How to Build Wealth — with Codie Sanchez

22:45But I think the real problem is you get into a business, you're like, hey, this guy's been running it for 30 years. I'm going to buy it for a million bucks. And I think the business makes enough money in order for it to be worth a million bucks, and you quickly realize you've never run a business before. And so you're probably not going to do as well as the guy immediately out the gate, and then you run out of cash. And so my biggest protection is always, how can we even pay a little bit more for something? I'm okay with the premium, as long as it's over time and we decrease our risk by how we structure the deal.

23:16One of the things we really enjoyed about your book is your focus on investing in what you call main street businesses, industries including plumbing, construction, cleaning, and electrical services. This is something we talk about a lot on the pod, how the skilled trades are often overlooked. What makes these unsexy businesses so reliable for wealth building? Yeah, well, that's when I really wanted to reach out to you originally was because you have seen all sides of the trade. You've been a public market guy forever. You've also been inside the university system. You've also seen inside of even private entities or some companies maybe you want to take private from public.

23:52You've kind of seen the full gamut of what a company can do. And I've been sort of yelling at the Internet for the past four years about the fact that during the 1800s, American ownership was 80 percent. Most Americans owned their own business. This time around, we're happy if 10 percent of Americans own their own business. In fact, it's about 6 percent of Americans own their own business. And you know how we know we're losing is that the Canadians have more ownership than we do. They have like 7.8 percent ownership. And so my theory here is that ownership leads to wealth most often if that ownership is sustainable.

24:29And I think we have this like crisis where we have a bunch of young people today having 452 LLCs that make no money. And so we have a lot of like, quote unquote, company creation, especially since 2020, but they don't make any money. You know, 60 % of all small businesses listed are single proprietorships with no employees. And so why I like Main Street businesses are, if you've been a landscaping company, for 10 years you've been in existence. You never got funding from somebody to run your business. You never got VC capital. That thing had to make money by itself year after year in order for you to fund your salary.

25:06And so these Main Street businesses never benefited from this huge glut of capital that came from venture capital. And even private equity firms, they take the company entirely. So if they value a company incorrectly, it doesn't hurt like the individual. It hurts their investors. And I think they've gotten a bad rap, but they also are the thing that builds local communities. And I'd way rather some corner coffee shops and local landscaping than a Starbucks or a PE-owned roll-up. On the diary of a CEO, you listed three businesses that you really like right now. senior care centers, businesses that are services-based that don't require a lot of up-room capital, including window cleaning, pressure washing, and painting businesses.

25:49And the third being what you call gateway drug businesses. What did you mean by that? Yeah, so gateway drug businesses are the business that allows you to get a little taste of what the addictive game of business is, which is running a P &L, making money, being your own boss. It's awful, but it's also amazing once you've done it. And so a gateway drug business would be a thing like what is typically called like a self-serve car wash. So they're not super expensive. You don't have a ton of employees. It's not a complex business to understand. And thus you might be able to start with something like that.

26:21Mine famously was a laundromat. That was my idea when I first started buying businesses. I was like, man, I've been a corporate junkie for so long. I don't know if I could run a business by myself. This one's pretty simple. I could probably run this one. It's like dirty clothes, go into a machine, get clean. I take a quarter, I make money on it. That makes sense to me. There's not that many levers to the business. And so, you know, a lot of these are called people light or capital light businesses. So not that many employees, not that much operating expense. These are the type of businesses that I think are interesting for people to get their hands a little bit dirty on the game of business to start.

26:55And the only caveat there is we've seen a huge increase in the multiple cost of these business since we've started talking about that, both laundromats and car washes. So, you know, keep your eye on the prize that you do pay the right price in terms. Yeah, that makes sense. And then also you talk about, or I think it's in your book, but we talk a lot about here about this silver tsunami and that is with so many baby boomers retiring, there's a huge opportunity for younger generations to acquire these businesses. What are some signs that a small business is ideal for acquisition? How can what are some rules of the road for what feels like a good business in your view?

