How to Become A Main Street Millionaire

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1:33There's no safe like SimpliSafe. From Entrepreneur Media, this is Problem Solvers, a show in which entrepreneurs do what entrepreneurs do best, solve unexpected problems in their business. We were completely wrong. And I'm just like, it's not selling. It was like, we have to start from scratch. I'm Jason Pfeiffer, the editor-in-chief of Entrepreneur Magazine.

1:59Cody Sanchez bought a laundromat and she wasn't happy about it. I still remember the smell. It smelled like a gross laundromat. So that's when I was like, oh my God, I've made a giant mistake because this place is gross. And I'm not really going to make money here. And also, I don't even know how to wash my own clothes. How am I going to do this with somebody else's? But Cody wasn't buying this laundromat because she loves laundry or laundromats. It was because she had an idea, a thesis, about how to build an incredible business. Not by building one software business that you hope becomes a big moonshot and a billion-dollar company, but rather instead by hitting Main Street, by buying small mom-and-pop shop-style businesses, and then going bigger and bigger and bigger.

2:49We started with a laundromat for two reasons. One, I was like, I'm not that smart, but I think I can understand washing clothes, drying clothes, quarters, and like one employee. I think I should be able to get that. And so I had just the lowest level of belief in myself humanly possible as an entrepreneur. And then second, I had a guy. I had a guy who had run one of these before, didn't have much money. I had a little bit saved up. And so I was funding it. He was running it. And so I was like, all right, he's done this before. This amount can't bankrupt me. Like I can think I could afford to lose this.

3:22Maybe I go try it. So we did that first laundromat, not really out of any strategy except that. And then I realized, oh, wait a second. This thing actually makes money. It feels a lot like real estate. We're renting machines, just like one might rent an apartment. It's not that complex. We could layer three or four of these on side. And then I was like, also, this is a proven business model. This thing has made money for decades. The likelihood of it'll continue making money for decades is high. and oh, by the way, I don't have to market online. I don't have tough competitors because my other laundromat competitors are not that tough.

3:55It's already pre-existing. So there are some systems, processes, machines available and I can have a little fun with it actually, which I thought that I might not be able to do that independently. And so I basically thought, let's go ahead and do a weird thing, which is try to grow a business with one single idea, which is can we only do boring businesses nobody else wants to invest in that are profitable, have been profitable for a long time, don't cost that much money, and aren't that difficult to run. And that was our entire thesis. And it's worked. Cody now owns a large portfolio of businesses as well as a media company called Contrarian Thinking that helps people take control of their financial destinies, a couple of funds, and now a book, a book called Main Street Millionaire that teaches people how to do the thing that she did, which is to find, buy, run, and grow small businesses.

4:53Cody started as a financial journalist, worked on Wall Street, and then found this line of work where she's been immensely successful for, I think, two reasons, which you will see on display in this conversation today. Reason number one is that she's found a true opportunity. As she'll explain, small businesses are great investments and are generally overlooked. And two is that she's just really great at communicating and explaining and teaching all this. This is a great conversation, whether you are looking to buy one business, whether you are looking to turn it into a giant portfolio of businesses like Cody, or whether you have a small business and are thinking about getting out.

5:29Either way, her advice is for you. It's a really eye-opening and strategic look at an undervalued asset, and it's coming up after the break. All right, we're back. I'm talking today with Cody Sanchez, author of the new book, Main Street Millionaire, How to Make Extraordinary Wealth Buying Ordinary Businesses. And here's where we started. If you think back to when Cody explained the laundromat and why she thought that was a good business, she said a couple things as if they were obvious to her, but I don't think that they're obvious to everybody. For example, she said, well, this thing makes money and can continue to make money.

6:04It doesn't really have competitors. She doesn't really have to do marketing. I think a lot of people would be surprised to hear that about small businesses, which we often think of as running on razor thin margins and just being generally difficult to operate. So I asked her, what are most people overlooking there? I don't think you have to start with a laundromat. So let's just say that. I use it as an example because it's so simple to understand and it's where I started. It's easy to explain. But I call these gateway drug businesses because the idea is simply this. I think a lot of people were told that in order to start a business, you have to have some bright idea and do a startup.

6:41And that's really hard and has a terrible success rate. And I don't really like risk. And so when I look at startups and I think, hey, the average startup fails 90 % of the time, only makes$67 ,000 per year for the entrepreneur at the end of three to four years. That's a crazy number, I didn't know that. 67 % on average. Also, most of these endeavors fail because of two things, really. Somewhere around 60 % fail because of product market fit. So you have an idea, all your friends say, awesome. And then they don't buy it. And then second is cashflow. You just run out of cash. So I'm like, wait a second.

