How gurus lie about how much MONEY they make…I’m calling it out..
Summary
- Contract Value Misconception: Be wary of claims that extrapolate contract value. For example, if someone sells yearly contracts worth $30,000 each to 100 people at an event, they might claim they’re doing $3 million a month, but it’s misleading as it's based on the entire contract value, not actual collected payments. Always ask how much money was collected and how enforceable the contracts are.
- Lifetime Revenue Overemphasis: Beware when someone touts their lifetime business revenue as an indicator of success. For example, boasting about building a $50 million business might only reflect total revenue collected over many years, which doesn't necessarily convey current or consistent success. Don’t be impressed by this number alone; probe further into the spread of those earnings over time.
- Business Valuation Variances: When people mention their business’s value, make sure to ask for specifics like the type of multiple used and whether it's based on top line or bottom line estimates. Understand the reasoning behind their valuation assumptions. Typically, small businesses get valued at two to three times their EBITDA, while larger ones can secure higher multiples.
- Yearly Revenue Realities: Yearly revenue as a metric gets us closer to the business’s actual performance, but always verify whether it corresponds to cash collected and consider other factors like chargebacks and refunds.
- Profit and EBITDA: Profit, or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), is a critical gauge of a business’s health. It’s better to ask fellow entrepreneurs about their bottom line yearly to get a realistic understanding of their financial success.
- Net Free Cash Flow: This metric shows what can be extracted from a business after reinvesting to maintain and grow its competitive edge. For me, assessing how much an owner draws as dividends is crucial because it reflects the readily available monetary gain from the business.
- Personal Net Worth: Ultimately, an entrepreneur’s net worth is a telling sign of their true financial achievements, combining investable assets and business ownership stakes. I believe in de-risking by extracting profits regularly while the business grows, as most businesses do not sell for the hoped-for amounts.
- Business Metrics Synthesis: No single metric tells the full story. It's essential to understand how these figures interact to discern the actual value of a business and the entrepreneur behind it. Always use a combination of metrics to get to the truth.
Video
How To Take Action
To figure out if someone's business is really as successful as they say, don't just look at the big numbers they throw at you. Here's what you should do:
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Ask How Much Money Was Collected: When someone tells you their business makes millions, find out how much cash they actually got. If they sell long-term contracts, see if they got the money upfront or just promises.
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Check Yearly Earnings, Not Lifetime: Don't get fooled by a big total revenue number. That could be from many years. Instead, ask about what they earn each year and if it’s consistent.
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Understand the Business Valuation: People might say their business is worth a lot, but ask how they figured that out. What things did they consider to get the number? Real value is usually a multiple of the profit, not just sales.
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Yearly Revenue Details Matter: Find out if the yearly revenue number is the real deal. Sometimes they don't include refunds or money that didn't come through.
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Profit Is Key (EBITDA): See if you can learn about the business's profit. That's a better way to know if they're doing well than just sales.
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Look at Net Free Cash Flow: This is about how much money the owner can take out after keeping the business strong and growing. This could be a very telling number.
- Personal Net Worth Is Telling: Finally, an owner's personal net worth includes both cash and how much of the business they own. This shows if they’ve been smart with money over time.
No single number tells the whole story. Be smart and look at different things to judge how well a business and its owner are really doing.
Quotes by Alex Hormozi
"You want to know how long was that was that over 20 years, was it over 40 years, because that's what a McDonald's employee can earn over that amount of time"
– Alex Hormozi
"This is what's left after all the chips have fallen, all the cookies have crumbled, all the roosters have roosted"
– Alex Hormozi
"Most businesses do not succeed, that's just those are just the stats"
– Alex Hormozi
"Extracting cash flow is one of the values of the business"
– Alex Hormozi
"You can't put all your eggs in the single basket"
– Alex Hormozi
Full Transcript
in this video i'm going to show you the seven ways to measure business value and how you're probably being deceived by most people you see on the internet simply because you're not understanding the words and terms they're using all right so by the end of this video you'll understand who's bs who's legit who's real who's fake and if they haven't given you enough information to make the decision exactly what questions to ask all right so let's dive in so the first of the seven types of ways that people will measure value is that they will extrapolate a single month of contract value into eternity or at least over a year example what that looks like is someone you know selling a yearly contract at an event they sell a hundred people at that event let's say uh for thirty thousand dollars a year and they say we're doing three million dollars a month right crazy but the reality is they sold three million dollars of contracts that are unenforceable to people on monthly uh income streams or monthly cash flow and so a hundred people at twenty five hundred dollars a month is what will get you to that thirty thousand dollars right roughly what that really means is they did two hundred fifty thousand dollars at that event but they said i'm doing three million dollars a month right even though it was a one-time event that is not going to recur and they based it on contra value contract value and not payments collected and so the first way to see through this stuff is to say well how much money was actually collected and how reliable are the contracts that you're actually selling if you have highly uh you know secured contracts with companies that are legit or you have them secured against assets meaning that the likelihood that they continue is high or you have a