E141: Cash Flow Keeps Us Rich

25:32It used to take me probably literally a week or two to like figure out what my projections for the next year could be. With Service Analytics, I got it done in an afternoon. So it's like AI for your business knowledge. And if you want to check out Service Analytics, that is S-A-R-A-S and see how daily precise data can transform your profitability. All right, Jason. So you guys have used debt to pull more cash out of the business. You've done a dividend recap. How'd you decide to do that? We decided to do that because we were seeing all this profit on the P &L and seeing all of our cash going into inventory and taxes.

26:15And we have experience, I have experience doing large-scale financings. As a banker, I've seen people lever up to seven times EBITDA. and we kind of all sat around the table and said, hey, at two times EBITDA, that's in the current rate environment with the tax deductibility of interest. We look at it as taking a little money out earlier rather than having to wait, especially because we were going through some really high growth stages where we were tying up a lot in inventory. We're at like a more moderate growth stage now, really solid, but moderate. And so things are a little bit more predictable.

27:00But in our case, it was sort of taking money out from the future, knowing that, you know, we're basically like, look, public company CEOs, they always, they borrow against their equity, you know, like, rather than selling is a little, there's a little bit of that too. And it's like, okay, how do we borrow against our equity to enjoy our lives? Because we're not a bunch of people in our twenties or thirties. Yeah. Time value of money is real, right? Like I was telling this to somebody the other day, I was saying like the way that I'm wired, the way that I know you guys are wired is, hey, I'm willing to play the marshmallow test game.

27:34I'm willing to have less today to have more tomorrow. But there's one like really important characteristic that either makes that point of view like really wise or incredibly stupid. And here it is. Do you ever eat the marshmallow? Because if you never eat the marshmallow, then you're just lying to yourself. You're just kind of constantly pushing off into the future a day that never comes. and like your point Jason like hey at some point you've built a really valuable company and you want to enjoy it Sean your point about compounding money makes sense but again if you never use that money who cares how big you compound it to yeah look do you want to be a Christian Bale and the machinist just starving to death but you have like infinite marshmallows or do you want to just you know eat a couple of them every once in a while it's like when you want it's like when you go to buy a house.

28:20I talked to a lot of people about this, like going to buy real estate and they're trying to like calculate some ROI. And I'm like, my guy, there is a value to you living someplace that makes you happy, you know, and you can't do that. So, you know, just like stretch, just like stretch on, you know, you should stretch on that because it's going to make you happy. It's kind of it's kind of the same thing. Where are you in your life? You know, if you're in your twenties and early thirties, you should be grinding hard so that when you're in your forties, you get to enjoy it. And then when you're in your fifties, you enjoy it more.

28:58And then when you're sixties, you can just chill. That's the JP plan anyway. The JP plan, trademark. So one interesting thing, we, we work with Morgan Chase and we were talking with our group and, and I I don't know if they were talking about this being true regionally or nationally, but I think they meant nationally. They were telling us that another player in our space was trying to do a dividend recap and that they didn't think it was going to get done. And then they made an offhand comment to our CFO, Jeff, that they had not done a single dividend recap this year. Or maybe it was this year post-Liberation Day.

29:35So the idea of dividend recap is like, oh, we have stability in our earnings and we're going to kind of pull that forward into today. Well, not surprisingly, the banks are not really keen on giving that to just about anybody right now because it's like, who knows what the environment is even 12 months from now. That's a good point. You know, and what I've seen in the market to talk to banks, you know, we have a syndicate of six banks and just with the tariff environment, the way it is, it might be tougher right now. Luckily, we're not looking to do it right now. But that's why I tell people, take the money.

30:11You know, when there's a deal there, take the money because things can change. You know, we did ours. And like whenever there's a deal on the table, I'm always push, push, push, get it done. Because you just have no idea like what externality is going to kick in and mess up your deal. So always just, you know, take the money. Well, and I think you've rubbed on me some on this, Jason. Like I've always been like, no, keep all the chips on the table. And now I'm like, you should take at least some chips off the table. When somebody wants to give you a big valuation, when somebody wants to write a big check in, you should think about it.

30:47Yeah, it's nice to own 100 percent of something. But also, like, you can't pay for your trip to Disneyland with, you know, shares of your company stock. And so, like, when you get an opportunity to get some liquidity, I just am kind of more of the opinion that you do it in moderation. which we're going to get back to this later when we talk about like how we invest our personal money. But like generally like really big dramatic actions have a lot of opportunity to go against you. But somebody wants to give you a big number evaluation for your equity or something today, like you've never gone broke or gone bankrupt, taking a little bit of chips off the table.

31:27Yeah. Now, Mike, it seems like you're more structured than us when it comes to deploying capital. So maybe we should tell the audience what like the structured system of filtering capital through your businesses. Yeah. So the way that I think about it is just similar to you two, there is a hierarchy. And I think product, if you're running an e-commerce business, a consumer brand, you really have to invest in product first. And if you have good viable product ideas, you should be investing in them. One of the things that I think I have learned that I would do a little bit differently, and we'll maybe talk more about things we would do differently here in a bit, but we've put money in product historically, and we've been decent about investing there, but I would have put even more because when you, like, let's say you've got an idea for a new water bottle and you're like, we want to try and do a lid that works like this, but we're not exactly sure if it'll work or how it'll come out.

