How the top 1% make their money

the majority of millionaires are made in real estate the majority of billionaires are made in private equity and the point of this video is to walk you through the moneymaking process that they use to make tons and tons of money for themselves tons and tons of money for their investors and most importantly accelerate value in a business so let's walk through an example that everyone probably understands so if you were to buy a house and you wanted to use this as a real estate investment then you make money on this in two main ways one

is that the value of the house goes up so let's say it's worth one million it becomes worth two million great we had appreciation the other is that you get checks for $1,000 a month from the tenants right but the point is is that you're going to get paid every month for some sort of production from a renter and the house is going go up in value now if you just did your own house then you're just not paying this or you're just paying the bank for your mortgage and what not and you're pretty much

just going to make your money in appreciation there are some things that you can have appreciation that's just happens over time the other is kind of forced appreciation which is where you fix the stuff you clean the windows you add a kitchen you you know you do work right and then it increases the value of the thing because somebody else might be more likely to pay for it or buy it all right very very simple now the thing about real estate and why I think it makes so many millionaires it's a really simple business model

like you buy the house you put a certain amount down you take a loan for the rest as long as you put a tenant in that can cover that now I'm obviously simplifying this but that's because that's the point I'm simplifying it for the point of a video plenty of people have lost their asses in real estate but because it is a reliable thing they're not making any more land and they do keep keep making more people over time as long as population growth continues uh real estate will be a really good investment okay now

that is a big ass risk because of how population growth has been happening look at Japan's real estate market for example because their population has declined we take some of these things to be true we assume that humans are going to always have more humans but that's not always the case okay now our second example is let's say that we have a business so let's see if I can make a really simple business storefront all right we'll make that my little business storefront right that looks is that kind of business no all right there's my

business if you don't like my drawing deal with it um so the interesting thing with private Equity is that there's more ways that you can make money number one is you can buy businesses with a much wider range like a house isn't going to go for sale for a dollar but businesses do sometimes get given away for free more or less and that's also because there's no debt a lot of times people buy houses they have debts that they have to pay back and that kind of fixes pretty hardcore where people's kind of bottom is

they're like I'm not going to lose money on my house like fine I won't make money but you have to at least pay the bank back of course the market still dictates prices but I think there's still a strong line that people will hold in negotiations which slows down uh crashes in real estate whereas a business can go from being not valuable at all to 12 months later being worth hundreds of millions of dollars let's say it's a technology or let's say it's a patent that goes through or some sort of pharmaceutical thing that I'm

giving you extreme examples because you're like wait a second how's this apply to my business well if you didn't have a way to reliably get customers and then all of a sudden you find a channel that reliably brings you customers that makes something that isn't valuable incredibly valuable right or you hire one key person in the business that expands a new territory for you makes something that was once a risk and the thing is is that a lot of times businesses accelerate in value kind of like the forced appreciation here when you build in a

kitchen or you build in a a bathtub or something the forced appreciation in business sometimes takes a negative and then turns it into a positive and so what was once a risk then becomes a a pillar of value and so when you're thinking about accelerating value in business and this is what we do at acquisition. comom is that we think through what are all of the negatives what are all of the risks associated with this business and then if one by one we can flip the risks into pillars of value then we take we get

we kind of get counted twice so instead of a negative discount on our value it becomes a pro uh and adds to the multiple and so this is kind of the big difference with private Equity versus the house right with a house you can't change the neighborhood right maybe the neighborhood can slowly change over time but you can't take it and then put it in Manhattan right it's just going to be where it's going to be you can fix a couple things so there's there's kind of an upside limit to real estate you're not going

to get a 100x deal in real estate but you can get a 100x deal in private Equity all the time and that's why the people who amass fortunes the richest people in the world know how to reliably create 10x 50x type returns and at least in their careers especially the best ones have had multiple of these 20 X's 50 x's in big big bets and so let me walk you through how that would actually happen so let's say you've got a business that's doing three million bucks a year all right and let's say he's doing