net negative churn company meaning the contract increases in value over time based on the business economics that you have like salesforce for example when you sign a contract with salesforce you sound a contract with hubspot which is another crm most of those clients increase how much they spend over time and so that would be legit in that instance but the vast majority of people who are saying this to you are not being legit and so first thing to look out for at the very end i'll give you my rating for each of these ways of doing it all right the second is lifetime revenue so this is when someone says we've done x amount of total revenue collected in our business now a lot of times we'll say i have a i mean i see an ad right now that i run all the time it's like how i built a 50 million dollar business but they mean how much revenue they've collected over the lifetime of the business and so for context of how ridiculously inflated this will be mcdonald's employee will collect a million dollars in revenue as income is honestly that's even better because it's income it's not even revenue but like just to show you how ridiculous and preposterous this is a mcdonald's employee will collect that over the entire lifetime if you work to mcdonald's your whole life right and so if you if you use this metric then it's incredibly inflating and it's great for your ego and it sounds good to impress people who don't know what you're talking about okay and so you may have seen one of my videos that said 122 million in revenue uh for for me and i do that a because the headline is more compelling than saying you know we've done mid-30s for the last three or four years you know i'll play the game too but understanding what that comes from and so that's why i try and be as honest as possible like well this is what we did in revenue this is what we did in profit so that i can just be transparent with everybody so you know at least what to look for and so when someone says we have a 50 million business or 100 million dollar business ask them are you talking about yearly revenue are you talking about profit like what are you talking about specifically when you say that number right and a lot of times we're like well i i meant i guess that's how much you know total revenue we've done you know since we started now mind you most entrepreneurs especially newer entrepreneurs will conflate they will mix revenue with cash collected right those are two very different things right revenues is is contract value right but cash collected is really reality and so they'll use this term and for the purpose of this video when i say revenue i mean cash collected what was processed and received by the business so the second way that people describe their values how much total revenue they've done in their lifetime so you may actually have seen you can see this award counter over here i got for doing 100 million or passing 100 million in total revenue in three years three and a half years i think since we started with clickfunnels which is a software that we use for landing pages and they recognize the people who are top performers but again that's revenue like it doesn't mean it means cash collected but it that doesn't mean that like we're doing that per year now this year is a breakout year and i'll tell you what we do at the end of this year because we will be close to that number um i don't think we'll cross 100 million this year but um we're we'll be really close number three is business valuation so this one is one where it's based on the market's value of the business if it were sold so this is another way of kind of inflating the the business that you have now this isn't necessarily an unfair way of valuing your business right based on its own value but the thing is it all depends on who's the one who's ascribing the value what are they what are they using to create that value i hear all the time like i think i'd be able to get 15 times top line you don't know squat right the market will pay what the market will pay all right and so for most businesses that are small businesses so anything that's under 5 million dollars a year in revenue most of those guys are getting two to three times ebitda which is another measurement i'm gonna get to in a second which is the earnings before interest tax amortization and depreciation right and so those are business metrics uh that is going to have a multiple scribe to it so if you're a mid market which would be like 10 to 100 million dollars in revenue per year then you might have a six to eight times multiple if you get above 100 million dollars then a lot of times you can get into the you know 12s 15s etc and most of the time that's done on ebitda in a very very very rare number of circumstances will they do it on top line revenue all right and that is in a fast growth company that has high amounts of capital that need to be reinvested in it that they believe are going to give it a strategic advantage for high gross profits in the future um that they're reinvesting capital into all right and so that's where you know i saw somebody recently saying that they had you know they stole their business for a hundred times ebitda right what that really means is that like and this is where this is what i want everybody to watch this video to be thinking well either they had a really really crazy business or more likely they were making almost no profit in their business and just got a high valuation because of or not even necessarily a high valuation if they if they're doing a you know 10 000 a year in profit on a five million dollar business then if they sell for you know five million dollars they get 500 times ebitda which is ridiculous right but people do that because it sounds impressive right so that's why we're that's why we're going through this so you can cut through the bs and hopefully get better sources of information which is kind of my goal here is that you can measure you can measure other entrepreneurs value based on the true value that they've been providing all right so the next one here is yearly revenue all right so this is how much revenue a business is doing yearly now we're getting a little bit closer to reality here now again revenue versus cash collected it depends on the type of business if you have a service business that's based on recurring revenue and contracts then you're gonna have contracts that are factored into that if you had an e-commerce business for example which is purely transactional then the revenue and cash collector can be very close to each other right and you know revenue would also not take into account refunds chargebacks things like that which then gets into net revenue i won't get into it there's a zillion terms and just as a side note here the reason there are so many terms is because