Why Brand is the Biggest Risk in Investing (on Don’t Be Sour) Pt. 1 Feb. ‘23 Ep 540



In this insightful conversation, Alex Hormozi, celebrated for his impressive beard and business acumen, joins the host to discuss the intricacies of business growth, customer acquisition, and the importance of asking the right questions to solve problems. Hormozi shares his journey from owning a chain of gyms to creating a licensing model with over 5000 locations, and eventually selling two-thirds of his company for $46.2 million. Now, he focuses on private investing and running acquisition.com, a portfolio of companies with an annual revenue of about $200 million. He emphasizes the value of content creation to educate and attract potential investment opportunities, while also touching on the nuances of company valuation, the decision to raise funds, and the significance of long-term thinking in business. Hormozi candidly discusses his approach to business, the skepticism surrounding 'free' knowledge sharing, and his mission to provide genuine, actionable insights without the typical trappings of monetization seen in the industry.

Summary Notes

Problem Solving Philosophy

  • Alex Hormozi expresses a fundamental belief that asking the right questions can lead to solving problems.
  • He is confident in the ability to grow businesses profitably through creativity.

"I like trying to solve the problem rather than saying, cool. That's the equation. I have a fundamental belief about the." "Right questions, you can solve the problem. And I just believe that if we're creative enough, we can figure out a way to make it grow profitably."

The quotes highlight Alex's approach to problem-solving and his conviction in the power of creativity to drive profitable business growth.

Alex Hormozi's Introduction

  • Alex Hormozi started with a chain of gyms in Southern California.
  • After selling the gyms, he retained the intellectual property and licensed the model to nearly 5000 locations.
  • He sold two-thirds of his company for $46.2 million to a private equity firm.
  • Hormozi has engaged in private investing due to the cash flow positive nature of his company.
  • He founded acquisition.com, a portfolio of companies with an annual revenue of approximately $200 million.
  • Hormozi creates content to help others grow their businesses with the potential for his investment in them.

"Started with a chain of gyms out of the southern California. I sold those, kept the IP, started licensing the model to just under 5000. Actually, I think we're just over 5000 locations now. Sold two thirds of that company last year and some ancillary companies that went with that at 46.2 million to a private equity firm out of San Francisco. And during that whole period of time, it was a very cash flow positive company. And so we started doing a lot of private investing. And right now, we started acquisition.com, and that portfolio of companies does about $200 million a year." "And I have. And I make a lot of content now just to help other people do it, too, and hopefully grow their businesses big enough that we could invest in them someday."

The quotes provide a succinct summary of Alex Hormozi's business history, his current endeavors, and his motivations for creating educational content for other entrepreneurs.

Perception of Wealth and Net Worth

  • Alex Hormozi discusses how the perception of wealth becomes more complex as one's net worth increases.
  • He identifies several ways people talk about their net worth, often leading to confusion or exaggeration.
  • Hormozi emphasizes the difference between owning assets and having liquid cash.
  • He speaks on the liquidity of assets and the reality of net worth in private vs. public markets.

"When you have a lot, then it's like, well, what's the value of the 28% stake I have in this business that we're not planning on selling and we're investing profits into? Yeah, I don't know. I mean, I could probably sell that to different people for different prices. A lot of assets aren't liquid. And so even when you, it's kind of funny because going through the sale process, you get a big chunk of cash and then after that you then." "Have to allocate the cash." "So when people are like, oh, this guy's worth a billion dollars, it's not like he has a billion dollars in his bank account. He just owns something that is worth a billion dollars, which is very different."

These quotes explain the nuances of wealth and net worth, highlighting the difference between asset value and liquid cash, and how the concept of net worth can be misleading.

The Role and Strategy of Acquisition.com

  • Acquisition.com invests in companies with annual revenues between $3 million and $100 million.
  • The company takes minority stakes and provides hands-on help to grow the businesses.
  • Investments are made either for immediate cash flow returns or to reinvest into the business for future sale.
  • Hormozi emphasizes the value brought by hands-on involvement, which leads to discounted valuations for their investments.

"We are minority investors in companies that are between three and 100 million a year. And so we take minority stakes, typically between 20 and 33% of those businesses. And depending on the business, we're either investing for cash flow for some sort of return, or we're reinvesting cash into the business so that we can eventually sell it later."

The quote outlines the investment strategy of acquisition.com, detailing the type of stakes they take in companies and their approach to investment returns.

Branding and Domain Acquisition

  • Alex Hormozi values speed and opportunity cost over haggling for lower prices, which led to his purchase of the acquisition.com domain for $370,000 without negotiation.
  • He prefers not to endorse companies unless he has significant control or ownership, as endorsements carry the risk of brand damage.

"I could prove it, yeah." "I bought it." "I think it was 370 something." "Just wire it like, I can wire it tomorrow."