$1 million in profit this business is not going to be valuable like not that valuable all right so no Institutional Investor is going to want to buy this it's too small I mean it makes money maybe it requires the founder so there's keyman risk there's a bunch of other things but like fundamentally this isn't going to be a super attractive business now a retail investor meaning like some doctor or lawyer who's local might want to buy this business as a a retirement asset for themselves not knowing what the they're doing and then lose their asses

so someone could give you money for it because they don't know what they're doing but it doesn't mean that it's actually worth anything it just means that you pulled one over on someone all right so the thing is is that a good private Equity investor realizes that this is not worth much to a potential acquire today but could become very valuable with a few small moves and so if all of a sudden this business starts doing let's say $12 million a year which would be a million doar a month and then it gets to somewhere

in the neighborhood of call it $5 million in profit okay this is now a much much more valuable business and so here's this is the this is the magic this is how it works is that you could pick this up for almost zero dollars you wouldn't have to pay a lot to get a business that does a million dollars in profit depends who you are but fundamentally like you might have you might do some seller financing put some money a little bit of cash in just million dollars a year in profit you might put five

00 Grand down like as a show good faith but the thing is this thing is riddled with risk right a $3 million top bu business probably has I don't know 10 15 employees like not a lot of people and so it's it's not very reliable it's very volatile and so it just screams risk and so risk means fundamentally the multiple that you ascribe to a business's profits is a direct correlation to the risk you ascribe to the business so saying that in the opposite way is How likely you think it will continue to make money

if if nothing happened and so if the owner leaves that's a material change to the business how long do I think this business will keep making money when this person leaves if I think it's absolutely guaranteed there's no way this business doesn't make money even after the the person leaves then he's going to get a high multiple in the business his his revenue and profit are very valuable because they're really secure on the other hand if it's like I think this could maybe burn down in 6 months then it might get a 0.5 multiple or

just realistically a zero multip the business saying I'll just take it over for you I'll take it off your hands for you right now the thing is is that sometimes the difference between these things doesn't actually take a ton of work it takes some expertise but like not necessarily a lot of time and so if a company's doing these numbers it's like all right well we probably need to hire a CEO we need hire a COO probably need to have bring in some sort of director of marketing to run s of the some of the

uh the datto day for it we probably need to you know update sales Ops uh in the business we'll probably update pricing because they're probably mispriced right and because we update pricing we can now spend more on marketing which gets us more sales right and we just we we run that little CIT and sometimes something like this can happen in like I don't know 12 to 24 months not not a very long time in terms of time periods but here's the crazy part here's the crazy part this business is basically worth nothing this business and

let's say that it's moderately risky so it's not it's not like this is not a bank it's like they're probably not going to go out of business not even going to cover that but like 95% of Banks Banks are actually a very very stable business and they make a lot of money um there's way more restaurants go out of business than Banks I'll just put it that way all right but let's say that this business gets an 8X multiple and this would be a $40 million business okay so in what world do you know that

you can go from something that cost you no money to 12 to 24 months later having something that's worth $40 million not many and so fundamental this Arbitrage that exists here because it doesn't take many steps or much time to create huge step UPS in value that is where private Equity investors make their money this is where business owners who know how to play the game get filthy rich and the thing is is that a lot of people are just very intimidated by this this word and these Concepts but this is all it comes down

to is that 99% of transactions are going to be some sort of multiple when I when I say multiple of eida eida is just a fancy word for right now just call it profit but in the private it's earnings before interest taxes depreciation and amortization which is just the earnings before this is the part that matters earnings how much money you make before all this other stuff so if you made money and then you get taxed in different differently in different states would you say the business is worth more or less well I could incorporate

a different state okay well then I want to know the earnings before the taxes right well I just bought this piece of equipment and like if I didn't buy the piece of equipment we'd have more profit cool well then I want the earnings before the depreciation that you're going to apply right that's that's the idea here okay and so there's that means that there's two big two big variables that we can influence with a business the multiple and the iida so basically if we can increase how much profit a company makes and how reliable that

