy who had rental events. So basically he started an event business where he would, he basically have a venue that he would rent. and he'd have two, three events a week there,

and he would charge whatever the day rate is for the event, and that would be more than what his rent was. And that was the entire business. And so he had three locations. He sold those. And then he started a coaching business or an education business around helping other people find event spaces, rent them out, and do the same thing he did.

Right. And so he was like, hey, I want to sell this business the way that you sold gym launch. And after talking to it, I was like, dude, I think you're going about this all wrong. You're trying to sell the goose when you should be trying to sell the eggs. And this will be the common theme throughout this is that most people are trying to sell the goose rather than sell the eggs.

And you never want to sell the goose. You want to keep the goose and letting golden eggs, right? So that you can keep selling them. And for those of you don't know the story of the goose and the golden egg, I'll read it to you. It's two seconds. There was once a countryman who possessed the most wonderful goose you can imagine. For every day when he visited the nest, the goose had laid a beautiful glittering golden egg. The countryman took the eggs to the market and soon began to get rich.

but it was not long before he grew impatient with the goose because she only gave him one egg a day. He was not getting rich fast enough. Then one day, after he had finished counting his money, the idea came to him that he could get all the golden eggs at once by killing the goose and cutting it open. But when the deed was done, not a single golden egg did he find and his precious golden goose was dead. There is something that creates value and then there's the thing that is value bull. And so figuring out which of the things that you have in your business is the goose and which of them is the eggs is the eggs is one of the highest leverage things that you can do because you can build towards the exit intelligently. And so in this business, I was like, hey, man, you're getting all these people on using your systems and your processes and your price points. I was like, you're doing all the work that a roll up would have to do if they acquired a bunch of these businesses.

I was except you're doing it up front. And so why don't you know this ahead of time and say, hey, I want to build so that I can have the 100 or 500 or 1,000 of my students who are using my system for doing event spaces. I should use all of those guys and I should set it up ahead of time saying, hey, use these colors and use these systems and use these price points. And in the future, if you're successful, if you're the top 10% of the students here, I have an opportunity where you can roll up and sell with me in a group of 20 or 50 of these. And so here's the thing. If that's the business model, then you can just roll up 20 to 50 every other year and have a massive exit

while you still keep the goose that brings those people in. And the thing is, is that the goose often is incredibly valuable, but not sellable. And that's the difficult part about this, right? And I'll give you a counter example. So for me, Acquisition.com is my goose, right? Like, am I going to sell acquisition.com? Not really. There are some things that I'll talk about in a second about, like, transactions you can have at the goose level. But what really makes sense for me? It's for me to sell the eggs. It's for me to sell the subsidiaries. For me to sell the companies that Acquisition.com invests in. right so the big picture is understanding what is your goose and what are your eggs so i'll give you a different story so i had a dude who uh who was saying you had a couple amazon stores you'll notice

this recurring theme it a couple amazon stores and he did well with those and he sold the amazon stores and he started teaching people how to sell you know to start and build amazon amazon stores and i was like okay he's like so i want to potentially sell this company i was like well the thing is is that this business isn't very recurring it's not very sticky uh it has huge keyman risk with you being the face of it like not a lot of investors would a want to buy it or B, if they did, they wouldn't bait a lot of money for it. I was like, so why don't you think about a way to get all these people that you're helping start Amazon stores bundled together so that they become a sellable asset? Because the thing is, just like the

event business, that guy had already sold three of the event venues. We know they're sellable businesses. They're very straightforward. They're faceless. Like, they're relatively turnkey. Same thing with Amazon stores. Like, they're faceless. Like another investor can say, okay, how much does it cost? What's my, you know, what's my yield? What's my return going to be over time. Okay. And like, these are very sellable things. And so it takes a lot less effort to take something that is already very sellable and just think, how can I do way more of them or how can I make them bigger, rather than try and take something that inherently has a ton of key man risk, isn't recurring, has a lot of volatility in terms of acquisition. Like, all of those things make

it not very attractive to a potential investor. Real quick, if you want to sell your company or make it into a sellable business, acquisition.com just started our workshop division for companies that we don't own, which is just walking through the process that we do to build significantly more valuable companies at an accelerated pace. We have it here at our headquarters in Vegas. And so if that sounds interesting, you go to Acquisition.com, hit scale and follow the steps. And if you qualify, our guys will be in touch. So let's get tactical for a second. How do you figure this out with your business? So the first thing is, is that is there something that's dependent on you? If anything is dependent on you for the business, it's inherently going to be significantly less valuable.

