The Pomp Podcast - #1450 Codie Sanchez | Millionaire Reveals Secret To Financial Freedom

Episode Date: December 6, 2024

Codie Sanchez is the founder of Contrarian Thinking, and the author of a brand new book called “Main Street Millionaire: How to Make Extraordinary Wealth Buying Ordinary Businesses.” In this conversation, we discuss the process to find, buy, and scale small businesses, the amount of wealth that can be generated, how you can do it, and why it is so important for you to own upside in whatever you do.  ======================= Buy book: https://www.amazon.com/Main-Street-Millionaire-Extraordinary-Businesses/dp/0593718615 ======================= Xapo Bank, the world’s first fully licensed Bitcoin-enabled bank, offers military-grade security with an unmatched blend of physical and digital security, as well as pioneering regulatory oversight, so your funds are always protected. Beyond secure storage, they enable you to grow and use your Bitcoin. Earn daily interest in Bitcoin, spend with zero FX fees using a global card, and make instant payments via the Lightning Network for unrivalled access and convenience. Visit https://www.xapobank.com/pomp to join. ======================= Polkadot is a scalable, secure, and decentralized blockchain technology aimed at creating Web3. Created by Gavin Wood, co-founder of Ethereum, Polkadot empowers users to build decentralized applications with ease. Backed by industry leaders, making it a preferred choice for big names, Polkadot stands out as a leading choice for investors seeking a reliable, future-proof solution in the growing world of Web3 technology. Learn more at ⁠⁠⁠⁠⁠https://polkadot.com/.⁠⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. What's up, guys? Today's episode is going to teach you a hell of a lot about how you can make a lot of money. It is with Cody Sanchez. She's the founder of Contrarian Thinking and the

author of a brand new book called Main Street Millionaires. In this conversation, Cody breaks down the process to find, buy, and scale small businesses. Why small businesses? These boring businesses end up creating an immense amount of wealth for people across the country, and she's here to share all the secrets as to how you can do it and why it's so important for you to own equity or some sort of upside in whatever it is you do. You guys are really going to learn a lot from this. Cody is in her top game, and I think that you guys will all find her book very valuable. So here's my latest conversation with Cody Sanchez. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast

are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by Zappo. Picture this. Every time you trade Bitcoin, the spread determines how much value stays with you. That's why securing top tier Bitcoin trading fees is key to growing your Bitcoin wealth. But what if I told you that there's a platform that lets you save up to 90% on your Bitcoin trading fees? Now here's the kicker. Not only do they save that money, they also are dubbed the

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Today's episode is brought to you by Polkadot. Polkadot offers secure, scalable, and decentralized blockchain technology that perfectly aligns with the needs of innovative projects. It was developed by Gavin Wood, one of the co-founders of Ethereum and the creator of solidity. Polkadot aims to build an internet where users have full control over their data and their applications. Polkadot offers tons of unique features, a shared security model, along with a new auction model and significant implementations like ASIC banking. Given these characteristics, it's easy to understand why Polkadot is gaining more and more traction in the cryptocurrency world. Some people even are talking about it as the AWS of

Web3. Now, companies such as Mythical Games, Astro Network, and over 50 other independent blockchains with hundreds of applications already leverage Polkadot's technology to power their platforms. If you're looking for a reliable, scalable, and cutting-edge solution, Polkadot seems to be the top choice for industry players. Go check them out today at polkadot.com. In America, there's really kind of two different classes of people. There are people who own equity, own upside, who own a share of profits, and that whole class is kind of like the ownership class. And then there is everybody else. And those people usually are working inside of a business or somehow operating in a way that doesn't allow them to have ownership of equity or profits.

Your whole thing is getting to the ownership class. Why is it so important to be in that part of the economy? Well, if you care about making money and you want to be a millionaire, let's say, let's look at what the data says. The data says that one thing that's good news, 80% of millionaires in the US are actually self-made, right? Despite what we hear on the news, most of them made it themselves. They didn't inherit it. The other thing that's interesting though, is that if you want to be a millionaire, well, 60% of all millionaires have ownership in a business. So you either have a 60% higher likelihood of becoming a millionaire if you own something, or you can stay in the lower percentage. And the higher the net worth of

an individual climbs, the more the likelihood is that they have ownership overall. Like an 88% likelihood that a person who has a $30 million net worth owns assets, predominantly business assets. The problem here though is, is that we've kind of become this nation that no longer owns anything. And you know how we really know that? The fucking Canadians are beating us. So Canada has an ownership class structure of 7.8% of Canadians own a small business. In America, 6.5. So we, by and large, do not own small businesses. And then you might be able to say, well, what about the stock market? Do we own stocks? And you probably know this all too well, but the fascinating thing is stock ownership has gone up by and large. More Americans today

own stocks than they did say during the Great Depression or before them, even at the height of the Great Depression. 62% of Americans own stocks, but small problem there, the 80% of all outstanding stock is owned by the top either four or 6%, depending on how you calculate it. So we all, like, maybe we own a little bit of stock, but not enough to be material. And if we don't own things, we have a much lower likelihood of actually becoming a millionaire, which is a dream, I think, that is very American. And so my push here is, all right, the data's not looking great. It's looking like we're increasing to have concentration of wealth in the hands of the

few. And if we're students in history, we know that ain't good. It never turns out very well. And so my push is, how do we get more everyday people, not even necessarily having to own an entire business, but get a piece of it because it's the only thing that somebody can't fire you from or take away from you in this capitalist structure. Now, when somebody says to themselves, hey, I work at a company. I don't own upside in the company. I don't own equity. I don't get a share of profits, any of that. But I want to. I want to get into that. Is the quickest, most

easiest path to go from I own no stocks to okay, I own some stocks. And that's kind of like the crack in the wall, or the crack in the dam to kind of enter into this new world. And that's where they should start. And then they should go figure out how to like buy their own business and kind of do that. Well, I certainly think stocks are the easiest. The problem is like over time, right, they beat inflation, basically. And so you really want stocks because you want to make sure that your money doesn't erode, since that's what the government does to our money. Your people know this all too well. And so yes, I do think you have to have some mechanism, whether it's Bitcoin or stocks in order to beat inflation. And so I think you can start there. But what I am presupposing,

