Active Business to Passive Income Ep 361

Summary Notes


In this insightful discussion, Alex shares his personal journey and strategies for transforming an active business into a passive income stream. He emphasizes the importance of timing and the pitfalls of stepping back from a CEO role prematurely. Alex illustrates his point with his own experience of reducing his involvement in Gym Launch from a full-time commitment that earned $17 million in profit to just 90 minutes a week, yielding $8 million. By doing so, he significantly increased his dollars per hour and the enterprise's value. He advises entrepreneurs to arbitrage their time, delegate low-value tasks, and focus on higher-value activities to grow their businesses. Alex also highlights the distinction between getting paid for what you do versus earning returns on what you own, advocating for the development of assets that can be sold and stressing the increased net worth that comes with a business that can operate independently of its owner.

Summary Notes

Entrepreneurial Freedom and Passive Income

  • The primary goal for many entrepreneurs is to achieve freedom by generating passive income.
  • Passive income allows entrepreneurs not to work or have the option not to work while still having money flow in.
  • The speaker emphasizes that any business can be transitioned from active to passive income generation.
  • Entrepreneurs often face the temptation to become more involved in passive ventures to increase returns.
  • The key to maintaining freedom is to focus on time management and ensure that your time is not entirely consumed by the business.

"So the goal that most of our entrepreneurs have is to have freedom, right? So we want to not work or not have to work and have money coming towards us."

This quote highlights the ultimate aim of entrepreneurs seeking freedom through passive income, which is the central theme of the discussion.

Transitioning from Entrepreneur to Investor

  • Entrepreneurs transitioning to investors may struggle with the desire to actively improve their investments for better returns.
  • The speaker suggests that managing the balance between active and passive engagement is crucial.
  • By chasing time, or being more time-efficient, entrepreneurs can reclaim their time while still generating income.

"And one of the difficulties for entrepreneurs when you switch from entrepreneur to investor is that you want to take your passive things and make them more active in order to increase your returns."

This quote underscores the challenge entrepreneurs face when they shift their focus from active business management to passive investment strategies.

Case Study: Gym Launch's Profit Evolution

  • The speaker, Alex, provides a personal example with his business, Gym Launch.
  • In 2018, Gym Launch made $17 million in profit, but Alex was deeply involved in every aspect of the business.
  • In contrast, the business is now projected to make $8 million in profit with minimal involvement from Alex, only about 90 minutes a week.
  • Despite lower profits, Alex's dollars per hour have increased, and he has more time for other activities.

"So gym launch two years ago, I think, made 17 million... And this year we'll probably do 8 million ish in profits... Now, the business basically generates half the profit, but it involves me for about 90 minutes a week."

This quote demonstrates the trade-off between profit and personal involvement, illustrating how a business can still be profitable with less direct engagement from the owner.

The Right Time to Outsource

  • Entrepreneurs often consider outsourcing when their business reaches a certain level of success.
  • Alex receives messages from entrepreneurs making $1 million to $3 million, contemplating outsourcing.
  • He believes that the decision to outsource should be based on achieving desired wealth and the ability to prioritize other life aspects, such as family and personal time.

"I'll get messages from them and they're like, dude, I think I'm ready to outsource my business. And I'm like, but why? I don't think you've gotten to the, I mean, maybe somebody who's at a zillion says to me, why are you doing that now? But I think for me, my answer would be like, I've achieved the wealth that I want."

This quote reflects the speaker's perspective on when it is appropriate to outsource aspects of a business, suggesting it should align with personal wealth goals and the desire for a better work-life balance.

Defining New Metrics for Success

  • After achieving financial goals, entrepreneurs may seek new metrics for success, such as quality time with loved ones and personal hobbies.
  • Alex measures his success by the time he can spend with his wife, in the gym, and meeting new people.
  • He also values the opportunity to engage in activities like making videos, which he could not do while actively growing his business.

"And now it's really using a different metric for success, which is like, how much time can I spend with my wife? My wife, how much time can I spend whenever I want in the gym, working out, eating the stuff I want to eat, et cetera."

This quote conveys the shift in Alex's definition of success from purely financial to a more holistic view that includes personal happiness and life satisfaction.