Number one. Number two, is there a component of your business? or of your customers' businesses, that's very stickier recurring. So, for example, gyms, microjimms for gym launch, intrinsically, they don't get sold very often. So there's not a market for small service-based facilities, like personal training, studios, things like that. A lot of people don't want to buy that. Why? Because they have keyman risk at their level two, right?

Whereas if I were helping franchise chains of restaurants like Subway, you know, improve their profitability, then there would be a clear exit path because franchises that are existing trade all the time. Same thing for accounting firms because they have high revenue retention. And so basically, if you look at all the different things that exist in your business, whether it looks at your customers, you look at different service lines that you offer within your business. And then the overarching business itself, one of those things should have some level of revenue that sticky and that doesn't require a face. And there's a lot of other factors. But if I had to pick a couple, those would be two. That would be really important that I'd be

trying to suss up, you know, pull apart to figure out what is the egg and what is the goose. And the easiest way to know if you're right about this is looking for M&A activity. So mergers and acquisitions activity for that type of business. So if you look, if you Google like coaching business, M&A activity, one, it'll show you how much there is. And if you don't find a lot, then you'll be like, okay, maybe there isn't a big market for this, number one. Number two, if you do find some, what is the difference between those businesses and my

business. And then you'll be able to bridge the gap and say, oh, these are the things that these buyers like, not these other things. And then you can start orienting your effort and your business model around the things that investors have proven that they like. What I don't want to go is try and sell a product to a market that doesn't exist. So you have to zoom all the way back out and think of your business as a product and an investor or potential acquirer as a customer. And so somebody might listen to this and say, okay, well, what about Jim Launch? Like, Jim Launch was that type of business. Well, one thing is that Jim Launch was really dangerously close to being a franchise. And so I knew what franchise laws were. And so I purposely like name system fee,

by the way, is what you need to be a franchise. Name as in everybody's under the same name, system, everyone needs same systems, and there's a fee associated. And so if you have all three, you have a franchise. And if you don't have a franchise and you're doing all three of those things, you have an illegal franchise, which means you're actually subject to getting sued and all that kind of stuff. And so if you're in the business of helping people do a specific type of business, you either have to pick name and system with no fee, which most people don't do. But you could that. You could go name and fee, like CrossFit, for example, like they have a name and there's a fee, but they give no business systems, right? Or you go systems and fee, but no name, right, which was

Jim Launch. We didn't tell everyone that they had to unify under one flag. Now, one of my potential ideas that I was thinking about for Jim Watch in the future was maybe I will start a franchise off the side of it, and with the best people, I'll plug them into there. Now, and that will be covered under franchise law, right? But the reason that Jim Launch was sellable is that the big things that everybody needed, which is that keyman was removed. So I was no longer involved in the delivery. I was no longer involved in the ads. I had a leadership team in place, right? All of those things. The recurring revenue, it is recurring revenue business. We did have relatively good annual retention of customers. And we had multiple acquisition channels. And over time, I grew Jim launch

to be bigger than me at the time. And here's a nugget that people don't get. You see me now and you see Jim launch, right? The thing is, is that this dynamic of the size of me and audience, you know, influence now. And Jim Launch, like, I am bigger than Jim Monch now. When I sold Jim Munch, Jim Munch was much bigger than me. And so that's the big thing that people miss is that, like, if you're bigger than the company, you will always be keyman risk for the business. Now, in that instance, you can sell the goose if you are bigger, but you usually have to sell a minority. And what that means is, like, people aren't going to take a risk that you're going to leave, but you're saying, I want to take chips off the table or I want to either fund an acquisition or I

want to like expand in this way. And so an investor will happily bet on you by investing in your business. That's what raising money is fundamentally. And so if I had so like acquisition.com, I probably can't exit acquisition.com nor what I really want to because I'm associating myself so strong with it for such a long period of time. But what I could do is I could raise money off acquisition.com and say look at all of our holdings and I'm going to sell 5% or 10% of acquisition.com at a monster valuation so that I can either take chips off the table if I wanted to or more realistically, I would say, I want to go buy this massive company, and I want investors to help me do that, and look out, it will add value to all the other holdings that we have, so we'll get a disproportionate