7:14So if I could decrease my risk by 70 % by having a business that already has product market fit, people have been paying you for this thing for a while, and it has cashflow because it's profitable. If I have those two things, then I have a 70 % higher likelihood of success than a startup. So I'm like, that's just great odds. If I get to gamble, I want to gamble like that. And then the second thing that I realized again and again is with this type of entrepreneurship, it's very like a home. So like your first house, you might buy a studio. Maybe you go a two bedroom, then you get a house, then you get whatever.

7:48And it's the same with business. The first business that you buy doesn't have to be the last business. In fact, it should not. And so what I realized is I wanted to start with a laundromat, but that's by far from my biggest business now. My other businesses are much bigger. But now that I have my first small business, I understand how to run a P &L. I understand how to hire people. I understand systems and processes. And I do it in a way where I can't really bankrupt myself. I want to protect the downside to some degree. Now, if I was going to do it again, I would start with a bigger business.

8:17We have different levels to the game of businesses. But laundromats, our biggest laundromat did$3 million a year in revenue. And that's big. And that was through a wash and fold, which means taking your clothes that you put in a bag. I go pick them up from your house. We wash them, fold them in the laundromat, put them back. Yeah. In New York, we're very familiar with it. Oh, yeah, of course you are. In Texas, they're like, huh? The normal is like 300 to 500K that you can make with like 15 to 30 % margin. So they're not huge businesses, but they are enough to make six figures off of. And then you'll realize that process of buying that laundromat is so damn close to buying an accounting firm, a law firm, a property management firm.

8:57Anything we do as a startup, it's the same thing. except we get to kickstart it because we buy it profitably as opposed to build it and hope to hit profitability. Yeah, you had described the laundromat as entry level. And you said there are larger steps here. So just so people understand what other things you're buying, you just rattled some of these things off. But is that what we're talking about? Law firms? Maybe what's level one, two, three, four, and whatever, just to get a sense of what you're out there doing. Typically how they talk about this in private equity, they say, hey, We've got the Fortune 500 all the way down to lower middle market, all the way down to small businesses.

9:33We talk about here micro businesses, which is sub$10 million in revenue. These businesses typically don't have a lot of competition for them. Unlike once you get up higher than you're playing against PE, that's tough. These businesses, then I break down inside of the 10 million. So like the first level of a business is typically one that's about a million dollars and less in revenue. Could be lots of different sectors. You could have a law firm that was one guy that does less than a million dollars in revenue. So it's less sector specific. Some of the main ones, I think, standalone car wash, vending machine routes, FedEx routes, standalone laundromats.

10:09These are typically one to five person businesses, right? There's not that many employees. There's not that much complexity. Then we get up to three to five million dollars in revenue. Those businesses, you're starting to have a few more employees. Those businesses, again, could be a cross sector, but maybe these are where you start to have service businesses really sit. So that's like landscaping businesses. Maybe you have a cleaning business, et cetera. Then we get up to like the end of the cap for these under$10 million businesses. And those are businesses that actually have some scale in them.

10:43You could actually have a CEO or what we call an operator in a business that's doing more than five million a year revenue. So you don't have to run the thing. Maybe if you're more of a pro, you're bringing the money, you're bringing some expertise in marketing or distribution or hiring, and somebody else is running your HVAC or plumbing company. Anything past that$5 million mark getting up to$10 and plus is where you start actually being able to be acquired too. Hard to get somebody to buy a series of small businesses. That's why we have this big opportunity right now. There's so many of these small businesses available.

11:15And then once you get up past that five, six,$10 million mark, you're looking at a real business that has enterprise value that you can sell. All right. So a lot to unpack there, but here's what I want to seize upon, which is that you just said there are so many of these available. So I'm thinking back to you buying this laundromat. Now, Cody, you come from finance. you are able to put together a real aggressive financial plan for not just the laundromat, but for the larger business that this laundromat is now a part of. And the opportunity, correct me if I'm wrong, that you see and that you're suggesting here is that it's not just about buying one little small business, but it's about recognizing that there are all of these profitable assets that you can piece together and grow with.

12:08And that's where the real wealth comes from. So number one, am I right about that? Like that's the plan that you're laying out? I think it depends on what you want. We call it a perfect fit business. So I think there's a lot of people in the US that want to make a couple hundred thousand dollars a year. They want to do it in their community. They want to do it with a minimal level of stress with a company that they care about. It's manageable. Like they don't actually want a$10 million enterprise. That comes with some complexity. And so that type of person, yeah, you can have a lovely little series of laundromats or maybe even one car wash that makes you a couple hundred thousand dollars a year and you can live a really lovely life.