Transitioning from CEO to Owner

  • Emphasize the importance of transitioning from active involvement to passive income generation.
  • Discusses the value of a business not tied to a personality brand.
  • Highlights the need for a company to function independently with a management team.
  • The goal is to transform a business into an enterprise that consistently provides value to customers without the founder's direct involvement.

"But what I want to do is give you the best model for how to do it when it's right. Because ultimately, if you can turn your active income into passive income..."

The quote emphasizes the ideal timing and method for transitioning from being a CEO actively involved in the business to an owner who earns passively.

"Gym launch as an enterprise is far more valuable... because there's a couple there are far more valuable now than they were when it made $17 million in profit."

This quote illustrates the increased value of a business when it operates independently of the founder's personal brand and involvement.

Entrepreneurial Growth and Time Arbitrage

  • Describes the entrepreneurial process of delegating low-value tasks to reclaim time.
  • Advocates for using reclaimed time to perform higher-value activities to grow the business.
  • Entrepreneurship is framed as a constant cycle of trading time for more valuable opportunities.
  • Stresses the importance of continually upgrading one's skill set to match the value of the time reclaimed.

"If you can pay someone $10 an hour or $15 an hour to do 10 hours a week of your work, then you get 10 hours back, and then you can put higher value skills in those 10 hours and then make more money."

This quote explains the concept of time arbitrage in entrepreneurship, where delegating tasks allows the entrepreneur to focus on higher-value work.

"And that's, I think, one of the bigger issues that I see a lot too, is that people will outsource their time and then not fill their time back up with higher value skills."

The quote highlights a common pitfall where entrepreneurs fail to use their reclaimed time effectively to improve their business or skill set.

Mental Framework for Business Evolution

  • Encourages entrepreneurs to reflect on their business's evolution over time.
  • Emphasizes the importance of recognizing progress and planning for future growth.
  • Suggests that looking back at past roles can help in strategizing for future delegation and growth.
  • Mentions the possibility of accelerating business growth by planning to delegate current and future tasks.

"Imagine, let's say you look back at what you were doing a year ago and it probably should look different than what you're doing today, right?"

This quote prompts entrepreneurs to consider the changes in their roles and responsibilities over time as a measure of growth and evolution.

"If you can actually jump two steps forward, then your business could be 100% growing at the same pace it is now with somebody doing both of these things that you were doing..."

The quote suggests a strategic approach to growth by planning to delegate not only current tasks but also anticipating and preparing for future responsibilities that can be handed off.

Growth Through Word of Mouth

  • Alex emphasizes the importance of word-of-mouth for the growth of his podcast.
  • He does not use traditional advertising methods such as ads, sponsorships, or sales.
  • Alex requests listeners to share the podcast in the same way they discovered it.
  • Sharing the podcast is seen as a way to generate good karma for entrepreneurs.

"The only way this grows is through word of mouth."

This quote highlights that the podcast's primary method of audience growth is through listeners sharing it with others, which does not involve paid advertising.

"My only ask is that you continue to pay it forward to whoever showed you or however you found out about this podcast, that you do the exact same thing."

Alex is asking his listeners to share the podcast, continuing the cycle of discovery that brought them to it, as a form of support and community building.

The Challenge of Selling Personality Brands

  • The difficulty in selling businesses centered around a personality is discussed.
  • Alex notes that these businesses often rely heavily on their owner's direct involvement.
  • The issue of perceived value versus actual value in a business is raised.

"One of the number one issues that people have is like, you can't sell personality brands."

Alex points out a common problem for entrepreneurs, which is the challenge in selling businesses that are closely tied to their owner's personal brand.

"You can't sell their own businesses because they're so integrally involved in them."

This quote underscores the difficulty in selling businesses that are dependent on their owners for their operation and success.

Business Valuation and Profitability

  • Alex discusses the misconception of business valuation based on net profit without considering the cost of replacing the owner's role.
  • He explains that the value of a business is halved if the cost of hiring executives to replace the owner's tasks equals the net profit.
  • The importance of distinguishing between what the business generates and what the owner contributes is emphasized.

