The Game with Alex Hormozi - Lessons Learned from Investing in 22 Companies (Pt.2) | Ep 590

Episode Date: September 21, 2023

“The way you act during the deal process is a great predictor for us or a great measuring stick for us to see how you're gonna act afterwards.” Today, Alex (@AlexHormozi) discusses the importance of being founder-friendly in investment decisions and prioritizing the qualities of the founder over the business. He also shares his views on private equity models and the need for hard conversations in unlocking business growth.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:(0:40) Founder-friendly approach during deal process.(10:02) Prioritize founder over the business.(18:53) Theory of constraints in investment decisions.(29:13) Disruptability by AI and bigger companies.(34:36) Business doesn't require perfection or compounding vehicle.(40:22) A "gray hair" on the team is needed.(44:43) Checklist for selection as a portfolio company.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

I'll say this, is that the founders who are willing to have hard conversations are the ones that unlock the hard to get to growth. Because most of the growth in every business sits on the other side of two or three hard conversations. 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. The three beliefs I'm about to share with you are ones that I have leaned even more on. So I believe them at the beginning, and now I would say they're core pillars of how we make investment

decisions. So number one is being founder-friendly. And so the idea that we wanted with Acquisition.com, because I've gone through several transactions with institutional buyers, meaning like people who have lots of money, is I didn't enjoy those transactions. I didn't enjoy necessarily what happened afterwards. And this is no, like, they're all great people. I just, I think that the way that the process was approached could be better. That's more what I'm saying. And so we wanted to create something different. We wanted something to be founder friendly. And rather than basically taking out the founder entirely, which is the vast majority of the investment world, with the exception of like VC, who is super, super tiny fractions, it's, is there a way that we can marry the idea of

hey, we're going to buy in at a discount? We both know that. That's because we're going to be investing a ton of resources that does have hard costs for me. But your slice of the pie will be worth 10 times more than it is today, even if the shape of the pie is different. And so this is one of my big, like, visuals for you is that you can have a round shape of pie, but the round shape of pie can be like this. Or you can have a triangle shape of a pie that looks like this. And to give you a bit of a proof point on this, of, you know, if you want to go fast, go alone, if you want to go Fargo together, the average IPO, and most people would consider founders who IPO their companies pretty successful by commercial standards. I mean, you have to have at least $100 million in revenue or basically you have $100 million company

your hire, just broad brush drugs. Those founders, on average, IPO at 12%. And so the idea here, and again, that's the minimum. So some of them are doing billion dollar IPOs and 12%. Yeah, 12. So they're 12% owners. Those founders still have 12% ownership. So you think about the slice of the pie. It's like this, right? It's an eighth of the company. And so that's okay, because maybe the alternative to that was them owning 100% of a business that's worth $10 million versus owning 12% of of a company worth a billion dollars. And so making that shift as a founder is important. And that was one that took me too long to understand

was that the more people I get aligned to my ultimate goal, the bigger the pie ultimately gets. You don't lose by getting more people involved. And so here's a quick laundry list of reasons that I think traditional P sucks. Now, this is no, like, I love the partners who bought in the companies that I've sold. Like, this is a big disclaimer.

They're awesome people. They genuinely are awesome people. but I think it's more of a model thing. So one is the process is incredibly long and incredibly painful for really all parties. Second, it's incredibly litigious, meaning lawyers are paid through the ass to be as painful as as seemingly possible. And you're constantly asking, playing banana phone between lawyers to translate things back and forth, negotiating on phrases of sentences and wording.

It's terrible. The entire private equity model is the vast majority of them are based on not actually growing the business. They're based on financial arbitrage. trosh. This basically means this company, we can put a ton of debt on it and then use that to buy other companies and not actually grow the business in general. Now, I'm not against debt, to be clear, but I do love growing businesses organically because it's, in my opinion, one of the easiest ways to grow a business, but that's because that's in our skill set. Most private equity people in general don't come from

the world of actually founding and growing businesses. They come from MBAs who learned spreadsheets, who learned how to raise debt, who then deploy that debt. Like, that's how it works. All right. And again, different skill sets. Not saying it's bad, just different. Then the entire diligence and deal process as a whole feels like a root canal. Basically, you know, I remember during our diligence process, this is 2021. They were asking about an $8,000 order from 2017. And we were like, why are we doing this? And it's because everyone is following checklists and doesn't want to get fired for making a mistake. And it's because their incentive system internally is basically zero reward only punishment for messing up. And so everyone, like my CFO answered that one question

that she didn't have the receipt from this $8,000 purchase nine times. She showed me the emails of every time they continued to ask the question. She said, I don't know how to say this differently. Don't have the receipt. Not going to be able to find it. The company we did that thing through is out of business now. And they're not responding my emails. I don't know what you want me to do. It was five years ago, whatever was four years ago. And so it is a really, really tough experience. Like, if you don't have audited financials, you don't have them built out a data room that has access to all your data in real time, like a full deck, a sit, like there's a lot of steps to the problem. I actually even made a video about it about how people and like every single

step in that process. And a big part of this from a negotiating perspective is that the longer deal takes the more it's in the favor of the buyer. The shorter deal takes the more it's in favor of the seller, meaning the founder or the business owner is more advantaged to a shorter process. Why is that? Because they always have the gift of knowledge. The person who's selling the company always knows more than the person who's buying the company, right? That's the idea. So, like, the investor knows less about the company than the guy who started it. And so the longer it takes, the more the person who buys will know. Also, the more war down, the founder will be. And that is part of the psychological process of this is that they will get typically a founder to say yes to a price to get you to go exclusive with them.