I guess, is that you should figure out a way to either become so valuable to the place that you work, where you understand how you make money in your company, you understand how the company makes money, and you can become a co-owner because of the value that you bring to a company. And I don't think we think about that anymore. If you think about it, like historically, what's fascinating is if you go back to the way America was created, how did businesses used to get changed hands? Well, you used to have a small business and maybe that's a, you know, could be a stable, right? It could be a blacksmith. Well, that blacksmith didn't go out and sell the blacksmith company to a bigger blacksmith company or to a private equity firm. What did they do?

They took on an apprentice, that apprentice learned the trade. And then eventually when the blacksmith wanted to retire, it exchanged hands. That's how we used to trade businesses. And somewhere in between that, we got corporations coming in the middle. And so what I'm saying is there's a generation basically of baby boomers, of our generation's blacksmiths, who have businesses that they need to exit. I mean, we're talking millions and millions of businesses, somewhere around 68 trillion in wealth to be exchanged between the baby boomer generation and let's call it millennials and Gen Z. And people think that that means they have assets they're going to transfer us. They don't have assets they're going to transfer us.

They by and large have businesses because this group of baby boomers, they own 50 to 60% of all small businesses in the US are owned by baby boomers. You know this all too well because you run businesses too. The average small business owner has 90% of their wealth tied up in their small business. So a big chunk of the asset exchange is actually held up in these businesses. And if we don't transition them over, then that wealth eviscerates. And so what I think is maybe you start with stocks, and maybe you then get a little equity in your business. And maybe then on top of it, you learn how to transition and take over a business that you work in a division of the business that you work in. And I wish somebody had taught us that sooner. And so that's

the idea with the book. If you're working inside of a company before I want to go buy a business, maybe I want to, I like who I work with. I like, I got a short commute. I, you know, this has been a place where I've learned. I, maybe I feel some degree of loyalty to them. What are some things that I could do to try to negotiate with my boss or the person who owns the business to say, Hey, look, I want to stay here, but can I change the way that I get paid a little bit? Right. Can I maybe get a share of profits or can I get some equity in the organization? Like what are some tips or tricks that you think could, could resonate there? Yeah. Well, I'd be curious your take too, because you've played this game also, but

I sort of think there's three legs of the stool for getting ownership in a company. And the first and most obvious leg is, can you make the company more money? If you can make the company more money in a way that currently not today, you can ask for a percentage of the upside. You don't ask for all of it, but you could ask for, like you said, hey, if I increase the revenue of the business, could I get a share of revenue? Maybe not 100% of it. Could I get like 10% of the $100,000 in additional revenue I bring in a year?

Then, and that would be cool if you could get that. And then if you were really sophisticated, you might say, could I get a percentage of that revenue in perpetuity? You could say, could I get a percentage of that revenue plus some equity in the business pro rata? So the amount of revenue that I bring in, could I get that as a equal percentage of the business overall? If you can't negotiate that, because that would be like the best negotiation for you, you might say, could I get a profit share? Hey, I know I bring in this much revenue, but I only want to take a small percent of actually the money that you keep in your pocket. That might be even a more giving way for you to do it. And so, or if you really believe in the company, you might say, hey, I don't even want a dollar for me bringing in additional revenue. I just want equity because I believe in what we're doing here if I drive additional revenue.

Okay, so you can say I'm bringing more money to the company. Can I get a percentage of the upside? The second way is can you cut costs, right? So a lot of times this is how consulting firms or private equity companies make money. They come in and they go, okay, right now you've got a 20% margin for every dollar that you make. You're only keeping 20 cents. If I can get that up to 30 or 40%, so 30 cents or 40 cents, could I keep a percentage of

the cost savings that I make for you in the company overall? And then the third way would be decreased pain. So especially if you're in a smaller business, it's like, wow, I can tell right now, boss, your job's tough. You're managing all these people. you've got this mess over here. What if I come in and I help operationalize this? I take a few of these direct reports off your plate. If I do well and build this segment of the business, but it's less stress for you, would I be able to earn into some portion of the business? But at this point,

I think a lot of people kind of get overwhelmed. They're like, I don't fully understand all of that. That might seem like too much. And either you're like, you either snap, get it, and you kind of start to see the matrix, or you're still a little confused because you haven't played in the finance world like you and I got lucky enough to. And so I think at that point, if you're feeling overwhelmed, the thing to do is you just obsess on the only thing that I really think makes wealth, which is understanding the language of money and deal making. It's not like stocks versus bonds versus crypto. It's like, do you understand what revenue share, profit share, distributing equity looks like? And then it's like, you can play with these levers that nobody else knows

exist in the world. And most people just go, can I earn more boss? Can I get a higher salary? Could I get two weeks off? You know, could I have a different title? And you'll like never care about those things again, once you know how to actually negotiate. What is the best way to go get that knowledge, right? So it's kind of like learn the language of business, learn the language of finance. Do I read a book? Do I go on YouTube? Do I have to find somebody who knows this stuff and buy them coffee so they teach me? What is the best way to do it? Yeah. Well, I mean, I wrote a book called Main Street Millionaire. And so in the book, there's an entire section on what I call structuring and negotiation. And those things

are what you need to know in order to do this. I think the best way to learn is typically through a case study. It's how you and I learned when we were doing deals, right? And in a fund group, how does a fund group decide whether to invest in one thing or another or to take risk? Well, we get together in what's called an investment committee, right? We sit down and we go, all right, I got this idea. I think we should invest in this. And somebody goes, hate that idea. Here's 10 reasons why.