32:30We've got two or three ideas. The way that we've done in the past is I would allocate enough money to make them the mold and the tooling for one of those lids. I think if I could go back and do it over, one of the things I would do different is I would be like, no, I actually want to have enough money that I can make three tools and maybe I don't even use two of them, but that I know I get the best product out of it. And product is like such an asymmetric lever. And so I'm similar to you guys in that, that like, hey, if we're going to put money towards product, if we're going to put money towards anything, we're going to start with product.

33:02But I'm probably, we're probably more structured in how we think about people because we want to have low turnover. We think that's, you know, a formula for outperformance. So we're pretty intentional about thinking about, hey, where's our overhead as a percentage of revenue? Where do we think it can go? Who are the people, you know, how do we continue to invest in our team so that we have low turnover and that we keep all of our top performers. And that's usually going to be, I mean, at our scale, like, I don't know, that might be a million dollars of growth in a year or something, a million and a half.

33:32I'd have to look at the numbers. And so we, but then the other thing that we have historically invested money in is growing through inventory. So a real simple example here is that when you're selling in, say, Walmart or Target, there will always be one or two things of your new kind of set every year that just pops off unexpectedly and sells more than you expect. And so your options are buy everything pretty lean and then be surprised and be out of stock for a couple of months on one of your best things. Or you buy five, six months of cover to for your initial set with Walmart and Target. And even if something pops off at a level that you weren't expecting, you're able to get all those sales.

34:18And so like, but it ties up more capital. And that's a really, so we've seen quite a few examples in our business where it's like, yeah, if we're willing to have another$500 ,000 set in inventory, we will get more sales off that. Now, it might not be as high a return as some other things, but like that's a good way to invest capital. What I think I've come around to, And one of the things that got me thinking about this subject is I think as a shareholder, I should have done more demanding capital to flow back out of the business. I think I've shared the hat of like, I'm the biggest shareholder and I'm the CEO.

34:54And so I've had this temptation to like just be like, no, run it back, run it back, keep all the chips on the table. And if you do that, eventually the business starts investing cash in lower and lower return ways. I think we might have even invested some cash in negative return on investment ways where it's like, hey, you already got four water bottle listings on Amazon. A fifth one isn't going to be incremental. It might be a negative return on capital for you to do that. And so I'm more interested in this idea of like running a business well is this balance of how you think about cash. And even to some extent as a shareholder having good expectations about how much cash flows out of the business, that holds management accountable to make good investment decisions, if that makes sense.

35:40Yeah. And there's a rule you hear in private equity when they hire CEOs is that like the CEO shouldn't be the owner because it makes a CEO's life easier to have more money in the bank and it makes an owner's life harder to have more money in the bank, in the business's bank, right? So the CEO will always be way more conservative. And I'm like this. I'm like, I don't want to take money out of my business because what if I need it? But the reality is you'll figure out what to do when you need it. And it's like a safety blanket just keeping cash in the bank. Where, yeah, if you have a more demanding shareholder, you would just always be pushing money out of the business.

36:16And I think that's what HexCloud does better than Ridge. Yeah, HexCloud has been good about this. And I think you're right, Sean, absolutely, that like there's advantages and disadvantages of sharing the shareholder hat and the management hat. Whereas like in all corporations, these are going to be more split up. And one of the upsides is you don't have an unreasonable shareholder like like Liberation Day happens. And it's like, well, you know what? There needs to be no capital flowing out of the business right now. And figure out what the heck is going on and then we'll get to it. Whereas, you know, if ownership was totally divorced from management, they might be like, I don't care.

36:51We want the dividends to keep flowing. But the other side of that is that you can start to think about all of the capital and all the cash flow of the business much more like an operator or a manager than a shareholder. And then, you know, what you're really doing is you're devaluing the company and devaluing the shares when you do that. All right, folks, this episode is brought to you by our friends at Northbeam, the marketing attribution platform that every smart performance team should be using. Northbeam just dropped something game-changing. It's called clicks plus deterministic views, the world's first deterministic view-through attribution model.

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38:55That's the North Beam edge, clarity, accuracy, and confidence in your budget decisions. You'll know which channels are really moving the needle and which ones are just taking the credit. And yeah, the biggest brands are already using it. Manscaped, Dollar Shave Club, Hexclad, Grunz, and many more. So if you wanna see what real deterministic view attribution looks like, go to northbeam.io slash demo to book a demo and tell them that we sent you. Because if you're still flying blind on clicks only, you're missing the full picture. I'm really kind of, I guess I'd ask this question now, like based on what we're talking about, how Jason, you said this, like you should run at a good EBIT margin, but you should, the business should also be able to spit out cash.

39:43How much cash should your business be able to spit out? Obviously I'm not, I'm not looking for a number, but like, how do you think about that? What's the bar you hold Hexclad to of, Hey, you should be able to produce this much? Is it, is that, and is that one of the reasons why you did a dividend recap? Because then it's like, Hey, you have to produce this much. The production is, it depends on, it just depends on your growth rate, right? Because businesses require working capital to operate and require investment capital to grow. And so, um, yeah, I think it's, it's hard to put numbers on it, but like, you know, When we were growing really fast, we just realized that there's a level of capital investment that we were going to have to do.