And then they will start this root canal with you. And then they will slowly chip away at your valuation and tell you all the reasons why your business sucks. and then they will produce a smaller offer at the end, but you've already gone through six fucking months. And so you're like, you know what? I don't want to do this again. Like, fine. And so that is how they get the vast majority of founders to do that. So given all the pain associated with that,

we wanted to create something different. And so for us, we went from a terribly litigious process to having plain English contracts. We try to jointly involve the attorneys and say, this is a friendly transaction. We try to have all negotiation or conversations between us, not the lawyers so that we can come to agreements, which I'll give you an example of a deal we just closed. We made a minority investment in a company, and the lawyers were coming back on, and their lawyers

were coming back on a non-compete clause, all right? And they said, we want the non-compete to be a 50-mile geographic area and for only 24 months post-transaction, all right? And so we were like, no, why are we going to invest in a business of in 24 months the founders are going to go and compete with the business that we just invested in? That makes no sense. So non-compete just means you can't compete with the business. So like if I own five gyms and I sell you my five gyms, that I can't tomorrow after selling you this asset, email all my clients and say, fuck that gym, come to my gym. It's literally across the street. Just cancel with them, sign up through me. It's the exact same business. If you don't have a non-compete,

the founder could do that. And to be fair, the founders that we do business with would never do that. But people are shitty, especially when big amounts of money on the line. So the non-compete, the lawyer came back with was 24 months. And so we hopped on the phone with the founder and we're like, are you planning on competing with the company in the next two years that we own, that you own majority of? And he was like, well, no. And I was like, well, your lawyer is making that case. He's like, oh, well, that's ridiculous. And I was like, yeah. And so for that reason, we have the conversation face to face and we resolve things in seconds that in my deal, because everybody has to be solitaged with their lawyers and have teams of lawyers on every call, it would take three weeks to get that one

clause out when it shouldn't even have been there to begin with, right? So planning those contracts, face-to-face, us talking through, it's really a conversation not in negotiation. It's probably easiest way to say it. We try and target our process to end-to-end to be 60 days, meaning the actual LOI to close is like 30, which is unbelievable compared to, you know, P.E. will say it'll take six months, it's going to take a year in terms of like from when they start talking to you to when the deal actually closed. And I think for us it was actually two years. So like very painful. And so we're looking at all of these things. It's like, how do we make this more founder-friendly? And on top of that, any enterprise value that we're going to unlock, they're participating basically 50-50-and-ish,

rather than being a 10% owner in the thing that we then 10x, right? And for us, the founder always stays on, unless there's some sort of explicit thing, but we want the founder there. And I'll tell you, the reason that we're able to do deals faster is because the founder's still there. So we don't have a material change in leadership. So this is part of our model. overall. Not to say that if we did have majority, so like we just did a 51% deal I was referencing earlier, the founder still chose to stay on. But we had some other things that we included in the deal that made it make sense for the founder to do that. And so they're still going to unlock a ton of value, and we already have unlocked a ton of value in that business. And they're participating in their

49 is still worth way more than their 100% was worth prior. And they still got compensated for selling the 51. By contrast, a lot of private equity firm's entire playbook, circles around going in, buying the assets, firing everyone, and then putting those assets in another company. That is 100% of playbook. And so that is not our playbook. And so again, this is not to say P is evil. It's not to say that they are bad people. It's just that they are different business models. And I believe, I mean, it's a capital market. So you can do whatever you want. But the way we wanted to approach it was simple legal, conversation is not negotiation, keeping the founders involved after the transaction, allowing them to participate meaningfully in all the upside that we're

going to create and not materially changing the business or only doing that if it's a last resort and not our intention. And this segues perfectly into the second belief that I have doubled down on. I mean, this might even be the biggest one, which is jockey over horse. And the reason for that is because the private equity world almost exclusively values the business and not at all the founders. And that's because they immediately remove the founders as soon as they get in and take control. The VC world almost exclusively values the founders, not really the business at all, because they're pre-product market fit. So they know they have to change a bunch of things anyway. So the business model doesn't really matter. What they care more is how do these people interact?

What types of people are these? How dedicated are these to the mission? Are they mission-oriented? Do they have strong beliefs loosely held? Right. And so for us, we are kind of this interesting blend between the two because we still have the founding teams and leadership in place when we buy into a business. but we're buying into bigger businesses than VCs do, right? Because most of the people come to us don't actually want money. They want help. And so they actually want to unlock what it's like to go from a million a month to five million a month. They want to go along for that ride, not get kicked out, and then have the ride gone on without them, right?

And so since founders are so key to our long-term success within our strategy, we actually way more heavily vet. And we just literally, month after month, we just get better and better and better. at vetting founders to the degree that now, 80% of what we look for is the founder because we've had a couple of times we've had to change the business model materially. And so the thing that we bought into isn't even the thing that we ultimately ended up doing, but we believed in the founders and their ability to manage change, manage growth, and honestly just manage their own egos. And so I'm working on this because I want to have this really cool chart, but basically show compliance against growth. What I mean by that is, hey, we think you should do this. And then

the founder says, great, that is what I will do. Matching the people who do that grow the most, the fastest. And the reason is the Solomon paradox. We have a lot more context and we also have way lower emotional tie-in. And so, like, we have way more data and way less emotion. That makes a very dangerous combination of better decision-making and better strategy, which is ultimately why a lot of people come into our world. Let me give an example of half-followed advice. And so it's a lot like diet advice, right, where I say, hey, I'm going to give you this diet. And so six days a week, you're going to follow it. And then on Saturdays, you're going to do a cheat day.

The reason for the cheat day is it's going to refill all your carbohydrate stores, boost your metabolism, et cetera, right? And so a month later, you talk to the person, you say, hey, so how's that diet? They're like, oh, it's awesome. I love the advice. I'm killing the cheat days. Not doing as well on the other half of the diet, but the cheat days, I'm crushing. And they're like, yeah, but it's not really working because I'm actually gaining weight.

And so you can't half follow advice. You have to wholly follow advice. So I'll give you a business example. So we had a company that clearly needed an operator. they had promoted somebody from front line all the way to basically giving a director of operations title to somebody who really should have been. And this is not a slight to the role, but somebody came in at like a $7, $8 an hour roll and just really became that person's assistant. And they were paying this person way more than they should have been paying them.