27:33I have two methodologies. If you're going to buy a business, first thing is we buy realities and profits. We don't buy hopes and dreams. So I think where you can go really wrong in buying a small business is that you go and buy a business that's losing money today and you go, the thing is, I can fix it. And I always compare this to real estate. Like how many times have you redone a house and it's under budget and done quicker than you thought it was? The answer is like, never. It's just physics or something. And so just make sure that you don't buy turnaround businesses. I think that's for pros.

28:03If you're a pro, you could do a turnaround, but you've done some of those publicly. Man, they're brutal and litigious. And so stay away from that. The second thing that makes a business really interesting to me, I think, is that you have an owner of the business who's been around for a long time. It has a managerial layer. So it's not just a job, it's a business. There are other people running varying divisions of the business. It's profitable. The business is usually in a recession-resistant sector. Like, for instance, you know, it doesn't mean that it can't go down, but you might have a plumbing business.

28:34You might have a roofing business. You might have a landscaping business. You know, these aren't so luxurious of items that you're going to die during a recession, as opposed to, like, a custom framing business, which, you know, maybe is not the best business to get into with volatility. And then the last thing that I think is interesting for these small businesses, like, you really got to make sure that you don't get in over your head. I say so simple, grandma could do it. And if grandma doesn't understand your business model, then maybe that's not the right business for you. People have been talking about this for a while, that there are a lot of mainstream businesses coming up for sale.

29:08And there's a bit of an asymmetric or dislocation. What do I mean by that? That young people find these businesses not sexy. And there's a lot of baby boomers whose kids don't want to inherit the business. Dad has a carpet cleaning business and makes good money. he wants to retire and he can't find anyone and there's not a real liquid market here. Is this market getting more liquid? Have you seen, you reference evaluations have gone up, but you still feel there's a lot of opportunity. Yeah, well now we have some unique data on this market. So we bought a website called BizScout, which is a marketplace for buying and selling small businesses.

29:43Now we have 68 ,000 listings on that website. We've connected about 3 ,000 buyers and sellers over the past four weeks. And we're starting to get sort of our first realm of proprietary data, which is, it's a real bitch to get data in the small business space. You know, you can go to the SBA, they won't really release any information from you. There's a couple of behemoths in the industry. They don't really share third-party data. And so what we found from the 58 ,000 businesses listed is most of them are highly incomplete. So we have this marketplace where it's the opposite of Zillow and Redfin.

30:13There's no historical listings of pricing. There's no uploaded QuickBooks or tax documentation to confirm what the listings have located there, very little usage of data room. They say that less than 10 % of all small businesses that are listed for sale run through a broker. So most of the businesses are kind of a carefully concealed series of disasters, and they don't have a roadmap for you to actually see what you're buying. And so because of that, I could scream about this from the rooftops, but if people don't actually know how to get inside of a business, hold the hand of a business owner that's done paper invoices for seven years and move them into 21st century tech, they're probably not going to close that sale.

31:00And so I think we still have a lot of runway to go there. Plus, this is the perfect fragmented market. I mean, most of these small businesses are probably jobs. But guess who wants a job? your 30-year-olds who are making less than their parents were at 30, as you've talked about before, they'd be thrilled with a business where they could raise their prices more than inflation each year, where they could be their own boss and where they might actually be able to grow the business overall. And so, you know, businesses that are sub$10 million in revenue are numerous. I mean, that would be businesses sub$10 million, but above$5 million are about 20 % of the marketplace, and the rest is below$5 million in annual revenue, which is a very, very small business.

31:43Talk a little bit about financing. There's different ways to finance a small business. I would think a lot of people don't consider us because they think I've got$20 ,000,$30 ,000, $50 ,000 to my name or no capital. What are different means of financing the acquisition of a small business? Yeah, without trying to sound like a used car salesman saying that you could buy a car with zero dollars down and no credit. You know, the interesting part about the business landscape is the credit is not your own. I think a lot of people don't realize this. When you go to buy a house, you go, okay, I got$200 ,000 in earned income.

