Acquisition and Creating a Licensable Model (on Anik Singal) Pt. 1 Sept. '22 Ep 504

In an episode of "The Fighting Entrepreneur," host Anik Singal welcomes Alex Hermosi, a successful entrepreneur known for selling his companies and becoming a social media sensation. They discuss Hermosi's vision of building world-class companies by sharing best practices and focusing on buying and building businesses. Hermosi emphasizes the importance of creating companies with recurring revenue models and removing founder dependency to increase enterprise value. He shares insights from his experience with gym launch, detailing how they transitioned from founder-led sales to a licensable, systemized model that could be easily replicated across gyms, leading to a successful exit. Hermosi also highlights his current strategy with acquisition.com, aiming for a portfolio with significant gross revenue and potential high EBITDA exits, without the pressure of frequent acquisitions.

• Information is extremely valuable just before it's acquired but loses value quickly afterwards.
• The podcast focuses on customer acquisition, increasing customer value, retention, and learning from failures.

"The difficulty with information is it's really valuable the day before you get it, and it's not as valuable the day after you get it."

This quote emphasizes the transient nature of information's value, highlighting the importance of timing in the acquisition of knowledge, particularly in business contexts.

• Alex Hermosi is welcomed to the podcast after a delay due to the host having a baby.
• The host acknowledges Alex's significant achievements in business and expresses eagerness to discuss Alex's plans and strategies.

"And here he is, Mr. Alex Hermosi himself. Alex, what is going on? Welcome to the fighting entrepreneur."

The host introduces Alex Hermosi, setting the stage for a discussion on his business acumen and future goals.

• Alex aims to document and share best practices for building world-class companies.
• He focuses on buying and building businesses, leveraging his expertise in the business services and education sectors.
• The mission is to create a holding company that can scale companies quickly within a specific buy box.

"The big vision at this point is to document and share the best practices of building world class companies."

Alex Hermosi outlines his overarching goal of spreading knowledge on how to build successful companies.

• Alex's strategy involves buying assets with the capital from business exits.
• He has a competitive advantage in traditional business and education sectors.
• Social media is used to provide value to a broad audience without direct selling.
• The target audience for his company's services are businesses with revenues ranging from $3 million to $17 million.

"And so we wanted to build a business that builds businesses because after having the three exits that we had last year, it was more around like, okay, now that we've kind of done that, understand the process, et cetera, it's much more about buying and building now."

Alex explains his focus on leveraging past successes to buy and build businesses, using his expertise to grow these ventures.

• Alex's immediate goal is to get Layla on the Forbes list for women, requiring a net worth over $250 million.
• A long-term goal is to achieve a billion dollars in gross portfolio revenue.
• The ultimate personal goal is to be listed on the Forbes list for men, which has higher financial thresholds.

"The first one would be to get Layla on the Forbes list for women, which is she'd have to have a net worth over 250,000,000."

Alex shares a specific financial milestone he aims to reach for Layla, demonstrating a clear set of goals for success.

• Alex and his team are not public about their current net worth.
• Acquisition.com currently has 11 companies.
• There is no set goal for the number of acquisitions; the focus is on gross portfolio revenue.
• Growth is prioritized over the quantity of acquisitions, with an emphasis on selecting the right companies.

"There isn't a goal. So that's been something we're pretty deliberate about, because we didn't want to try and force acquisitions."

Alex discusses the deliberate strategy of not setting acquisition targets to avoid pressuring deals, focusing instead on organic growth and strategic choices.

• The average company in the portfolio generates $17 million in top-line revenue.
• The largest company in the portfolio made $11 million in the last month.
• One of the companies grew from $20 million per year to $11 million per month after acquisition.

"No, our average, our average company. Big difference. Our average portfolio company. Yeah. No, our largest company did 11 million last month."

This quote highlights the success of the portfolio companies under Alex's strategy, with significant monthly revenues showcasing effective growth post-acquisition.

• Alex Hermosi's goal is to grow the portfolio revenue of his investments.
• Growth can be achieved by expanding existing companies or acquiring new ones.
• This goal aligns with the interests of both the investor and the invested companies.