40:30But we still need to be satisfied with the ability to take money out of the business. And again, we will only do it up to a certain level. We're not going to over-lever the business. But also when you look at companies like ours, any of ours, and when you look at M &A today, you're going to have private equity guys in the equation. And more than likely, those private equity guys are going to want to use some debt. So that was one of the things that hit us, that the light bulb went off to the guys. I get it because I've been a banker, but these guys want to buy your company with debt that they're going to basically take based on your cash flow.

41:17They want to juice those returns, baby. Yeah, lever up. Yeah, let me just like – I'll let you clarify, but I'll just say like – so in our case, it was like, yeah, you know what? We don't particularly want to sell the whole thing, but the dividend recap is like, well, here's a little way for us to do our own kind of like mini LBO. So I look at the dividend recap more like mini LBL. It's basically like selling a part of your future. It's selling a part of the business when you do a dividend recap. So it was like you guys taking some chips off the table, right? Yeah. And just because we're an educational podcast, so I just want to step in and let's educate some listeners.

41:53When you have profit, okay, profit is at the end of the rule of 40. Okay. You do all this. You get this profit number. Okay. Taxes, take a piece out of it. And then you have free cash. then it's like free cash could either go into distributions, working capital or investment capital. And at some point, maybe you'll get your money out of working capital, but usually that balloons over time, right? Yeti has$500 million in working capital because of a huge inventory. I mean, it's basically either you liquidate the business, you have a going out of business sale, and that's how you get the working capital out or you sell the company.

42:28That's it. Like there's no other way to get it out, right? Right. Right. Because when you sell it, you sell it, working capital is on the balance sheet. So they will pay you for your cash in your business. They'll pay your inventory value. So eventually maybe there's some way to get it out, but usually there comes some sort of a carve out where you have to give them some sort of working capital in a bank account so they don't have to pay your people the first day or whatever. But anyway, you have profit, a big balloon full of profit. You're going to have to put it across these buckets. And it's like, how do you decide what goes into distributions to my pocket?

42:58So it's leaving the business. So it's a one-way door. Hopefully it doesn't come back in. What goes into working capital so you can grow next year? And then what goes into these flyer investment ideas? That's what we're talking about. So everyone has way more money than they think, but just tied up in inventory and cash and paying your people and whatever else. That's why e-commerce in particular, I bring it up all the time, you can have a$50 million a year business and you can make 700 grand a year. You think you should be rich. You're like, oh my God, I'm a 50 millionaire. No, you're not. You have about 700 grand, right?

43:32That's just the reality. But people need to realize that businesses require capital. The word capital is in there, right? Working capital is capital. So at some point you put cash in the business, cash goes on the balance sheet. It's a short-term asset. You use that cash to buy inventory and that's working capital. You need a basic, base amount of working capital to run your business. And back in the early e-com days, when everyone was either in some kind of affiliate business or dropshipping business, you really didn't have to put up so much working capital. This is why the dropshipping bros pop up every so often.

44:13And it's like, and the reason why dropshipping seems attractive is that if you never take possession of the inventory, then you never have to take on the working capital. This is also why those businesses don't ever last. Or scale. Yeah, or scale. Because what happens is somebody's like, well, if I invested some capital here and held the inventory, then I can smoke these dropshipping bros. And that's what ends up happening. So like there's a lot of this also has to do with manufacturers. And remember, your manufacturing partners, they have working capital in the exact same way. And some of their working capital is that they have to own like, you know, stainless steel and equipment and all this stuff.

44:54And some of their working capital needs are that they have to finance your growth. So they have receivables just like you have receivables. Our manufacturer has receivables. And we probably have, I don't know,$5 or$10 million worth of credit that we take advantage of. Guess where that capital is coming from? It's their working capital. And the reality is if you're still doing business in China, a lot of people got totally screwed by Liberation Day. Not because orders slowed down, but because people just didn't pay for their f***. So, like, that's a real issue right now happening in factories. And there's going to be a lot of factory closures because, you know, if you're making dog beds or whatever, and now there's 100 % tariff on dog beds, you're not going to bring the dog beds in.

45:39You're like, yeah, I don't want them. Sorry. And now the factory's stuck with a bunch of products nobody wants, right? And this is why working capital also gives you an advantage from negotiating. Like, when you're well capitalized, you can go to a factory and say, I should pay less. and they should say, well, this is the price and say, yeah, maybe that's the price you're giving everybody else. But you know what? They are much bigger risks to not pay than I am. I'm going to pay less than them because I'm well capitalized. And they'll say, well, you know, that's a good point. OK. And so like when you have a lot of capital in the business, this is the argument for keeping your business well capitalized.

46:12There will be opportunities left and right that you're or, you know, like you don't have to finance as much of your receivables, for example, while you're paying the bank to finance your receivables. There's a thousand different ways that this plays out. And this is also the reason why it just takes a while before money coming out of the business makes sense because putting money back in the piggy bank of your business is the right financial move for the first several years for almost every business. I think we should define, we've talked about it before, but if you're a new listener to the Operators Podcast, like, subscribe, comment how much you love Sean, how's your favorite operator.

