https://www.youtube.com/watch?v=f\_ceDZqhKbw

1 00:00:00.000 --\> 00:01:00.000 mosey nation two days ago i was
speaking with some business owners that approached me about becoming
portfolio companies and acquisition.com and i want to talk to you about
how that conversation went um and i want to give you one of the most
useful frameworks that i use in analyzing a business that you can use
today to analyze your own business and instantly 2-3 exit which is
exactly what i do when i'm looking at the portfolio companies that we're
considering on investing in the beautiful thing about this equation and
as you as you develop as an entrepreneur at least as i have and just so
you if you guys don't know who i am my name is alex romozy on
acquisition.com our portfolio companies do about 85 million a year and i
have absolutely nothing to sell you all right and so the reason i make
this channel is because a lot of people are broke and i want you to be
one of them and mozi nation is not going to be one of them everyone
needs if you are good at something you need tools all right this
equation is one of those tools that you have as an entrepreneur if you
have to rely on your your systems if you have to rely on finance to get
you the reports to get to make general directional decisions then you're
going to be weak as an entrepreneur because you have to be able to do
these calculations in your head back of napkin all right and so i want
to show you the most valuable equation that i use in analyzing my own

2 00:01:00.000 --\> 00:02:00.000 businesses and potential portfolio
companies and it requires five variables and i'm going to show you what
they are and then i'm going to show you how i got the two hardest
numbers that most people don't know how to get within their business all
right so i can even give you the sixth number which will be a bonus one
number one is going to be number of new sales per month most people know
this number the next one is current revenue so that's most people also
know this number the next number is price most people know this number
the next number is going to be churn most people do not know this number
the next number is going to be lifetime value most people do not know
this number the next number is gross profit all right so i'm going to
show you how in a simple conversation we can figure out all of these
things and extrapolate where business is going to cap out where the weak
points are and how we can see what the size of the opportunity all right
so i'm going to give you a hypothetical example that i just had i was
talking to a business they were doing a hundred new sales per month all
right so that's number one i said cool what are you guys doing in
revenue right now they were doing uh 400k

3 00:02:00.000 --\> 00:03:00.000 in revenue i said okay this is really
important you will want to pay attention to this video they had 380
clients all right their current price was a thousand dollars per month
churn they didn't know lifetime value they didn't know all right so i
said okay well the first thing we have to do is figure out where your
hypothetical max is going to be all right so if we know the current
number of new sales because they were like well i i i have to get you
these numbers later i don't have them on me i was like if you know these
numbers we can do them live together and they're like oh i was like yeah
so let's walk through it okay a thousand dollars a month is the price
right and i said okay well how many customers are canceling every week
and they said 13 people per week were cancelling i was like okay so
roughly 50 per month okay makes sense everyone good here they said they
have 380 active clients what we do is we take 380 active clients we
divide it by 50. oops sorry 50 uh 50 people cancelling divided by 380
active clients

4 00:03:00.000 --\> 00:04:00.000 i already did the math for you it's 13
churn all right so now we take our price all right which is a thousand
dollars per client per month we divided by that 13 churn and we get 7
700 bucks all right roughly so now i know that seventy seven hundred
dollars is going to be the ltv per customer all right which means that
this business is going to cap out at 770k per month all right which is
about 9 million bucks a year now they were currently doing about 400k
now the thing is there's a lot of business and they're growing really
rapidly right it makes sense because they were because they had this
kind of sales velocity so with this kind of sales velocity they're going
to keep growing pretty quickly and then it's going to become an
asymptote which looks like this all right so an asymptote is you have a
hypothetical max and it and it approaches it but never gets there all
right so the asymptote here will be 770k the thing is is that the growth
rate would slow down because churn is going to start eating a bigger and

5 00:04:00.000 --\> 00:05:00.000 bigger and bigger percentage of the new
business that is coming in we know the current clients we knew the new
sales we know the current revenue right we know the hypothetical max
which for me helps me analyze the potential opportunity of this business
right we know the churn now which is 13 percent we know the lifetime
value of each customer now which is 7 700 and i asked them what kind of
margins are we running on this and they were running over 90 gross
margins all right and the easy way to do that is how much does it cost
to to fulfill a customer so for them for that thousand dollar month
customer it cost them less than a hundred dollars uh to fulfill on all
right so it was very very very low cost business which means all you do
is you multiply this by 0.9 and then you get let's see here let's see if
i can do my own math really quickly all right so now you get roughly
let's say 7 000 okay so the lifetime gross profit per customer is seven
thousand dollars which means as long as we're spending less