12:46And you can go to your kids soccer practice and you can actually be around all the time with your family. You can take whatever vacation you want and have an infrastructure that could last and an asset you could pass down. And I think a lot of times that's the American dream, right? You can take a loan on that business, et cetera. Now, if you're a crazy psychopathic masochist, maybe like you, like me, yeah, I'll be like you. And then you also have the option of building up something really big. And so it really depends. Like one of my favorite humans, I have recency bias because I saw her yesterday.

13:16Her name's Jade. She's actually in the book too. And she was part of our community. And one of the first people that I talked to about, could you buy the business that you work for? So Jade was, She's a vet and she worked for a military contract, a government contracting company in the military. And her boss was a little bit older and she got into our community by happenstance and ended up talking to the owner of her company and was like, hey, have you ever thought about selling this business? I want to run my own business one day, but I'd like to buy this one. I love what we do here. You're in your mid 60s.

13:49Could I buy this thing? And the business is doing millions of dollars in revenue with a million plus in profit. it. And Jade worked with the owner over a course of two and a half years. And as she told the owner, she was like, I'd love to in the next couple of years talk about this. He's great. We start like thinking about a transition now. Literally one conversation, which is not always the norm, to be very clear. One conversation, the owner was like, I'm actually looking for an out. Let's start apprenticing you over the next year. Then the second year, I'd like to pull back my hours, maybe not work so much.

14:20And then the third year, I'd like you to run it. And I think I want to retire, maybe I'll hang around a little bit. Seller financed the whole thing for them. And I think this exists so much more than we imagine, especially if we work in businesses with older people. So this is something that you write about in the book that was really eye-opening for me. And that's why I wanted to seize upon this thing that you said about how much inventory there is out there, which is that what you write is a lot of these profitable small businesses are being run by people who are nearing retirement age and there's nobody to take this thing over.

14:52And so they're just going to shut this thing down. And then that asset disappears. I don't think that's something most people know about. And now that they do know about it, I think they have no idea how to find those businesses. Yeah, that's a great point. So let's think about even, think about Google for a second. Google shut down like 290 different businesses inside of Google since it started. There's like a kill Google list or something. Almost every single business has inside of it different revenue lines and divisions that they've shut down. I always remember I was talking to Michael Hyatt the other day, who's known on the internet for writing books and talking about productivity.

15:27He was like, yeah, we've got this division. It's a coaching division. And I think we're going to sunset it. And I was like, no, wait, before you sunset it, ask if any of your employees want to run it, take a percentage of the royalty of that business, give an employee an opportunity for ownership and bet on the next generation a little bit. And so he did. And one, I would say the best place to find a business to start with is your immediate circle. We call this your center of influence list. So where you work right now, your vendors you work with, your friends, your father's and mother's friends and family, your friends, father's and mother's, like anybody inside of your community groups, Costco lines, like there's lots of places to look for local small business owners.

16:10And then because we know that our internet generation loves the internet, we bought a company called BizScout. And at BizScout, you can go in there and they have both off-market deals. So that's where you can Google around and be like, huh, I want to own a accounting firm in Chattanooga. Let's see which ones are available. Could I call the owners? And simultaneously, it pulls listings from across the web for a bunch of on-market deals, which would just be like people have listed their business for sale. So two ways that you could find, we teach 12 in the book. Okay, great. And let's say that I want to do this and I have identified a business.

16:49How do I know that this is a business worth buying? It's a great question. Let's simplify it a couple of different ways. One, I have two methodologies I love. How do I know if it's a business I want to buy and I have a high likelihood of success? The first one I call BRRT, which is one, buy a boring business. What does that mean? You can explain it to your grandmother. It's really easy to understand. There's no intellectual property. In a recession resistant asset class, that would be like plumbing, HVAC, landscaping, nothing sexy, that hasn't raised prices in quite a while. And fourth, where you can put technology on top of it.

17:26Oh, hey, they have no Slack. They don't use Zoom. There's no Canva account. Great. The second is sales. And so this one I call buy businesses that are stale. Those are businesses that have been around a long time. I prefer businesses that are over six years old, businesses that are have outdated competition. So that would mean, hey, I'm not that scared about competing against my local handyman. I'm scared about competing against Jeff Bezos. So my competition's not too scary there. Weak, that means there's probably not a lot of marketing. There's like opportunity you see all around the business.

18:02And we really want a business that is not sexy. We want a business that is simple, easy to understand. So first, those two things. That gives you like a broad, non-financial based frame. Because sometimes if we start talking money and spreadsheets right away, it freaks people out, which I get. But we have a deal calculator, which you get if you have the book to think about it. If you came to me and you're like, can you explain to me how the mortgage works? Can you calculate what my interest would be on like a 30 year or what about an arm? I might not know, but I haven't. Now it's very normalized to have a deal calculator for a mortgage.

