https://www.youtube.com/watch?v=al\_WXFDbN8I

1 00:00:00.000 --\> 00:01:00.000 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

2 00:01:00.000 --\> 00:02:00.000 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

3 00:02:00.000 --\> 00:03:00.000 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

4 00:03:00.000 --\> 00:04:00.000 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

5 00:04:00.000 --\> 00:05:00.000 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

6 00:05:00.000 --\> 00:06:00.000 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

7 00:06:00.000 --\> 00:07:00.000 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

8 00:07:00.000 --\> 00:08:00.000 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

9 00:08:00.000 --\> 00:09:00.000 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

10 00:09:00.000 --\> 00:10:00.000 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

11 00:10:00.000 --\> 00:11:00.000 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

12 00:11:00.000 --\> 00:12:00.000 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

13 00:12:00.000 --\> 00:13:00.000 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

14 00:13:00.000 --\> 00:14:00.000 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

15 00:14:00.000 --\> 00:15:00.000 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

16 00:15:00.000 --\> 00:16:00.000 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

17 00:16:00.000 --\> 00:17:00.000 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

18 00:17:00.000 --\> 00:18:00.000 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

19 00:18:00.000 --\> 00:19:00.000 all right so it's for you guys so i
hope this found valuable and keeping awesome i'll catch you guys bye