These quotes reveal Hormozi's decision-making process in acquiring the acquisition.com domain and his perspective on brand risk management in relation to company endorsements.

Business Outcomes and Investment Goals

  • Hormozi prefers to hold investments indefinitely but will prepare a company for sale if the founder wishes to do so.
  • The process of preparing a company for sale and going to market can take an extensive amount of time, often years.
  • Hormozi does not promote the companies he invests in, as his role is to provide expertise and team support rather than act as a spokesperson.

"So for us, we're two years in to the minority investment. So even in a normal deal cycle, I probably wouldn't sell unless we're just flipping a company, which is not really our model. I would prefer to hold all of them forever."

The quote emphasizes Hormozi's long-term investment philosophy and his approach to managing the businesses within the acquisition.com portfolio.

Control and Brand Association

  • Alex Hormozi emphasizes the importance of maintaining control over one's brand and actions to avoid negative associations.
  • He discusses the risks to the business if it is too dependent on a single individual for sales and value.

"I can control me. And so if I'm going to do it, I want to have as much control as I can."

This quote highlights Alex Hormozi's philosophy on personal responsibility and the desire to have control over one's brand and business decisions.

"It's also a little bit of a risk to the business, because if I'm a huge driver of value to the business in terms of percentage of sales, et cetera, then it does make it more difficult to sell because then the acquirer would have to make a deal with me and a deal with the company."

Alex Hormozi explains the complications that can arise during the sale of a business if it heavily relies on one individual, which can make the acquisition process more complex.

Independence vs. Dependence in Business

  • The goal is to make companies independently valuable rather than dependent on specific individuals.
  • This approach avoids short-term solutions that could harm the company's long-term value.

"So we do this ultimately to make the companies independently more valuable rather than." "Make them dependent on us, which is."

These quotes illustrate the strategic decision to build companies that can operate and grow independently, rather than relying on the owners or key individuals.

Misconceptions in Business Valuations

  • Alex Hormozi addresses common misconceptions about business valuations, such as equating sales with company worth.
  • He explains that a company's value is based on future profits, sustainability, and associated risks.

"They're buying a percentage of future profits."

Alex Hormozi clarifies that an acquisition is fundamentally about purchasing a share of the company's future profits, which determines its value.

"That person gets hit by a bus, the company's dead. Right?"

This quote by Alex Hormozi emphasizes the risk of a business being too reliant on one person, which can lead to a decrease in valuation due to perceived risk.

Unique Mechanisms and Competitive Advantage

  • A company should have diverse sources of acquisition and a loyal customer base.
  • Unique mechanisms, such as a distinctive brand, can provide a competitive advantage and increase a company's value.

"You want to have some sort of unique mechanism, if possible."

Alex Hormozi suggests that having a unique element in a business, whether in product acquisition or branding, can make it more attractive and valuable.

"Brand would be an example of that, which is why Warren Buffett talks about buying big brands."

The quote explains the importance of branding as a unique mechanism that can enhance a company's value, as supported by Warren Buffett's investment strategy.

Factors Influencing Company Valuations

  • Valuations are influenced by variables like the capital environment and the type of buyer (strategic vs. financial).
  • The value of a company can also depend on future synergies with the acquirer and the terms of the deal, including earnouts and transition periods.

"Values of businesses are so murky, right. I want to use amorphous, but they're so variable."

Alex Hormozi describes business valuations as complex and subject to change based on various factors, making them difficult to pin down.

"It's just what someone is willing to pay."

This quote encapsulates the concept that, ultimately, a business's value is determined by the amount a buyer is willing to pay for it.

Raising Capital: Right vs. Wrong Approaches

  • Alex Hormozi discusses the appropriate and inappropriate ways of raising capital, focusing on the importance of sound business economics.
  • He criticizes the practice of using raised funds to artificially lower prices or cover losses, using Uber as an example.

"So I think there's a right way and a wrong way to use to raise money."

Alex Hormozi introduces the topic of raising capital, suggesting that there are strategic and unwise methods to do so, which can impact a business's growth and valuation.

"You get insane valuations."

The quote by Alex Hormozi points out that businesses can achieve high valuations by selling a small percentage to many investors, but this can lead to unrealistic expectations and potentially harm less sophisticated investors.

Innovation Through Constraint

  • Alex Hormozi believes that constraints drive innovation and prefers solving problems creatively rather than raising external funds.
  • He suggests alternative strategies, such as adding fees or services, to improve customer acquisition costs without diluting equity.

"I believe constraint drives innovation."

This quote reflects Alex Hormozi's philosophy that limitations can inspire creative solutions in business, leading to more sustainable growth.

"I have a fundamental belief about the world that if you ask the right questions, you can solve the problem."

Alex Hormozi expresses his conviction that by asking the right questions, businesses can overcome challenges without resorting to raising outside capital.