46:47When private equity comes to buy your business, okay, they're going to give you a check. Let's say they're going to give you$100 million for your business. They're going to buy 80 % of your business at$100 million valuation. So you're actually only getting$80 million. They're going to roll over 20%. You're going to continue to own that. And you're like, great, I would love $80 million. It's fantastic. Let's say you have$10 million in EBITDA. So$10 million in EBITDA times 10, you get a 10X multiple. When it comes time to do the deal, they're only going to come out of pocket maybe$40 million. Where does the other$40 million come from?

47:21Your business that you owned 100 % of is going to be responsible for the$40 million in debt. The business is going to take out the debt or the debt will be taken out insured by the business and then given to you. So now you're going to own 20 % of your business, but now it has$40 million in debt on it. What Jason did is he cut out the private equity guys and he's like, I'll just put debt on my business and then take the debt into my pocket. That's a dividend recap and that's the leveraged buyout. So it's like the reason why private equity can offer the highest prices is because they are putting debt onto your asset that you owned before they did that.

47:57And this is also why private equity takes things that once were awesome and makes them not awesome. So because like, yeah, sometimes, I mean, not always, like obviously it works sometimes, but there's a great meme. Maybe we'll have to find it and throw it up on the screen, but like where it's like a Scooby-Doo meme and it's like, you know, what made this thing that was once awesome, not awesome. And then they pull off the mask and it's private equity. And so like, you know, when you take on debt, like there's bills that have to be paid. And so this actually kind of going back to our conversation with cash.

48:30Well, when you have debt, the first thing in the stack is actually paying your debtors. So you don't go bankrupt. And so like investment actually comes after paying debt. And that's one of the reasons why you want to be careful with debt is that it reduces like your options, reduces the choices that you can make. But it's super interesting how you guys handled it, Jason. I mean, one of the reasons why this is top of mind, we had our owner meeting, I guess, two weeks ago. And I just said, listen, here's what I want going forward. I'm going to set a number. It's an eight figure number. We are going to do this much in dividends every year.

49:06And then I want to find a way to reinvest everything over that number. And in some ways, the number was a little bit arbitrary. I mean, it kind of makes sense for where we are in terms of our EBITDA and stuff. But I was just like, this is a number. As a shareholder, I need to be able to plan on this number. And we are going to hit this number. And then we'll reinvest everything that we can over and above that. We're getting to the scale where I don't even know if we can reinvest everything over and above that number. But I need to be able to plan. and because like one and like maybe we can transition to like the personal piece of this is that I'm really curious how you guys handle the cash that comes out of the business because it's actually a lot more simple when you're reinvesting cash in the business than when the business starts to spit out cash because you can use it on you can consume it or you can reinvest it and then when you reinvest it I'm curious how you guys reinvest it so let's let's start there.

50:03Now that you guys both live the good life, you're on easy street. Your business is 10 years in, you survived the e-com, uh, you know, the e-com challenge, and you now actually make cash from your business. Your business kicks off cash. How do you think about using that? Jason, how do you use the money that comes out? Mine's an easy, mine's an easy one. I think Sean's is going to be more interesting than mine because he's younger. But honestly, my goal is to just have a good setup for the rest of my days. And so I've been investing a lot in my own personal real estate so that I can enjoy my life later and make sure that I have enough that my kids need it.

50:50That's kind of like the way I look at it. Sean's life is going to change a little bit soon, but But, you know, it's pretty, I'm investing in, I'm doing the things that just are going to make me happy, you know, because I'm 54 years old. So you're more focused on consumption. You did mention your kids. Like, have you thought about how much of that cash flows down to your kids? Yeah, look, my kids have been, I paid for their college. You know, they're both really great kids and they have direction in life, which I'm very fortunate. So that part is good. I managed to pay for everything for them and they work hard.

51:20You know, son's got a good job. My daughter's graduating from university this year. So I want them to – I worked really hard to get to where I am. My parents were great parents, but they didn't have a ton of money. And my kids actually – they grew up in middle class. It's not like we were – we did a lot. So I want them to have that mentality of actually putting in the work too. But I want to make sure they have a good – they can have a good safety net behind them as well. Operators, Black Friday, Cyber Monday is coming up. Is your SMS list ready? If not, get on PostScript. They are helping us drive 14 % more email signups through their better opt-ins.

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53:11You want serious gains. You want Postscript. Thank you for supporting the podcast. Thank you for being here. It's interesting, Jason, one of the reasons why I asked this stuff about kids. One of my projects, I would say over the last three or four years is that I am fairly, I'm very interested, borderline obsessed with talking to families that have had kind of generational wealth. And I'm really curious about how do you manage high net worth in a way that doesn't screw up your kids or your grandkids. And so one of like the ways that I've done that is I've started to get to know these families that have had that kind of wealth.

53:53And what I look for is I look for third generations that aren't screwed up. And then I'm like, okay, now I want to talk to the grandparents. And I want to understand like, what did you do? How did you handle things with your kids? What did you pass down that led to you've at least got grandkids that aren't totally screwed up by all the money. And one of the things that's been really interesting is that there are a lot of different approaches. The other group of people that I'll talk to about this, wealth managers are super interesting to just pick their brain because this is all they do. They deal with families that have really high net worths and they've seen all the horror stories.