32:15They'll loan me whatever based on my earned income. And I can't buy a house that's more than that. It's all based on how much I earn. You go to buy a small business, the small business is what the loan is on. Now, they also want to make sure that you are not going to fail and you're not going to sit as like a a liability on their balance sheet because you can't run the business, but they're really analyzing the business. So your earned income is whatever the earned income of the business makes, which is like a huge mindset for people to have to think about. Now, you know, we know the SBA will do loans up to 90 % of the purchase price of a small business.

32:50So that means you're on the hook for probably 10 % to 20 % down for a small business. And then, you know, you want to have float, right you want to have enough cash on hand to make sure you can handle operating costs for the business overall but you know there's three ways that we buy businesses that people don't think about one uncle sam sba gives you money to buy the business this is just getting expanded for the first time ever they're allowing diversified investors so you don't have to be the only one you don't even have to put up the 10 or 20 percent now you can have other people invest alongside you put up the capital and be on the loan with you that's just enacted this year the second way is seller financing or creative financing.

33:27I don't really like to say seller financing because it kind of sounds weird if you go to the owner of business and say like, you sell me your business using your future profits, which is what it is. I might say instead creative financing. In the book, we have like a couple of graphs that I think help make this more reasonable as to why a seller would do this. But 60 % of all small businesses are sold with some component of seller financing, which is a wild number. Now, not 80%, but 30 % at least. And then the third way that we see small businesses getting sold, and we're seeing it like crazy in Japan, I think it's going to start happening more here in the US, is basically we're seeing apprenticeship begin again.

34:06A small business owner knows that they want to retire in the next five years. And because they want to retire in the next five years, they are starting to look for somebody to take over for their small business for them. And so it just happened with Jade, a member of our community, she went to her boss, this is a military contracting company, and said, I want to eventually take over your business. Would you be open to selling to me? And instead, he said, why don't we start transitioning the business from me to you, and I'll continue to take a glorified salary, really like a royalty payment on what you make over the next 5, 10, or 15 years, but I don't even need you to actually buy the business from me.

34:44And so if we don't do this, my thought is that a bunch of these businesses go away and they die. And we've seen that happen. And so that is why I'm pushing people to say, yes, be careful of risk, but these businesses are available all around you to purchase and baby boomers simply will not live forever. And if we don't buy them, then those businesses will go away entirely. So say you're sold on this, what's the best way to try and cast a wide net and identify these businesses? I wouldn't even know where to start to try and find these businesses? Well, I think the first thing you got to do is we call it deal clarity.

35:19So you got to really make sure you know what you want in a business. I think a lot of reasons why people get overwhelmed in searching is because they're like, okay, I'm going to buy a business. I guess Cody talked about laundromats, so I'm going to buy a laundromat. And that's not actually right. We call it a perfect fit business. So imagine kind of like, you know, three circles of end diagram in the middle is the business that's perfect for you. What I usually tell people today is like, everybody listening has some sort of skill set that is unique to them. If you're an accountant, yes, you could go buy a landscaping company.

35:48And accountants actually are great for buying businesses because you know how to analyze the P &L. But you might be better off buying an accounting firm. You might be better off actually looking at your competitors and some of the others in your same or similar industry. So that's more strategic. I always think first, what is your like satellite acquisition strategy where either you already have a skill, you're an employee in that business, you just go buy a business that is similar. Number two would be what if you are an accountant, but you don't want to stay in accounting, you want to do something else.

36:18Well, then you might want to run around and look for a business that necessitates somebody who has a strong financial acumen. And then third, we kind of go through this, it's called the deal box, you know, this from investing, but we have our investment thesis categorized by 15 different components that says, how much money do you want to make? Where is the business located? Do you want to run the business or do you want to be an investor in the business? Do you want the business in which sectors? And once you fill out this deal box, I think bumper lanes actually make it easier to hit the pins.