And that person had absolutely no experience and was completely had a chokehold on the business and didn't let anyone else in because the less control. they had the less influence they felt they had over the founder, right? And so we said, listen, you need an experienced operator to get this business from, you know, five million in profit to 25 million in profit. And so because this person was so entrenched in the founder's life, they refused to let that person go. And so they then hired another operator. And so we had two operators in the exact same business with basically the exact same title and responsibilities. And so what do you think happened? Who's in charge or what? And then you have two bosses, giving two sets of directions,

absolutely complete confusion and chaos, finger pointing, blaming, and ultimately a very terrible situation, just not fun. And so the big lesson, and again, we learn these things. Like, we've learned this is that you can't half listen to advice. And so we need founders who we have a certain level of trust with. And it's not even trust because I would say that even that founder knew that they should do that. But they, for whatever reason, the same reason people know they should follow a diet and don't. They couldn't take the jump. And I'll say this. is that the founders who are willing to have hard conversations are the ones that unlock the hard to get to growth. Because most of the growth in every business sits on the other side of two or three hard conversations.

You know you should have, but haven't had yet. And that's where having some from the outside be like, you know this is a problem. And they're like, I know, but she's my sister. I know, but she's been there since the beginning. Or I know he's a dick, but he's my top sales guy. Right? Like, everyone has that story. But I can tell you that when you make the call,

the entire team goes up. And that is just a micro example of being willing to put the business above your own personal and emotional needs. And that's tough for a lot of people, which is also why most people don't grow. And so for us, the three values that we have at Acquisition.com, sincere candor, unimpeachable character, and competitive greatness are the three things that we look at every single founder, but like really look at them. And I would say that at this point, when I started this, Layla and I were completely diametrically opposed in terms of our expertise. Like, I was all the hard stuff. So like quant, numbers, conversion percentages, CTRs, like all of that. And Layla was all the quote soft stuff. And I was like, yeah, yeah, yeah. But like, this is the stuff that matters.

And over time, Layla's influenced me a lot. And, you know, probably five years in it became, you need to have the hard and the soft. And I would say that I have now actually swung even more in her direction, which is I used to think this is only, thing that matters. And then I thought, this matters plus culture. And then now I just feel like culture is strategy. And so a company that has superior culture will beat the one that has superior strategy every day of the week. And I'll tell you two stories. So we actually made two investments, and we actually kicked the companies off in two days back to back. So it was a ton of work for our team. But it was one of these crazy, like tale of two businesses. And so we had two completely different businesses. One was a really cool platform that we were really excited about in terms of the actual

business opportunity. The other was a business that was kind of boring from an opportunity perspective, but like such engaged in enthusiastic founders. And so we went back to back. And what was crazy is that my portfolio operating partner who basically runs the strategy for the implementation teams that help grow the businesses, it was actually his first day when we onboarded these two companies, not with not in business, but just start. with us. And he made his own internal bet of like which of these companies do I think we'll do more or do better. And he bet on the company that had the much more exciting opportunity. And fast forward a year later, that company has floundered. And the company that had the dynamic

founders that were full of energy, enthusiastic about the mission they were going after, even though it's kind of a boring opportunity, have crushed it and become a really rising star within our portfolio. they've already tripled in less like a little less than a year. And so the lesson that we've all taken from that is that we now put founders above everything. Because if they execute what we already know works, then like we've already de-risked the implementation or rather, we've already de-risk the strategy. We know that this playbook works to get from here to here. And so it really comes down to a degree of execution of the founders and their enthusiasm around. it. And a lot of that comes down to humility and saying like, okay, you've taken more companies

from a million a month to many, many millions a month than I have. So I'll just use your playbook. If they can say that, they'll crush it. But it's still hard for a lot of founders because here's the thing that if you're watching this or listening to this that you might not get is that somebody who's doing a million dollars a month might feel like they're the coolest, richest person they know. And this kind of goes to a different statement that I have, which is like, if you feel really good about yourself, you just need to get into a different room, is that you need to try harder stuff. And so, like, the, I've said this before, but like one of my neighbors took him like $935 million in income last year. Income, not revenue, income, for a company that

he wholly owns 100% of it. So 45 years in the making and does $3.7 billion in top line revenue. And paid, I'm pretty sure no income tax on it because he has a massive real estate portfolio that he depreciates against it. And so, when I walk into that room, the air is sucked out of it. Or the other way, when he walks into a room, the air is sucked out of it. And so is my ego. Because he's much better at it than I am. Right. And so like, and this is half note to founders is that like there's always a bigger fish. And so just a piece of advice there is that like you don't, you stand a lot more to gain from listening than talking. So the third belief that I've doubled down on is the theory of constraint. And so if you're

familiar with the, there's a book called The Goal by Eli Goldblatt, I think. I think that's his name. Anyways, I haven't read the whole book. I've read part of the book. But enough to, I think I actually learned about The Theory of Contraint before I read the book. Doesn't matter. Anyways, point is, is that every single system has a single point of constraint. And if you properly identify the constraint and then relieve the constraint, the business will grow until its next constraint, which is why sometimes you see businesses go from like 300,000 a month to 3 million a month, just straight line and then they hit a wall. And then, that wall is the next constraint. And right now, if you're not moving as fast as you want or you've

been the same exact line of revenue for a year, it means that you're doing the wrong stuff. You're focusing in the wrong area or probably more realistically, you're focusing in too many areas and none of them are the ones that matter. And so we have really ingrained the theory of constraint into our operating model as a hold co in terms of how we prioritize what companies do. And so if you think about strategy, it's just a fancy word for priorities. Right. And so strategy is how you choose to allocate limited resources against unlimited options. There's technically anything that you could do, but the question is what should you do that will get you the most bang for your buck, the most return on your energy, time, money. So to give you a tactical

realization of this, we used to have a six-week diagnostic process where we do a huge deep dive into every single department of the company, and then we'd have 100 plus different things that we thought were wrong with the business, and then we'd say, okay, here's 100 things that wrong with the business and let's start at the top and start checking them off. What ended up happening was that founders became, A, incredibly overwhelmed, and B, they felt really bad about themselves, and C, wherever they started, sometimes that would change things down the line on the other items that we had snapshot identified as problems. So, for example, if you change the branding of a company, which does take longer, you might all of a sudden attract better customers who are

less likely to churn. And so churn might have been an issue that we wanted to resolve, with tactical inputs like better onboarding process, better explanation, better activation points, leading indicator metrics, et cetera, et cetera, that we do on the decreasing turn side. But if we fix the brand issue, then all of a sudden the turn issue might disappear. And so some of our, you know, the identification of all these problems might actually be moot by the time we would get to that issue in the future. And so we've radically changed our approach to the businesses and just said, we will look at everything in a much shorter period of time and just say, what are the three?