"If it would cost a million and a half to get all of the leadership and executives, in order to do all the stuff that you're doing... then your business is actually only making a million or a million and a half in profit."

Alex illustrates how the actual profitability of a business can be overestimated if one does not account for the costs of hiring leadership to replace the owner's functions.

Transitioning from Active to Passive Business Ownership

  • Alex advises on how to turn an actively managed business into a passive income source.
  • He suggests delegating current responsibilities and hiring someone else to handle future tasks.
  • This strategy allows the owner to step back and gain a broader perspective of the business.

"So the idea is what we want to do is take two steps forward from where we're at right now, not one."

Alex is advocating for a strategic approach to business management that involves forward-thinking and effective delegation to progress beyond the current state of the business.

"And now you're owning the business while this person now does the thing that you were doing before."

This quote describes the transition from being actively involved in daily operations to a more passive ownership role where others handle those tasks.

"And then what's crazy about this is that you can actually see the weaknesses of your own business far better when you're outside of it, looking in."

Alex explains that stepping back from active management can provide clarity and insight into the business's weaknesses and overall market position.

"And then you really become the chairman of the board, and then you're really meeting with the CEO, and you're talking to the CEO about their direct reports, how they can improve as a leader and what they need to do."

This quote depicts the ultimate goal of becoming a chairman who oversees the business with a strategic view, guiding the CEO and contributing to leadership development.

Vision and Consistency in Business Leadership

  • Leadership involves casting a vision for the company.
  • A company's vision is generally stable and doesn't change often.
  • The key is to make smart decisions about the company's direction and execute consistently to achieve the vision.

And the thing is, the vision doesn't change that frequently. And so you need to be smart about why you're choosing to go in the direction you are. But once you've made the decision, there's not a lot of change that has to happen.

This quote emphasizes the importance of a stable vision in business and the need for thoughtful decision-making in setting the company's direction. Once the direction is set, the focus should be on consistent execution rather than frequent changes.

Transition from Business Running to Business Ownership

  • Transitioning too soon from running a business to owning it is a common mistake.
  • Understanding the difference between getting paid for work and earning returns on ownership helps in separating personal value from business ownership.
  • Skills contribute to personal value, while ownership contributes to net worth.

If you want to go from business running to business ownership, one, it too soon, and this is probably the number one mistake that I see people make, is that they do it too soon.

This quote warns about the risk of transitioning from an active role in business to a more passive ownership role prematurely, which can lead to challenges in maintaining business success.

Financial Strategy for Business Owners

  • Distinguishing between income from labor and returns from ownership is crucial for business owners.
  • The goal is to have someone else perform the income-generating work while retaining ownership that generates returns.
  • Hiring someone may lead to a temporary decrease in income but can increase the value of the business and personal net worth.

So we want to put someone in place to do the things that we're getting paid for and then continue to keep the things that we're getting returns on.

The quote outlines a strategy for business owners to increase their net worth by focusing on ownership returns rather than personal labor income, suggesting the hiring of others to handle the operational tasks.

Increasing Business Wealth Without Personal Involvement

  • Once operational tasks are delegated, the focus shifts to increasing revenue without personal involvement.
  • Asking better questions about revenue generation without direct involvement leads to better answers and strategies.
  • The ultimate goal is to grow business wealth while maintaining personal freedom.

How can I increase the revenue that I'm making here without me being involved? Because it's all about the constraints that we can put on ourselves. So if I can increase the revenue without me doing anything, how would I do that?

This quote discusses the concept of increasing business revenue in ways that do not require the owner's direct involvement, emphasizing the importance of strategic thinking and the creation of systems that allow for growth without personal time investment.

Conclusion and Engagement with the Audience

  • The speaker hopes the information provided is valuable and encourages subscribing and engagement with future content.
  • There is an openness to receiving both positive and negative feedback from the audience.

And so anyways, hope this is valuable for you. Hit subscribe if it was, check out the next video that comes up because I'm sure it's sweet. And if you hated this, then I would ask that you can also tell me that you hated it.

The quote concludes the discussion with a call to action for the audience to engage with the content by subscribing or providing feedback, indicating a desire for interaction and community building.

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