36:50And so then you can start narrowing down your deal search. And we talk about the 100 to 50 to 10 to one rule, which is basically you're going to look at 100 different companies, just like you'd look at 100 different houses, high level on business sites, high level publicly. And then you're probably going to, you know, after you're perusing your Zillow of business, you're going to narrow down to like 50 that you might reach out. Most of them are never going to get back to you. Then you're going to go down to 10 that you get kind of serious with and you might go visit them. You might get to know the owner.

37:21Maybe it's people you already know. You're going to get into their financials. And then you get down to one business that you actually buy. And I'm not saying that's the right way to do it always, but it's a good rule of thumb. We'll be right back.

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38:22Tito's is known for giving back, teaming up with nonprofits to serve its communities and do good for dogs. Make your next cocktail with Tito's. Distilled and bottled by Fifth Generation Inc. Austin, Texas. 40 % alcohol by volume. Savor responsibly. There is a lot to talk about when we talk about Donald Trump and Jimmy Kimmel. One big question I've got is why in 2025, are late night TV shows like Jimmy Kimmel's show still on TV? Even in our diminished times, Jimmy Kimmel, Stephen Colbert, they're just some of the biggest faces of their networks. If you start taking the biggest faces off your networks, you might save some nickels and dimes.

39:05But what are you even anymore? What even is your brand anymore? I'm Peter Kafka, the host of Channels. And that was James Ponowozik, the TV critic for The New York Times. This week, we're talking about Trump and Kimmel, free speech, and a TV format that's remained surprisingly durable for now. That's This Week on Channels, wherever you get your favorite podcasts. Curious what you think about the MBA and college degrees right now. I'm not the biggest proponent. I mean, here's what I can say. I have an MBA from Georgetown. I went all credentials down the way. I started off at ASU, Harvard of the West, and didn't apply anywhere else.

39:51It was just where I got in for free. But then I was at Goldman and State Street and Vanguard and First Trust. And so I thought that in order to progress, you had to get an MBA. That was my idea. And so I went and I spent whatever, $100 ,000 plus getting the Georgetown MBA and added on a PhD to it. If I could go back right now and instead take those two years back from my MBA and that$100 ,000 and instead buy a couple of these businesses, I would. And to be perfectly frank, I learned nothing related to running a business at my Georgetown MBA. I learned a lot about international business, which is interesting at the time.

40:30And I learned a lot about how to make sure the government doesn't fuck with your business too much because I ran a pretty big international finance business at the time. I also am not in touch with anybody that I went to Georgetown with. Like they say, well, if you don't go for the knowledge, you go for the network. I don't know. I have a better network from YPO and EO, which costs me like 4K a year and maybe like 10K a year for YPO. So I have a little bit of a jaded view about MBAs in particular. I think it's awesome when you're like me, you want to climb a corporate ladder and you want a virtue signal, or if you don't really know what you want out of life yet.

41:04And so you just want to see the full spectrum of jobs or opportunities available, then I like it. But if you want to be a business owner, the best business school is business and it pays you. You said you'd wish you had that$100 ,000 back to buy one or two businesses. What kind of business? Give us an example of a business that you or someone you know has been able to buy for$100 ,000. The type of business, the cash flows, where it ultimately ends up in three or five years. Well, one of the first businesses I bought was a laundromat for$100 ,000. and it did about$67 ,000 a year in quote unquote profit, but that was also the operator's payment.

41:41And that business was perfect kind of because I had a guy who knew how to run a laundromat. He was a real estate guy. Real estate guys are interesting to partner on some of these businesses because they have to fix a lot of stuff. They have handyman. They usually know like local geography. And so he knew that this area was pretty good. We also ended up buying the property that it was in. So that business didn't make me much money. Like I was in finance,$67 ,000 a year plus split with the guy, plus whatever extra expenses we have was basically not very much. But what we realized from doing that first deal is we could add three or four more to those.

