https://www.youtube.com/watch?v=EPEjYEihZ1s

1 00:00:00.000 --\> 00:01:00.000 what's going everyone in this video i'm
going to show you the number one mistake um that i made and that i see a
lot of entrepreneurs making in terms of how to make money from more
money from their business so the number one metric that i track for our
businesses is this one and you may not even have heard this one but i
think it is the most important and warren buffett agrees with me all
right it's net free cash flow all right say it and then imprint it into
your minds all right and obviously this depends on what type of business
you're running but what net free cash flow is is the amount of money
that an owner of a business can take out of the business after the
business reinvests in staying ahead of the competition and maintaining
its competitive advantage right and so the problem with the vast
majority of businesses and or business owners is that what they do is at
some level i mean the first problem is that many of them don't make any
profit right so that's probably like problem number one and when you say
i'm reinvesting the business and the reality is that you're not making a

2 00:01:00.000 --\> 00:02:00.000 profit you need to be real with
yourself that's probably what's happening category two is the type of
businesses that are making a profit but then they take that profit and
they reinvest it back into the business now i'm not saying that this is
necessarily a bad idea i'm saying that for me in my entrepreneurial
experience i like to take money out of businesses i like to make money
while i'm growing businesses and this comes hard learned because in my
first five years when i started my businesses at the time i was starting
gyms i had an online fitness coaching business too whenever i would make
money from my gym i would open up another location which sucked right um
i mean it sounds great and but i was asset rich and cash poor all right
and that made a pretty problem that you were suffering from too i had
equipment i had leases i had flooring i had signage i had lobbies i had
front desks i had glass walls i had all of the things except for money
in my bank account and what ended

3 00:02:00.000 --\> 00:03:00.000 up happening is i actually at after
after three four five whatever years it was um when i sold those
companies i ended up getting out of them relatively quickly and i took
all the money i got from those sales which i would consider like short
sales they were kind of garage sales i pretty much sold them as assets
rather than as businesses because i wanted to do this new thing which
was gym launch um but what ended up happening though is i took all that
money and i went into a new venture so gym launch happened after this
but there was a little period of time there where i uh did something new
with a partner that i thought was gonna be partnered with and i'll just
say in short terms it didn't work out and so what ended up happening is
i didn't get a ton of money for the gyms that i sold and then all that
money disappeared and at that moment i promised myself i'm never making
the mistake this mistake again because what ended up happening is that
after all those years and all that you know all that time and the money
that i had made all of it was gone i was like i've made millions at that
point dollars in revenue

4 00:03:00.000 --\> 00:04:00.000 right and i had i had nothing you know
what i mean and so i see this a lot and the thing is is that a lot of us
entrepreneurs have this dream that someday we're going to sell the
reality is the chips are stacked against you all right 99 of businesses
don't get sold ever right and so this idea that we're going to have this
mythical exit someday right for most businesses isn't true and of the of
the businesses that it is true many of those exits aren't as sexy as
they may sound like right like i technically exited those businesses but
it wasn't like you know i wasn't set for life right you know what i mean
i think it was like multiple it was like 200 grand 300 it wasn't a lot
of money um that i made from those i think i sold all in all uh covering
partnerships and all that stuff i think i all in got 200 grand i think
for selling six locations like it was just not a lot right and if you've
been doing this for years then that exit if you've been like i've been
doing this at that time i think for four or five years like that's like
40 grand a year

5 00:04:00.000 --\> 00:05:00.000 right if i had been just ripping cash
out of the business and stacking it the whole time i would have had a
lot more money than that at that point right and so this is a mistake
that i see a lot of entrepreneurs make is that they're not focused on
this net free cash flow right they're not thinking how can i take money
out of this business every single year how can this business pump out
profits while i still continue to grow it and some of that also comes
from the expectation of how quickly i want to grow so a lot of times we
want to grow really fast for no reason only the arbitrary reasons that
we set for ourselves and the expectations of others that we project
right but there's really no reason to do it but we end up just growing
irresponsibly and then in so doing do it wastefully and expose ourselves
to higher risk and more mistakes and in the process also lose the one
thing that we get along the way if you do it the right way which is net
free cash flow as in like getting paid to grow your business i remember
i sat down with some of my employees um probably eight years ago i was
actually at the gyms and i think they had said that they wanted to get a
raise or something like

6 00:05:00.000 --\> 00:06:00.000 i can't remember what it was and i was
like do you understand the difference between like imagine working for
an entire month right working your ass off every hour of the day right
and then at the end of the month not only did i not pay you i just
cleaned out your savings for working that hard and they're like yeah
that would suck and i'm like that happens to me all the time right and
so that's the thing is we take on so much risk and you start to get used
to the risk because you've just been doing it for such a long time but
you have to reward yourself for the risk that you were taking all right
now um the reason that i like net free cash flow is that it focuses the
entire company on not just making a profit but making a profit in excess
of what is required to continue to run and grow the business all right
and so um this is the number one stat that i look at this is what i have
my financing report on for all of our entities because this is the real
real this is owner earnings this is what warren buffett and charlie
munger calculate with the companies that