return on it, right? That, me doing that isn't really an exit. It's a transaction or a liquidity event, but it's not me leaving the business. Like, you look at Beast Industries, right? Like, with Jimmy, Mr. Beast, he's raised at the Holdco level. So that means that Beast Burger, the software he has, feastables, all of them are under that big thing. And so he's not, he can't exit his YouTube channel, but he can sell a portion of it to fund more growth, which is what raising money is. And so he's able to do that. If you look at,

look at Elon, right? Elon is inextricably linked with the companies that he has. And so his way of doing that is like they're mostly public companies, with the exception of SpaceX. And so by doing that, the public participates, but he's not leaving. He's the owner of the business. He's still running the business, but he allows other people to participate in the growth of the company overall. So, back to smaller businesses. So I had a media company that reached out to me and was like, hey, I'm trying to figure out like how I structure my media company to become sellable. He had a number of stars or talent in his kind of like stable, right? And so if you're in that business, you basically need to pick one of two directions. So either you get all of the guys in

the stable to support a product. So they'd be like, hey, this is our hair gel. This is our dip. This is our whatever, right? And ideally, you want that consumable to be a recurring thing, something that, and when I say recurring, it doesn't have to be recurring, but it can also be reoccurring. Meaning, if I use hair gel, I might not want to have a subscription for it, but if I, when I run out, I buy more of the same thing.

Like, I'm not a recurring subscription for Coca-Cola products, but I do buy Coca-Cola stuff on a reoccurring basis. And so if you get enough exposure, then people will buy that. Right? And so the idea here is that for him either has to have a product or he sells advertising space and the impressions that he's able to consistently generate become the product. Right. So if you're a media company, it's one of those two things. You're either pushing all of those impressions that you're getting from your stable into one product you own or you're saying, I'm going to let any advertisers come in as long as it makes sense for our brand or the brand of the talent to place ads on their and I'm selling media space itself. those are the two ways that that business would work. Now, if he wanted to exit that business, he can't exit the stars. The stars would generate the impressions.

Now, if he's not a star, he could exit the business if he has the stable of stars and he's selling advertising space. But if I were him, I would say, well, I would rather just have this incubator where I could just blow up products. And again, which one's the goose, which one's the eggs? In this instance, having all this massive media and impressions and whatnot, that's the goose. and then the eggs would be the products that we'd sell through that distribution.

Now, using the strategy of saying before, he could raise money by saying, I'm going to sell 10%, so I can front all the capital for this massive launch. Because if you have a ton of impressions, this is one of the big issues that a lot of creators have, is that their impressions and their fame far surpass their wealth. And so in order for them to accommodate the demand that they have, they'd have to basically have a ton of money they don't have to buy in inventory. and get, you know, logistics set up and, like, all these other things up front to do it right, right? Because you want to do a good job because you can only have one reputation.

And so they have to front all this stuff. And if you don't have money, it gets very hard, right? And so that's where sometimes having, like, you're not exiting your brand before you have the product. You take a tiny bit. You give it to somebody else so they can bet on you. And then you can put that money towards something that will make everybody more money. Now, I'll give you a fourth example of this. So I had an accounting firm kind of like coach,

consultant, whatever you want to call it, reach out. And he was like, hey, I'm trying to think about the ultimate version of my business. Now, his business was a business world role. It made a lot of sense because there's a lot of M&A activity in the accounting space for a variety of reasons. But one of them is that the book of business is just worth a lot of money. There's usually high gross margins or net margins in the business. It's incredibly recurring and sticky. Like people don't normally switch who they're doing their taxes with year to year to year. And so they have massive LTVs. The hardest part of the business is acquisition is getting customers, but keeping customers is actually not too difficult in that business as long as you do a

good job. And so he was like, how do I sell my accounting firm coaching consulting thing? And I was like, well, that's not what you want to sell because no one's buying that. But what people are buying is accounting firms in Glob together. And so the top version of your business is having a rollup of 10, 20 accounting firms that you can exit every one or two years and exit for 100 million bucks or whatever. And you take your slice and you say, hey, I'm the one who's putting this deal together. and I get 20%, I get 30%, whatever. And if you're thinking about this and you're like, well, why would somebody give up that kind of percentage? Well, here's how it works.