42:14And that business ended up getting pretty healthy,$300 ,000,$400 ,000 a year in both of our pockets, split between the two of us, but in our pockets. And that's when I realized, oh, there's not that much difference between a smaller deal and a bigger deal, just confidence. at some degree. And then also, once we did a couple of those, then we were like, huh, we need to add wash and fold to this. So then one of our laundromats, actually one located here in Texas, ended up doing$3 million a year in total revenue, and then more like a 25 % margin on just that one laundromat from a wash and fold add-on.

42:49And so even a laundromat can scale up to a business that does a couple million dollars a year if you have a few of them, one individually know. And that's a laundromat is probably the worst business from a total return standpoint out there because you cannot scale it very high. And all of these VC companies have died at the altar of trying to spend a bunch of money on laundromats and scale them up. But for a new person who didn't understand much, you know, that's how I made my first couple hundred K outside of my nine to five. There's a lot of research showing restaurants where the owner is there just do tangibly better.

43:21I mean, isn't this about being really on top of your business? And if you want to scale, it's about finding and retaining really talented managers. What kind of people do you look for in your business to bring on to manage these different businesses? Well, one good thing about a lot of these businesses is the word talent is so different here than it is for a media company. Like the talent at my media company, they're expensive. They leave all the time. They don't want to do all of the work. They have a lot of optionality. And, you know, I'm lucky in that we screen for kind of the right culture fit for us.

43:57But that talent is really hard to manage. VC talent, really hard to manage, really hard to keep, really expensive. When I run these small businesses, I mean, God, Laura, one of my operators, has been with me for years and is incredible. Like never asked for anything, can run a business that does, let's call it almost just seven figures a year and probably will do it for decades for me and doesn't require this really sophisticated product knowledge or sophisticated talent set. I think, you know, we owned a mobile home park, for instance. And like, do you know what the operator of a mobile home park makes a year?

44:37It's funny, my father actually, his fourth wife owned mobile home parks. So I know a little bit about this. This is 20 years ago, but they made$28 ,000 plus they had their rent paid for it. But that was 10 or 20 years ago. Well, that's, yeah. So when I first learned this, I was shocked. I was like, wait a second. We paid, in my mobile home park, we paid like 300 or maybe 400 bucks a month to the operator of the mobile home park. Plus, they got their rent for free. Plus, they got to screen everybody that came in. So they ended up picking their friends and like family members in order for them to come in as well.

45:15And that was the entire pay. And I remember when I asked originally to the guy at Botho Mobile Home Park, I'm like, why would somebody do this job for so little? And he said a couple different reasons. He said, one, give them the friends and family perk. They really like, they like self-select their own community. You know, two, upgrade them, do whatever they want to their actual mobile home, like take care of everything for them. And then three, like, that's it. Just make sure that they're sort of taken care of from that perspective. And so, you know, she's like in her 60s, loved the job and ran a mobile home park that did, you know, God, I mean, one one and a half, one point seven million dollars a year.

45:56I think we underestimate how much we have to pay people when we've been in these fancy industries. And then, you know, we ended up selling the mobile home park and then she got a little piece of it, which was kind of cool at the end. The thing that always pops out to me about something like this is that return on investment is inversely correlated to how sexy a business is. These are not sexy businesses. But what is sexy as you get older is being able to take care of your kids and your parents. And like you said, be rich, do whatever you want. Is there any one sector right now that's propping up that you think represents more opportunity than others?

46:31I think rehab, individual rehab homes right now, we're analyzing a bunch of them. I mean, we have an addiction crisis here in the U.S., the likes of which really no country has ever seen before. And that's not going to get better in the near future. And we do not have enough beds. We do not have enough resources for these individuals. And originally, when I looked at the sector, I thought, well, who has the money to like spin up a$10 million or a$50 million rehab center? That must be very aggressive. But actually, there are all these grants for you to do it with single family homes. And so there are these small little rehab, I don't even know if you would call it centers, houses all around the country that are popping up.

