The Entrepreneur's Path to Financial Freedom

0:00What I was thinking would be cool is over this weekend, I had a text friend of mine in the music world, who is an advertising executive executive director of my business,

0:30require in 15 years. And then I was driving through the gates to one of the places that you and I have lunch when we're... Hey, everybody. Welcome to another episode of Business Lunch with your hosts, Ryan Dice and myself, Roland Frazier. Ryan, how are you doing today? So freaking good. How are you doing? I am also doing quite well. It is a bit rainy. I would prefer it not to be that, even though the responsible human in me says we need water always here in California. But, but you know, when it comes, you're like, maybe it could just rain at night and then be all dried up in the morning. That would be ideal.

1:08Yeah. You're not allowed to complain about rain in Southern California. It's a desert. Dude, you know what? It's so funny. We had my, my mother-in-law out here who left this morning and you forget how the weather is. I mean, I forget how the weather is in the rest of the world because she flew out into ice storms in Michigan where her flights were canceled and there's no gas in the town she lives in. And I mean, it's like, you just forget about it. And then you, then you, you know, you complain, you're like, God, sprinkling today. You know, they're like, I can't get gas. I can't get to my house.

1:44You know, it's like, so, so, and I know you've run into that now that the cold weather has moved down to Texas. So. Well, thankfully we're done with all that. It, what we're going to be dealing with here in another month or two is 158 degree temperatures. Uh, so that's, that's instead what we're going to be doing. It's colder and warmer. I don't, I don't understand. We're just, it's just really, we're really good at both. Yeah. Just good at the extremes. Um, what I wanted, was thinking would be cool is over this weekend, um, I had, um, uh, a text friend of mine in the music world who is an advertising executive that he said, I think he said he was, you know, making six figures working for a company and then broke out a couple of years ago and now has, you know, tripled his, his income, but is kind of looking, you know, he's got a birthday, kind of a milestone birthday coming up.

2:38And he's like, I want to retire in 15 years. And then I was driving through the gates to one of the places that you and I have lunch when we're here at Rancho Valencia. And the guy at the gate said, yep, just 11 more years and then I can retire. And both of them were thinking about how do I do that? And not the guy at the gate, but the other guy asked me this weekend, he said, what would you do? What do you think I should do? And so I thought it'd be kind of interesting to talk about anybody who is consuming this podcast that is interested in how could I accelerate my time to financial independence, whether you want to retire or not?

3:21How can I increase my income most rapidly? How can I increase my net worth most rapidly or wealth generally? What would we recommend to do that? I thought that'd be kind of fun. So I'm going to pose that to you and see what your thoughts are and then kind of share what I thought as well. I'm guessing they're going to be fairly close. Would you describe this as individual investment advice that we're offering here? I would say it's specific financial advisory. No, definitely none of those things. We are not RIAs or any other licensed professionals. This is strictly for entertainment purposes only.

4:00Yeah. follow at your own risk, consult a licensed professional. How's that? I like it. I like it. So I'm going to, if you're okay with it, I'm going to operate under the assumption that we're giving advice to entrepreneurs or at least people who are open to their entrepreneurial minded. Cause I honestly don't know what to tell somebody who is merely a wage earner and they have no interest whatsoever in alternative investments. I think that's... Because I just, I don't know what to do. Yeah, I think that's a really good point. And the best advice I've ever heard there is the magic of compound interest and take your money and get into S &P index and hope things continue to go well there and you'll probably do great.

4:48Yeah, exactly. Like, you probably should do that. And I'll tell you, like, if you're at a job and the job offers a 401k, then, and there's matching, that's called free money. So you should do that. You should take that. That's tax advantaged. You know, fill all those suckers up. Don't do that. It just boggles the mind. You'd almost be better to do it, like, if you needed the money. If you're like, I can't do it because I need the money. I bet if you did the math, this would actually be fun math to do. I might do this. if you did the contribution, took the match, and then took the penalty to take it out early, I bet you'd be ahead.

