The Game with Alex Hormozi - I Discovered the Easiest Business To Make $1,000,000 A Year | Ep 723

Episode Date: July 26, 2024

"The reason why this thing is really fast is the same reason why it's not going to make you a billionaire" In this episode, Alex (@AlexHormozi) He breaks down the pros and cons of the education or coaching business, how quickly it can scale, but the roadblocks to scale that it's likely to run into along the way.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 and will learn on his path from $100M to $1B in net worth.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

The easiest business to start to make a million dollars a year is also the hardest business to get to $100 million a year. And I say this is someone who's both a product of the education space, which is, by the way, wink-wink, the business model I'm going to talk about. But I've also done $100 million plus in sales in that business and sold my last one for $46.2 million. And so I have a very good understanding of being both a customer in that industry and a supplier of that industry.

And so I want to make this video for two types of people. First is somebody who's like, hey, I want to start a business. and the second is for people who have a business and they're considering switching into an education or coaching business. And this business and this video is going to talk about the pros and cons on both sides and the two biggest considerations

that you have to make. One is, what's the goal that you're actually solving for? Believe it or not, the reason that this thing is really fast is also the same reason why it's not going to make you a billionaire. The second problem, or the second thing that you have to consider

is what problems are going to come up for each of these businesses and which ones you're better at solving. The problems that are in this business are the opportunity in this business, and the problems in this business are the opportunity in this one. And that's why this thing can be mega, mega big,

takes a little longer. This one can get moderately big really fast, but really hard to scale from there. So let's dive in. Coaching, information, education, digital course, membership, businesses are among the easiest businesses to get to $100,000 a year,

$100,000 a month, $200,000 a month. But this is what the business looks like in terms of the difference between that and a traditional business. A digital course business looks like this in terms of the speed. A traditional business looks like this. And so the key thing to make this decision really only comes down to two factors. And they're both incredibly important, but they're very simple to understand.

So the first one is, what is your goal? If you want to sell a business and build an asset that you can exit for 25, 50, 100, 250, million dollars, a billion dollars someday, then this business, the coaching, digital, et cetera, businesses are not a good business for that. And all we have to do is look around and see, okay, of the people who don't have a brand who started from scratch and had information businesses, how many of them were able to get to $10 million per year? How many to $30 million per year? How many to $100 million per year? The amount of guys had $100 million, I can count on one hand and I know them all. And all of them have deep brands and have been doing it for 30 plus years.

almost all of them. The people at $30 million a year, there's probably I can count on two hands, and I almost know all of them. And think about how many people are in this space. There's millions, if you count creators, of people in the information digital product space. And so that's a very, very small success rate,

even at $30 million a year. And so what's interesting is that there's this massive band of people at the $500 million, $2 million, $3 million a year because it is a business that requires almost, no operational infrastructure to get to that level. You can get to two to three million dollars a year with a team of 10. That for most entrepreneurs is where they cap out in terms of their operational skill set. They don't know how to lead. They don't know how to manage. So the first thing you have to figure out is what your goal is. And the second is what

problems you are more comfortable solving. All right? Let's walk through this. So if your goal is to make, let's say, one to three million dollars per year in a business, This is probably the fastest and easiest way to get there. You have no inventory. You can immediately package the knowledge and experience that you have. You can deliver very outsized value to a very niche audience. So, for example, gym launch, I knew how to run a gym. There is no school for running a gym.

And so if you're a gym owner learning from thousands of other gyms and getting the best practices off the bat because there is no book for running a gym, there are textbooks, right? I tried to write one. But there's no real book on it. And so no one tells you how to set up a membership sale. No one tells you what the script is.

No one tells you how to set up your lobby. you what hours are the ones that are empty and which ones are full. No one tells you how long to make your session. No one tells you how to pay your trainers. All of these things you have to figure out on your own. And it's so valuable if you can immediately learn the stuff and then triple your income, that's incredibly valuable. But it's not sticky. Once you teach someone, they know it. That's why four year degrees are four years, not forever. You learn it. You graduate. And so for that reason, they become very difficult to create revenue retention with, as in people buy it and then they leave. that is why this business is very hard to turn into an asset because the recurring nature of it is very low.