things that they should absolutely work on and in what order. And if we have three things, it would usually be because there are things that could be worked on concurrently that do not affect one another. If there were things that had to be done in sequence, then it might just be the one thing that matters most. And so, for example, if we had a company that was, I don't know, stuck at a million bucks a month and all the metrics were okay, and they're outbound, I might say, okay, you've got 20 sales, guys, let's get to 40. That's the constraint. And so I'd be like founder. anything that you talk to me about that is not how we're hiring, onboarding, and training new sales reps, I do not care about. That is it. Massive focus on the constraint. And then the business doubles.

And then when we do that, we look at it again and say, what is the biggest constraint? It could still be gone from 40 to 60 sales guys. And that might, yet again, be the biggest constraint. We do it again, right? And so we look at this on a quarterly basis and think, what is the one thing that is limiting this business's growth? And by simply laser focusing on that, we achieve higher growth rates and way less stressed out founders. And I think the beauty of that is that they actually grow faster by doing less, which is beautifully elegant, which is everything we're about, which is doing high leverage activity. So if you didn't know anything, I'll give you a little sidequest here. The Acquisition.com logo is comprised of three separate ideas that have been combined together, which is why I like

the logo so much. One is that there's something called the three-term contingency, which is that many frameworks are based on before, during, after. And so oftentimes frameworks are triangles, because they account for all three of those things, just called a three-term contingency, which is why triangles are cool for me. The second thing is that this is a fulcrum for leverage. So if I had a stick here, I could pull this and I could lift the world. Archimedes, right? The third is that I believe the single governing law above all else in business is supply and demand. Is at the end of the day, many people overcomplicated. And what's interesting is that if you read some of the autobiographies from some of the wealthiest people in the entire world,

at the end of this, it's kind of like the full circle of like, you just got to have something that a lot more people want than you have supply of. And then you learn all these terms and CPLs and CPMs and KPIs and metrics and and IT and leadership and recruiting and all this stuff. And then at the end of your career, you say like at the end of the day, you just need something that a lot of people want, right, that more people want than other people can supply it for, right? And so this is true in real estate markets.

It's true in stock markets. It's true on the micro level of actually transacting in business. All of those things are true. And so I believe that's why we have this logo. And so when we focus with the theory of constraints, we focus on what thing will give us the absolute most leverage on the resources that we deploy in the business. Because if you really zoom out, I said strategy was prioritization. And it's because every business has limitations. We have time, money, energy, et cetera.

And so the best founders, the ones that move the fastest are actually efficient allocators of resources. And so in the beginning, you have to learn all these microskills. But once you get your first real level of leadership in, I'm talking executive leadership, then you're zooming out and saying, okay, we have all of these people. We can only really pick one or two big things. Which of these things will get us the closest to our ultimate goal over the next 12 years? I'll say 12 years, 12 months, five years, 10 years. And then you take that one big bet.

And that's ultimately we're trying to get to with all of the portfolio companies. So let me give you a simple example of theory constraints. So let's say that you're a deadlifter and you can deadlift 500 pounds is your current best lift. And let's say that your back, your legs, your quads, everything can handle a 700 pound deadlift. But your grip can only handle 500 pounds. If you go do more lat work and more hamstring work and more quad work to get all those muscle stronger, what have you actually done? you've added potential to the system, but not more throughput.

And so you might have gone from a 700 potential max with every other muscle to an 800 potential max with every other muscle, but your grip is still limited by 500. So six months later, when you do all that strength and you expended all the energy, allocate all those resources, ate all that food, what's your dead left? It's still 500. And this is where a lot of businesses stay stuck. Now, you can say 500 pounds, you can say 500,000 a month. It still works the same way. And so instead of doing that, and then all of a sudden, somebody comes in and says, dude, Let's just do grip work and put everything else on maintenance.

And then all of a sudden they go 50 pounds every month in growth because their grip gets so much stronger that they can get all of a sudden to an 800 pound deadlift. And they go from 500,000 a month to 800,000 a month, any very short period of time. And it's because the actual constraint of the business was identified and properly deconstrained. And then the business just grows on its own. And that's the crazy part about this that I have now learned is that once you decontrain a business, it will just continue to grow until it hits the next constraint. If we're investing in a business, it's usually because we see somebody who's deadlifting

200 pounds that has a thousand pound back and just needs 800 pounds of grip work. And we can just see that we just fix that one thing. And then they go from 200,000 a month or $2 million a month to $10 million a month from that one change. And those are the huge leverage gains that we try and pick and find. And a big picture here is that like we prefer across everything to find businesses where it's about more better. Whereas how can we do more what we're currently doing?

