The Business Game No One Tells You About. Hormozi Hotline. | Ep 966

0:00Let's talk about whatever. And by whatever, I mean, ideally, keyman-related topics. You don't understand the value of enterprise value. Of course, you build net worth without taxes, but it's fictional numbers that can't liquidate. I like cash flow, hard cash. Thanks, Tuve, B-L-C-C-T-G-J. Let me tell you why enterprise value fucking matters. Enterprise value is important for a variety of reasons. Enterprise value dictates how valuable something is. So Stripe, for example, is not publicly traded, but people are willing to invest money in it. And so the founders can get liquidity. And so what you want is to be able to spend something.

0:40But the thing is, is that that comes from the position of already not having enough. So let me explain. Once a business actually has enterprise value, it usually has already generated or had the ability to generate more than sufficient cash flow for the owner. which means that all the excess cash flow that the business generates is going to be transferred to the owner in a tax inefficient manner. And so then what happens is that you want to have growth in your net worth that isn't affected by taxes, right? And so if you say, I want cold hard cash, cool, bro. You want to pay your rent. I get it.

1:14After you're done paying your rent and after you pay your house off and after you pay for your parents' house and after you pay for their cars and your kids' schools and all that, There's still cashflow coming in. And then you're like, well, I'm upgrading all my cars. Okay, great. And then I want a vacation. Cool, cost a hundred grand if you want to be a fucking baller. Okay, then what? Then you want the most efficient tax vehicle for building wealth, which is your enterprise value. Guess what else you can do with a high value enterprise? You can take loans against it. You can get lines of credit.

1:46It becomes an asset. You can raise capital on that, right? And so said differently, there's levels to this game. If you want to move up levels, you need to play a different game. And you have to graduate. If you don't know where your rent's coming next month, fuck enterprise value. Being super real here, fuck enterprise value. if you have those things satisfied and the vast majority of my content i try to make four business owners who are trying to get bigger who are trying to scale enterprise value becomes increasingly important basically the bigger you get the more you satisfy your needs the people around you's needs at some point then it becomes about the game and to be clear i'm not saying this game is the only game worth playing and there's not other games in life that are worth winning but in the game of business net worth becomes the objective measure and so that's how that works cool So, okay, let's do next question.

2:48So Alex, as a software dev trying to grow a startup app, what do you recommend? I mean, that's like saying, how do you advertise?

2:59Honestly, read this book, pick one of the core four, which is either going to do outreach to people you know, outreach to people you don't know. You're going to do paid ads. You're going to make content. The other four things you can do is get an agency to do that thing for you. Find affiliates to do that thing for you. get customers to do off a viral loop, or you have employees that do the first four on your behalf. Those are your options. Which one would I pick if I were you? In the beginning, you actually care more about revenue retention. And then eventually, once you have revenue retention, then we have to figure out whether it's going to be viral growth, or it's all based on like, I can keep everyone who comes in past month 12.

3:35But the issue is that no one knows about my stuff. And then it just becomes of CAC to LTV ratio. Problem. It's just math after that. Okay. The problem, the hard part is obviously keeping people. Okay. Can you clearly define how to find out what is valuable to your marketplace? Yes. You ask them to buy it. And if they pay you for it, then they have found value in it. And if you're like, what, how do I know how to define value? I actually wrote a book on that too. I actually made an equation for it. So the value equation has four components. One is the dream outcome, which is what is the thing that people ultimately want.

4:12And then the other three variables are things that detract or pull away from that dream outcome. And so if I can give you this dream outcome, let's say that you want to get a six pack, you want to be in shape. And I say, it's going to take two years. So it's going to be slow. It's going to take time from you every single day. It's going to be, it's going to take a long time and it will take you a lot of time. So it's two elements of time. It's going to cause you to have to do things that you don't want to do. And it's going to cause you to do, stop doing things that you do want to do. So you stop good stuff and you start bad stuff.

4:41And on top of that, there's a chance that you might not hit it, even if you do all these other things, right. And you take all this sacrifice. Is that a valuable thing? It's kind of, but I basically described the fitness sale to you. you got to work out. You got to stop eating tacos. You can't drink on the weekends, right? It's going to take multiple years and it's also going to take you time every single day. You're going to be sore. You're going to be tired, all this stuff, right? And then on top of that, you might try this whole period of time and you might have terrible genetics. And so all that to say, it will, that's why you have to spend an hour arm wrestling somebody to sign up for personal training.