And on top of that, you have three types of key man risk. So if you're a personal, you're an influence, you've got a personal brand, you're the one who's bringing the customers, you're the one who's leading the team, and you're the one who's delivering the product. If you're the one who's required to make the ads, then no one's going to buy the business and say,

okay, well, we're just going to get rid of the guy who gets all the customers in. Well, that's not going to happen. Let's say you magically replace yourself on the front end. Well, you're still the one who's in charge making the thing that delivers all the value, which is the product. And you're the one who's staying on top of it, seeing what's working right now and all that stuff. And if you're not doing that, then they're like, okay, well, maybe we can replace this, but eventually the product's

going to deteriorate, and we're going to be out-competed by people who are newer and better. And so, okay, fine, then you have to replace that. These are both very hard problems to solve. And then finally, the entire team's loyal to you, and they started working because they probably watched your content or consumed your ads or in some way they aspire to be like you in some way, or they admire certain traits about you. And so if they're like, well, if you leave, I'm leaving. this infrastructure of people who also don't want to work for anybody else. And so there's huge risk from an asset perspective to sell or exit this company. And so if you want to make this as income and just think about this as getting a really high paying job, then this is a

great opportunity. But now I want to talk to these people. So I had three different business owners, and this is why I'm making this video, recently. One was a guy who had a paint business who's doing four million bucks a year. Another was a salon owner doing about three or four million bucks a year. She had six locations doing lash extensions and other stuff like that. And then the third business was a business was a business opportunity, like a microbusiness, where he would set up home gardens in people's backyards. Like that was his thing. And people would pay him to do that. And so he could teach other people how to set up gardens in other people's backyards, et cetera. Okay. So almost all of these guys were right here. They had enough skill that they could teach a

beginner, but not enough skill to be a master. So they could jump from here and based on the time in the business, they'd be like here. Like if you look at this amount of time to here, they would jump all the way to here on their income. They'd jump higher up on that graph. But as time continues to go on this way, this graph, as time goes on, goes off the chart. And this one is very difficult to get there, especially if you have a exit, meaning somebody buys your business, because you built an asset that does not rely on you. When you have 60 locations and you're not the one in the ads and you're not the one delivering the lash extensions, that's a very sellable business. And what I can also promise you is that to get from one to five, going from 55 to 60 locations,

you're going to make more money at 55 to 60 and it's going to cost you almost no time. But But most people quit right when they reach a boss that they don't know how to beat. And which is interesting about this is that the cap on this business and the cap for most people in chains or traditional service businesses is about the same. It's because they don't know how to get the next level of leadership in. And so they're able to get the first team in, maybe one manager, but they can't get the next level of leadership in. That's what takes you from five locations to 25 to 30 locations.

That's going from one city where you've got three to five to five cities. We have three to five if you're thinking locations, but you can think about this as an accounting firm, it doesn't really matter. But fundamentally, you have another layer of leadership, which is why people get stuck. And so, if you are in this business, then you just need to realize that you're about to get the best returns that come at the end and not get the shiny object. Now, if you are in this boat and you deceive yourself and you say, you know what, I love the shiny object. making an impact. I love helping people with their businesses more than I like. I like paint owner, help, I like helping paint owners make more money with their paint business than I do like helping homeowners paint their houses. Fine. But guess what? That will one, wear off. When I was

in the gym business in the beginning, I was like, I love fitness. But guess what it very quickly became. Not about fitness. It became about business. And so once I got my hundredth and 500th and thousandth weight lost testimonial and before and after, I stopped caring. It's just like, I got numb to it because I had so many testimonials. It was like, yeah, you know, you ate less and you did resist training, and you got stronger, and you built muscle. And like, yeah, like, your body changes. That's kind of the point. And the thing is, is that right now, this is novel. It's new. Now you're like, oh, wow, you know, this guy was able to move houses and go into a new zip code and his kid went to a new school, and he's got time for his family. And as crazy as what I'm about to say will

sound, you will get used to it too. It'll be the same as the other thing. Because you're going to say, well, I mean, dude, it's not, you'll start downplaying. You're like, listen, man, I mean, you ran some ads that we already knew worked, and you ran an offer that was better, and you set up a sales process, which you didn't have, and you had a script, which you also didn't have. When you run that thing, you're going to make more money. And so it starts, the razzle-dazzle around, it starts to go away. It's just exciting because it's new. And so my first big piece for either these people is do not straddle their line. You've got one ass, that's an ass, okay? You can't ride two horses. Pick. And it's the fundamental skill of an entrepreneur is being able to make a decision.

And if you can't make a decision and you can't commit, and atacquisters.com, we define commitment by eliminating alternatives. When you get married, you eliminate all other women or all other men that you're going to be dating. That's how you commit. You say, I will eliminate all alternatives. And so if you want to commit to either of these things, that means you need to eliminate the alternatives. Focus is the measure of the amount of things that you say no to. So somebody who says no to more things is more focus than somebody who says yes to more stuff. Period. So if we're looking at these two opportunities, this, if you want to be in this range, then great. Then this is a good opportunity. But understand that this will cap and it will get

very difficult to scale, which goes to problem number two. So I'll write the goal here real quick, if you want to have a $10 million plus exit, then sticking with the traditional business is the better model. Now, real talk. Over five years, you might make that in income over here and not be able to exit the business, but you'll have made that in income. And so there are lifestyle benefits. So here you'll make more income faster and you'll sustain a higher, you'll be able to sustain a higher lifestyle the whole ride. And so that's also a little bit of a tradeoff. So here, you usually have to reinvest more of that cash into opening new locations, into hiring better people, whatever, less so than you do in a digital products or education business. So that's a pro or con depending how you want to see it.