6 00:05:00.000 --\> 00:06:00.000 than seven thousand dollars to acquire
customer we are going to be a profitable business right for the most
part when we had this little discussion all right let's go back to our
little drawing we know that they're going to cap right at 70 700 k right
whatever i'm saying here right so if we want to grow this business we
either have to increase this one or we have to increase this one that's
it you can only grow a business by getting more customers or making them
worth more period that's all we have to do and within this particular
business i saw the opportunity here because i saw 13 churn right because
check out how this goes if we can just cut the churn to let's say three
percent ah let's do some cool math you want to see something really
quick sure alex i want to see all right fine i'll show you so if we
change this to just three percent churn all right the new ltv becomes 33
000 per customer now this business all of a sudden without changing
anything else becomes a three point three million dollar per month
business that will become the new hypothetical

7 00:06:00.000 --\> 00:07:00.000 hypothetical cap and almost all of that
would be margin ah much more interesting right what most people do is
they say hey i want to take this thing and see how we can get it to uh
you know a thousand right which would be you know awesome because then
that would get us to 7.7 million per month but which of these do you
think is easier to do 10xing the acquisition or simply dropping your
turn from 13 to 3 percent and there's lots of ways to drop churn and i
had a different video or i said how i cracked netflix recurring revenue
model there's eight c's to d to increase your stick or decrease your
churn whatever way you want to say it that we'd be going through to
figure out how we can cut churn from 13 to 3 percent and fyi for a
company to have enterprise value most private equity firms want to see
80 yearly retention meaning you keep you keep 80 of your clients per
year so if you start at a thousand beginning of the year you have 800 at
the end of the year all right now if anyone wants to venture a guess at
what 13 your monthly churn looks like you're probably keeping less than
20 of your customers by the end of the year all right and so for them
they don't

8 00:07:00.000 --\> 00:08:00.000 think that's an enterprise that's very
valuable because what they're looking at just in case i'll give you guys
a little nugget here all right there's three main variables that they're
going to be looking at any kind of any kind of potential buyer which is
what's the growth number one number two is how likely stickiness which
is like how likely is the the business gonna be here and then what's the
profit right so you could pretty much multiply these things together
which is if i have a super fast growth company all of the revenue is
super sticky and we're very profitable and this is going to be a very
very very valuable business if i have a a business that uh is mediumly
growing right it is not sticky and i have low profit then this is going
to be a low value business and so the objective for us at
acquisition.com is how do we take one of these guys right one of these
businesses and turn them into one of these businesses and so it's really
looking at these fundamental metrics to figure out where the weak points
in the business model exist all right so right now if you're a business
owner and you don't know what your hypothetical max is with your current

9 00:08:00.000 --\> 00:09:00.000 model and your current numbers you are
fooling yourself you don't know where you're going to cap out which
means you don't know where your weak points are all right and so right
now everyone should be able to do this math within their own business
without any kind of complex recording without any kind of you know excel
sheets that are getting sent from finance all you need to do is you got
to know how many new customers you're getting which is this guy how many
new sales you're getting how many current clients you have where your
current revenue is right what your prices are you should know all that
stuff and as long as you can know how many people are canceling every
month then you can calculate the rest of this entire equation for
yourself and figure out how you can de-bottleneck the growth of your
business because i'm a big believer in the theory of constraints which
is a business will grow up to its nearest constraint and so all i try
and do is simply remove the constraints of the business to allow it to
grow right i see businesses organic beings they want to grow and they're
simply being constrained by something and our goal is to find what the
biggest

10 00:09:00.000 --\> 00:10:00.000 constraint is and remove it most
people try and do lots of things i believe that the smartest people in
the world try and find how to do the fewest things that get them the
most returns and removing the biggest constraint is the biggest one of
those anywho my friends this is alex ramose reporting in from
acquisition.com we're doing 85 million a year in our portfolio revenue
and i have absolutely nothing to sell you mosey nation keep being
awesome if you enjoyed this and you're new to the channel hit subscribe
if you liked it if you didn't like it i love you either way keep being
awesome i'll see you guys in the next vid bye