5:23On the flip side, if I sold GLP-1, which is a diet drug, right? And they have a new drug that's coming out that they're going to pair with GLP-1, which is like a muscle preserving drug. So you can literally keep or gain a little bit of muscle on this drug while also starving yourself. Then you have a better physique and it takes no willpower and you just take this drug. So it's fast. It's virtually guaranteed because it requires no willpower. It gets you the physique you want. Which one's more valuable? Which one do you you think would be harder to sell? Probably the personal training one. And so fundamentally, this is how you differentiate value.

5:59Hopefully that answers your question. All right. Hotline. Let's rock and roll. All right. Who we got? Hello. You're on speaker. What's up, man? Hi, this is William in Michigan. How are you doing, Alex? William in Michigan? Yeah. All right. What's up, man? Tell me about the business. Yeah, so I'm in the Wiping Booties for Seniors business, the assistive living and memory care business. And the main problem we have, sales are good, but it takes a long time to get the LTV, so they stay within a year at least in our business. But I'd like to find out a way to bring the cash forward. So it's kind of like we're getting cash, but it takes two three months for us to really get good profits and then of course after that doing really well but how we bring that cash up forward and present it ahead of time are you billing insurance or you billing private okay got it so do you bill monthly or how do you bill yeah so we both you know the first of the month and a lot of times we look to collect first and last month's rent and last month's rent is fully to you know with fundable on a 30-day notice, but it's similar to like an apartment building.

7:18Yeah, got it. So I would have, honestly, there's really only two options that are like immediately available to you, or I guess three. So number one is you could have some sort of setup, enrollment, onboarding, some sort of fee like that that you could put into the upfront payment. That's thing one. Thing two is you could require first three months upfront. that's option two option three is you can add on additional service that many of them need and then you could contract that out so let's say that what are the other things that someone has to buy in order to begin your service i'm guessing there's some sort of moving costs or moving services right yeah there's like insular like transportation beauty hair and nails stuff like that yeah so basically what we do is just create a bundle that many of those people immediately need to buy in addition to, have you read the Money Models book?

8:15Yeah. Okay. I'm reading through it and I bought the course too. Oh, awesome. So big picture, the, one of the first stories I tell him there is a guy who owns a storage facility. And so he gave a free month of storage away. So very similar business to yours. Not saying that you get free month, but same idea. It's like, well, what else do you need to have when you have a storage unit? You need a lock. Oh, you need boxes. Oh, you need insurance. Oh, you need maybe a bigger unit, right? And so all of these things pull cash forward. And so we're not the bigger unit, but the other ones do. And so same degree, it's like, okay, can we sell insurance on top?

8:50Can we sell the move in services? Can we sell the boxes associated with that? You're going with this? Yeah. So I think people will have some sort of elasticity, like people are very, very sensitive to the monthly fee, right? They are less, that people are less sensitive to one-time fees because it's only once. Correct. So we just need to create that one-time fee for people, and it'll be even more profitable, obviously, if it's not just a fee, but it's also tied to stuff they already have to get solved. And if they do it through you, then it just feels easier. Yeah. Does that help? Yeah, something else I was thinking about, too, is like even furniture.

9:28We have it fully furnished, but maybe we could give them, like, buy extra furniture if they want a nice clean size or upgrade on their bed. We could offer that to them too. That's something that just popped up. I didn't have to talk about that. Yeah, exactly. So we just look at all the other problems that a customer has that they're going to pay somebody to solve. Because you're at a transition point in someone's life. So money is coming out of their pocket and the wall is already open. And if you can, especially because this is such a stressful time for many families. If you can just say, we'll handle everything.

9:58Just pay us this extra fee. We'll make it easy. Many people will just give you that money. and then I think you would pull forward all your cash flow to car customers. Awesome. Okay. Well, sounds good, Alex. Appreciate you, William. Yeah. All right. Have a good one, man. Thank you, sir. Do we have somebody on here? All right. We've got some boats coming in. What's up, man? Howdy. How are you? Howdy. What's your name? My name is JT. JT. All right, JT. Yes, sir, brother. Tell me about your business. I run a real estate company called Closer, and it handles the marketing and sales for new wholesalers and people getting into the business.

