https://www.youtube.com/watch?v=aOq1Hdz0w3k

1 00:00:00.000 --\> 00:01:00.000 my wife and i laila talk to 10 to 20
service information e-learning coaching businesses per week that we're
looking to invest in and that's you know after they've gone through uh
you know several screening processes and what i wanted to talk about
today is what are the ways that we think through in terms of the value
of the business and not from a dollar's perspective but like what is the
opportunity and i want to give you kind of the three-step checklist that
i think through and how you can apply it to your own business and think
like how can i take what i'm currently doing and make it more of an
opportunity for me and if you don't know who i am my name's alex from
rosie on acquisition.com it's a portfolio of businesses it does right
now 110 million a year and i have nothing to sell you so i make these
videos just because i was once broke and i don't want you to be broke so
that is why we do this anyways so let's rock and roll when you've heard
people say opportunity or opportunity vehicle you need to get into a
better monetization structure there's different ways of kind of saying
the same thing which is like how much money can we possibly make that
from this core thing and so when i'm thinking through this there are
three pieces that i think through at the end of the video i'm going to
kind of walk

2 00:01:00.000 --\> 00:02:00.000 through kind of the the downstream
impacts of these things um and how you can apply them but this is the
this is the big picture and you have to make these i have to make lots
of decisions really quickly so i have to use frameworks in order to make
those decisions right and make snap judgments on like do i think this is
interesting should we pursue this further or do should we just give some
advice and you know wish them well and maybe see them in the future if
they implement it right there's three things that i that i've kind of
boiled down to an opportunity vehicle is this something is this
something a business or opportunity that i want to pursue and so for a
lot of you guys who are starting out this will be very valuable for you
because hopefully you can just set this up right and if you're already
in the process of building your business then maybe you can make
alterations to the business and incorporate this so there's three things
that i'm looking at in terms of like what i think makes something much
more interesting number one is the number of potential units sold so a
lot of times people talk about tam total adjustable market and i'll talk
about why i think that that the longer i do this is somewhat of a
misnomer um so i'll talk about that at the end but just how many people
could potentially buy this thing right or buy this service or buy this
you know whatever this thing is how many people do i think would be a
fit um to

3 00:02:00.000 --\> 00:03:00.000 be purchasers of the thing so that's
number one and that's just going to show me how big how long we can run
this game is this indefinite is this like you know i mean like if you're
selling weight loss like do i believe that people are going to continue
is food going to keep chasing better and are people going to be able to
change their genetics in terms of how they how they rely on it no i
think those things are things that aren't going to change overall and so
those are assumptions that i'm willing to base the fact that there's a
lot of people want to buy this thing it's just a simple way of thinking
through like what are the assumptions that would continue to make this
trip so number one is how many people could potentially buy this service
number two is going to be what is the potential profit i can make from
the service all right and that's a function of two things which is what
is the value that people are are getting from this outcome and then how
much does it cost us to deliver it and so those are two very important
components because there's some some elements right that are extremely
valuable but also very costly to deliver so that's something that i'd be
less interested in it might be very valuable but like there's not a lot
of opportunity for profit on the flip side sometimes it's a very very
small amount of value but it costs nothing right and the thing is is
there the gross profit is actually kind of enticing and depending on
what that first one was which is how many people

4 00:03:00.000 --\> 00:04:00.000 are willing to buy this thing then it's
like ah this becomes a little bit more interesting right and so the
potential for profit and the gross margin of the of the unit of thing
that we are selling becomes more interesting which is why laila and i in
general like course e-learning you know guru coaching type businesses to
work with because we can transition them from a not valuable model into
a much more valuable enterprise model that has something that they could
sell in the future if they wanted to the third piece is the competitive
uh the supply demand or competitive dynamics of the landscape and so
i'll give you a counter example and and a good example so if i wanted to
get into wireless cell phones right like or cell phone service well lots
of people need it okay that's good because how much does it cost me to
add one more uh user to my phone phone network pennies right and what do
i charge them hundreds of dollars a month but then the third one is
competitive dynamics well i'd have to uh beat out verizon and any tnt
and all the other big conglomerations of phone service that exist it'd
be very difficult for me to break into that and so that's an example of
it checks two of the three boxes but not the third one and so different