And you go, no, I think this is a good idea. And you beat up these ideas live. And so in the book, we have these case studies where you can actually, you can see by seeing a bunch of examples continuously, and you're going to start to see yourself in those examples. And so I think that is the best way. If you just go read the terms, you won't institutionalize it. You won't internalize it. And so I like them to see a bunch of examples.

You learn the terms, and then you see the terms in action, and that's how you figure out how to play the game. And then we have a community where we teach people how to do this. And in the community, we started doing an investment committee once a week on Monday nights. And I wasn't sure if it would translate from finance to people who hadn't done this before, but it's fascinating to watch live because most investment firms are closed doors for a myriad of reasons, risk, liability, et cetera.

So if you're a normal person, you're never going to get a chance to watch people who are really smart and have skin in the game and are going to lay down a lot of cash, determine how they handle cash. So the best you could get is you could go read one of the greats. You could read Ray Dalio's book. You could read Howard Marks' book. But you can't actually see what it looks like when Howard beats up a deal. And so when we started doing that, I realized, oh, this is actually how you have to learn dealmaking. You've got to get in a room with a bunch of other people And you've got to watch people fight over whether you should allocate to something. And that is, I think, how you learn how to get equity, how you learn how to do dealmaking,

and how you learn to structure. Now, as somebody starts to learn from somebody else, when do they know that it is time for them to go try it themselves, right? There's kind of like in college, maybe, whatever topic you're there to study, you kind of get kicked out after four years, right? And they're like, okay, like go out into the world, like now it's time. So it's very obvious when it's time to start becoming a practitioner. when you're doing more self-study, it's not as clear. And, you know, one of the things people

is they can get paralyzed by just constantly studying, studying, studying, studying, you know, like, have you done a deal yet? Have you, have you talked to somebody who's selling their business? And so what is your advice for people to kind of figure out when to actually, you know, start putting some of this into practice? Yeah. Well, say you're going to do it by yourself. So say like you, you pick up something like the book or watch a YouTube video and you, decide, okay, I want to buy a business. I want to figure out how to get ownership myself. We sort of have a process where we funnel you down from at the very top, high level origination. So looking at a ton of deals to smaller level due diligence, you take very few deals and you do

sort of a base level due diligence. Do I like the profits? Do I think I like this industry? Then you go pretty deep into a few deals. So typically I found for the people that buy small businesses, you're looking at, you want to do somewhere between 50 and 60 high level due diligence deals, you're probably going to go pretty deep into 4 to 10 of them. And then by the end of 4 to 10 of them, you're going to kind of be able to tell, oh, this one looks really interesting. And so that's what I've seen the numbers be. Could be a lot less, could be a lot more. For instance, let's say you're an accountant right now. And you already understand finance a little bit. You understand how to look at a P&L statement. You're ahead of the game. Anybody who's

already in finance corporate backgrounds, you're going to know how to do this a lot quicker when you see it. And if you go to analyze another accounting firm, you also have a leg up, right? Because you're like, huh, I know how we make money here. We got this recurring revenue. I know these businesses typically end up making about 30 cents on the dollar. So like, oh, here's a business that makes 30 cents on the dollar that's doing this kind of revenue that's located in this city. It's in accounting. I already do that. I might be able to move pretty quick on that deal. So we teach something called the perfect fit business, which is basically an investing. and we all have a thesis, right? Like I invest in American companies that are in the SMB space

that need tech infrastructure. But if you're a newbie buying a business, you don't have a thesis, you don't have all of this built out. So we have something that looks like a deal box where you have a bunch of parameters, kind of like when you're going to buy a house, you're like two bedrooms, two baths, 500K or less located, not in New York because it's too expensive here, somewhere not in New York. And you're not going to really go outside of that box too much. And because you limit your scope, you actually have a higher success record. And I think usually what happens in doing deals, it's not so much how many deals can I do? It's I don't know what I'm looking for.

And so we spend a lot of time on deal clarity. What is a good deal for you? Because then when you find it, you just fucking know. You just go, you know, if somebody came to you right now and they were like, hey, I got this like company. It's in the financial media space. We have, you know, hundreds of thousands of subscribers. We've got all these eyeballs. It's the same target market as yours.

We don't really make any money. Could I sell you part of this business for like a percentage of upside maybe? You would probably be like, oh, I could very easily tell if that's a fit or not. And that's where I want to get more people because I think we all have some sort of Venn diagram. It's just nobody's shown it to us before.

Let's use like an example from one of the deals that you guys have done in terms of walk us through like, okay, here's how we developed what the deal box was. Here's why maybe we were interested in this space. How did you go find the deal? And then what did you ultimately like negotiate there? And I think using that example really help people understand like how this deal box actually makes everything more efficient.

And it's kind of like by saying no, you get to say yes quicker. Yeah, a thousand percent. I mean, I do think, I think about it a little bit like that song too, you know, that six, five blue eyes trust fund, right? It's like, okay, I don't agree with that woman that those should be any of the things you should actually care about in a marriage, but say that is what you actually care about. Once you see it, you move a lot faster. And so, for instance, you just walk around New York City, like over six, five, exactly.