7 00:06:00.000 --\> 00:07:00.000 they want to buy because they're like
we hate companies where we buy them and then we take all the profit and
have to reinvest all that money back into the same business right
they're like that sucks that's why they said they don't like
manufacturing and they don't like a lot of types of companies where you
have to have all these capital expenses meaning money expenses that you
buy big stuff that you you know depreciate over time they're like that
sucks right and so um net free cash flow is the stat that i track and if
you're interested at all um i was reading a book recently called uh the
little book that beats the market really good book you can read in one
sitting really fascinating actually and he posits that there are only
two metrics that are really important for tracking for really getting
above average returns all right the first is the p e ratio which is the
price to earnings ratio and if you think about what warren buffett talks
about in terms of buying businesses he says you want to buy good
businesses for cheap prices right so the figuring out whether it's a
cheap price is going to be the price to earnings ratio how much how much
net free cash flow how much how much earnings is this company creating
not

8 00:07:00.000 --\> 00:08:00.000 that those are the same thing but i'm
saying generally right um how much how many what's the earnings of this
company and what's the price for those earnings all right so this is
number one so ideally you want a really low price for really high
earnings now the second thing is uh return on capital and so what that
means is now imagine a company that has i'll give you two scenarios
let's say we've got a company that um you know let's say they make a
million dollars in profit and when they reinvest a million dollars in
profit into their company uh let's say it's opening locations just for
whatever reason right so they open a new location and fro it cost them a
million dollars open location and then that location gets them a hundred
thousand dollars a year in additional earnings all right that's a 10
return on capital right that's what that means now let's take an
alternative scenario let's say that another company um for a million
dollars can open 10 locations and each of those locations can do 100 000
a year right that would be a 100 return on capital and so the beauty of
these two metrics

9 00:08:00.000 --\> 00:09:00.000 is the pe the price to earning ratio
tells you this is a is the price of the business we're buying this is a
cheaper business right the return on capital tells us the quality of the
business that we're buying which is how good is this business a great
business is a business that can take a small amount of money and
generate lots of cash from it right and so by combining these two things
finding the companies that have the lowest p e ratio with the highest
return on capital you can consistently beat the market that was kind of
the premise of the book which actually really interesting they um they
used this algorithm that did these two things and they beat the the s p
500 which is basically i want to say impossible it's it's very difficult
to do for most people and they beat it for i think like 25 years which
is nuts by a big percentage which was crazy the thing is is that the
companies that are usually in this bucket are usually companies that are
going through issues and so you're basically buying mispriced bets right
and half the companies that you buy that that meet these two
qualifications end up tanking but the other half that might have had
some bad press because of something are disproportionately

10 00:09:00.000 --\> 00:10:00.000 discounted in pricing and as a result
in the future they they outperform uh the price that you're paying for
them right and so to to bring the wagon back around here as business
owners net free cash flow is my home base this is what i care about this
is the money that i get to deposit at the end of every month because
tomorrow may never come we may get outlawed our business may be outlawed
there may be there may be some horrendous thing that happens that blows
your business up you may have to move locations and stop everything that
you're doing and you just don't know and so what we are all exposed to
that we discount on a regular basis is something called operational risk
we are all exposed right and so if you're doing this for one year two
year five years solely with the hope that someday you're going to sell
well i just want to break the news to you that you have a 99 to 1 chance
of not actually succeeding doing that and so you might as well take some
money out of out of the business every month so you know you make money
along the way

11 00:10:00.000 --\> 00:11:00.000 and i can promise you having done it
both ways taking money out of the business every month is way more fun
it's also way less stressful all right because this is gonna be the
stuff that allows you to know every month how we're really doing when
you always leave it in the business account you always leave it in there
you just don't have a feeling for it but you should be able to deposit
money in your account this month and be like this is better than last
month or this is worse than last month and you got to feel that not just
the numbers but literally what you put into your account all right and
so i'll give you one easy tactic um that i was working with one of the
one of the companies that i have um an equity interest in um let's let's
imagine you've got a big bucket of money all right this is your bank
account for your business every month you know after a certain amount of
months what your projected fixed costs are going to be all right now
what i asked this entrepreneur to do uh because he wasn't taking profit
out of the business so i was like hey we're going to fix this right now
is you need to come up with a line and you say this is our line this is
our non-negotiable everything over this we take out every

12 00:11:00.000 --\> 00:12:00.000 month all right so everything over a
hundred grand everything over 500 grand we're going to take out of the
business every single month we're going to clear this right all the way
down to the bottom and by doing this you hold yourself accountable to
this level all right and so to wrap this puppy up if you're not taking
profit out of the business i'd highly recommend doing it number one
number two if you're not measuring net free cash flow you absolutely
should because you're losing out on one of the most important metrics
this is what charlie marker looks at this is what warren buffett looks
at this is what i look at not that i'm in the same category as those
guys but once i switched to this in terms of my finance and reporting it
really clarified it for everything just not just for me but also for my
team all right and when you're looking at businesses in general if
you're thinking about reinvesting in the business make sure that the
dollars that you're choosing to reinvest you're getting the best return
on capital you possibly can all right so if you're reinvesting the
business and you think you're going to get 10 back we might as well just
put it in the smp and get that right and not even have to deal with all
the mess

13 00:12:00.000 --\> 00:13:00.000 and that's okay if you make a million
bucks a year you make 500 000 a year and you just put it in the s p
every single year you're gonna be really really wealthy right and that's
okay and so sometimes your wealth doesn't necessarily have to be
generated all entirely from your business or from a sale that you
someday hope to achieve that may not actually happen okay that's all i
got for you so that's my my my moment for the day net free cash flow
track it stack it and make sure that you empty your bank account every
single month and stack the right account which is your personal bank
account lots of love catch you soon bye