So your goal is really to grow the portfolio revenue, which I like that as a goal.

The quote highlights the shared objective of increasing the value of the investment portfolio, which benefits both the investor and the companies involved.

• Alex Hermosi admits to facing difficulties in successfully building technology companies.
• Despite hiring capable individuals, he has not found success in this domain.
• He has lost a significant amount of money in his attempts.
• Alex considers that having a passionate technical co-founder might improve his chances of success.
• The allure of tech companies comes from the high valuations and recurring revenue models in SaaS businesses.

I have tried to build technology now multiple times... I've just lost so much money.

This quote conveys the speaker's frustration and financial losses incurred while attempting to build technology companies, despite multiple efforts and substantial investment.

• Alex Hermosi focuses on building simple, traditional information businesses.
• He is open to e-learning businesses due to their service-like structure.
• His portfolio includes various business types, including brick-and-mortar chains and professional services.
• Information businesses are seen as service businesses with the added benefit of a learning portal.
• The value of a business is tied to the predictability and potential growth of future revenue.
• Information companies often rely heavily on the founder and have a transactional revenue model, which can lower their value.
• Recurring revenue models attached to information can increase the enterprise value.
• The goal is to create businesses that are transferable, likely to grow, and do not rely on the founder.

Information as a service is the way that I kind of see it... service businesses can be sold for 10-15 times EBITDA without an issue.

Alex Hermosi explains his view of information businesses as service businesses and the potential for high valuation based on EBITDA multiples, emphasizing the importance of recurring revenue and transferability.

• Alex Hermosi's investment strategy includes the potential for exit at a high EBITDA multiple.
• He is currently in the process of selling one of the portfolio companies.
• The founder had a clear exit number in mind, and an offer from private equity met that expectation.
• Alex and his team are minority stakeholders and support the founder's decision to exit.
• Their typical stake in a company ranges from 20% to 30%.
• Investment can be through direct capital or exchange of services for equity.
• The preferred companies for investment are those with high cash flow and low capital expenditure.

Yeah, no, we're actually in diligence right now with an offer for one of our portfolio companies we took on two years ago.

This quote reveals that Alex Hermosi is actively engaged in the process of selling one of the companies in his portfolio, indicating that exit strategies are a part of his overall investment approach.

• Alex Hermosi's investment approach varies depending on the deal.
• Investments are made in companies that are either cash-rich or have a clear need for capital to fuel growth.
• The focus is on businesses that do not require significant capital expenditure for expansion.

We're typically in the 20% to 30% range... We've written checks, we've not written checks. It depends on the deal.

This quote indicates the flexible nature of Alex Hermosi's investment strategy, which can involve direct financial investment or other forms of value exchange, tailored to the specific needs and circumstances of each deal.

• Alex Hermosi does not work with ecommerce businesses due to their capital-intensive nature.
• For a business to be an attractive acquisition target, it needs to transition from founder-centric to an enterprise company.
• This transition typically takes around two years to "wash the fingerprints off" the founder's direct involvement.
• Key areas to remove the founder from include advertising and fulfillment, especially in information businesses.

"Like we don't work with ecommerce, particularly for that reason, because they tend to just be big. Capital sucks."

This quote explains why Alex Hermosi avoids ecommerce businesses as potential acquisition targets—they require significant capital investment which is not ideal for his business model.

"The transition from founder face forward to enterprise company is one that takes two years ish to really fully kind of wash the fingerprints off."

This quote highlights the typical timeframe and process required to make a company less dependent on its founder, which is critical for making it an attractive acquisition target.

• To become investable, a company must reduce its reliance on the founder in ads and content delivery, such as calls, events, workshops, or webinars.
• Alex Hermosi's companies, gym launch and Prestige Labs, were sold as a bundle after removing the founders from day-to-day operations and direct involvement.
• They had minimal direct reports and only attended quarterly meetings, indicating a high level of operational independence from the founders.
• A two-year preparation process involved addressing issues such as Keyman risk, acquisition channel diversity, churn rates, and demonstrating growth potential in adjacent spaces.
• Actions taken included hiring a leadership team, building a sales team, improving customer experience, and developing a more expensive enterprise product suite.