There are probably more here, but you might not wish you married one. So one of our first one of my first deals before I was pretty sophisticated at this at all, I was working in finance. So I had a really, really big job. I was working long hours nonstop. And and I needed a deal that wouldn't take up much of my time. that could have an operator that ran it with me that wasn't that much money because I was scared about failing, even though I had been in finance before. I wanted it based in an area that that person was located on the ground because I wasn't. I was running around all over the country and

world at the time. So anyway, when I started looking around, the first thing that I looked for was an operator. I was like, who's somebody who I just knows going to get shit done, who has already had experience in the area that I would look to buy a business? We call that proven talent. And, and can I find that? So I started looking around for people in small business and I ended up finding a guy in the laundromat space and he had done real estate. We were going to do some real estate deals together. And he's like, I also have this like laundromat thing that I did over here. I'm like, talk to me more about that. And he's like, well, here's how it works. It actually works really well for real estate. It's the same play. You're looking for demographics in a region.

You want location. It's, there's a lot of similarities. I was like, could you run another one? And he was like, yes. I'm like, so if I find one, you could run it. I'll finance it for you. I want to see how this works. And if it works well, could we scale it to a few? And he was like, yeah, we could do that. That's really easy. And so anyway, so if you came to me and were like, Cody, do you know how to operate a laundromat? I'd be like, the thing is, no. What do I know how to do? Find deals and I can get money. So my first deal was tiny, six figure deal, five figures in profit. And we bought this laundromat because I was like, I think we can cash flow off of this. And then if this model works, can't we buy like five or six in the area

and you could service all of them, or we could have a GM that could service all of them. And I bet we could make like a couple million bucks a year on this, like nothing crazy. To me at the time, I mean, a couple million is a lot, but that's top line. That's not bottom line. So let's say at the end of the day, we can make 300 or 500 K between the two of us on a bunch of these laundromats. That would have been material to me. And so, so anyway, so that's the first deal that I did that worked. I did some little deals before that were startups and I was always terrible at that. So I like buying instead. And when you go in and you find one of these laundromats, how do you figure out which one is the right one to buy first? And then also how to structure the

deal and maybe actually what the seller is willing to structure may have an impact as to whether it's a good deal or not for you to do. Thousand percent. Well, I want to say a couple of things first, which is please don't buy a laundromat. I talk about it on the internet. So then people go to things you should buy laundromats. And I use laundromat as an example because they're just simple. They're simple businesses. I call it the gateway drug business. It's easy for you to understand. But I really also do not like starting laundromats. So I was just meeting last week with somebody who started it. You know, when you meet an entrepreneur and you can just tell by the look on their face, they've fucking been through it lately. Like I just, I walked in and I was like,

how are you doing? She was like, it's good. You know, we got it under control, but she had started a laundromat and it cost her $2.1 million and was nine months delayed. And laundromats just don't make a ton of money, like a couple hundred thousand dollars per laundromat, top line revenue is like normal. And so to make back 2.1 million, that's going to take a minute. And so I was kind of watching this and that's why I like starting some of these old businesses because, or buying them, starting a car wash, starting a laundromat, real expensive, actually a lot of equipment. So anyway, so I just want to say that first. Now, how do I structure a deal? The good thing about deals these days is this was an off market business. So you know, the person didn't know that

they wanted to sell. And this is the case with most small business owners. So if you go and talk to a small business owner, six out of 10 of them have no transition plan and have no desire to sell their business. They think that they can run it forever, even if they're 60. And so in this instance, a lot of times what you're doing is you're kind of educating the seller a little bit like you might walk in and go, Hey, and this is what I now do. I mean, the team sees it like pretty much everywhere I walk in and go like, Oh, this is incredible. Like this coffee shop. Is this your coffee shop? It is. I would say about not in New York again, but in smaller towns, probably about 30 to 40% of the time, the person you're talking to at the front owns the business. She's like,

Hey man, like, do you own this coffee shop? That's awesome. Okay, cool. How long have you owned it? Wow. 20 years. That's incredible. That's so great. You have a family, you're located in the community. Cool. Do you want to run this thing forever? You know, you're going to want to have those kids take over. Oh, your kids moved to New York. They're accountants. They don't want anything to do with it. Interesting. You know, it's kind of funny. Like I look to buy businesses in this area, actually. I have no idea if you'd ever be interested in selling a business, obviously at like the right terms and price and all that jazz. But if you did, I could talk to you a little bit about what a business might be valued at and what business owner is not going to,

they're like, yeah, what would this thing be valued at? Like often they're going to be open to the conversation. And so that's typically how I start. And in laundromat space, I had a little bit of an unfair advantage because I speak Spanish and a lot of them are owned by Spanish speakers and they extra do not know how to sell. And they don't have bank loans. They have like all their money in cash in the business. So if I buy a business for a couple hundred K from them, that is material because it's not like they're sitting with debt on the business. That's like 200 to 300 K in their pocket. Right. And so that's how I would start. And then the only other thing that people typically say here is they're like, well, must be nice. I'm not sitting on 300 K Cody.

I don't have any cash. How could I buy a business without cash? And I'm not saying that you can go out and pay $0 in 30 days to buy a business. I don't think that's reasonable. But 60% of all businesses sold on the lower middle market below private equity level are sold with some percentage of seller financing. And so that means that the seller will use future profits in order for you to buy part of their business. And so it's very normalized in small business. And for whatever a reason I don't think people talk about that. Now, as somebody is going through this process, what are the red flags that pop up where, you know, there's some things where I think if you want to be the operator, if you want to go and fix it, sometimes you see issues and you're like,

oh, that's the opportunity. I can jump in and fix it. But there's got to be things where you're like, if I see X, I smash the, you know, break glass emergency button, I'm out. I just eject from the situation and I don't want to go in. What are those red flags? Never buy a business if it is not profitable and it's your first deal. We don't buy other people's problems, we buy profits. Second red flag is if the owner of the small business says, hey, I don't work on this business ever, it's an absentee business entirely,

unless you're in there in the business watching them never work on it, little bit of a red flag. I typically don't believe that in businesses. Third would be you wanna make sure that the business and the real estate is not tied or you due diligence them separately. So a lot of times people will get into real situations where they get over their head

by buying a small business that they're like, the business is profitable. You know, the business makes a hundred K a year, but they just bought a $2.5 million commercial property to go with it. And that sinks them. Like those are two very separate things. And then the fourth, I would say is like the perfect for storm. So if you want to buy a business and have it go under, here's a great way to do it. One, buy a business that is not profitable.