measuring value is something that is one of the hardest aspects of investing in business in general is that people want to figure out what is this thing worth and so that's why they have lots of different metrics that look at and so for you as a as a as a keen you know entrepreneur or investor or you know person who wants to grow within the business world understanding all of these metrics and how they work together to to assess or get as close to true value as possible are these are going to be tools in your in your skill set and some of these are better and some of these are worse and i'll get to my ratings in a second all right so yearly revenue is the next which is just how much are you doing every year in terms of top line right now the next one is profit or ebitda now these two things are not necessarily the same um but i'm going to say ebitda being earnings before interest tax depreciation and mortization right um for most businesses this is where coming back to the business valuation if you're mid market you're getting six to eight if you're kind of smaller then you're at you know two to three sometimes four if you're doing really well or you have some sort of competitive advantage and so and again and that may sound soft to you in terms of those numbers but the reality is that a lot of people just look at the the outliers which catch all the news in the press but most businesses every you know businesses are sold every day at 1x 2x 3x ebitda all the time just no one wants to talk about it right and so this is even closer to reality so if i'm looking at a business owner or somebody's trying to posture with me right the eggplant measuring contest of of of entrepreneurship they're gonna if they're starting to talk to me about these numbers i'm like hey bro like what are we doing bottom line right what are we doing bottom line per year this is what i want to know and so that leads me naturally to the next one which is okay well you've got a you've got a certain amount of ebitda that's coming up but depending on your type of business you might have to reallocate all that money back into the business to just maintain your competitive advantage which charlie munger warren buffett uh they talk about how their least favorite type of businesses are businesses that require lots of additional capital right now as they've become gazillionaires they have to find businesses like that because they have to put their capital to work but for the thing that created their wealth was finding businesses that did not require a lot of additional capital that created lots of survey says net free cash flow so how much owner earnings how much can you extract from the business all right that's what this nfcf here is net free cash flow right and i've talked about this in other videos but this is after i've reinvested profits in the business to maintain and grow our competitive advantage how much can i as the owner take out the reason this is so important is because a lot of times you're not going to sell a lot of times businesses fail there are tons of risks that's why business is one of the riskiest things to get into most businesses do not succeed that's just those are just the stats right and 99 times out of 100 your business never actually sells you might do an asset sale or a garage sale but doesn't actually sell for what you think it is which is why for me as an entrepreneur you want to de-risk by extracting cash flow and many times this is one of the values of the business and so if i'm talking to an entrepreneur and they tell me this then i'm going to probably ask well what are you babe what are you taking home and owner earnings what are you extracting from business what are you taking out as dividends because i want to know what's reality right and that leads me to the last and the bottom one here and then i'll give you my ratings on these which is what's your net worth right this is what entrepreneurs you know everyone's shying away from talking about a lot of guys that you see on your newsfeed those guys message me and say hey man i want to do x y and z i want to start investing et cetera and they've got a half a million dollars for their name and they talk about how they've done 10 million dollars in revenue right right lifetime and so again you could just i'll give you a funny example for you so if someone um says hey we've done a million dollars in revenue look at our award right that's over a total lifetime right that could be over 10 years so if you did a million dollars revenue for 10 years means you're doing 100 000 a year in revenue right and if you're doing 50 margins on that right that's a 50 000 a year owner income business which is just the median income in the united states and there's nothing wrong with that but in terms of taking this person as an authority i would be i would be hesitant to to take their advice because candidly they're they're probably just spending what they're making on living if that's how they're trying to position so just just take that with a grain of salt you know what i mean and the reason i'm going through this is because the best thing you can do is learn from others but to make sure that you're actually learning from others learning from people who are good information sources is important and can there's tons of people who know way more about business but i just try to share the stuff that has worked well for us in creating you know for me an ultra high net worth which is over 30 million and there's two aspects of net worth all right you have your net worth that comes from your investable assets which is what you've extracted right we've extracted paid your taxes on and then been able to reinvest and grow and the second is the percentage of the businesses that you own business or businesses that you own all right which is why having a fair and reasonable valuation is important because what's the true market value of the business that you have now if someone says like my business does like 10 million a year and they do 2 million of ebitda right and they're getting a five times multiple on that because it's truly a business it doesn't require their face if it requires their face then they're not going to get that multiple right so it's important to understand these variables that create and measure value in a business because if you're looking for people and you're trying to listen to advice then make sure you're getting it from the sources that are true and real again two different ways that that can combine to create net worth is going to be your after tax wealth that you've extracted from the business and be able to reinvest on the side and grow on your own right and the percentages of the businesses that you own the value around them all right so let's get to the good part which is um yay or nay is this