Now, the second element of this is what problem are you more comfortable solving? So if you're in this business, you're going to have huge key man risk, which is you have to figure out how to transfer everything that makes you special to other people without making them so special that they leave your business and take your customers. Very, very hard. On top of that, you're going to be in the talent and training business. And if you really, really want to scale, then you have to build a brand. Because acquisition will only become more and more expensive as you get to colder and colder audiences, which means you need to build positive brand associations with you over time, which means the product needs to consistently be very, very good.

So you get good reviews, good word or mouth, and that continues to compound in time rather than compound against you. which is what happens for most people because they make mediocre products because they only are a little bit better than most people, not way better than most people. So, the problem that you have in this business, on the other side of sticking with the thing that you're in, if you're in a, let's say you're the painting business,

you're the accounting business, you're the whatever business. The problem that you have to deal with is that it's slower. In the beginning. This is fast in the beginning, slower near the end. This is slower in the beginning, faster near the end. So number one, it's slower. Number two, it typically has more capital involved.

You have to reinvest more of the money to continue to grow it, especially if you have brick and mortar locations. You literally have to spend money to open into location to expand capacity. Here, there is no capital expense to sell more people into your membership, sell more people into your course. Not really. You just have more people you have to hire, but that's it. So in this business, it takes longer and it costs more money.

But because it takes longer and it costs more money, there are fewer people who are who do it successfully. And as a result, they create something that we can put here in big letters, which is you create an asset. You create something that someone else could own. And so what I will say here is that if you stick with it from here to here and you get good enough that you really understand all the special sauce about the business, you might not ever want to tell anybody about it because you want to own the whole thing. And I'll say at atequisition.com, the last chain we recently purchased, it was a franchise, and it had more franchise locations open than it had corporate, and I bought all of the franchisees out. And so we took all 30-plus

locations in-house and made them all corporate. And we did that because I looked at the economics, and I was like, wait a second, why would we want to make 8% when the amount of work that it takes to open a franchise location is 50% of the work that it takes to open a location we own the whole thing on anyways. And with franchisees and customers, by the way, you can't fire them with, because they paid you. If you have employees and you have a bad manager, you can swap them out. And so we have more control and we can know that they're going to X you correctly. The amount of franchisor buddies I have, I can't even count. And they all say the same thing. Man, these franchisees are idiots. They all think they're smarter than me. They all want to do it their own way.

Right. And their own way is the wrong way. And so they end up making less money. And they don't do it right. And so then all of a sudden, your reputation tanks, because they're not following your process, and it's a whole cycle. And so there's a reason Panda Express is a significantly more valuable company is that Mr. Panda owns them all.

He owns all the net income from every single location, and he owns the dirt, and he owns the property itself, all 2,600. They're almost $4 billion in sales with 27% net margins. Absurd. 27% net margins. It's almost a billion in sales.

year in income. Income. Cash flow. But he didn't start coaching other Chinese restaurant owners when he had five locations. He just stuck with it. And so it goes back to what goals you have. If you want to build an asset that eventually will require less of you, less work, and give you ultimate freedom, this business model will do it. If you're looking to make $100, $500, $1,000, $2 million a year and are willing to continue to work and basically always have to keep working in order to do that, then this is a good business model. Reiterating this, if you're here, right, which is at this early part here, then this model is

the faster and easier way to make a million to million dollars a year. It is. If you want this and you're further along in this curve, then for most of you, it makes sense to just stick with what you're doing because you're about to unlock this huge amount of value that's going to get created. And so I want to give you an even-handed approach to thinking about this and understanding that you also may be, let's say you're at this point, and your goals might actually change. And so when I was starting out, if someone's like, hey, you can make a million bucks here,