two that is not located near you if it's a brick and mortar business so you can't go to fix it three with a partner that uh gets equity in a business without cash uh alongside you four that is in uh restaurants real estate or um i don't like consulting businesses ones where like it's a human you have human risk it's basically a job and um and i've seen that happen quite a few times and so if you can stay away from the the perfect four and if you can stay away from some of those big red flags, you decrease your risk quite a bit. But the number one risk is always, is there enough cash in the business for it to be profitable and to continue to be profitable? And how do you evaluate that?

Yeah, two things. One, you want to look at the financials of the business, the P&L of the business. And then you want to confirm that against the tax returns. Where we get in trouble is small business owners don't love to pay the IRS every single cent from their small business. And so because of that, there's usually a big difference between the P&L and the tax return. And then they'll do this thing called add backs, which is like, let me add back in the truck that I bought that was $60,000. That didn't really need to have it. So the profit of the business is higher than you think it is. Let me add back in a bunch of these expenses. This was really me and my family in Mexico, not like a real trip that I had to take for the business. And so all of a

sudden, you're sitting on this profit and loss statement that looks juicy. And you compare it to the tax returns. You're like, wait, you lost 20k last year. And so we've really got to make sure that we understand what is real in the business and what is not versus the two statements. Now, if they're a pro and they're looking to sell, they've either got audited financials, really rare in small businesses, or they have really clean financials with a lot of explanations that you can dig into. I would expect if you're going to buy a small business, you're not going to have that. And so what you really want to do is realize one thing.

Every time you buy a small business, you're at an information disadvantage, right? The guy who's been running the thing knows more than you. And so your real job is to get that person to understand, hey, if what you're telling me is true, not only will I pay you what you want for the business, I'll pay you more. I will give you a premium for the business on the upside, but I can't be sure of everything you know. That would be unreasonable for me to think everything that you know, I know, right? So I'm concerned about your legacy and your small business continuing and me going bankrupt and your employees not continuing, which means we have to de-risk this deal a little bit. And so could I buy the business

instead for a 30% lower price unless we hit these milestones. And that means if we hit those milestones, I'll actually pay you 40%. But if we don't hit those milestones, then at least I've protected the business and I've protected your employees. And that's hard to argue with. What you're describing is a lot of detail-oriented work, almost like a checklist, really making sure that you're hitting certain metrics and avoiding the red flags, et cetera. There's a lot of dreamers that are out there. Can they be successful buying businesses if they're not detail-oriented? That's a great question. Well, I think tools limit mistakes. So one of the things we do in finance, I'm not the most

detail-oriented person, but I am very risk concerned. And so every investor has what's called a due diligence checklist, right? So like a list of all the things that we got to check off before we fly the plane, just like a pilot. And so we have a checklist. It's in the book, in the digital download, but we have a series of checklists that you can use. I think that limits mistakes. And then the other thing is every good business owner

or buyer or really leader knows that they can't do it all alone. And so I think if you're like, man, you know what I'm good at doing? Selling shit. I'm good at branding. I'm good at marketing, but I'm not so good at finance.

I'm not so good at details. What would you want to do? Well, do you want to just say, okay, I'll never be successful. I'm going to decrease my likelihood of being a millionaire by 60%. I'll never understand the language of money. It's too hard. It's too tough. Let me just be poor.

Fine. Option one. Or option two, find yourself the opposite of you. Get yourself a little yin to your yang. And in business, typically the vernacular is like EOS's visionary versus implementer. And that's really the idea of like, can you have somebody who has big ideas? And then can you have somebody that goes, whoa, whoa, wait a second. How are we going to actually execute on that?

And so find that, but still get ownership. And I think otherwise that's just an excuse for you to live a small life. I'm going to read out a couple of things that you've said over the years that I'd love for you to elaborate on. It sucks being broke. It sucks working hard. So choose your hard. The truth of the matter is simply this. I think today we have a society that tells us, hey, it's just too hard to be fit. Well, have you tried being fat lately? Being fat sucks too. And so I think at the end of the day, you can either do what Naval talks about, which is you can up front pain or you can have long term pain. And if more people today can think about the Mark Twain ism of if you're going to eat a frog, eat it first thing in the morning. And if you're going to eat to eat the big one first, your life just gets easier. And so I mean, you you know, there's more than anything being in the military. I'm married to a dude that was in the military. And the most fascinating thing about him, and I think he'd agree with this. he just does the hard thing when he says he's going to do the hard thing always. He literally doesn't ever not do it. When he says he's going to go to the gym,

he goes to the gym every day. When he says he's going to work really hard at going to the gym, he works really hard. Does he have to be smarter, richer, better than anybody else? No, he just does what 90% of people don't do, which is the thing you say you're going to do. And so I think it's freeing. I think a lot of people think that that is rude or demeaning. And to me, I'm like, whoa, if the difference between me and the really, really rich people is just that they do hard things more frequently, even when they don't want to, that's fucking cool because that means I could do that too. Another one is a rule when hiring, hire people so hungry they may bite you.