54:30And so anyway, like, I don't know, it's interesting. I asked one wealth manager, I was just like, Hey, if you had really high net worth, what would you do when it came to your kids? And she was like, I wouldn't give them anything based on everything I've seen. Now, not everybody comes out that way. I've talked to other people that are just the opposite where they're like, hey, when my kids got into their 30s and I saw that they were going to be responsible, I started moving assets over. So I've seen a really wide spectrum of people doing it different ways and it working out okay. But it also like really gives you pause when you talk to these type of people because you realize that like, yeah, man, the money has an opportunity to really make my kids' lives better, but it also has an opportunity to make their lives quite a bit worse, you know?

55:17And there's plenty of those stories if you're not careful. Yeah. Dude, it's something I'm thinking about. I plan on giving my kids no money or at least telling them they're not going to get any money. You know, and I think Jason has a correct approach. You should pay for unlimited college. If they want to go be doctors and you have the means, student loans are a killer of my generation. I posted on Twitter recently that I think there's a lack of 25 to 35-year-old entrepreneurs. You guys are killing it. People look up to you guys. You guys are Gen Xers, right? It's like this people around my age, I think we got screwed the worst by the 2008 housing crisis because then there was a recession.

55:55You're coming out of the job market. I graduated high school in 2012 or whatever. But like, it was very hard to get jobs if you're a little bit older than me. And a lot of people came out of college, couldn't figure out. And then we also had the highest tuition ever. So I think like there's like a double whammy over my generation. So yeah, it's a terrible, the system really screwed over a lot of people. And that's why, like, let's take a world, well, it's not, not quite politics, but like social situation in the United States right now, you have all these people with great, with huge amounts of loans that were told, go to college and you'll, and, and take out loans and you'll find something to do to make that money back.

56:36And, and it has not happened. And, and therefore these people don't have a stake in the current system. And that's why you're seeing someone like the guy who might win for mayor of New York and, and people supporting what like a real capitalist person would think is like a really crazy and the ideas that people get is it's fundamentally because they don't have a stake in the current system. Like they're so screwed. There's so many people that are just so screwed. It's crazy. Yeah, I read something interesting yesterday about gold and they were making the point that it's just very unprecedented for gold to be appreciating this much versus almost every currency.

57:15It basically shows a loss of confidence in the current financial system. and that if you go back historically, like over centuries and look for any of the other times where it has gotten this out of whack. I mean, you're talking about things like the French Revolution, you know, like major disruptive events in history. And the point they were making is that typically when you see gold go this kind of vertical, it's because the rich start to acquire it and hoard it to try and kind of find protection in it as an asset class. But that that's usually a sign that it's about to go really badly because it's it's also a sign of disenfranchisement among lower income levels.

57:55And to your point, Jason, clearly we're we had a period where there was like this. Yeah. Hey, if you're you're a good kid and you get into a college and you get a degree, you know, you're going to be able to go buy your house and do these things. And like then a bunch of people realize, like, hey, that's not actually possible that that that version of the dream was not actually possible. And so it's pretty frustrating if you think you're playing the marshmallow test and you're not really. There's no marshmallow at the end. Oh, dude. Yeah. So I have a friend. His dad went to UCLA. But UCLA in the 70s was a lot cheaper and easier to get into than UCLA today.

58:33And then his son worked his a** off to get into UCLA. And then it's like, for what? It's, you know, if you want to live in LA and you make$100 ,000 a year, which is an amazing salary, you will never own a home, right? Because every home is$2 million. dollars. But look, and America is actually better off than everybody else. Look up the housing pricing index. So it's like average incomes in an area to the average housing price. Europe's Canada's Asia is crazy, dude. Houses in Shanghai cost 30X the average income per year. And in LA, it's like the craziest. If you think you've seen a housing bubble, you haven't seen anything compared to China and what they did.

59:10Yeah. So I know what's going to happen. I'm grounding us back in this conversation. I think Jason did the correct thing. If you have the means paying for your kids' college, because that was the path everyone had to be on until this year, basically, right? So thank you for not, you know, saddling your kids with a bunch of debt. But yeah, I definitely, I'm going to tell my kids not getting anything because I want them to work their asses off like I had to. And then if they get something when I die, I go for them, right? Well, there's a pretty good principle here, which is like when you take on debt and you don't know your future earnings, That is a really precarious place to be.

59:42I mean, it's precarious for a business. Like when you're like, yeah, I'm going to take on debt. I'm going to run up my credit cards and I'm going to borrow as much as I can. I don't have product market fit yet, but I'm going to find it. It's like, well, good freaking luck. Like there's a really good chance that that story doesn't go well for you. It's the same thing where it's like, hey, I'm going to go to whatever Vanderbilt and I'm going to study 15th century literature at$35 ,000 a year, but it's all going to work out somehow. And it's like, well, no, I think everybody realizes like that's not the case anymore.