How can we do it better? because oftentimes that is the constraint. And it's just not nearly as sexy as most entrepreneurs will think it is. Because they get distracted by something new, something exciting. But the business doesn't exist to satisfy your personal needs. The business exists to satisfy the market's needs. And the market may need you to just keep doing more of what you're doing and keep doing it better. From a mathematical perspective, and I talk about this in my book, $100 million leads,

you can actually identify what the constraint of the business is by fixing an absolute improvement across every function of the business and seeing which of them, when multiplied together, gives you the most increase. So let's say we, in a micro example of just a sales setting, we had 50% of people were scheduling, 10% of people were showing, and then 50% of people who showed for their appointment closed. That's current state. To identify the constraint, if you're like, wow, this is an obvious example, that is the point, but I'm going to show you how math-wise you can prove it, is that if I take a fixed amount of improvement, so I say 50% schedule rate goes to 60%, what's my improvement? I get a 20% improvement across the board.

right so if I multiplied it through 0.6 times 0.1 times 0.5 you'd be at 1.2 of whatever the original number was. All right. So it'd be 20% improvement. If I do a 10% improvement on the close rate, so going from 50 to 60, I again would have the same multiplication through and I have a 20% improvement. But if I go from 10% show rate to 20% show rate, then what would happen? I would double my throughput. And so the area where you get the largest increase in throughput from the same fixed increment of improvement is what the constraint of the business is. Now, sometimes we look at companies that come to us like this and I'm like, dude, we can take the show rate from 10% to 50% and just like that, we 5x the business. They're like, but we've got all these. It's like,

I don't want to talk about anything that isn't show rate. I don't want something like anything. If it's not show rate, I can't hear you. And having that kind of ruthless discipline is what will ultimately grow up business. And the beauty of finding these big value unlocks is that it's so much less work than all of the brute force that they're usually pushing through the market. The last set of beliefs are the beliefs that I was wrong about and have cinch rewritten and taken a new view on. And so there are five of them. So this will be the mediest one of our buckets. So number one is disruptability by AI. So obviously the world's changed in the last, I mean, 36 months, the world's changed. The access to AI, the knowledge about AI. And some

industries are beginning to get disrupted. And I don't think that's going to stop. And so now one of big criteria is how likely do we think that AI will have a huge disruption on this industry, right? You know, if we have a mechanic shop, it might be less likely to get disrupted compared to a design shop, right, that does graphic design, right? And so that would be like, that's how we'll start wading companies, because again, a lot of it, remember the thing that risk factor of enterprise value? Well, what's the likely that this company is going to continue on? Well, if there's a massive likelihood of disruption from an AI, it's not to say that they're going to go out of business, but we're going to have to basically risk product market fit fix again. It's basically starting over

in the future. Now, that's where having amazing founders is really important, but is at risk that if I can't avoid it, I can. So I do. So that's bucket number one. So belief number two is bigger chunks of bigger companies. And so this is actually a pretty typical investor path. And in the beginning, we were investing in smaller chunks. And I think part of that was because like I was getting into it. And so I didn't want to, you know, I don't want to make as big a bets with companies. So that's, that's partially me. The other part of it is like, we've gotten better and better at it in terms of like the value ad.

We're just like clear. Like, we're just tighter and tighter and tighter at what we do. And like I said earlier, it's not a quantity game. And so like if you find one Facebook, you don't need to really invest in anything else. I mean, you can look at Berkshire Hathaway right now, like over half of their portfolio is just Apple. And they're huge. You know what I mean?

And they're still, but their largest holding by a mile is Apple today. So there's the best investors in the world. I think last time I checked Warren Buffett has already made $90 billion on the trade he made for Apple. And so, yeah, like Warren's G and the fact that he's still getting the returns he is with so much capital to allocate is mind blowing. For us, not buying Apple, just the idea of having taking, you know, buying bigger chunks of bigger companies forces us to be even more disciplined in which opportunities we really want to pursue that we think we can both drive meaningful value, but also have tailwinds and grips that need to be strengthened that we can easily. unlock huge value. And a big part of that is that like you can have a smaller chunks of many pieces of pie strategy if you're not doing a lot of value at. And so if you're a passive investor, if you're buying and trading stocks, you can have a hundred stocks in your portfolio. It doesn't

really matter. Like you're not doing anything. You just buy them. That's it. But for us, because our value at is active, we have to be like prioritization, right? Limited resources, unlimited options. We have a lot of options to invest our time and money into. But which are the buckets that we think we're going to get the highest return on? And so that is what we choose to allocate our time and energy towards, which is meaning, if I'm going to allocate this, I should take a bigger bet on it. And so for context here, when we're thinking about like opportunity size, we're looking at companies that really at minimum, we think we can get to a $50 million plus exit, but ideally a $100 million plus. And part of the benefit of the founders that come into Acquisition.com is they get to

work off of my scale of what's meaningful. And so one of the things is like if you hang around with a lot of poor people, you'll adopt a poor ruler stick. Right. And so for a poor person, and again, you can tell how wealthy someone is by the increments of money and time they talk about. So the wealthier someone is, the longer the time rise than they talk about and the bigger the money stick is. Meaning, they talk about increments in millions, like literally on Wall Street, in terms

of a stick. They even have a shorthand for what a million dollars is. It's like two sticks, five sticks, right? Because that's literally a measurement unit. When I was really poor, a Chipotle Brito was a measure. unit of how much money I made. I knew that this paycheck would buy me this many Chappalo burritos. I was like, wow, I got 200 AAA burritos, right? I knew how many, how many meals it would literally buy me, right? And so as you level up, your ruler changes. And so one of the

benefits of just like when you work out with someone who's way stronger than you, if you hang out with someone who's way richer than you, you start to adopt their time horizons and their money measuring sticks. And so if it's going to be meaningful for me, I typically have a higher net worth than most of the founders of the companies that I invest in, because most of the times, their first or second time founders. And so if I think it's meaningful for us to have a, I think we can get this to 250 million, it's usually meaningful for them. But somebody else who might be broker might think, well, I'll take a $20 million exit.

To me, it's just not as, it just, it's not going to change my life at all. And so for me, I want to allocate my time with things that like any one of them could change my life in a meaningful way. And the whole underlying principle around this is actually a phrase, heard from Sharon Savazzo, who's the president of real, that publicly traded a real estate brokerage. And one of his mentors told him this, which is, you should only have to get rich once.

And so our goal with the founders is that, like, I said this at the beginning is that this is the best deal they've ever done. And they should only have to make this one good deal one time. And so we take them from where they are to a level of exit or a level of enterprise value if they want to keep it for the long haul, either or that they don't have to get rich again. Like they get rich once and they are set for life. and they create generational life-changing law.

That is the idea. And again, this is why it is a founder-friendly company in terms of how we structured acquisition.com. Belief number three is that I don't need the business to be perfect. So I think in the beginning, I was looking for unicorns that don't really even exist. And the more I've just kind of been in the game, it's just like every business has skeletons.