Acquisition Strategies and Growth Metrics

  • Alex Hormozi discusses acquisition strategies, emphasizing the importance of expanding the business pie for all parties involved.
  • He addresses the misconception that there is a specific revenue target businesses must reach before being acquired.

"Is it worth giving up a third to have a ten times bigger thing? So you are now seven times wealthier than you were at the beginning."

This quote highlights Alex Hormozi's approach to business acquisitions, where he considers the potential growth and mutual benefit for both the acquirer and the acquired company.

"Just build a great company and worry less about how fast you're going to get to 100 million, we'll call it."

Alex Hormozi advises business owners to focus on building a strong company rather than being preoccupied with reaching a specific valuation milestone for acquisition purposes.

Missionaries vs. Mercenaries

  • Missionaries are individuals passionate about the cause they are working on, as opposed to mercenaries who are more focused on monetary gain.
  • Passionate individuals tend to build bigger companies because they are driven by a cause rather than just the end goal.
  • Long-term thinking and having an unlimited time horizon can lead to better decision-making and higher returns in business.
  • Short-term thinking, often seen in public companies due to quarterly earnings pressure, is less preferred for building substantial and sustainable businesses.

"The big thing that we always try and find is missionaries, not mercenaries."

This quote emphasizes the importance of finding individuals who are dedicated to the mission of the business rather than those who are only looking for financial reward.

"Somebody who's passionate about the cause will always build a bigger company because they're doing it for a different reason."

This quote highlights the belief that passion for a cause is a stronger motivator for building a successful business than the desire for financial success alone.

"If you have unlimited time horizon, then there is no such thing as a rush. And you can make the right calls."

This quote suggests that when business founders operate without the pressure of a time limit, they are more likely to make decisions that are beneficial in the long term.

Traditional Business vs. Tech Startups

  • Traditional businesses, excluding tech startups, typically do not attract institutional money such as private equity until they reach a certain scale, often around $10 million in sales.
  • Tech companies, like OpenAI, can raise significant funds without immediate revenue streams due to the potential for high returns.
  • Traditional businesses can often solve their problems by thinking more strategically rather than seeking external funding.

"What point do you get institutional money? So institutional money would be like private equity money and up."

This quote refers to the stage in a business's growth when it becomes attractive to institutional investors, which generally requires a significant amount of sales.

"Most businesses that are what I consider normal businesses that don't have a million x possibility, oftentimes can solve their problems if they just think about it a little bit harder."

This quote suggests that many traditional businesses can overcome challenges through careful thought and strategy rather than relying on external funding.

Founder Readiness for Acquisition

  • Founders should aim for a minimum of $10 million in top-line sales and $1 million in EBITDA before considering institutional investment or acquisition.
  • A business becomes significantly more attractive to potential acquirers when it reaches higher profit margins, such as $5 million in EBITDA.
  • The goal is to build a business to a size that can attract "real money" and command a higher multiple in an acquisition.

"Founder with institutional, usually 10 million in top line sales is minimum, that they're going to really be interested in."

This quote outlines the baseline financial metrics that make a company interesting to institutional investors or acquirers.

"If you got to ten, or if you're at 7 million and you've got one and a half million in profit, it's like, dude, let's just get to 20 and have five."

This quote advises that reaching a higher threshold in sales and profit can make a company much more appealing for acquisition.

Popularity and Verification on Social Media

  • The importance of building a team that can effectively package and promote one's personal brand on social media.
  • Consistent content creation and leveraging media is crucial for growing an online presence.
  • The lack of verification on social media platforms can lead to issues with impersonation and scams.
  • Real-world business success and providing valuable content that yields results for others can lead to organic growth and popularity.

"Help a brother out. No, I actually feel bad about it because there's like 100 zillion fake Hormozi accounts."

This quote expresses concern over the lack of verification leading to fake accounts and potential scams targeting followers.

"The team that's off the side here that you can't see, you got Caleb, got Quinn, got the boys with a Z who really packaged me well and make me look cooler than."

This quote highlights the importance of having a skilled team to manage and enhance one's online presence and personal brand.

Strategy for Internet Popularity

  • The strategy for gaining popularity on the Internet involves starting with a high quantity of content to learn what resonates with the audience and refine one's voice.
  • Over time, the focus shifts to improving the quality of content while still maintaining a good volume.
  • Understanding the audience and alternating between top-of-funnel content and deep content can help build a strong relationship with followers.
  • The ultimate goal is to provide valuable, actionable business advice that leads to real-world results for the audience.

"For anybody who is trying to do this, it's quantity first."

This quote advises that those looking to build an online presence should initially focus on producing a high volume of content to gain feedback and improve.

"So you start getting, you're like, oh, why did that video do well? Oh, is that a topic thing or did I have a good hook?"