profit is and growing then we're going to get a higher multiple all right and so let's say we have two businesses all right we'll say two businesses business number one let's say they're both the same size let's say they're $10 million in Topline revenue and let's say we're they're $3 million in profit so let's say we have two identical businesses here this business is purely transactional meaning it's one-off transactions there there's no recurring Revenue there's no annual revenue retention it has one way of getting customers it has a Founder Who's integrally involved in delivery and

marketing and operation so all three aspects of the business so running the day-to-day the running making sure the product's good and making sure we're getting more customers so one guy's involved in all of it and they're going down they used to do 20 million and six and now they're at 10 million and three all right so this is our $10 million business so is this growing no would you say that this is reliable in the future that it's going to continue to happen well the thing is is that this business is basically unsellable like it's

not that it's worth nothing it's just that it's worth nothing to someone on the outside the thing is to the to the guy on the inside who's making $3 million a year there's value to the business there's just not value to anybody else and so that's the key here is that when you're thinking about building the business it's I want to make this valuable for anyone not just valuable for me so if you own a a barber shop and you make 200 Grand a year from your barber shop but you're involved in the DayDay there's

nothing wrong with that I mean you're meant to work forment to work right but it's just that I haven't built it so that it can be worth $200,000 a year to somebody else if you can build it like that then now you own an asset that has intrinsic value to the marketplace now let's go through SE this other one so this one this guy's worth zero I don't know what that was there this is worth zero dollars unsellable to this guy so this one last year they did five million this year do 10 million and

they're pacing 20 million for this this upcoming year they'll do three million this year but they'll probably do six million or seven million next year um it's all annual recurring Revenue we think that the margins are going to expand as they get B because they're going to have economies of scale um and so we've got profits going up we don't think the Market's going anywhere it looks reliable and it's growing well this thing might get a 12x multiple and so then this thing might be worth $36 million and so then you're like wait how can

these two businesses with the same size and the same profit worth such dramatically different amounts because fundamentals of value creation how reliable is this money that I'm going to be making and how much of it is there so if you have a lot that's not reliable then you're going to get a small multiple and a big number if you have a small amount of profit but it's super reliable and it's growing then you're going to get a big multiple on a small number and if you got a ton of profit and it's super reliable and

growing really fast then you're going to get a monster multiple like fundamentally that's it that's how it works so here's one of the other big things that people don't get with private Equity is that with a house you can't build a house from scratch I mean you can build a house from scratch but it's going to cost you money but a business you can start with nowadays almost nothing you can start selling your time and you start making some money you start paying other people all off cash flow in the business which the business can

start for free and so you can have something that literally costs you Zer that becomes worth billions and there is no piece of real estate on Earth that you can build for Z doar and then it will someday be worth billions and so the reason that private Equity makes more money than real estate at the highest levels is because it requires more skill because there are more skills required in order to do it now to be fair this is in some ways just as strong as an advocate of real estate is that it's a simpler

business model now people still lose money in real estate all the time just got to look at the forums people lose money all the time in in real estate when they get greedy but in terms of reliably giving people returns over years and years and years it has worked provided population continues to grow so if you are going to buy real estate try and buy it in areas where people are continuing to either move to or have more kids so fundamentally there's only three ways that you make money in a business or make a business

more valuable number one is you increase the number of customers number two is you increase their value which I'll just say as LTV or lgp depending on how you say which is how much they pay you over time third is decreasing risk right which is increasing the reliability of the business over time and so whenever you're allocating money or time in your business it has to Circle up to this is going to get me more customers this is going to make them worth more or this is somehow going to decrease risk and if you can't

very clearly State how you know it's going to get your customers how you know it's going to make them worth more how you know it's going to decrease risk then you have to ask yourself is this the best use of my time money and effort and this is where I think most people do this instead is that they then spend money on stuff that's worth nothing and that's why a lot of people don't get rich when they try to is that they don't know where value value gets created and so you either have to make

more money or you have to make the reliability of that money more valuable and you make money by getting more customers making them worth more and then you decrease the risk associated with that in the future so you're like okay well I want I want to have that big amount of profit but I want a massive multiple associated with my business so let me just give you a couple of kind of like the big leager ways that people think about this ais.com is a family office that functions like a private Equity Firm and we look