1:00:11You should not go into debt to do that. There's very few degrees where it feels stable enough. Like, I'll put it this way. Would either of you advise one of your kids to go into debt to get a computer science degree today? Well, I wouldn't advise my kids to go into debt for any education. You know, my wife became an accountant. She went to Northridge. It was$6 ,000 a year. And that was five years ago or whatever, 10 years ago. Like you can get those tuitions, but it's at schools nobody wants to go to, right? And I had a very untraditional education. I was out of school by the time I was 16 and I had to go to like - School hard knocks, baby.

1:00:50Yeah, I had to go to internet school because I was a troublemaker. So like, but look, untraditional outcomes, sorry, untraditional education leads to untraditional outcomes. Me and McCoy, the CMO of Point Leather Goods, had basically the same upbringing. And two guys from towns are running awesome brands. So I think it can work out, man. Is e-com like the digital juvie? Is that like all the delinquents we just gravitate towards e-com? Yeah, basically, man. Do you guys think about diversification when money comes out? Are you like, hey, almost all my net worth is in this company. Then who knows?

1:01:31Trump's throwing tariffs and things. I need to own some stuff other than stock in my company. Yeah. I mean, I have a wealth manager, so I put 70 % of everything into that. Then what's left over, I put 10 % into just S &P 500. And then I put 10 % into very speculative public market investing. And then I put 10 % into private opportunities. right and the private opportunities i'm net zero but i think there's one winner in the portfolio that'll pay for everything and that's the way money in 50 standard vc investment standard angel investment yeah yeah and i've deployed hundreds of thousands of dollars into just random ideas people have emailed me and a lot of them are big fat zeros but i think i got i think i got one big winner in there it's funny like i have i use monarch for my finances and i have a section that has all of my like angel private investments.

1:02:32And I don't even include any of those in my net worth totals because I'm like, I need to just assume they're all zeros, but it's like, it's the same deal, Sean. It's like, I have two or three that are like going to make the whole portfolio, but it's also like, I don't know when do those pay out five years, 10 years, 15 years, who knows, like on paper, they're going to be a really good return percentage, but I don't know when, and this is like, basically you shouldn't do anything in angel investing until you don't need money at all. Like that's the irony. Like when you hear about, oh, like he was an angel investor in Uber.

1:03:03Well, if, if he was an angel investor, then he probably didn't need money any anymore by the time he made that investment anyway. Because when you put money in as an angel, like first of all, the chances of that company being worth anything are very low. And then like the, we already talked about like the path to free cashflow is usually five, six years, even for a successful company. What's the path toward to an acquisition or an IPO? 10, 15? I mean, it's a while. Yeah, look, yeah. And who knows what the future looks like? Okay, I got to take a break and tell you a quick story from a few weeks ago.

1:03:38We were at eCommerce Fuel Live. This is Andrew's live event that he does once a year. It's like 200 brands. They do a great job. And this story is just too good not to share. So like, bear with me while I tell it. And I'm at the opening night party. I'm talking with Ahmed, Amit, CEO of Rich Palin, one of the great sponsors of this podcast. And Amit and I are having a good chat. And beside me walks in Katie to say hi to Amit. And Amit looks up and I swear to God, this is true. He goes, hey, Matt, is this your EA? And before I could react, Katie absolutely dares him a new one and says, I am not Matt's EA.

1:04:14Matt is my EA. So if you ever wanted a lesson in how to stick your foot firmly in your own mouth, this is it. Ahmed could not catch a break the rest of this event, deservedly so, right? And by the end of it, I think she actually said, I will never switch to RichPanel unless you give me 100 % discount. Now, I know this is a strange sponsor read, but I just needed to tell the story because I think it's kind of funny. So I don't think Katie's gonna get 100 % discount, but honestly, I don't think you need it. Switching to RichPanel is gonna pay for itself anyway. they are genuinely one of the best teams to work with.

1:04:47I mean that. We work with them at our brands. They have more than paid for themselves in their software. So if you want to reduce tickets by like 30 % or more, save on your SaaS bill, go into Black Friday without any chaos, give Rich Panel a shot. Just go to richpanel.com slash demo. And Amit, if you're listening, dude, that's just a terrible, terrible example of what you say to somebody when you meet them the first time. Oh, and Amit promised me there's actually a super special promo code. If you use SorryKaty, SorryKaty, you'll get 20 % off your subscription. Give it a shot. I do want to circle back and I want to start defining some stuff for people.

1:05:31So Jason brought up the rule of 40, okay? And that is, he explained it, 40 % income, EBITDA or 40 % growth or some combination of theirs, whatever you get to. But I want to actually talk about the P &L balance statement. How can you get to that in e-commerce? Because I don't think any e-commerce brands have 40 % EBITDA margins. It's just too high for us to get, right? And that's because - And you shouldn't. I mean, I think that's part of the point Jason would make is like, if you are at 40 % EBITDA margins, it's because you're under-investing somewhere in your business. You're doing something wrong.

1:06:04Look, you just have to determine what your goals are, right? Building enterprise value, you know, you need top line. Valuation is driven by the top line growth rate and EBITDA margin. I mean, that's what drives the valuation at the end of the day of investors. So those are the decisions that you make are basically based on that, right? How am I going to drive enterprise value? it's a combination of top line growth and margin. We hit 27 % one year and it was like, looking back, I'm like, we underinvested in areas of the business. It didn't feel that way necessarily at the time, but it was like 27 % is obviously like a baller EBITDA margin and the EBITDA was awesome.