5:25Yep. You probably would. And if you just contributed the money, you probably would adjust your lifestyle so that you just learn to live without it. Because that's kind of what everybody does. So yes, if you've got a job, you should be doing that. And then you should be figuring out how do I set aside at least 10 % into investments? I mean, we're talking about classic financial investing advice. Yeah, exactly. 10 % to do good, 10 % to save, 10 % to treat yourself because otherwise you're living a miserable life and then the rest is what you live off of. Treat yourself. Yes. So I don't know how to offer anything better than that for just kind of your standard person.

6:10So as we think about entrepreneurs, isn't it funny though? I did not think to make that distinction. And because I think so much like an entrepreneur that I'm like, of course, everybody would want to do this, but it's absolutely true. And it's okay if you don't. So if you're listening to it, you know, to this, the rest of it will be, you know, for your amusement of crazy people like Ryan and me and most entrepreneurs. But that's actually a really good, I'm glad that you mentioned that. Well, you know, this is business lunch. So if you're not an entrepreneur and you're listening to this, I'm welcome.

6:40I don't know why, but I'm glad you're here. So as entrepreneurs, how should we approach investing? Because I do think it's different for us. We can approach it from an entrepreneurial mindset. And I'm a big believer in the barbell concept. So I like the idea of ultra, no-brainer, mega, super conservative. For me, what that does mean is I do still put money in, you know, stocks and have to have some in the market. I'm fine with that. I keep a lot in cash, but then what I'm looking for, and I also will take outsized bets on crazy stuff. Like, So I will take some percentage and it could be 2%. It could be 4%, but I have what I call a FOMO fund.

7:32It is my fear of missing out fund. It is my, I'm just going to, and if I've got some extra money, I'll take a percentage of it. Like I said, it could be 2%, could be 4%, kind of however I'm feeling. And I'll throw it in my FOMO fund. And so if there's an opportunity where a buddy comes along and he's like, hey, you should throw some money at this thing called Bitcoin, which thankfully a buddy of mine did back in like 2008. And I'm like, what's Bitcoin? He said, don't worry about it. Just throw some money at it. And I did because I happen to have some money. That worked out, right? Now, there's been other times where people have said you should throw some money at this and it went immediately to zero.

8:12But now I'm never worried about like that fund has actually made me money in the stupid decisions I didn't make because I was able to kind of just scratch that itch. Yeah. And I think as entrepreneurs, we need to have just a little bit aside where we let ourselves scratch that itch, but only to a certain extent. So I've got the little bit of stuff that goes over here. I've got the bulk of my stuff that goes into cash. equivalents, and stocks. I've got the little tiny bit, 2 % to 4 % that's going to go in the FOMO fund. And then the rest of it, I'm looking to make investments into private companies.

8:54That's what I'm looking to make. And I mean, we can go into that. I'll just kind of stop there and we can get into the details of these, but that's my general investment mix. Yeah, I like it. As you know, I'm very similar. One thing that I think is good to talk about with respect to these private investments is my suggestion and my philosophy is to only go into existing companies that are already successful. And if I was, I did a lot of turnaround work where I went into companies that were faltering and turned them around. And if you want a giant challenge and have a lot of experience and are okay with, you know, with that, that is a way to go.

9:40But if you don't have that experience, I'd recommend you stay away from turnarounds as well, because there's so many businesses that are already existing, already have a history, have already proved themselves, have product market fit, have profitability, have sales teams and employees and everybody else suppliers in place that to me, it makes no sense to go into a turnaround situation. The other alternative would be venture capital. And I had a dinner here at my house. My wife was out of town on a girl's trip last week. And I had a dinner with three friends, all of whom you know. And they were talking about a couple of different investments that they'd made in like venture startup type things.

10:23And one of them was a space thing that was gonna use giant rubber bands to basically sling satellites into space. And it was this amazing technology and had all this great proof and everything. But it was a startup and several of them invested in it and they were talking about other investments. And there were a lot of losses in almost all of the things. And I've seen that so many times where people are betting venture bets. Venture bets, they don't work out most of the time. I think it's lower than a 10%. And when they do, it's like a 10 to 20 year payback. Yeah, exactly, exactly. That's my FOMO fund.