First of all, you can't teach desire. My dad has the best line ever about this, which is you can lead a horse to water, but you can't make it drink. And I think that is the true thing in business too. If you get to optimize for one thing and people you bring along with you in life, make sure it is that they want a bigger life for themselves. This is the Carol Dweck growth versus fixed mindset. If I could choose one thing in any member of my team, it's not IQ. It's not history. It's not where you went to school. It's how bad do they want it? Because if you want something bad

enough, you become obsessed and obsessed. People are really hard to beat. And so I like my team having a little, little ankle biters on it. When talking about digital businesses, you said, build once, sell forever. The nice part about a business that doesn't have operating costs, like fixed operating costs, like a hard asset business, is that you can have a product that you don't have to keep creating. It just sits there and more people can utilize it. So right now, for instance, I think there's a real opportunity for people to buy internet businesses just like they buy Main Street businesses. And for instance, we had a newsletter

that we built just for one singular purpose. I wanted to see if we grew just a newsletter business, the newsletter business didn't make any money. It had like 3000 subscribers, I think by the end of it. This was years ago. I was like, can I sell this list to somebody else? And so I built it up. I turned it into a business.

It had an LLC. It had intellectual property associated with it and it had subscribers. And I went on a website called Deuce and I sold the newsletter for 8K. I think when people think, I want to buy a business, they think millions. For a lot of people, I'm like, start with 5K, start with 10K, because then what are you going to learn? Intellectual property, you're going to learn deal docs, you're going to learn negotiating,

you're going to learn how to buy and own something and eventually how to sell it. And I think once that happens, now we don't think that much about buying and selling houses. We're like, yeah, yeah, yeah, people do that. I'm not that concerned about it. And I think we should get that same way with business. And so if you can do that with a digital property, then you have much higher ability to make money long-term because you only have to build something once. What are other examples of digital businesses where you see people doing this?

I mean, across the board. Think about, I like to use Turner News Network. I don't know if people know who that is anymore, but Ted Turner was a total stud and basically built CNN. He built Turner Cable News. He built this media huge conglomerate. And the way that he built it is really interesting. He didn't build it.

He bought it. So his dad had one of the first cable news networks, but his dad got sick, sold it to somebody else. Ted found a way to buy it back. And then he went across the country and he bought up media assets across the company to create an empire. And I think that we have this delusion today that businesses are built in our garages with our sweat and tears, backed by venture capitalists.

And listen, I invest in those companies too. I'm glad people are willing to do it. But if what you really want is profits, if you want to make money on something, then I think you have a higher likelihood of making money if the thing is already making money, since 90% of startups fail anyway. So like, let's start it, I don't know, second base, instead of in the dugout. And then let's build on top of it. Then the other cool thing is if you buy a business today, so let's say you buy a newsletter. Let's say you buy a YouTube channel. Let's say you buy an education business online. Let's say you go to Kajabi or you go to one of these sites where they have Coursera and you buy an education business that's cash flowing a few thousand bucks a month. Well, then you use the cash flow of that business to do your next acquisition. And the other cool part is that I wish more people told me that you can get loans on your business then. And so you can't get loans to start a business. That's really, really hard. But you can, if you have something that cash flows already consistently and a history, you can go to the bank and you can say, hey, this thing's made $100,000 for three years. Can I get a line of credit? And it's not going to be a huge amount, but you can't do that in startup land. And so if we want to compete with the really rich, we got to play their game. There's a acronym that you have, R-I-C-H, Rich. Research, Invest, Command, Harness. Explain.

So in the beginning, I want you to learn as much as possible. You never lose money learning, right? You don't lose money in the education. You lose money in the implementation. So what I want people to obsess on is becoming as smart as you can in your first deal. Because if you do that, you'll do more deals. If you do a deal willy-nilly without learning much, you might fail. And then you'll never do a deal again.

and I think that's a shame. So I like to start with this idea of research and learn. Then once you've sort of learned, it's okay. Now to your point, how do we actually get you in the game? Let's have you take a little risk. And when I talk risk, it's not that I want you to mortgage your house. I don't. Please, please do not do that. I want you to do the thing that I know to be true, which is, I mean, have you ever made money with zero risk? Like it just doesn't exist. In finance, we talk about like risk on and risk off trades. We actually have risk allocations. And we know that in order to make money, we've got to use this four letter word, which is put some money on the table, some time on the table, some reputation on the table. And so I think we haven't normalized that for most citizens. We're like, that's risky. You're like, that's where the money is. And so that second part is implementing. The third is, okay, now that you've done this, maybe a small deal or two to start,

how can you become in command of your deals? How do you make the business profitable? How do you layer them on consistently? If you want to be very, very rich, how do you continue to buy more? Or how do you create a portfolio? And then finally, how do you start thinking about the next steps? What if you want to sell the business that you bought? And I think we should think about buying businesses the same way that we think about going into a relationship, which is let's start with the end in mind. How do we want it to end at some point? You're probably your first business you buy probably is not going to be the business you have forever. And I think that's okay because then you can sell the asset. You can't sell a job, but you can sell an asset. And so

that's what we focus on at the end of the book. What can sellers be doing to better position their business to be bought? Yeah, we have this whole process. I call it the cash out cake because I think about it sort of like a tiered cake. It has levels to the game. And the bottom level is really simple. It's up your profitability as much as humanly possible and up your revenue. If you make more money,

you can typically sell for more money. And then on top of that, we've got systems and processes. So if your business doesn't have any systems and processes, you got a job, you don't have a business. Next up from that, we wanna think about who are the people in your business? Is it a single man, key man risk? Like you're in charge, if you leave, business is gone.