18:33You're like, OK, how much would I pay? What's insurance? What's the interest rate? We have the same thing. We call it a small business deal calculator. And in there, there's only a few things you really need to know, in my opinion. Like, that's not true. There is 20 % that drives 80%, like everything in life. We want to know that the business is profitable because we buy not hopes and dreams, but profits and realities. We want to know that the business has revenue and profits that we believe, so are we being lied to about the business overall. We want to know that we're buying a business, not a job, unless we do want to buy a job.

19:08We're just aware of it. Business and a job means it has like employees, a managerial level. They have systems and processes in place. And then finally, it is an area where we have some skill set that matches the business. And how you break that down financially is really just three things. Financially, you'd say, I want to look at your profit and loss statement. Ideally, I'd like your tax return. and then I probably want to dig into some sort of data reel. I want to be able to see who are your customers, where are your invoices and receipts, let me look at your contracts. And with those three things, we should be able to do our first level of what's called due diligence on the business.

19:46Okay, two more questions for you, Cody. Number one is picking up on this buying a business, not a job. So another thing that people often think about when they think about small businesses is someone who owns the business, who is locked inside of that business from sunrise to sunset. And these are exhausting businesses to run. Cody, you're not running the laundromat. So you're identifying businesses that already have operators that is not the owner. Is that something that you're looking for specifically? Correct, that's what I am looking for. Now, you know, where I'm different than other people is I think if you wanna play the game of business, let's be honest, it's not easy, but I think it's worth it.

20:28So there's plenty of people that say, you too can own 10 ,000 dollars in real estate and make$3 million off of a four hour work week. I just haven't fucking met him yet. I don't think that's real. So let's be reasonable. If you were going to buy a business for the first time and you've never done it before, put in the work and or stay and do the job that you don't like. 85 % of the populace making money for other people with the ability for you to get fired at any moment. I just don't think that's as safe of a trade as we realize. And so I want to be honest. It's hard work. Now, do I think it is overly complex?

21:01Not really. It's more simple than we think it is. And we have this perceived belief in risk. Like, Jason, I know you now to some degree. Our likelihood as Americans in the U.S. with some relative skill set to become homeless, starving, and no options is incredibly low. We just don't take a lot of risk because we don't want to play this relative loss game against our peers. Well, I was here and now I'm a bartender and we don't want to take like that risk. But I think increasingly with technology, we've got to realize that there's not any real death risk in business. So I don't think you get to spell rich without risk.

21:43I think more of us need to take it than we realize. There's ways to decrease our risk and diversify away from our risk. But I don't see a massive risk problem in the U.S. where too many people are YOLOing it into business, maybe into Robinhood or E-Trade or something. In this particular instance, one, it's going to be hard. But two, the cool thing about business overall is you don't have to keep the business forever. So let's say you do a terrible thing. You buy a business. The business doesn't make as much money as you thought it did. It's harder than you thought it was going to be. Are you stuck with that business forever?

22:18No. You bought the business. You can also sell the business. You can sell the business to an employee. You can change the business. You can use the assets of the business to pivot into something else. And so I think we have to be really careful about thinking about buying a business as a final destination. It's not just like your next career path is not your final destination. And the reason I wrote the book and why it's not enough to talk about this on YouTube and Instagram, you know how sometimes people write a book and you're like, could have been a postcard. Like, why are we? All the time.

22:49That's 75 % of the business book aisle. Oh my God. It's like, why could you just have given me the cliff notes on 2x speed? That would be awesome. The reason I turned this into the shortest book I humanly could is because there are steps that you can take to decrease your risk that are real. And you do need to learn them if you want to play this game. And so like that, I think is a little bit of the difference between this book and others is there are steps that you actually need to take. Cody, final thing. You answered it there in your answer, but I just want to put it to you because as we've been talking, I've been thinking about the flip side of this.

23:27My wife's good friend from high school spent years and years building up a kitchen goods business. It's just a retail shop. It's done really well. She is burnt out. And she recently told us that she's ready to just shut it down and walk away. It is exactly what you're talking about. It's a profitable business. It's wonderful. and she doesn't know what to do with it. And so she's going to close it. If someone like that is listening and they're like, okay, I don't want to buy the business. I want to sell the business. What's the guidance you have? It's such a good point. This is the next book I need to write.

23:57I'm going to work on. But the idea is simply this. Sorry, I can't figure out how to turn this off. Yeah, you're blowing up. It's actually this not my computer. So also don't know how to turn off her. But so the, here's what you need to do. If you want to sell a business and you do not know how to get out of your business if you feel trapped, first, say it with me, do not just shut your business down. Please, for the love of all the toll. And let me tell you why. Because every business inside of it has some assets to this business. So worst case scenario, she has a client list. She has inventory, most likely.