1:06:48But it was also like, I think we felt it some the next year because we should have been reinvesting in some ways. Yeah. So like, okay, you have a hundred million dollars in net revenue. What does net revenue mean? It means after discount returns, everything that goes above that. So what they pay you, what people send you, you know, from that, those sales, right? Yeah. So, so maybe it's 120 million gross sales, but it's a hundred million net. Okay. Now a hundred million net, three millions coming off the top for payment processing rates. That's just the reality of it. So you have$97 million left.

1:07:20You have to pay for the cost of your goods, which if you're amazing is 10 or 15%, right? Now, maybe it's 20%. It's called 20%. We're down to 77. You have to pay for the freight to come into America and then into your customer's hands. If you're lucky, that's 10%. Now we're at 67%. That's called your gross margin. Your gross margin now is 67 % minus selling fees and everything else. You don't have to pay Amazon, but let's say it's covering that 3%, whatever. I'm just going to say you're at 65 % gross margin. Now you have to spend money on marketing. okay if you're if you're my brand almost half your revenue is going to marketing if you're Mike's brand it's five or ten percent going to marketing right let's just call it but it has to be because our gross margins are so much smaller than yours and and so like this is you got to play the hand that's dealt you like there's times when I'm like man I wish I could spend 50 percent of revenue on marketing we would have a lot more brand recognition but I just can't because I'm hemmed in by gross margins yeah the point of this exercise to show everybody that like at the end of the day, all the brands are the same.

1:08:22It's like, there's only so many of these buckets. The only thing that changes is the widget and then the mechanics of the widget. And I want to make a point here, Sean. So there's a great article, I've referenced it here before that Bill Gurley talked about the LTV and he uses an analogy that I really like. And that is that a lot of the key variables are, and think about it this way, a lot of the parts of your P &L, they pull on each other. So for example, the higher your gross margin, the higher your marketing budget as a percentage of revenue will have to be. Because the higher your prices, the more you're going to have to convince people to buy the thing.

1:08:58The more attractive you're gonna have to make it look, the more you're gonna have to pay influencers to push it. So for, or you can go, hey, the more attractive your price point, the smaller percentage you have to spend on marketing. And that actually, there's several areas of your business that work that way where they tug on each other. It's not just like, oh, I can keep my marketing percentage the same. I can raise prices and then boom, all that's going to fall to the bottom line. It's like, no, doesn't work that way because those things tug in different directions. They pull each other. So like Sean's saying, you end up getting to the same place, but sometimes in like really radically different ways.

1:09:34We had this, we have internal projections we build like with our profit model and our income statement. And my guy who runs it, Brett, he built one in early April. And then we just basically like threw that file away because it was like there's a trade war. Everything has changed. Every assumption in there is wrong. They pulled it back out in the beginning of this month and they looked at April, May, June, July, August. I think they looked at a five month period and we were within 15 ,000 of the EBITDA projected in his model. But you know what? We got to it in a really, really different way than we thought we were going to because like the world really changed.

1:10:15But we somehow ended up producing the same amount of EBITDA that we thought we were going to produce. It's just, hey, we had way more marketing and our margins were way lower and our top line was higher. But our gross. Anyway, you get the idea. These things pull against each other. And that's why there tend to be industry standards for EBITDA margins and stuff like that. is that whether you go heavy marketing or heavy margins or whatever, you end up at the same place. Yeah. Look, everyone's given a box of 100 Legos, build whatever you want, but you can't add any more Legos, right? And that's what this business is.

1:10:48So my fake business, I had 65 % gross margins. I got to spend 25 % on marketing. I'm down to 40%. I haven't paid contractors. I haven't paid for insurance. I haven't paid my people yet. Your people. Yeah. Yeah. So it's like very quickly that gets to 25 % EBITDA. That was just randomly made up. That'd be amazing. For everybody listening, if you're at 25 % EBITDA, congratulations, you're winning probably in business. But more likely, Sean, you said 25 % on marketing. Somebody running 65 % gross margins is probably running more like 35%, 45%, 50%. Yeah. Yeah. I think like 35 would be very reasonable.

1:11:28And that's to think about that every publicly traded company reports on a gross margin number, and yet he's like 50 % or 45 % or whatever, right? Nike's at 45%. You're saying 45 % of revenue on marketing. No, no. So I'm talking gross margin. After selling their products, they only have$45 out of$100 they get back. And then they have to pay for marketing everything else. So 65 % or$65 dollar gross margin on$100 cost of goods is near best in class, right? You have to be really, really special to get that done. Your name needs to be Jason Panzer and you got to be selling something special. Well, and this is like one of the more shocking moments for me was when I realized our EBITDA margins were better than Yeti's because I'm like, that can't be right.

1:12:10Like how would that be true? But another thing that I realized is like nominal dollars are what pay paychecks. And so this is the other thing about getting too obsessed with percentages is that, so if I sell a bunch of water bottles at$25 and I have, you know, 20 % EBITDA margins, let's say, but Yeti sells a bunch of$50 water bottles and they have 15 % EBITDA margins, they're going to make a heck of a lot more money than I am because their ring per bottle is way higher and they're getting that percentage on a much bigger nominal number. So this is where you have to like kind of marry those two ideas together to get the best financial outcomes is like, yeah, I've got percentage goals, but also like I have to think about things like what is my nominal average selling price and things like that.