5 00:04:00.000 --\> 00:05:00.000 example of that i'll tell you like a
hypothetical crazy good example would be if someone had figured out a
way to create hardware that does crypto mining right and let's say that
that crypto mining you know could get could make people let's say 50 000
a year all right this is i'm using an extreme example to illustrate the
point well if they had figured that out then one just about everybody
wants you know passive or close to passive side income so total number
of people that we can sell this to a lot amount of value that someone's
getting a lot 50 000 and in this case it's actually quantifiable how
much does it cost us in this instance we'd have to figure out what the
cost of the rig would be but let's say it was you know small let's say
it was 500 well then this business becomes incredibly interesting as an
opportunity and then the fourth or so the third is what are the
competitive dynamics well if there's no one else who can offer this then
we're we're off to the races right but on top of that how new is the
space are there a lot of new people coming into it are there established
people who are killing it that would try and price us out etc and in
this space for example everything's brand new and

6 00:05:00.000 --\> 00:06:00.000 so the competitive dynamics are great
and it's massive you know it's very quickly growing and will continue to
grow probably for the first table so in this instance it'd be like wow
this is a very interesting business that i would want to participate in
or learn more about and so if you're thinking through these lenses and
i'll talk about the tam thing in a second about why i don't think it's
necessarily as good as people used to think in terms of assessing the
value of the business i'll talk about that in a second but if you're
using these three lenses to think about your own business you can ask
yourself okay is there a way that i could make this you know applicable
to potentially more people so that i could have a total higher number of
units or bigger audience that i could sell to number one number two is
is there a way that i can reconfigure this thing so that it either makes
the the customer a more valuable outcome and or it costs us less to
fulfill that outcome right so we increase the gross profit per unit sold
is there a way that i can reconfigure what i'm doing right and i'll give
you a couple rules rules of thumb here that i like which is if i'm just
doing any kind of service business i like to have 80 or higher gross
margins all right so what

7 00:06:00.000 --\> 00:07:00.000 that means is if i'm selling something
for a thousand dollars a month it has to cost me less than 200 a month
and for those of you who are new to making money people will get their
panties in a wad about that but like profit is what drives business all
right it's not that all of that gross profit that's before cost of doing
business goes to the owner that's just everything that you have to chip
down away from so you're starting at 80 and let's say you want to run a
business that runs 50 margins well then that means you've got 30 percent
there right in that thousand dollar month example i got 300 bucks a
month to cover everything else that i do in the business that covers
that covers marketing that covers admin costs it covers payroll that
covers that uh that covers you know hr finance all of these other fun
legal whatever all the other functions of the business so the thing is
80 is minimum and the thing is especially smaller businesses think for
some reason that that that's like charging more is bad right and you got
to get out of that because if you want to help more people you need to
have gross profit in order to scale if you look at the biggest companies
that exist out there they sell something that's very valuable that costs
them almost nothing so think about google right they

8 00:07:00.000 --\> 00:08:00.000 sell ad space it costs them a moment
nothing besides the actual like their incremental cost of running an ad
is is virtually zero right and they charge a king's ransom for it right
facebook same thing right they charge for eyeballs that cost that like
they've one time cost of building then after that the incremental cost
of of showing add some more eyeballs is almost nothing so it's all
margin you look at the phone company that i was i was explaining earlier
they have their one time cost of building the thing but then the at the
additional cost of adding one more user is almost insignificant right
but they can still charge a great amount of money for it this is the
reason software is something that people find incredibly valuable it
costs one time to build it and then after that the each incremental user
is almost all profit now the only other type of business that's like
this with a close to 100 gross margin is information and education
businesses which is why layla and i like these types of businesses
because they have uh they have the same margin as software businesses
except you don't have the cost of development the downside is that those
types of businesses tend to have higher churn because the increased
value or the value declines over time when someone learns a skill from
this