10:41They can scale faster and learn the process while they earn money. Okay, so you generate appointments and leads for them? We generate the leads for them, and we send our sales team on the deal. So basically, we are running the entire front end and the back end. So they're basically running the marketing, but they get to learn while they do the process with us. So why, this genuine question, like why do you do that versus just like doing wholesaling? I do it because it fixes the cash, our cash conversion cycle. Like we're able to fix the liquidity issue in wholesale because the phase on market is so long.

11:24We're taking it down to where we can like become way more profitable as we do this way. Yeah, okay. you could raise money and just do it side note but alright okay so what do you want to have happen that's not happening so when we're on like sales call with people basically they agree on the price but a lot of the times like they can't afford the first payment or they can't get approved for financing and I'm like is that a sales problem or is it like a lead problem and should we just collect whatever cash they have or no? Well, how are they going to afford to pay for the marketing, too, if they can't pay for – or is that what you're saying, they can't afford to pay for the marketing?

12:13Yeah, so they can't afford to pay for the marketing. What's the revenue stick? What's the stick in this business? Like, do people stay for years doing this with you? Like, what percentage of customers are here 12 months later? No, it's mostly not that they're here 12 months later. It's, like, the onboarding. So the LTV is roughly like 35 ,000 within like 90 days. But over time, like the only thing they really stay for is like the CRM that they use it. Okay, so you might let them go high level or something. Yeah. Okay. Okay, so the issue is that what's your LTV to CAC right now? so right now our cat is roughly like 5 000 but we're we're um at 35 like 35 000 ish lpb okay so you're seven to one okay so i mean that inherently is okay so what stops you from doing more what you're doing um nothing's necessarily stopping me our close rate is just super low okay i would probably just throw in lead qualifications on the front end it'll just like decrease the frustration of your team you'll probably increase your well obviously increase your close rates if you take up the disqualifieds but it'll you'll close more in general because the sales team won't be beat down from hearing no all day okay i'll tell you this man you will make significantly more money by adding qualifications to a funnel like i almost i have almost never i'd like i'm trying to think of a time where me adding qualification friction made me less money.

13:52Your metrics will change. So like your, so not CAC and LTV, but your LTV might change, but said differently, like your cost per call or cost per click or possibly, you know, whatever metric you use there will probably go up, but your CAC may go down and your LTV will certainly go up. Okay. I always add more qualifications in the process and then do more. So I guess that's a fear of mine. Let's see. For the cost for employment to go up, but basically it should make it more profitable because we're not talking to unqualified people, correct? Yes. Because, listen, if you let some of these minnows in, right, it's not a good fit for them.

14:37It's their last dollar. Like, you shouldn't do it ethically anyways. But outside of ethics, that never convinces anyone if they're making money. It's not good for the business. It's bad for the sales team. It's bad for reputation. And fundamentally, like, when you accept everyone, you ward off people who can actually afford stuff. Yeah. Yeah. And, like, I guess, like you say, you're big on these magnets. So we do provide, like, a really in-depth training guide, like, really in-depth. But the issue there is the majority of people who come in are not qualified at all. So should I add more qualifications to that too?

15:17So you can add qualifier. What is the lead magnet again? The lead magnet is a training. Like it's like all of our SOPs, like all of our SOPs, all of our basically for our entire company. You can, I mean, you can have the SOPs there, whatever. Just add an extra box that says like whatever the qualifications are that you know are required for somebody to be a good customer. So like, for example, at the book launch, People could opt in to show up to the launch. The launch functionally acted as a lead magnet in this scenario. I still ask for people whether they owned a business and if they had a business, what revenue level they were at.

15:52Because I have no need for leads in a CRM who are not business owners above a certain size to get a call from my team. There's no point. It's a waste of their time. It's a waste of ours. They should just use all my free stuff. And so just add a qualifier on the front end. Okay. And then only call those leads and then have the thank you page sort leads, the best leads to the sales team. And then the worst lead, just send them to an automated thing that maybe self-liquidates some of the ad spend. Okay. So on the qualification question, would you put like something vague? Like we have right now, we have a qualification question.

16:26Like, are you willing to invest in your business? No, but that's not a qualification question, dude. That's like, do you have a pulse and a credit card question? I'm saying you have to, you need to figure out who your avatar is. Have you read the Lost Chapters book? The Lost Chapters book? No, I haven't read that one. First chapter of the Lost Chapters book is finding your first avatar. The process that it walks through in the book in that first chapter is you need to look at the customers who have spent the most with you and stayed the longest. What are their characteristics? So we look at their demographics.