Or do we actually have a managerial layer in there? Then on top of that, what I'm really thinking about is in a business transaction, what you're doing is you're trying to decrease the risk for the seller so that they will, for the buyer, so that they will increase your purchase price. And so that segment is like, can we have more diversified clients? Can we show historicals? And then the final segment is, have you explained this business and done some projections on what it might look like in the future to show that, yeah, the past was great, but the future

might be even more bright. And so those levels can get you to a higher multiple. Does it make sense for somebody who wants to learn how to do this to go work with someone who's buying businesses and kind of like almost as an apprentice and then go do it themselves? Or do you think that that's a high likelihood of picking up kind of bad habits? And so maybe you're better off starting by yourself. That's a good question. I suppose it's like everything in life, the who matters hugely. but I do think that this is still rare enough in our society that getting around other people that are buying businesses is probably smart. And so even if the good thing about finance and buying

businesses is black and white, did that deal work? Did you make more money? Did that deal not work? Did you lose money? And so you can tell if somebody is good or not based on track record. And unlike often the stock market, there's slightly less luck and variability because you don't have the same market exposure. It's a little bit depressed because these are private companies, not public companies. So I think getting around other people who are doing deals is really, really important. Whether you go work for somebody, whether you get a group of people together who are all doing deals, whether you join a community like ours, when you get in the room with other people who like their Tuesday is your dream day, I think you make more money.

And when you get in the room with other people that already have the life that you want and are already playing the game that you want to play, it's more likely you're going to play. If you hang out forever with people who aren't actually making moves, it'll become really hard to. You're talking about people and the quality of the people. There's not really problems. There's just people problems in most of these companies. And so how do you deal with managing people, hiring, firing, and kind of all the people relationships or employee management? Yeah. Well, we have a couple processes there. I think the most important thing that you can do is try to hire well.

It's always easier to bring in the right people than it is to change people. And so how do you hire well? Well, you start with doing a deal with a company that you already like the culture. And there's lots of like red flags or green flags to look for in a culture. For instance, like, you know,

if you're gonna go buy a business and their average tenure is six months of their employees, red flag. If you're gonna go buy a small business and the average tenure is 10 years and the business is doing well, that might be a green flag. And so best predictor of future behavior is past behavior, right?

So I'd probably look for that. And then we have some systems in there, like we call it the cheetahs, we call it the stripes versus the spots. So I think about this idea, like if you want to find a top player, cheetah and a house cat, both a cat, right? Two very different types of cats though. And so we have a profile for what a cheetah looks like at our company. What does somebody look like who's going to run fast?

And then we have a profile of what a house cat looks like. Doesn't mean a house cat's bad, but you better know what you're getting. So it might be okay to have a house cat type personality for somebody in your business who is, for instance, working in the warehouse, who's, for instance, driving a truck. They're like, they're steady state. They're kind of going continuously, but you know you're not going to get a fast uptick from them. And so I would recommend if you're looking at hiring, you use and steal other people's

processes. The beautiful part about business is that we're not doing rocket science here. Everything that we do has been done before continuously, and we can steal other people's homework. And so we have something called the nine Ps, which is where we take up a business from, let's call it, this first couple hundred K to nine figures. Now, not everybody's going to get to nine figures. That's when you get to like, you know this all too well, protection.

That's when you start getting to perseverance, which is like how to create a company that lasts forever. But the first six P's are really important, which is like, you know, your people, your process, your productivity, your performance. And if you have systems to measure all this stuff, it gets easier. And last thing I'll say there, like, you know, you become an entrepreneur because you're kind of unemployable, typically, right? And because you're tired of people telling you what to do, because you want to be the architect of your own life. And sometimes I think the negative side of that is you think that you need to do everything yourself. And what you should do instead is steal as much as possible to create little bumper lanes alongside you. So you can like be your wild self inside of the lanes that won't murder you.

And that's what we try to do. When you buy a deal and all of a sudden you realize you may have made a mistake or it's not going well, what do you do? That's a great question. Well, first, your bank account size is a reflection of your speed. So don't dick around. Move quick. I think one of the biggest issues why businesses don't succeed long-term is you know you need to

do a thing and you're not doing it. You know there is a manager in that business that's not doing well. Put them on a performance plan. Have that performance plan be 30, 60, 90 days. And when they're not hitting that, you lovingly tell them it's not the right fit for you or for us. Move them quickly. Second is you always want to protect the house, which means cash. So one of the first things we do when we buy a business, for instance, is it's called increasing, sorry, decreasing the time between getting paid and providing a service. We want to increase the velocity of our cash. And so in most small businesses, if you have a cash suck business, that means I go and clean a house. I schedule somebody to come to the house. I clean the house. I do advertising to clean the

house. And then I don't get paid until after the job is done. What would be better than that? Let's just flip it. Let's just say when we book the appointment to clean the house, we take payment upon booking, right? And so we're, we're changing the cash conversion cycle to be upfront. We're increasing the velocity of cash coming back to us. And so I think a lot of times when businesses get in trouble, it's always money. Like money solves all problems in business. If you have money, you can pretty much control almost anything except like legal fraud, I guess. And so because of that, I obsess first on just let's get cash stable. We also use something, and this is slightly technical, but it's called a 13-week cash flow. And private equity typically

manages their turnarounds off of a 13-week cash flow. I think money is a cruel mistress. You need to pay attention to her. She's going to leave you. And so we, every single week, every Friday, I sit down. And now some days on Tuesdays, because some businesses aren't ready by Friday, but Tuesdays and Fridays, I'm looking at how much money we have in the bank account. I'm not looking at what the accountants say the money's going to be on XYZ. I'm like, how much money do we have in the bank account? And what if things go sideways? Do I understand? And that has saved me so much headache. What's the best part of your day? I mean, candidly, best deal I've ever done, husband. It's kind of funny. We do a ridiculous