11:00Just so you know, venture bets, venture capital VC for me, that is just like, I'm gonna buy the latest meme coin for funsies. Me too, same thing. I have an amount I put every year into that. And then to me, it's already lost when I do it. And if it shows up, it's kind of like, let's put it all on double low green and see what happens. But so I would go there to make that distinction. No turnarounds, no startups, no venture things in your primary investing. FOMO, yes, love it. Whatever you have to do that with. But if you don't even have enough to do the FOMO, than be disciplined enough to think about these existing businesses.

11:47I do want to talk about a couple of potential startups in the knowledge and, and networking, uh, business, but, uh, you know, or, or niches, but, but like to me, there's just no better investment than going into a business that already exists, that has a proven track record because your return on your capital is going to be exponentially higher than anything else that I've ever found. That's not just a bet that hopefully you get lucky. Have you? Yeah, no, let's run the numbers real quick. So let's say that you find, you come across a business that's doing a half a million dollars in revenue. So this is not a gigantic company.

12:32It's doing half a million dollars in revenue, but what it has is proof of concept. So it's not, it's not a startup. If it's doing a half a million dollars in revenue, it's probably doing between a hundred and$150 ,000 in profit. Yep. Right. And that profit's like SDE. So if you invest, seller discretionary earnings, so if you invest in this company, then, and you're generous with your valuation, you're probably buying in at a 3X multiple. Right. And I'm going to assume, by the way, that you're bringing cash to the table, which I don't have to tell you this, Roland, but you don't even have to do this the majority of the time.

13:08What? I don't know if you've heard of it. But let's assume you are going to treat it like a traditional investment. So you've got some money and you're going to put money in, you know, in this business. I'm further assuming that you're not necessarily directly adding value. Because the other nice thing about these small businesses is if you can add value, not only can you quickly improve the value of your investment, but you can also get into the deal at a better valuation. So, but we'll just, we'll assume that you're not adding value. You're just coming in as a standard investment. So you're investing at a 3x multiple.

13:42So it's about a$300 ,000 to$400 ,000 valuation. Let's say you come in, you're buying, you follow my math based on, okay. Let's say you're buying 20 to 40%. You're letting them have the majority. You're letting them have a fair and reasonable salary. And you're getting everything over and above their fair and reasonable salary. You get to take as distributions. This is the nice thing about small businesses is they can kick out cash, unlike venture investments. Now, if you can ride this thing up to 5 million in revenue and about a million dollars in profit, which is not absurd. Companies go from a half a million dollars in revenue to$5 million in profit all the time.

14:26And this can happen in a couple of years. Like that rate of growth at that level, a 10X, if you're doing $50 million a year, 10Xing is hard. 10Xing when you're at half a million dollars, I'm not saying it's easy, but it happens all the time. It is easy. It's pretty easy. If you've got three or four years to do it. So now at this point, you've got a business that's doing 5 million in revenue. Let's say it's only doing about a million dollars in profit. You now can exit that thing at a six to nine. Again, if there's just, I'm talking like the most standard kind of thing. And you're You're probably under that at that level still.

15:06I think you're probably closer to like a five, you know, four to six probably. But still great. Fair enough. So let's say, yeah, so let's say you're at a five, at a five-ish multiple. So if you're coming out at a five, even if the business doesn't sell, you can go out there and get, they can go and get growth capital. You can recap and take some of your money off the table. or you're just getting big, fat, massive distributions. I just don't know of another way that you could invest, you know, 50 or$100 ,000 and get that kind of return over that short a period of time. Yeah. While you're also earning cash flow.

15:45And think about like from a, you know, a little bit more return numbers on it. If you're buying into a business that is 500 ,000 in sales, that's operating at a 30 % margin and making 150 ,000, because that's 30 % of 500, then it's a 30 % return on the valuation if you owned the whole thing. But you're going to effectively give, you're going to reduce that by two thirds because you're paying a 3x multiple to acquire it. So you're paying, let's just call it 500, it would be 450, but let's call it 500. You're paying 500 to get it. Uh, and you've bought 40 % of it. So you're going to get 40 % of the 150 that it's making, which would be what?