16:56Like, who are they? We looked at their quantifiables. Like, do they have a certain income level? Do they have a certain amount of kids? Do they have a certain family? And then I look at geographics. Do they live in a certain area? Right. And so when I have those three things put together, then I know that it's like, okay, it's actually conservative Christian males, you know, 35 plus who are married is actually my best avatar. And it's like, great. So that's what we're going to make in our ads. And your big fear right now is if I make more qualifications, my cost is going to go up, but it's not dude, because you're going to need to advertise to the right type of customer and you'll get those people to opt in.

17:30And then you will go get them to buy more expensive stuff. It's everyone's fear. Everyone's sphere is going from general to specific. But when you go specific, you get the right people. Okay. So actionable steps are just like the qualification question and making it specific to the avatar. So in order, it will be determine the avatar by looking at all the customers that you have. You want to look at who they are, what quantifiables they have, geographics, and if you can, bonus points for sales process. Did they consume anything else in the sales process? that they have a different experience than the people who aren't worth as much.

18:06Once we have that data, we then weave that into the advertising in terms of call-outs of who the avatar is. We weave that into the landing pages. We weave that into the drop-downs for the questions and the friction that we add in the funnel. We add that into the VSLs. If you have a VSL, I'm sure you do. That tells them about the process, and it begins with the pains and the hook of that specific avatar. You do all that stuff, you will for sure convert more. Okay. Cool. Thank you, brother. You bet, man. Have a good one, dude. All right. So it looks like, ooh, what does it look like? Let's, let me see if any questions.

18:39Okay. What you think are the best revenue retention opportunities for an architecture firm? What would it take to get their start from scratch? All right, Emiliano, I'm going to give you, I'm going to give you some, some game. So some businesses like yours, you need to chunk up a level to figure out revenue retention. So what does that mean? So I'll give you an example. So Alan, the universe knew. Alan, the software that we ran. At the beginning, I was trying to sell lead nurture services to brick and mortar businesses, SMBs. The problem with lead nurture services when you have an SMB is that they have inconsistent lead flow.

19:17And so as soon as they're like, oh, this is great, but how do I get leads? And I was like, oh, no, this is a whole other problem. This is a different business. And so then we had the smart idea of like, well, what businesses already have leads? And the answer to that question was businesses already working with agencies. And so then I said, oh, maybe agencies are really our customer. And so that's what we figured out was that agencies would bring customers in and they would churn those people out. But let's say a chiropractor agency has 10 chiropractors that pay$2 ,000 a month. I'm sorry, mini itty bitty agency, right?

19:48They've got 10 chiropractors paying$2 ,000 a month. And let's say every month they lose two chiropractors and they gain two chiropractors. I can rely on that agency to use my software month over month over month with each of his chiropractor people, even though the logos of the people inside of his little ecosystem will change. But my revenue retention at the agency level was super good. So why did I tell that story? Because it's an analogy for you, Emiliano, which is that your architecture firm, you're thinking about it at the house level or at the building level. right? If you chunk up a level, which is like, okay, who are the referral partners or who are the people that you do business with on a regular basis?

20:24Is it contractors? Is it, who are the people referring you business? And so once we find those people who, who are doing business with a regular basis, we want to demonstrate that we're retaining them rather than the pro at the project level. So you chunk up and then those become your nodes of revenue. And so you then have your acquisition or your sales motion is going to be geared around. How do I advertise and acquire more of these referral partners? And I know each referral partner is worth X and it costs me Y in order to acquire them. And I can retain them significantly more than I can for the individual products or logos that they're bringing on.

20:59That help, Emiliano? That's how you do it. Okay. Next caller. Hello. What's up, man? What's your name? My name is Liam. I'm 24. My The business is going to do about$6 million in revenue this year. And we do apparel for TV shows on limited time exclusive drops. Apparel. Okay, so you partner with Shark Tank, right? I'm saying hypothetically. So you partner with a TV show. Yep. And then you make Shark Tank merch. And then they drop that merch on their show and you deliver. We market it ourselves. We drop it through our channel. So it's a collaboration, but it's all through our own channels. But you obviously get to use their brand in the advertising.