Every business has bodies buried everywhere. And so the question is like, are these bodies material to the likelihood that it's going to be here tomorrow? And so we don't need businesses to be perfect in order for us to invest in. This is partially like a soft plug, which is like, I've had a number of founders like, I want to fix this, this thing. I have this huge issue or they're like embarrassed about it. It's like, I told you, there was a company that had 25% monthly turn, which is atrocious, right? But they had other things that were really good. And we're like, well, we can fix this. This is a grip issue.

Like in some ways, if you have a massive hole, sometimes it's like you're about, like, we can help you unlock a massive amount of growth really quickly rather than waiting and slogging through on your own, not knowing what to do. And so, yeah, like imperfect business is the name of the game. The question is, what is the potential? So how strong are their backs compared to the grip that we can identify as the constraint? Belief number four is that a business doesn't need a compounding vehicle within the business at the point of the acquisition. Meaning, if a company doesn't have something that compounds unto itself, some flywheel that continues to spin, it doesn't mean. mean that it's a bad business. It means that it's an opportunity for us to install one of those flywheels. So I'll give you an example, a couple of different flywheels. So if you continue to

make content and your audience can compound month over month over month, then it means that no matter how big the company gets, it can still grow by 10% each month because those people tell other people, right? If you have a compounding vehicle for capital, then we mean that like we have a way that we can reinvest capital every X period of time and get Y return. And it doesn't matter whether we're investing a million dollars or a hundred million dollars, we're still going to get the same return. And so that is something that can compound over time. Berkshire Hathaway is a compounding vehicle for capital, for money, right? If we have an incredibly strong word of mouth strategy, right, where every person who comes in brings 1.3 people with them, then whether we have 10 customers

or 10,000 customers, it will still compound onto itself. You pretty much have to have a compounding vehicle to unlock crazy levels of growth and enterprise value. And that's what most companies who are going to require for the several hundred million dollar and up are going to look for is that there's at least one vehicle that compounds independent of scale. And so we just try and find, okay, even if this company doesn't have one, what could it be? And do we feel confident that we could make that flywheel spend? So a simple example is like you can calculate the hypothetical max of a business by multiplying sales velocity by a lifetime value. All right, our lifetime gross profits. So we've got a business that does a thousand dollar month agency service. The average customer stays for 10 months. But

That company signs up 10 customers month. Even at $1,000 a month, we know that month one we're going to get $10,000, right? Month two, we're going to be at $19,000 because we're going to lose one from the first month because we have 10-month LTV. So it's 10-month churn. So churn would actually be like 8%. But point being, you're going to lose someone from churn. And then it'll be an asymptote, which basically looks like this on a chart.

Basically, month one, you have the most growth. Month two by percentage you have a little bit less level, until eventually it flatlines. that flat line is a hypothetical max that you can calculate for yourself, which is sales velocity, which is a number of units, multiplied by the lifetime value or lifetime revenue of every average customer. So in this example, if it was $1,000 a month, the average person stays 10 months, then $10,000 is the lifetime revenue from the customer. And if we sell 10 customers a month consistently, then 10 times 10,000 is 100,000.

So this company will not grow past $100,000 a month unless we either increased number of units sold or we increase the lifetime value. Now, let's say we double the lifetime value. What's going to happen? It'll just continue out again until it re-platoes at $200,000. What if we just double the sales velocity? I mean, we sell twice as many customers from 10 to 20. Well, we'll do it again, and we'll hypothetically max at $200,000 a month.

And so the idea is that when we see one of these issues or see one of these businesses, we have to have a way that we can see basically uncapped growth. And so that means we need to put a higher lever, front-end in so that we could actually grow the number of sales that we get every single month or that we can increase the lifetime revenue of every customer every single month. That is the idea. And so I used to reject companies that didn't have a compounding vehicle because honestly it was just my own, I don't know, pickiness, if you want to call it that way, but just being like, well, you need to have X, Y, and Z and I want to see that. But now I see

it actually just has a big opportunity for us to add huge value to the business with not a ton of effort on our part because we just know we can identify how to, implement those flywheels in a business. So for example, if we have a, like one of our companies has a founder-driven face, right? And they use organic content in order to generate the vast majority of their leads. And so for us, what do we do? Well, he has a fixed number of media people and he puts out X number of content. And so for us to improve that, we can increase the number of content, which is a linear improvement, but we can make the quality of the content better, which is a exponential improvement. And so if we do that, then we know that his audience will grow disproportionately

every single month and keep getting bigger and bigger. And so that's a very big unlock for us to continue to get more and more leads every single month, month after month with a limited one-time effort. On the flip side, if we were to change the deal structure on something so that we can massively extend the LTV of a company, like cutting churn from 10% to 3%, then we will unlock huge amount. Now, what we'll do is it'll unlock growth until the new hypothetical max. I'll be real.

There are some times where the hypothetical max gets unlocked to, let's say, $4 million a month and the company's doing $500,000 a month. I'm good with that win, right? Like, even if it's not forever, we can still basically linearly grow now that we've unlocked this next level until we tap out at $4 million a month. And at that point, we have a $200 million sale if that's what the guy wants, or we just wants to keep printing money, which we're also okay with. Fifth belief is that businesses should have gray hair on the team.