"The easiest one to remove is from the ads. And then the second place that they have to get removed is from...if there's calls or there's events or there's workshops or there's webinars, things like that, we have to remove them from there."

This quote details the first steps in making a company investable by reducing the founder's visibility and involvement in advertising and customer-facing roles.

"We went out to market, kind of preliminarily, talked to different bankers, et cetera. And we're like, what do we need to do to sell this? And they basically just gave us the checklist of all the things that were wrong."

This quote describes the process of seeking professional advice to identify what changes were necessary to make a company investable, emphasizing the importance of external expertise in preparing for an acquisition.

• Alex Hermosi provides a hypothetical checklist for a personal development company seeking investment or acquisition.
• The checklist would include strategic and tactical steps to transform a one-time transactional business into a recurring revenue model similar to gym launch.
• The focus would be on creating a business model that could be exited without the need for an earn-out, seller financing, or a consult-back period.

"So one big strategy, things, and then kind of like more tactical."

This quote introduces the concept of having both strategic and tactical elements in the checklist for making a company investable, though the specific details of the checklist are not provided in the transcript.

• The model can be replicated across various service-based businesses such as physical therapy, hairstyling, real estate, and gyms.
• The key is to identify the recurring needs of a business and provide additional services on a consumable basis.
• Creating a recurring revenue model (MRR) is essential for business reliability and growth.

once you basically figure out the model, you can copy and paste a tremendously personalized solution to many people, which then gives you a very valuable thing that doesn't cost much.

This quote emphasizes the scalability of a successful business model that can be tailored to different service sectors, providing high value at low cost.

• Information is highly valuable before it's known, but less so after.
• Consumable elements like accountability and community maintain their value over time.
• Distinguishing between consumable and one-time aspects of a service allows for the creation of a sustainable revenue stream.

the difficulty with information is it's really valuable the day before you get it, and it's not as valuable the day after you get it. But there are other things that are consumable.

This quote highlights the transient value of information and the importance of focusing on elements that provide ongoing value to customers.

• In personal development, solutions must be lower cost due to the target market's limited revenue.
• Recurring needs might include tax services, website management tools, and other essential services for early-stage entrepreneurs.
• The goal is to identify small, recurring services that can collectively form a stable revenue base.

in the personal development space, it would have to be probably something that was much lower cost... so it's going to be probably lots of little doodads and widgets that would create that recurring base.

This quote discusses the strategy for creating recurring revenue in the personal development sector, focusing on affordable, essential services for entrepreneurs.

• The model involves picking a successful local business, showing them how to build and scale, and then licensing a model they can use.
• Licensing allows businesses to pay for a proven system, generating significant annual revenue for the model creator.

it's almost like, how can we do gym launch? But for like... pizza restaurants, right? Or like you said, like hair salons or spas or any.

This quote illustrates the concept of replicating the Gym Launch model for various types of businesses, emphasizing the adaptability of the model to different industries.

• A specific way of making money is preferable to broad 'make money online' strategies.
• Providing specific solutions to anticipated needs creates more value and predictable revenue streams.
• Customer success is crucial to back-end development and aligns the company's interests with the customer's success.

if it's like, hey, here's how you start a rank and rent website business, then it's a very specific opportunity so we can create specific solutions to them that we predict we know they're going to need.

The quote underscores the importance of offering tailored solutions to businesses with specific needs, which enables the provider to predict and fulfill future requirements, enhancing customer success and revenue.

• Gym Launch transitioned from a service-based model to a licensing model, which allowed for scalability.
• The key product offerings included a front-end acquisition system and a back-end program for recurring needs.
• The business model was simplified into two products: front-end for client acquisition and back-end for long-term services.

Gym launch was a product that basically sold a turnkey acquisition system... The back end program is like, okay, well, then what would you sell them on a recurring basis?

This quote describes the two main products of Gym Launch, highlighting the turnkey acquisition system as the front-end product and the recurring services as the back-end product, which together formed the basis of their licensing model.