something that i'd be looking at uh in terms of uh whether i'm going to value this person's opinion based on this stat alone survey says contract value no i would not do that and that is because this can be wildly inflated especially if you extrapolate on one month's contract value for the rest of the year it can be wildly inflated all right so number two lifetime revenue survey says no i would not use this as a way of measuring how good someone is at uh at business because you want to know how long was that was that over 20 years was it over 40 years because that's what a mcdonald's employee can earn over that amount of time alright so don't be impressed by this number ask more questions which we which you should hopefully do as we go down this all right business valuation survey says yes but caveat on this you want to know what type of multiple are you assuming um and what is that off of top line or bottom line and why can you defend that right so this is asking good questions so that you can actually get closer to true value which is why all these metrics even exist to begin with it's so that people going to ascribe and measure value all right next one yearly revenue survey says ah partial answer because it goes with number five which is yearly profit all right the difference here if someone's doing 100 million dollars a year in top lane revenue and they're spitting out um just a little bit of profit that may be okay right if you're doing 500 000 a year in profit i knew a company that um 20 million in revenue 500 thousand year profit they got sold for 168 million right now that's a super valuable business and it's because the bankers and the people who bought it saw that they had reinvested everything right into growing the business so understanding the relationship between these two things if i have another business that's doing 500 000 a year and a million dollars a year in top lane revenue then it's to be a far less valuable business all right so understanding that they might be making some strategic decisions about how they're reinvesting the business et cetera or some capital costs that might have cost them but they see what it's going to yield them in the future etc all right now um this is especially true with software businesses fyi all right which that particular business was a software business next one survey says yes on netflix flow this is uncle warren this is uncle charlie munger this is their primary uh metric for measuring business they try and figure out what is the net free cash flow after i reinvest everything this is an excellent way excellent way to figure out the value of the business all right because if you can do your net free cash flow and then you multiply it then you're going to get very close to what an investor might be willing to pay for the asset excluding some sort of crazy monopoly thing that they're trying to get with some sort of category king uh you know situation in a marketplace and then finally net worth how do we see this on the on the valuing of uh eggplant right survey says yes i think this is an excellent measure uh of value because this is what is left after all the chips all the chips have fallen all the cookies have crumbled all the uh the roosters have roosted this is what's left after everything right because if you you know if you like i've had 13 businesses and i now own eight more so i've had 21 businesses right um so i've had a lot of these things and the thing that remains is you your net worth is an entrepreneur and if you look at the fortune 500 and you look at it 50 years ago what you'll see is that there's only two businesses that are still on the the fortune 500 from now from 50 years ago g and ford that's it that's it right and so when you think about that a lot of times what what business becomes is you create something and then as an entrepreneur you want to be able to create enough personal wealth throughout the trajectory of the business that's like literally all businesses fortune 500 and only two of them right are still there and so thinking about that that should hopefully shift your perspective which is why i'm so big on extracting dividends while the business is growing and i know that that might not be as popular in the silicon valley world but a lot of those guys don't live in reality and for the everyday business owners everyday entrepreneurs that are you know hustling out there trying to make a buck trying to feed their families it's important to de-risk because you can't put all your eggs in the single basket that is my opinion sure you can bet on yourself but there are so many more stories of guys who bet everything on themselves at the casino and walked away empty-handed all right and so it is my belief that if you were generating a profit you should be purposely taking some out every month even though the like for me the vast majority of my net worth is in my business valuations still i still have you know over whatever a lot um in in in investable assets um that categorizes me as ultra high net worth all right and so again ultra net worth just so you know from the definition standpoint is investable assets it's not based on total value these are the seven ways that i wanted to highlight for measuring value if you see someone and they say i am worth this or my business is worth this or i built an x million dollar business ask these questions is that lifetime revenue is that contract value that's been extrapolated is that your business valuation based on what multiple is that based on a top line multiple or is that based on a bottom line multiple what's the net free cash flow what are you taking out as dividends every year and then finally if someone will share it with you which i i'm actually not that opposed to sharing net worth numbers i know some people are i don't really know why i figure if you make enough money over time people always end up finding out what your net worth is which is basically the entire forbes list and so anyways these are the ways that you measure value these are my two second snap judgments on them and if you have if you have your astute cap on then you probably figured out that a lot of these things go together right and it's not just one number it's understanding the interplay between them so that you can ascertain with the true value of a business and or the entrepreneur that owns it is so hope you found valuable in that i hope you found valuable in that hit the subscribe button if you did and if you didn't then don't hit the subscribe button uh leave a comment if you have any other questions or other things that you would like me to talk about because i just like to make the stuff that you guys want because that's what this is for all right so it's for you guys so i hope this found valuable and keeping awesome i'll catch you guys bye