16:3560 ,000. Um, so you're going to get 60 ,000 on your investment of 200 ,000. That's a 30 % return. I mean, it's, it's, it's a great return on your money. Even if you could do nothing else, Warren Buffett, you know, would kill to get 30 % returns. And the only reason he can is he has too many dollars that he has to invest. So he can't find ways to deploy it enough, but you can. And even if you only bought one of those businesses and it never did anything else, compounding at your money coming in at a 30 % return on your initial investment and then compounding because you're taking that money and assuming, put it in S &P, put it in another business, put it in that business to grow the business.

17:19It just, I don't know any way to make, to make money faster. I really don't. Yeah. I mean, and I know that there are people, we haven't talked about real estate. I know lots of people who their thing is I want to buy one property per year. And like, that's, that's kind of the thing. I want to take my money. And the nice thing about real estate is you can get leverage, but I don't, I don't know how to add value to real estate because I'm not that handy. But it's also really hard now because the prices have gone so, so crazy, you know? So right now to me, this just trumps, you know, it does really trump real estate.

17:55And, and, and now we get into, to me, the fun thing. So you talked about it already. We just talked about cash on cash, your return, but when you exit, you're able to get significant, you're, you're able to realize that multiple. So like everything thing that is added to that business in profit, as Ryan said, you know, let's say that you, let's just say, let's not even say you get to 5 million. Let's just say that you get, um, to a million five and you're still maintaining that roughly 30 % margin and you're making a half million in profit now, and you get a professional manager so that it's not owner operated.

18:32You're going to jump from a two to three X valuation to between a four and a five most likely. And, um, and you know, just that jump, that's a crazy jump. You know, your, your business that, you know, was worth 200 ,000 in your hands, you know, is now worth a million or 800 ,000 like that wealth. And that wealth is not taxed until you sell. So that wealth is compounding like a Roth IRA where, you know, it's just, well, not like a Roth IRA, like an IRA, um, where you're not paying any taxes on it until you actually sell it. Now, if you actually put that investment and a Roth IRA, you wouldn't pay any taxes on the entire gain.

19:10So it's, it's an amazing how much you can accumulate just with the buy-in to a profitable business that already exists at a fair market value, all cash. We're not even talking about leverage because when you leverage, you get way more. If you're paying, use an SBA loan and acquire the whole business and you're paying around 12 % interest right now, but you're earning 30, you're making an 18 % interest spread every single year on the government's money, which will finance up to 90, uh, what is it? Ninety 7.5%. If you, if you structure it right of the purchase price can be done with, you know, with the SBA.

19:51So you're in for 2.5, you're going to get into a million dollar business for 2.5%. I mean, that's crazy. 25 grand to get into a business. That's a million dollars. that's now returning you 200 ,000 a year, like you're starting out with a return of 800%. It's just crazy when you get into all that. So I hope it's not too fast because we don't have slides and pictures and graphs and stuff, but man, the return that you can get on that money and then you go to sell it, even if the only thing you did was buy in with SBA money, if you're in the United States, that's available to you. And you hold on to it and replace the owner with a professional manager and sell it.

20:41You're, you know, every couple of years, you're just, you're millions of dollars ahead. It's hard not to be, right? Yeah. I will say if it's me, I prefer, and I'm telling somebody else, you know, if I'm giving recommendations to somebody else, which that's what we're talking about, I would rather do a couple of minority deals as opposed to going out there and buying all of a company. Because the thing about buying all of a company is now either you bought yourself a job or you now need to go and recruit an operator, run that business. Unless it already has one. If it already has a professional operator and not the owner.

21:23because I'll tell you this, if it's the owner that you just bought out, they're unlikely to continue running it with any degree of enthusiasm, let's just say. Yeah, yeah, I have run across, it's definitely the minority of deals, but there are owners who just don't wanna be entrepreneurs anymore. They are the accidental entrepreneur that stumbled into being a business owner and find that they like doing the thing they're doing, like baking the pies or fixing the cars, but they just don't want to deal with hiring people. Especially they'll do it just to not have to manage the people, which is amazing, right?