And it doesn't mean literal gray hair, but it's more been there done that. And so think about this is 80-20, and this is kind of Layla and I's rule of thumb, is that 20% of your team should have already been to where you're trying to go. And this is super important, especially for first-time founders, because what I was mentioning earlier, where you have one brain that becomes the cap of the business, right? And so if you're teaching everyone how to do everything, the likely that you're going to make in a massive business, especially on a short time horizon, is really low. When I say short, I mean, like five years. So, like, you can't solo get your way to like 10 or, you know, like 20 years later you can get there. It's just to take so

much more effort for one person to download their brain into that many people. And you have to be exceptionally smart because you've got to learn really deep on lots of things. It's not not realistic, or at least it's not my preferred way to grow. And so we want at least 20% of the team, which sometimes we have to right size and say, hey, we need two big leaders or experienced leaders who have been there done that in these functions to get us where we want to go. An example, that would be like pulling in a true CFO for a company that's at a million dollars a month and say, okay, this person is going to help us get all this stuff cleaned up so that in a year and a half or two years, we can be at two and a half million a month and we can actually have

audit to financials and actually do an exit. Or let's say we're in a company that the founders, the was the salesman moves up to managing a team of three to five salespeople, but he's never really stood up and scaled a sales team. Well, sometimes it's good to bring in an outside person who scaled multiple companies from five to 50 and have that person come in that role, move the founder over so they're operating or doing something else that they actually do have more experience or expertise in. And so the idea is we want someone who has gray hair or multiple people in gray hair on the team so they can also be mentors to the rest of the team. It also gives an interesting feeling of stability for attracting talent. So especially if you're a younger founder,

like having a few people in their 40s or 50s on the team, when other people who are new and talented are interviewing, they're like, okay, this is a stable thing. This isn't just like four kids who like are doing this in their basement. And like, again, this isn't me hating on that. I love you guys. And that's why I'm telling this. But like when Layla and when Layla was 23 and I was 26 or seven, we hired Suzanne, our CFO. And I won't say what Suzanne's age. Don't worry, Suzanne. You'd been in the industry 35 years. And she had been sell side 40 times. And she had been on the founder's side of the table selling 40 times.

She'd done a $15 billion, a $15 billion, and her most recent transaction was $750 million. And so we felt really confident that she had the experience to help our company, which at the time was valued about $150 million. And you feel like, wait, didn't you sell for $50? Yeah, I did. I sold for way under value. If you're like, I'd just be very upfront about it. I sold a gym company during COVID. So like, take that for what you want.

but it was because I wanted to do this more. And for me, I knew that I, for me, when I'm gung-ho on something and this is what I think about every morning, like it was the right move for what I needed to do. So it's going to be a great investment for the private equity firm that bought it. Anyways, gray hair on the team can give you a little bit more emotional stability, can give you somebody to bounce ideas off of, can implement things that you don't know. Because here's a good let-miss test for this. In the interview process, if you don't feel like you're learning something from the person you're interviewing, it's not the right person. So if it's a role or department that you don't have experience in, so if it's like you're hiring for HR, you're hiring for finance, you're hiring for IT, you're hiring for marketing, whatever

department you don't know anything about. If you feel like you know more than the person you're interviewing, don't hire. They should be teaching you. And that is actually where the next level of education happens as a founder is the talent that comes in your company because you've built something of appreciable enough size that you can attract a higher level of talent and then everyone starts getting better and cross-pollinating, cross-learning. And transparently, one of the big competitive modes that we have at Acquisition.com is that we have a big brand. And so we are able to attract really high-level talent that a smaller company might not otherwise be able to attract. They will respond to our emails.

They will take our phone calls. They will do our interviews. And they will believe us when we vouch for a company because they know there is a, don't take this the wrong way, a professional or legitimate investor that backs the company. Right. And so in that way, we have, I mean, this is a competitive mode. This is an advantage for us. and so that we can get a disproportionate amount of value in a company that the IQ per square foot, we can jam into a company goes way up.

And then that unlocks a huge amount of growth that founders wouldn't otherwise have experienced. Yeah. And so at the beginning, I promised to give you a checklist of things that would increase the likelihood that you could get selected as a portfolio company or move further in the process with us. And just as a quick side note, if you go through the process, my promise to you is that as long as you're meeting the basic level of quantitative qualifications, if we decide not to do a deal with you, we will still give you what, our recommendations are that you can benefit from for your company. And we will tell you the things

that we think you should fix that would make us interested in again. Or we might just say, hey, this might not be our type of deal, but we'd still recommend you do these things that would increase the value of the company. And that's our way of trying to always make, leave everyone better off than we found them. So that's one of my promises to you. And if you ever feel like you didn't get that, please let us know. That being said, checklist. So one is know your numbers. Like if you don't know your numbers, it makes it really hard to assess anything. It's also kind of a leading indicator that someone's like really not that organized. And if you want to get really big scale, you got to know your numbers. So it's like, seen Shark Tank, it's the first thing this is. Like, know your numbers. Number one.

Number two, don't, this is like the correlate of it feels separate, which is don't inflate your numbers, all right? Which is, you know, if sometimes I don't really get this. It's like, you're not going to talk to me, right? Like, it's not like you're hopping on the phone. That's like, that doesn't happen until we close deals. So you're not going to like, fool us and be like, oh, yeah, we're doing a million a month. And we'll be like, cool, send us the financials. And then it's like, oh, you're, you did a million dollars last year. that's not a million dollars a month. Well, yeah, but I mean, like, we're gonna.

And it's like that, that don't, like, that'll immediately disqualify. And we're also, like, not really be inclined to, like, give you a big laundry list as if because you lied to us. So don't do that. Number three is having a big goal. And so this is important because I said earlier that you get to adopt some of my litmus test or my measuring sticks for money is that like, if someone comes in and says they want to have a $20 million exit or something, like, there's nothing wrong with that.