1:12:55Also, the cost to be public is about$10 million a year. So Allbirds is public on whatever, $200 million a year in revenue, and they're spending$10 million a year to be public. I feel so bad for the Allbirds. It just feels like it's too easy. It's too easy for that to be like the example, you know? Yeah. Well, they should go private. Okay. The last thing I wanted to summarize was Mike brought up working cash, maybe it was Jason, working cash versus investable cash versus free cash. So just so first you think about this, your business is a steady state, needs some money to operate. You have to pay payroll before money comes in.

1:13:32You have to pay whatever. That's working capital in your business. And if you want to get crazy, you can set the inventory too. But it's like, hey, look, you always need$30 million is tied up in your business in some way or the other, either cash in the bank account or sitting there as a pile of wallets in your warehouse, right? That doesn't really change. It can never really go down because unless your business shrinks. Yeah, yeah, exactly. Right. Which is one of the counterintuitive things. Like we shrunk top line this year. And so you would think, wow, cash is not going to be great. Our cash is exploding, right?

1:14:06Because you don't need as much working capital. Like when you're not growing, you don't need as much working capital. And that was like really counterintuitive for me. When you're growing, it's the opposite. Like your working capital is having to grow. And so you're having to insert cash into the business. So again, it's just counterintuitive how cash can flow in and out. Mike, you said one offhand comment that maybe you'll have too much free cash. You don't know what to do with it. It's like, that's when companies explore M &A. That's when you should go buy a kid's shoe company or whatever. It's because if you have too much money and you don't know what to do with your business, You either do fat dividends for the next three or four years, or you try to grow the business through artificially through M &A.

1:14:43So if you want to buy a wallet company, I know one, man. So hit me up. Is it affordable? Dude, for you, you got a sweetheart deal. I really want a power bank company. Do you know anyone, Sean? Working on it, man. All right. I think there's a great pot in there, but I want to thank all the listeners. You are what makes operators function as an organization. We have full-time employees. We have Aaron. We have everybody. We have wonderful sponsors in Fulfill, Northbeam, PostScript, Ceres Analytics, and Rich Panel. Five softwares all of us are paying and using for. Jason, you're paying for every software on earth.

1:15:15We appreciate that, man. You're keeping the lights on in this business. We have a newsletter you got to subscribe to. We have new shows coming out all the time. Operators Titans, a special exclusive 10-episode series with the best of the best sponsored by AppLove. And we love them. I spend money there as an ad channel. I also want to thank EcomFuel. We got Econ Fuel. They're going to start playing the music and take me off stage. Just keep going. What are all the things you can think? Dude, look, I'm having a great year. We didn't talk about how Liberation Day totally f***ed up so many businesses.

1:15:46That'll be in the next episode, so stay tuned for that. But look, we had a friend die of a brain tumor this year. We had houses burned down for our co-founders. We had tariffs f*** everything up. I mean, there's a laundry list of horrible things that have happened this year. With that being said, I'm super happy. I'm super healthy. The year's ending strong. We got plenty of cash. Everything's going fine. So even in the hardest years ever, it's all worth doing. So thank you for being here. By the way, I just got to say this. I love when Sean does optimistic Sean tweets because my Twitter feed is just rife with negativity.

1:16:23And I almost don't even want to go to Twitter anymore as much as I grew up literally. I've been on Twitter since it started. but there's so much negativity and I just, I just love the Sean positive tweets. So keep them coming. The return, Sean, the tone on your return to Twitter has been chef's kiss. And I just think that it's like, it's a choice. Life's a choice. The perspective you choose to take on this show, we're always going to take the positive perspective and the optimistic perspective. And maybe that's because we're insane, you know, as e-commerce operators, but like, I love it. I love that we get to build businesses.

1:16:58And even though it's been a crazy year, like what a freaking opportunity, what an amazing like world that we live in, like with the way that we can build companies today. So I love it when you take that tone. And I want that to be the tone of the show also. Like you shared in chat, a screenshot of some of the feedback that we've gotten from someone who like, this has really helped them to accomplish things that wouldn't have been possible. They said without the show and man, that's the content I'm here for. I love that. Oh dude. And look, I am readily available. If you're an e-com operator and you're having a hard time, reach out to me.

1:17:33I will help you however I can. I get free consulting calls all the time. I don't need any money, so I'm here to help everybody. But if you're a SaaS person trying to sell me, please don't email me. This is just for e-commerce operators. I want to try to help them. If you need funding - Email Jason if you're a SaaS provider. That's so true. Jason does lead gen, so it's just, I'll leak his email. I took out a dividend recap to do more software. That's what I heard. They just want to funnel all that money into software. Dude, no, positivity nonstop, guys. We're killing it. The future is so beautiful.

1:18:05We have a note from our producer in chat. What are they saying? Email Aaron. There you go. Yep. So if you want to be in touch with operators or your SaaS vendor, Aaron, he's available. Just talk to him. Goodbye, everybody. Thanks for being here. Later, boys.

1:18:27You