21:58And those are the people who I'd rather get in and do a 20, 30, 40 % deal on, make sure that I like it. And then just as it's working, buy a little bit more and a little bit more until you get a majority stake because I would just want to make sure that they're good to go, that they're actually going to be good. I don't think I'd do that without an option to acquire more in that interim. Yeah, that's what I'm saying. Yeah, I agree. But the idea, the nice thing about the minority, if you have a solid operator, because my whole thing was like, what I would be looking for is, ideally this is somebody that you know through your network.

22:38You know, maybe this is a client. You know, you talk a lot about consulting for equity. Maybe it's a past employee or staff member. Maybe they're in your Vistage group. Yeah. Not that that was the best deal in the world, but yes, it could be somebody like that. It could be a vendor that you're already paying, right? Like let's, you know, let's kind of invest in your existing P &L or something like that. I would want to see that they've got at least three to five years of business experience, right? Like, do they have something going on? Maybe not in this business, but like, do they have some? Do they have a personal track record of, like, do they personally seem like a successful person.

23:18Like they're not just an absolute, you know, bum, but what I would want to see if I'm going to do a minority investment, are they clearly just sold out to the, to that business? Like, are they passionate and enthusiastic about that business and they want to see it be a thing? You really don't want to invest a minority position in somebody who they're burnt out about the business and they're looking for a savior. 100%. Now that's the thing you want somebody who they're like, they see value in just getting some help and in getting some cash infusion. Yeah. Or they're looking to the second bite, right?

23:56That you're doing it kind of like private equity where you're saying, hey, I'm going to come in and again, I probably wouldn't do a minority for this, but I'm going to buy a majority and you're going to be in for, you know, it's interesting. The trend used to be like 80, 20 deals. The trend currently is much higher on the retained roll-in interest of the entrepreneur, like private equity is looking more for it to be 70-30 or 65-35 their way. So the entrepreneur gets a bigger bite of the apple, but there's less risk to the private equity firm and there's more buy-in because a lot more is riding on the line for the entrepreneur that's staying in.

24:36But they're willing to stay in because they're being sold on the bigger picture of, look, we're going to come in and buy a controlling interest now. And then three to five years from now, you know, we're going to be growing this organically and, uh, through additional professionals and professionalization and, uh, through acquisitions. And then you're going to have 20, 30, you know, 35 % of this way bigger thing that we sell. Probably that's going to be worth more than we pay you upfront because it's going to be, you know, it's going to grow so much. So I do like that as a pitch, if, if they're excited about that future vision, but 100%, if, if the reason they're selling and you should always ask what your reason for selling is I'm just burnt out.

25:19I'm so tired. I just want to quit and sit on my porch. Then, you know, you got to know they're not going to be there. So that's, that's, that would, that would be a challenge. Definitely don't do a minority on that one. Maybe, maybe you buy out the whole thing. And those, those are the deals, by the way, where you, you might not have to put any money in it because God, they just want out. That's one where it's like, I can pay you very slowly so that you don't have to show up tomorrow. How does that sound? But yeah, I think if you can do one of these deals a year, just do one of these deals a year and you start to stack them and they ladder.

25:52I mean, you absolutely can build up quite a portfolio that is both cashflow and future exit value? I think most people would feel comfortable retiring on 10 million. And I think that to get to 10 million in five years doing this would be pretty easy. If you did a deal a year to at the end of the five years, have that be worth 10 million, I don't think that would be that hard. Yeah. I mean, certainly we talk about starting off at a half a million dollar deal. as you get used to this and you start getting exposed and start getting more confident to larger deals, you tack a zero on the end and it does happen just a whole lot faster.

26:41And the ultimate multiplier on this is when you're able to get into these deals without having to put much, if any cash, any of your own cash into them. And I know, again, you talk about that all the time. I'm sure there's resources galore that we could drop on folks, but that is the thing that can rapidly accelerate this. And people say like, oh, you know, this is like a nothing down like real estate. That sounds like a scam. These deals happen all the time in businesses, especially if you have any value whatsoever to add. Because at this level, what companies, typically companies don't need cash.