9 00:08:00.000 --\> 00:09:00.000 type of business that being said there
are ways of reconfiguring the business to increase the stick of the
client with by pulling out the things that are consumable versus not
versus one times consumable um and i'm going into the weeds here but
hopefully you'll enjoy it so something that's a one-time consumption
would be something where i have now gotten the skill from the thing or
i've learned the learned the process and this is especially true with
learning or elearning type businesses if someone comes for a skill they
learn the skill and then the value of training for the skill decreases
because they already have it duh that makes sense but the thing is a lot
of times when people are learning something there are other components
that surround them that are consumable on an ongoing basis so the
information is one time consumable as long as they learn the skill but
then there become other things that are consistently consumable so
community is consumable as in like i want access to it this month i want
access to it next month accountability is consumable i consumed it this
month to get to point b but now i want to consume it again to get to
point c an additional piece would be if the the type of skill that
you're teaching someone creates new problems which most times if you're
good at teaching something all problems create solutions

10 00:09:00.000 --\> 00:10:00.000 or all solutions create more problems
right and so when we solve the the old problems we get new ones and
that's why we as business owners should always just see problems as
blank checks for us to cash in at our own desire right there are
problems everywhere and they just have a dollar amount attached to them
and the question is do we want to go and cash that check in and solve
that problem right like that's how you can you can perceive problems in
the world in terms of opportunity for these types of business which is
why we like them is that we can pull these pieces out and then create
something that has really high margin and has high ltv and continues to
build enterprise value over time by selecting and peeling these pieces
apart and so finally i want to talk about why i think tam is not as good
of a you know indicator for the potential size of a company well look at
some of these original companies so look at facebook when they started
out it was like supposed to just be a college you know network thing
right it was supposed to be you know facebook i think is what the actual
term was way back in the day uh for like a yearbook right and so that's
literally what the name of the thing was right and so somebody might

11 00:10:00.000 --\> 00:11:00.000 look at that initially obviously
people could see where it could potentially go but they saw that be like
well maybe the the tam the total general market is just college students
the reason i think it's interesting is that businesses and founders
expand in vision over time and the the time when when a vision is a
visionary or founder has run out of vision or run out of futures the
moment that the business dies or they sell it because they just don't
know what else to do to grow it right what happens a lot of times is
that if we can if we can contin you know continue to increase and eat up
the the total adjustable market that we have defined for ourselves and
our business a lot of times adjacent you know or adjacent markets or
silos all of a sudden become more and more attractive we find out that
there's a lot of similarities or that we find out there's another need
and then we can branch into yet another silo now if you're like i that's
the exact decision i did and i went from a hundred thousand to two
hundred thousand a year no that was dumb like that's not that's not the
point of this like you could you could just scale one avatar to probably
you know 100 million a year before doing that that's not the point the
point is that you know on a long enough time horizon businesses also
through mergers and acquisition things like that they can buy up other

12 00:11:00.000 --\> 00:12:00.000 companies that are adjacent close to
them et cetera and expand the total market they have which is why i
don't necessarily think of it on a long term time horizon but i do think
about it on a short-term time rise and so if i'm looking at like the
next three to five years then i may be like okay we're not going to
change avatars next three to five years but do i think that this thing
over the next 20 years could eat up more and more of the pie by
expanding who we're potentially serving if the answer is yes then the
original tam or the current tam is not necessarily what the future tam
is going to be and so that's why i don't see tam as as valuable as i
think it it is purported to be if you're new to the channel welcome you
hopefully can think through those three different opportunity kind of
vehicle frames in terms of like how can i look at my tam in a way that
potentially could sell more customers how can i increase the value
versus the cost of what it is that i'm delivering and is there a way
that i can enter a space that is more unique or newer which i can either
do by going into the clearly new spaces or by trying to redefine what
i'm doing in a new way right and if we can do those things then we
increase what i would consider the opportunity size of what we are
pursuing

13 00:12:00.000 --\> 00:13:00.000 and then ultimately make more money
all right and so that's what i'm thinking about when i'm looking at
these companies that we're you know potentially investing time and money
into otherwise hope you have an amazing day and i'll see you guys next
vid bye