thing in the morning. We don't have kids yet. I'd like to one day, but it's a little snugs. And then we have this ridiculous little 20 pound, super non-manly kapapu dog. And when you yell attack to him in the morning, like from the other room, he sprints in and does this jump onto the bed on top of you. It's the opposite of an attack. He's incapable of attacking anything, but it's just, it's the small things. It's husband and a dog in a snuggly bed. What's the worst part of your day? That's a good question. The worst part of my day is when I feel like I can't figure out what is wrong in one of our businesses. It's always the uncertainty. I don't think it's that hard to run a business. And I can kind of know what we need to do next. And I can work through

a lot of pain that way. But I think one of the scary parts about entrepreneurship is when you're like, I don't know. I don't know what's wrong. And it's not working. And there are days when that happens. And that I've had to just come to terms with is part of the game of entrepreneurship is it's not actually that it's super hard all the time. It's that sometimes you just don't know what to do next. What is the biggest win that you've had in your career? Figuring out my perfect fit business. There was a long, long time. I spent 12 plus years working for other people in big financial firms, making them a lot of money and feeling like maybe if I find the next business or the next team, it'll be right. And it took me a long time to realize

oh no you need to do this by yourself and not only do you need to do it by yourself but you got to do it in a way where it pairs together the things that you're actually good at but that also make money and so at some point i was like huh i really actually love teaching people and i love talking about what we do for a living and i don't just want to own all the companies i want other people to own with me it makes me feel good like it's a total ego play and uh and so when i figured out, wait a second, could I buy these businesses? And could I also teach other people how to buy businesses? And could we do it all together? That makes me feel like it's worth it. Because at the end of the day, we can't take all the cash with us, right? So don't get me wrong. I want to be

wildly rich. I like money. I think it's protection in a lot of ways, and it's freedom. But I want to do it with other people. Otherwise, it feels sort of meaningless. Biggest loss in your career? doing a deal with a friend that I thought was truly a friend that ended up stealing money. I really do love humans and I like doing business with people I like. It's one of my great joys is having a group. I mean, we're in some deals together and you're like, isn't that cool? Look at what that entrepreneur did and they won and you won and I'm winning and that feels good to me. Plus I like talking about it. But one time I did a deal

with a guy that I thought was really buddies with me. And it turned out he just really wanted to steal from us and use us. And that felt like a violation, the likes of which I had never imagined. And so now to this day, I have a little rule where I don't do business with people, partnership business with people, until we've known each other for at least a year. And after, I think it's hard to hide who you are for a year. And after that, you start to, you know, things start to show one way or the other. And so my dad had a line too that was, it's you're never going to regret uh the hows you're going to regret a few who's and i think that's true that's a great line um the book is uh is coming out now and um i think that you spent a

lot of time i don't think people probably realize how much time energy and effort went into not only uh coming up with these ideas but also uh presenting them in a very concise way that is understandable and digestible for people who are just starting out, but also maybe people who have bought one business, they're trying to figure out how to do it more often or scale. What is kind of like the one minute on, if I read this book, what am I going to get out of it? Yeah. Well, I think I'd maybe tell the story of Wayne Huizenga. I'd say, if you read the book, you could understand and create for yourself the same situation that led a man who had no prospects, drove a garbage truck to create a multi-billion dollar empire in this country using boring

businesses. And he's a guy that maybe we know his name today because he owned Blockbuster and he owned Waste Management, which was one of the largest waste companies in the country. But there's a line in the book about Wayne and he went to a pretty good school and he was just a fuck up. He just couldn't do anything right. He was kind of unemployable. And somebody recalls seeing him drive around after college in a truck, in a garbage truck and being like, man, I better start working harder because Wayne over here is having to drive a garbage truck now. And that same guy went to go work for a couple of garbage companies, watch what the owners of garbage companies did to buy some of his own to scale this monstrosity using creative financing and

seller financing, and then create a pretty insane life where he owned a bunch of sports teams and made a giant impact on the country. And so when I think about the book, it's got all the tactics and the tools and the metrics that you can use to have this be done. But I think the most inspirational thing is seeing humans who are totally normal and were able to do it. And I think that means we can too. Where can we send people to find you on the internet? And you guys produce a lot of content. So you have to say more than one place so that people can go and get all this. Yeah. Well, if you want to buy the book, it's at msmbook.com. If you're doing it now at the time of this recording, there'll be a bunch of freebies that come out with it that'll stop

in the next few weeks. And so you should go check that out, msmbook.com, because it's called Main Street Millionaire, and that's too fucking wordy. And then probably Cody Sanchez on Instagram, YouTube, Twitter, and then contrarianthinking.co is where our free newsletters are. So anywhere you pay attention on social media, we're there. You're doing a fantastic job. You're helping a lot of people. I appreciate you doing it. And I'll definitely do this again in the future. Sounds like a plan. What's up, guys? I hope you're enjoying this episode, but I got a quick message for you. I just released my very first book. It's called How to Live an Extraordinary Life. In this book, there are 65 life lessons that I've picked up over

the years. These lessons will teach you about money, investing, relationships, work, health, happiness, and much more. In this book, I wrote letters to each one of my children and I tried to share those life lessons with them. If you pick up this book, there's three things that I can promise you. The first is that it is very concise. The audio book is only three hours. You can listen to it on a long drive or on a rainy afternoon. The second thing is that you're going to learn something. It's worth the price of admission just for the lessons themselves. And then the third thing is it will make you think more deeply about your life and how you try to live it so go pick up how to live an extraordinary life today it's a quick read it's very impactful it's very concise

and it would mean the world to me for the support go check it out today on amazon barnes and noble or wherever you buy your books hardcover audiobook it all works thank you so much for the support and i'd love to hear what you think about the new book Thank you.