at lots of different businesses and one of the easiest ways that we have for companies to get into the portfolio is that we can meet you at one of our workshops and so we run workshops occasionally at our headquarters here in Vegas and so if that sounds interesting my team will be there we can give you a whole bunch of things that you can do to make your company more valuable and maybe someday become a portfolio company in the meantime you can go there acquisition. click scale and maybe we'll see you here so number one

is how much debt your company that looks like pet doesn't it how much debt your business can carry and so that's going to be a function of cash flow all right and so if you have a lot of cash flow meaning that you could take distributions in huge amounts every month then it means that your business can support a lot of cash flow which means it can support a lot of debt so unlike you know with your first home there's like these fixed amounts that banks will say you have to put 20% down and if

it's commercial real estate you have to put 35% down whatever it is right they're they're these fixed amounts that they say you have to put down in order to limit their risk but the thing is is that with businesses it's varied based on how much cash flow a business has right and so a business that has almost no cash flow like it's going to be able to take on almost no debt and one that has tons of cash flow can take on tons of debt right and a disproportionate amount the second thing is organic growth

so this is the stuff that I teach on this channel right which is like Marketing sales pricing all these things that we do this is all considered organic growth inorganic growth is when you buy other companies in order to grow and you combine balance sheets all right but if you are growing as a business that's going to give you a bigger lever on your multiple meaning you're get you're GNA get more for it because if they know or they believe that you're going to consistently grow 20% a year no matter what for the next five

years then they know that the business is going to double in five years so if they did nothing they're going to more than double their money because they're not going to buy 100% with cash they're going to buy it with debt so if you double a business and you put 20% down then you could fourx or five extra money on the business because of the leverage that debt gives you this is all why these multiple levers increase how much you get paid so the third one is categorization which appropriate for letter C here if you

are a business that is categorized as let's say a traditional service business right but you're able to build some technology into your business that allows your staff to get 10 times more done or handled 10 times the customers then you have something that would be called Tech enabled service right or sometimes even a true SAS business and so Tech enabled Services have higher multiples than traditional services and SAS companies have higher multiples than Tech enabled services and so how you categorize the business if it's just moving one step over which is okay let's just look

at our delivery let's just invest in a little p technology so that we can get categorized differently it might cost you a hundred grand to get some streamlined processes and Tech in place to help 5x 10x the delivery and if that's the case then you got a $100,000 investment that might give you three more turns on your multiple three more turns being like you go from a five multiple to an eight multiple and let's say you make a million dollars a year it's like well that had three million to your Enterprise value for a 100

Grand it's a 30X return so like this is how you have to start thinking about it within the business it's like oh this is totally worth it so should I take this $100,000 put in my pocket and then put in the S&P 500 well if you're a business owner you can put it right back into the business a way that you know you're going to get a good return on Capital so categorizing what type of business your business is really in next one is a size premiums this is one that a lot of people don't

understand when you buy Wholesale in your real life if you buy one roll of toilet paper or you buy 20 rolls of toilet paper the 20 rolls of toilet paper are going to be cheaper because you bought bulk you bought wholesale right businesses are actually the opposite if you put a ton of profit together you get a size premium so a business that does a hundred million dollar a year in profit it's worth a hell of a lot more than a company that does $100,000 a year in profit and a big part of that believe

it or not is that the people who have the most money in the world have so much money and this is very hard for like you to probably grasp if you're not familiar with this but like the people at the top black rock Blackstone you know like all the all the big guys all right State Street all that stuff they have so much money that they have minimum check sizes so I was talking to a friend of mine at um one of the banks I'll just put it that way and their minimum check size now

is 150 million so not Enterprise Value that's just the minimum so if you have a $300 million company they have to buy at least half or they're not interested because they need to be able to write checks of 150 million or greater because they have so much money that they can't waste time writing checks smaller than that and so they pay a premium for operators to go in and gather a bunch of assets together so they can write one check I know this sounds insane but this is how people make gobs of money is understanding