I'd be like, screw asset value. I don't care about exits. I was like, I just want to make money. In which case, great vehicle. But what happens, and the reason that you can look at Alex Becker, who I think got up to $25 or $30 million a year in his information business, switched to Hirose, and then built a multi-100 million enterprise with software. Sam Ovens had consulting.com. They were doing 30 plus million dollars a year, and then from all the skills you learned, transfer it to school.com,

and then made it significantly more valuable enterprise. Right. Now, mind you, school makes less cash flow than consulting.com because this business requires more capital and is slower at the onset. School's in your five or six right now, right? But it's scaling like this now because it's easier to add 5,000 customers in a month in this business and almost impossible to do it here, especially if you have service attached to it. And so there are pros and cons on both sides, and you have to realize that your goal will change. And if you do get to this point where you're right at this point where you're like, well, shoot, because sometimes people go the other way, they say, hey, I've been doing this for five years, I want to start a software company. Look at all the people

who are successful with software companies who made the switch. Let me tell you the one common trait, all of them. They stopped this. And they started doing that. And so in either direction, if you're gonna do it, do it and don't do the other one. So I want to talk to avatar number three, hidden bonus. Is somebody who's been successful here for five years or someone who's been moderately successful here for five years. The other side looks really tempting. Because if you're over here, you've got enough cash saved up, you've been making a million bucks, two million bucks a year for a while, and you're like, Man, now I want to have that 10, 20, 50, $100 million plus exit.

Right? I get it. I was there. On the other hand, if you're here, you're like, man, I've been put in five plus years in this thing. I want to start making some money. I want to start making some cash flow. And so this starts looking attractive.

And I'll give you the quote from my CFO. They're shit in every business. And so the key here is, let me walk you through the transition on either side. If you're going from traditional business over to digital education business, What you don't want to do is keep the traditional business. And so there's the fallacy of like, well, one, some of you want to keep it because you're afraid of actually making the jump and this is actually what makes you money. In which case, just keep doing what you're doing. But if you really are going to make the jump, then there's this idea that you want to keep a test kitchen.

And I actually think it's not true. So let me explain. So the concept of a test kitchen works when you're making food because you want to standardize a process and you're out the food making process across the locations. It's much easier to roll it out. You have franchise control, or you have corporate control, whatever. Now, if you're in an education business, you teaching your employees on site how to do a new process

or do a new play is not how you're going to teach all of the people in your community, all the people who are your customers that buy your stuff from you, from an education perspective. What are you actually going to do? You're going to probably record some videos and add some sort of Zoom call, you know, add-on to help give support,

maybe some community support as well, but that's about it. And so if you want to test whether or not a new play is gonna work in this education model, then test it like you would actually roll it out, which is if you have 100 customers, take 10 customers that represent different segments of the market, both geographically, like what market are they in, and what skill level they're at.

And so when we ran things at gym launch, I wouldn't say, let me take the top 10 gyms and test something out, because that's gonna give me bad data. I'm going to have the top 10 winners. They're going to make everything work. But if I take the bottom 10 on everything, nothing's going to work. But if something does work for them, it's going to definitely work for everyone. And so what I did was I took two people from each of the 20% bands. So two people from the top 10% percent, two from the next 20, next 20 in the middle, next 20 in the bottom middle,

and then next 20 at the very bottom. So I had 10 people in different markets at different skill levels. And so when I rolled it out, I got to have a representative sample of both markets and performance to see whether this play actually worked. And I see that as a far superior level. model to actually creating better products and better education that also doesn't require you to keep an appendage of a business that you have to stay attached to. Because whether you like it or not, if there's a problem in this business and a client

sleeps with an employee, right, or an employee stealing, guess what's taking your shower time? I don't care if this is 10% of your income. It's going to take 50% or 100% of your mental bandwidth until the problem goes away. Your brain is going to deal with what's urgent, not necessarily what's important. And so this is why focus is so important. So if you're going to switch from here to here, cut it, sell it, don't have any appendages, and go all in on this. If you are going to go from the education business over to a more traditional business

like software or a service business that you want to attach to it, then guess what? You cut this business, you say, I'm done with that, and I'm going to build this for real. Just don't straddle the line. I've yet to see anyone succeed big doing this. And the vast majority of people do exactly that, which is why I'm making the video. So, you have your three scenarios. You're starting out. You just want to make income.

Then yes, digital products, education businesses is probably the fastest and easiest way to make a lot of money pretty quickly. If you want to build an asset that's going to be valuable and sellable without you and you're comfortable with a slower pace of growth and putting more capital in, this is something that's going to give you a $10, $50, $100 million plus exit. If you're going to make the transition, then pick. If you are in this bucket and you're like, that is cool, I don't necessarily want that right now. That's not the stage of the journey I'm at. We have a free thing that you can do at school.com for slash games, where I will lead you through starting your business right now, 54.1% of people who start the school games with the paid community

and make their first dollar online. Very, very proud of that. If you are at this business and you're trying to get to here, you want to have a massive exit, then Acquisition.com, every once in a while we run workshops at our headquarters, We help businesses that are smaller than our portfolio size, kind of take the next step so that hopefully someday, maybe we're the ones who buy it from you and help you scale it from 30 locations to 300. That being said, this is the path.

I want to make it clear for you, give you the pros and the cons on either side, and hopefully get you to commit one way or the other.