So when you buy in bulk, right, when you go buy toilet paper or Costco as a consumer, when you buy in bulk, you get a discount. Like the more you buy, the less you pay per roll. That makes sense. What's interesting is that in investing, it's a volume premium. So basically the more profit you have, the bigger the company is, the bigger the roll-up is, the more you get per. And it's because big money is lazy. And so they will pay a premium to. to not have to do as many deals because deals are costly.

It costs a lot of time, a lot of attention. And so if you have to do 100 deals versus doing one deal, you'll pay a premium to only have to do one deal. And so if those individual accounting firms could sell at, call it four times earnings on their own, right? If they can sell in aggregate together for, call it 12 times earnings, then even if they give up 30% of the 12x, they're still double as good as they were before.

And so everybody wins. And the thing is that I spend a lot of time trying to find those types of situations in business where it's like literally everyone wins. It's like if we work together rather than be competitive, if we can collaborate. And I'm telling you all the guys that I know who make gobs and gobs and gobs of money, like, it's so rare that you're actually competing against people. Like I used to say this in the weight loss world. I was like, we're not competing against each other guys. Because I had obviously a big community of gym owners. And we had tons of gyms there on the same market. And I was like, guys, we're competing

against the couch. Like, we're competing against Netflix. We're not competing against chocolate. Like we're not competing against each other. Right. Like, It's only like, I think it's like 11% of Americans like have a gym membership. It's still a tiny percent of people who go to the gym. And that's have a membership, not even use their membership. And so, I mean, just look at how many fat people there are. Like, it's not like the problem doesn't exist, right? And so people get really obsessed about their competition rather than just thinking,

okay, how can we collaborate and we can all get better? Because the thing is, is that the private equity buyer, the ultimate person at the top of this food chain who aggregates fragmented industries, those guys don't think like small business owners. They just think, oh, this is really fragmented. I'm going to roll all these together and make a much bigger thing. They don't care that you have some sort of animosity because they just remove both founders who have egos and say, cool, these two work well together and I can see some synergies in terms of cost and I can get more profit and own more of the market.

They just don't think about it like that. And so all the richest guys I know are just like, it's so funny because there's these blood feuds that exist between businesses that are local. But like, the guys who you eventually sell to if you succeed and do a good job with it, those guys don't care at all. And they just roll everything together anyways. And so we have this whole obsession about like competing. But like the reality is that if you collaborate, you end up making a lot more money. I'll save another quick example on this. So there was a dental association that we were looking really heavily into. So they had like 700 dentists that were in their association.

And dentists have to buy like floss and toothbrushes and toothpaste and whatever, you know, other stuff they need. Right. And so they spent like 20, 30,000 a year on kind of like consumable products that they have to use in their practice. And so. So what they did was they did a co-op in terms of group buying. So they said, hey, let's all come together, rather than be competitive, let's collaborate, and let's buy together as one. And by doing that, they're going to negotiate a big discount in rates. And so the discount that those guys would save in buying together exceeded the cost of the annual membership,

which, by the way, brilliant model. And so, like, as long as you plan on being in business, why would you not want to have a savings that's in excess of the cost of an association, which if you ever have the opportunity to do that, like I said, great model, especially in a niche. And so they did exactly what I'm talking about. It said he took the top 11 of the dentists, rolled them up, and they sold it for $120 million. But the PE group, damn them, was extra smart. We were bidding against them for the business.

Was like, hey, you know what? We'll buy your business too while we're at it because we'll buy your goose and the eggs. Because all they saw was, wait, you have 700 other dentists in here? Well, that's our egg pipeline for the next five years. And so they just was like, cool. So we'll do this roll up. And we'll pay you a premium on your revenue, which was actually fairly recurring in defense of this business, which is, again, why it was sellable. Because they just knew that they're like,

okay, we'll do this roll up, but next year we'll just grab another 20 of them or another 50 of them and keep adding it together. And so the thing is that the most valuable version of that business wasn't actually that business. It was the eggs of that business. And so making sure that you understand which is the goose and which is the eggs for the business that you're building will allow you to build a much more valuable enterprise the right way. the first time.