21:44Correct. And then you do some sort of like split on the profits, I'm guessing. Yes? Yep. Okay, great. So you're doing$6 million. What's internal revenue? Or rather, what's gross profit and then what's internal revenue? So that's kind of three numbers there. Gross profit this year, we're going to be running at about 10 % to 15%. Gross? So$6 million is what you made. That's how many shirts were bought, right? Yep. Okay. $6 million of shirts are bought. What do you sell a shirt for? What does it cost you fully loaded? $50 for a shirt, and it costs about$12. Damn. Okay. Okay, so you got$38 on$50, right, is what you're making, right?

22:27Yep. Okay. Fantastic. Now, so what's that? That's 75 %-ish gross margin somewhere in there. Okay. So that's fine. Now, of that$38, what's the split between you and the TV show? Each license is negotiated independently. It can rank from 5 % to 25 % depending on the size of the IP. Oh, so they get 5%. So they would get$2.50 per shirt all the way to getting$12 a shirt. Yeah. Okay, that's not bad. That's not bad. Okay. This is workable. So I'm just going to say like midpoint, let's just say midpoint is$10. All right. We'll be aggressive with it. So 10 bucks. So you actually had$28 per shirt on a$50 shirt.

23:17Call it 25 with other shit. So 50 % is what we're working off of. Okay. So what was net profit? About 600K. Got it. 10%. Okay. So what's the problem? We've completely capped out on our, we do almost exclusively paid traffic on Meta and TikTok. We drive people to a wait list for the drop. We hype the drop up and then we do a launch. All right. And the pricing model, we base it off of what we can acquire a lead for. And the problem is our cash flow becomes super inconsistent because each IP performs wildly differently in terms of how much revenue we project. And some wait lists will convert at like a 25 % wait list to purchase ratio.

24:01Some will convert at 5%. And so we need a more cost-effective way to acquire leads. because it's nice that we're just dead in the water. Yeah. So I think that the big thing that's actually missing for you is predictive data. So you being able to say, like, you're like, well, they perform wildly differently. Well, the more you do it and the more data you track, the less wild it should be. Does that make sense? Yep. So if you were to take somebody, I'll give you a simple example. if somebody else were to go launch a book, right? And they have, call it 4 million, you know, YouTube followers, whatever.

24:39And I launch a book and I have 4 million YouTube followers. Why is it that my book is going to sell way more than theirs, right? You should be able to answer that question quantitatively. And so that'll take a lot of the guesswork and the volatility around which brands you partner with and the power of the negotiation. Because I'm sure there's some deals where they thought their brand was significantly more valuable than it really was. And there's probably other brands, and this is probably even sometimes more often the case, a brand that they don't think is that valuable at all, and in fact, is actually super valuable in terms of the people who are willing to buy.

25:09So thing one is predictive data. Thing two, have you considered going to influencers and doing this exact same model? We have. The big thing is emotional relevancy to the show or to whatever the IP is. So a lot of influencers are not doing particularly well for something like that, where it's like a really good example is the Nelk boys with full sense, right? Find a common audience. They have a hierarchy of brand over. They treat themselves like ambassadors. We've looked at it. We've interviewed you, but the numbers just never made sense to us. Well, I mean, like, I feel like they should, because you're taking premium TV shows, which have a lot of times smaller audiences than, like, some big creators do.

25:58You're honestly right. Mr. Beast can drop a T-shirt and do your entire year's revenue in, like, a day. If you can dive deeper into the creator economy, leverage the already existing audience, we don't have to spend so heavily on ads. Yeah, and they'll collab it with you. And there's a zillion of them, and a lot of them don't make money. and they're not going to be hardcore negotiators. Sorry, go ahead. All of the IPs we're collecting are in a specific niche. Yeah. And as we retain a whole lot of the IP, we can renew these releases over and over again. Okay. And that makes us an acquisition target when we have all these relevant IPs.

26:36You mean just the T-shirts that you're allowed to use and the ads that you can run for them? Exactly, because all the TV shows, they're anime TV shows. Oh, word. I got it. So you're super niche. So the issue is what? It's the issue that it's not growing as fast as you want. I mean, what kind of exit do you want? I would like to get positions for like over the 5x EBITDA within two years. Yeah. Well, who wants to? Okay, I'm going to say it back to you. So basically, you want to make like three or four million bucks on a sale? Yes. Okay. Who would be an acquirer for a business like this? Who's the buyer?