this other world all right and so this is why people are like man I've got you know keyman risk in my business I'm like dude you make a million dollars a year of course you have ke risk it's a tiny business like this isn't where you solve that we solve that when you're at once you get to an Institutional level which by the way is about five million in profit per year is where institutional investors like begin to really take notice of a business below that you're not really going to get much and at the

five million Mark you might get somewhere in the neighborhood of like 20 to 40 somewhere in there but like if you cross 10 million it gives you a size premium you get a little bit more on the multiple so not only do you have a bigger amount of profit you also get more for that profit so it's like a double multiplier effect and this is why people talk about patience all the time it's like you could sell a day for 25 but maybe if you waited a year and got your five million to 8 million

in profit and you shorted up a couple things you go from having a $25 million sale to a $75 million sale for one more year of work so $50 million of Enterprise Value 3x what you would have gotten paid for one more year of work and this is how that compounding unlocks these huge numbers in private Equity e is age so to further on my little uh my little speech there on uh on patience the age of the business also makes the business more valuable and so think about this way imagine there's a business that's

one year old that's doing these numbers and then a business that's do it's 10 years old and doing these numbers well you'll probably feel more confident buying the 10-year-old business because you're like it's been around for 10 years like it's not going anywhere so the managing partner APG said this to me and I never forgot he said a business always becomes more valuable every single year until it doesn't and then it's worth nothing and it was such a profound statement which is basically like as long as you keep growing no matter how slowly or even

even even maintain and the business dayss around the business is more valuable so $10 million business at year five then $10 million year six it's a little bit more valuable year six because it lived another year but the moment it goes down a little it's worth nothing because no one wants to touch it unless you have distressed asset experts and I'm not going to get into that all right and so when you're thinking about your business it's like okay I want to create lots of cash flow in my business I want to have lots of

organic growth I want to grow I want to sell more I want to Market more I want to make sure that my price is good I want to get efficiencies within my organization so that can get categorized as a better type of business that has generally higher multiples I want to get it big enough that I get a size premium so that I get more for each dollar of profit in terms of Enterprise Value and I want to keep doing this for a long time and if I do all this stuff I can make generational

wealth in a in a number of years and so no this is not the get rich in six weeks stuff this is like get rich next six six years is but the thing is that six years at least for me now is like not that long six years is not that long like you're still pretty much you're in the same decade that you're currently in right and so when I think about like that I'm like most people simply can't wait 6 months for anything and I was telling one of the one of the business owners

here the other day about this is like the woman in the red dress I talk about it all the time because it's this it's been the hardest thing that I've struggled with in my entrepreneur all the things that's been the hardest and once you stick with something for five years you get it you're like oh I understand now now it's not just saying you had a business for five years because some of you guys I'm looking at you do six other things all the time and you have the one business that makes you money and

you never paid all the attention you should be paying it to because you're always busy thinking about these other opportunity vehicles that could be better when in reality think about the logical extreme here one guy starts a new business or new side hustle every six months think about the other guy does one business for 50 straight years never does anything different who makes more money you already know let's say you're four years into your business okay and you say man I have this opportunity that I could be doing so much more money okay that's fine

but for you to do that that means you're going to miss out on your five of your current business all right now what you're really missing out on is not only are you missing all of all of this right but the new business has to be able to do that year one now maybe the new business does half of that year one which is great but again now year two let's say you're you're a little higher there that's okay but this is what you're also missing out on the line that would have been off this

graph right here is that this is the second year and this is the second year from when you made the decision and this is what people miss out on this is what people don't get this is why people stay poor is they can't stick with stuff because a mediocre opportunity executed to Infinity is going to do better than an inferior opportunity that you consistently switch to over and over again and so the reason that these things create more Enterprise Value is that most of these take time even in the recategorization would take work in time

almost all of these take time and so if you just think about the logical exam of what your actions lead to you can reverse into the present of what actions will I get the most return for my effort and that is how you can create a lifetime of generational wealth and if this stuff about focus is hitting for you I made a whole talk on this at my headquarters here in Vegas to a group of business owners about it check it out e