47:14But you get subsidized by the federal government. You also get a bunch of tax breaks on top of it. You get to do something good for individuals. You also get some unique tax consequences because it's largely real estate driven. You get a land hold on the real estate overall and they're not cheap to stay in. And so this one is there's not very many home services businesses that I think can have like a real positive impact to besides the clean communities I think are good for society. But this is one where I think you could make a real impact. You can make some money and it's probably going to expand crazily.

47:49And then we're going to eventually see a bunch of PE guys buying it out. Cody Sanchez is a former Wall Street investor and the founder and CEO of Contrarian Thinking, a digital education company with over 7 million followers. She's also the founder of Main Street Hold Co., a small business holding company focused on bringing Main Street businesses back to the limelight and Contrarian Thinking Capital, a firm that invests money back into the companies that support small business growth. Cody, I think what you're doing is really important, not only because it's growing the economy and you're creating jobs.

48:18But I think there's an unfortunate zeitgeist that if a kid doesn't go to Dartmouth and end up at Google, that he or she has failed. And there's other pathways into the middle class and maybe even to an upper income home. And I think you're sort of de-stigmatizing it. I think you're actually playing not only an economically important role, but a kind of an emotionally and psychologically important role. Really, really appreciate your good work. And, you know, right on, sister. Well done. Thank you so much. I appreciate it. It's fun. I wish more people realized garbage men have good times. There you go.

48:52Sanitation engineers. Thanks, Cody.

49:06Algebra of happiness. My friend Adam gave me a piece of advice that always sort of resonated with me. He has two boys, you know, both doing well, both wonderful boys, but they've had like every other boy, they've had their issues at different times. And he said that the only thing that worked consistently was time. And that is eventually things worked out or got better. And it struck me. And even though I don't act this way, I know it's right, but I don't always act on it. My son is doing really well at school. I don't want to say all of a sudden, He's always done okay, even good. But all of a sudden, he's just doing incredibly well.

49:44And when I try to reverse engineer it to our environment or what we've done for him, here's the answer. Here's what we did. Abso-fucking-lutely nothing. There's nothing we did. As a matter of fact, he wanted to take sports science. And our friends who are all, you know, Ivy League or die in America said, no, don't do that. He needs to say economics or businesses. Colleges don't take sports science seriously. And so we had this big intervention, tried to talk him out of it, and he pushed back on us, which I'm really proud of him for. And he kept sports science and he's getting commendations or whatever they call us, one of the top in his class in it.

50:23And it just struck me that so much of our stress around our kids is such unproductive stress. You know what you need to do. You need to love them unconditionally. You need to spend a lot of time with them. You need to try and instill a set of values in them. You need to model, right? You give your kids the basics, and then you realize that the only thing that works over the long term or doesn't is time. And you forgive yourself. You do your best. You work out. You learn about baseball. But once you've thrown the pitch, you know, it's up to the batter, your kid, and God, and the humidity in the air, and the environment.

51:01So, yeah. Do you want to be a little bit stressed out? Sure. But at the end of the day, when you look back, you're not going to be angry or upset about the bad things that happened to you or your kid. You're going to be angry and upset and how much pressure you placed on yourself and then injected into the relationship with your kid. The only thing that reliably works out over time, built on a base of love and support and time, is time. This episode was produced by Jennifer Sanchez and Caroline Shagrin. Drew Burrows is our technical director. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network.

51:34We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn. And please follow our Prop G Markets Pod wherever you get your pods for new episodes every Monday and Thursday.

51:50Oh, we're sad again. We're sad. We're not sad. Oh, sad. Not so sad.

52:01Ha ha ha ha.