This quote suggests that analyzing successful content helps in understanding what works and refining future content for better engagement.

"Then we have deep content that doesn't get the same amount of reach as kind of like the more general content. But then those people get to have, in my opinion, just like a deeper relationship."

This quote explains the strategy of mixing broad-reaching content with more specialized content to build a deeper connection with a specific audience segment.

Perception of Alex Hormozi as a "Fake Guru"

  • Alex Hormozi faces skepticism from some individuals who question his motives for sharing information freely.
  • Some people suspect that there is an ulterior motive behind his low-priced books and free content, assuming it's a strategy to make money.
  • Hormozi clarifies his intentions, stating that he is transparent about his goal to make money but does not rely on most people's money due to other significant income sources.

"I'm super transparent about my InTention."

This quote signifies Hormozi's openness regarding his objective to earn income, suggesting that he does not conceal his business goals from his audience.

"I just don't need most people's money."

Hormozi emphasizes that his financial stability does not depend on the money from the majority of people, implying that his wealth comes from other, more significant investments.

Alex Hormozi's Business Model and Wealth

  • Hormozi has a diversified business portfolio with 16 companies, indicating a substantial income that eclipses what he could earn from selling coaching and courses.
  • He expresses a desire to build a unique brand and live a life different from others in his field.
  • Hormozi's approach to wealth accumulation involves owning valuable assets rather than selling educational courses, aiming to become ultra-wealthy.

"Most of them I could probably, like, my equity stake is probably worth, I. Don'T know, 510 ish million."

Hormozi provides a conservative estimate of his equity stake's worth in his portfolio companies, highlighting the scale of his business interests.

"So I have to own something or stuff that's worth a billion. And so I have to play the game differently."

This quote reveals Hormozi's strategy for wealth accumulation, which focuses on owning valuable assets rather than selling information products.

Hormozi's Philosophy on Providing Value and Building Trust

  • Hormozi believes in giving away valuable information to the marketplace, with the expectation that this will eventually lead to greater returns.
  • His strategy involves proving skeptics wrong by continuously providing value without an immediate expectation of return.
  • Hormozi suggests that by consistently depositing goodwill into the market without immediate monetization, one can convert doubters into loyal supporters.

"But if you can just deposit and deposit and deposit, and people are like, I don't know, when is the other shoe going to drop? And then you just keep proving it wrong. Then that doubter, that person actually ends up becoming your biggest fan."

Hormozi discusses his method of building trust by consistently providing value, which he believes will transform skeptics into dedicated fans over time.

The Role of Alternative Education in the Market

  • Hormozi criticizes the formal education system for failing to adapt and providing outdated education at an inflated price.
  • He observes a shift towards alternative education as a response to the demand for income-generating skills, which traditional education fails to supply.
  • Hormozi predicts the rise of both legitimate and illegitimate players in the alternative education market, emphasizing the need for authenticity and proper expectation setting.

"And the supply of people who could provide those skills in the formal education system is basically nothing."

Hormozi points out the deficiency of the formal education system in supplying the skills needed for income generation, suggesting a gap that alternative education can fill.

"So the expectations that are set is the primary issue that people don't have a problem with formal education and do have a problem with alternative education."

Hormozi identifies the discrepancy in expectations between formal and alternative education as a core issue, where alternative education faces greater scrutiny.

Deception in the Alternative Education Market

  • Hormozi identifies two main problems in the alternative education market: deceit around expectations and legitimacy.
  • He argues that clear and honest communication about what customers can expect and the educator's legitimate qualifications are essential for credibility.
  • Hormozi stresses that exaggeration and false promises are the root of the problem, not the concept of selling knowledge or implementation itself.

"Guru, in my opinion, just comes down to deception."

This quote summarizes Hormozi's perspective that the label of "fake guru" is primarily associated with deceptive practices rather than the act of selling educational content.

"It's what's my legitimacy and what are the expectations that I'm setting for the customers? What promises am I making and can I deliver on them?"

Hormozi emphasizes the importance of establishing credibility and setting realistic expectations for customers in the alternative education market.

Hormozi's Approach to Providing Content and Value

  • Hormozi offers all his content for free on his site without requiring opt-ins, demonstrating his commitment to providing value.
  • He discusses the concept of giving away secrets while selling the implementation, highlighting that personalization and accountability are often what customers are willing to pay for.
  • Hormozi believes in the business model of providing free value upfront and offering paid services for those who seek personalized help or accountability.

"Give away the secrets, sell the implementation."

Hormozi captures his business philosophy in this quote, which suggests that he believes in sharing knowledge freely while monetizing the personalized application of that knowledge.

"You help people out who want it. You help everyone else for free. It's a win win."

This quote encapsulates Hormozi's approach to content and value provision, where he offers assistance to those who request it and provides free resources to others, creating a mutually beneficial situation.

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