It's just, that's not interesting to us because I have to allocate our resources and it has to be the biggest banks for buck in terms of founders. It's not about the size of the company. It's about the size of the founder's vision. And so if the founder has, you know, five, 10 locations of a thing and they want to go national and they're like gung-ho and they're mission-driven and they love the product and they've great repeat customers because there's amazing word of mouth and like, let's do it. You know what I mean? Like, I'm in for it. But if someone's like, yeah, I just want to get to, you know, 20 locations and then exit, unless it was like us buying majority up front and then them staying on for a period of time to then help them like, you know, exit from that

perspective, then maybe that's what we'd do. But that's because for us, we're going to want to do something that's going to go big. Number four is speed and decision making. So there's a kind of like parallel sides. So speed is one of the best ways, and I learned this from Mark Robarge in sales acceleration formula, you can actually test someone's attention to detail and work ethic by the speed that they communicate. And so if someone is very quick to respond throughout the entire process, we know that they'll be very, the highlight that'll be very quick to respond as a founder inside the portfolio. And so the way you act during the deal process is a great predictor for us or a great measuring stick for us to see how you're going to act afterwards. And so there's

many founders that we disqualified simply based on their behavior during the process. Because the bigger thing that we're looking at is who you are. The secondary thing we're looking at is the company that you own and the company that we're investing in. And that again is because of the big lessons that we have learned is that the tail of two companies. So how you act is more important than what you own for us and our business model. The decision making is also a function of speed, but it's really the way that you approach decision. So if we have somebody who is really skittish, really back and forth, says yes, then no, then changes their mind, that is very hard to do business with. From a deal process and then

post deal, if we're like, okay, let's implement this price change. They're like, yeah, let's do it. And they're like, oh, wait, what if this happens? Oh, wait. No, I want to do. Actually, I do like very, very hard, very erratic. Really tough. Number five, I think I'm on five, is focus. And this is, I said it was a point earlier, but I'm reemphasizing this because there's a couple ways you at this manifest. One is the guy who owns 10 companies. And you're like, well, wait, Alex, you own 10 companies. I'm not CEO of 10 companies. Big difference. Just like you can own 10 stocks or 100 stocks. All right, like, I'm not CEO of those companies. I am, I'm not even CEO of this company. I'm founder of this company. All right,

and I just make videos. If somebody comes in and says, like, help me grow this thing. And it's like, yeah, this is like, it's only five hours a week and I've got this and, you know, like all that. Like, no. Like, we just say like, no, I'm good, man. Pick one and while I'll be grow that one and get rid of the rest of them. And so, yeah. And so those founders we don't work well with. And then focus from a future perspective. So if someone's like, hey, I want to do all these things and we need to, like, there's so much money on the table. And we need to vertically integrate and we need to add this thing. I need to build a software. It's like, dude, like, you sell cleaning services. Calm down. Like, let's just sell more cleaning services. And for some founders, that answer is too

difficult because their emotional needs for novelty surpass their deeper desire for growth or impact. Real talk. Like, your short-term need for something new surpasses your long-term need to make a big difference. We need those to be flipped. We need someone to say, man, I would love to be distracted by all these shiny things, but I know all I need to do is keep doing these things. And I would like your help to unlock all of these levels of growth. That is the type of founder that we want to work with. Number six is the beer at the airport test. But I do like this because I think it's very simple. If we don't look forward to talking to you, we just won't do the deal. And this one actually like more and more and more. Like, I'm so stoked about the companies that we have in the portfolio

and in the pipeline right now. Like, I like all of them. And a mentor of mine said this and I really like it. He said, the litmus test for doing deals at, he said, our level is very honored by that was if you wouldn't do, if you wouldn't help the person for free, don't help them as a part of a deal. And he's like, that's how I have to feel about it. Is that like, I want to help this person. And the economics is only there to just make it make sense. But like, that was a great limit test for me to say, like, am I looking forward to hopping on calls or talking to this person or like having dinner with them or seeing them, you know, having them fly out or whatever? And it's not really advice for me to use like, be a cool person.

He's like, darn, I'm not a cool person. Right. But that is a huge part of it, right? And I will share something that has been interesting and not necessarily a red flag, but just something that I have found, which is Y Combinator, for example, doesn't even accept solo founders. So Y Combinator is one of the, probably the most storied incubators in Silicon Valley. And they judge exclusively off founders, and their entire process is 10-minute interviews.

And that's how they make the call. And when you talk to the founders, they say, when I say founders of YC, they say, we could do it in three, we just would feel impolite. So we do it in 10, like to give you some context of how important they bet on the jockeys, plural. And so one of the things that we have noticed is that the growth rate in general of companies, again, there's always exceptions. But in general, companies that have more founders or more vested partners, key point, doesn't have to be like, okay, there's three founders, they're all one-thirds. It could be a solo founder with three people who have some sort of equity percentage that feel ownership over the business that are really

stallions that can really drive stuff. Those companies in general do better because you have more brains working on the thing that are independently intelligent and problem solving. And in that tale of two companies that I was telling earlier, this is three equal founders, one founder 100%. So it's like we've seen these types of examples because if you have a founder who's over customer success, a founder over marketing and founder over sales, you can implement changes and improvements in all three departments and know that they're all getting done every quarter. Whereas if a solar founder might be like, all right, I can do the sales one this quarter, the marketing one next quarter, and the success one the quarter after that. So we can get three times the rate of progress.

Now, in theory, you want other people who can execute those things on your behalf. But sometimes when you're earlier on, you don't have the ability to attract that level of talent. And again, that's how we come in. And so, yes, big picture, be speedy, be honest, actually have the numbers that you say you do. Be focused on the actual business that you say you want to have. have a big dream for where you want to go because it has to be compelling for us. Be cool and have other stallions that are in the stable with you trying to run in the same direction. And tip number seven is more of an observation than it is a commander or a recommendation.

Having a few other people on the team that have a little bit of equity, when I say a little bit, I'm not saying give 10% of the company. I'm saying give one or two percent that can invest over a few years of the company to get people bought in. Like when we sold Jim Launch, we didn't own 100% of it. I think we owned 94% or something like that. And so it's okay to let other people make money. And I think the trade is almost always worth it. And so again, multiple founders or multiple vested parties in it is just a plus. It's not a requirement. It is an observation that we have seen in terms of me equipping you with the things that make you most likely to go through and win with us. And my last piece of advice, since we spent the whole time talking about the acquisition.com business model is that if you're a company that's doing over a million dollars a year in profit or two million dollars a year in profit, if you were kind of a founder face, obviously if you're not a founder face and you're doing over $2 million here, that works too. Go to Acquisition.com, fill out the forum, and our team will be in contact with you and we'd love to

help you understand more about the business, see where we can unlock value. And the worst case scenario is you get a full plan of what we would do on your behalf if we were to work with you. And the best case scenario is that we partner with you and we take this thing to the moon.