What I look for to invest in companies [no bs]

My wife and I, Laya, talk to 10 to 20 service, information, e-learning, coaching businesses per week, uh, that we're looking to invest in. And that's, you know, after they've gone through, uh, you know, several screening processes. And what I wanted to talk about today is what are the ways that we think through in terms of the value of the business and not from a dollar's perspective, but like what is the opportunity? And I want to give you kind of the threestep checklist that I think through and how you can apply it to your own business and think like how could I take what I'm currently doing and make it more of an opportunity for me. And if you don't know who I am, my name is Alex Rossi on acquisition. com. It's a portfolio of business as it is right now, $10 million a year. So, um, I make these videos just cuz I was once broke and I don't want you to be broke. So, that is why we do this. Anyways, so

let's rock and roll. When you've heard people say opportunity or opportunity vehicle, you need to get into a better monetization structure. There's different ways of kind of saying the same thing, which is like how much money can we possibly make from this core thing. And so when I'm thinking through this, there are three pieces that I think through. And at the end of the video, I'm going to kind of walk through kind of the downstream impacts of these things um and how you can apply them. But this is the big picture. And you have to make these I have to make lots of decisions really quickly. So I have to use frameworks in order to make those decisions, right? And make snap judgments on like do I think this is interesting? Should we pursue this further or do should we just give some advice and you know wish them well and maybe see them in the future if they implement it? Right? There's three things that I that I've kind of boiled down to an opportunity vehicle. Is this something a business or opportunity that I want to pursue? And so for a lot of you guys who are starting out, this will be very valuable for you because hopefully you can just set this up right? And if you're already in the process of building your business, then maybe you can make alterations to the business and incorporate this. So there's three things that I'm looking at in terms of like what I think makes something much more interesting. Number one is the

number of potential units sold. So, a lot of times people talk about TAM, total adjustable market, and I'll talk about why I think that the longer I do this is somewhat of a misnomer. Um, so I'll talk about that at the end, but just how many people could potentially buy this thing, right? Or buy this service or buy this, you know, whatever this thing is. How many people do I think would be a fit um to be purchasers of the thing? So, that's number one. And that's just going to show me how big, how long we can run this game. Is this indefinite? is just like, you know, I mean, like if you're selling weight loss, like do I believe that people are going to continue is food going to keep tasting better and are people going to be able to change their genetics in terms of how they how they rely on it? No. I think those things are things that aren't going to change overall. And so those are assumptions that I'm willing to base the fact that there's going to be a lot of people want to buy this thing. It's just a simple way of thinking through like what are the assumptions that would continue to make this true. So number one is how many people could potentially buy this service. Number two is going to be what

is the potential profit I can make from the service. All right? And that's a function of two things which is what is the value that people are getting from this outcome and then how much does it cost us to deliver it. And so those are two very important components is there's some elements right that are extremely valuable but also very costly to deliver. So that's something that I'd be less interested in. It might be very valuable but like there's not a lot of opportunity for profit. On the flip side sometimes it's a very small amount of value but it costs nothing right and the thing is there the gross profit is actually kind of enticing. And depending on what the first one was which is how many people are wanting willing to buy this thing then it's like ah this becomes a little bit more interesting right and so the potential for profit and the gross margin of the unit of thing that we are selling becomes more interesting which is why Leila and I in general like course e-learning you know guru coaching type businesses to work with because we can transition them from a not valuable model into a much more valuable enterprise model that has something that they could sell in the future if they wanted to. The third piece is the

competitive uh the supply demand or competitive dynamics of the landscape. And so I'll give you a counter example and and a good example. So if I wanted to get into wireless cell phones, right? Like or cell phone service. Well, lots of people need it. Okay, that's good because how much does it cost me to add one more uh user to my phone network? Pennies, right? And what do I charge them? Hundreds of dollars a month. But then the third one is competitive dynamics. Well, I'd have to uh beat out Verizon and AT& T and all the other big conglomerations of phone service that exist. It'd be very difficult for me to break into that. And so that's an example of it checks two of the three boxes but not the third one. And so a different example of that I I'll tell you like an a hypothetical crazy good example would be if someone had figured out a way to create hardware that does crypto mining, right? And let's say that crypto mining, you know, could get could make people let's say $50,000 a year. All right, this I'm using an extreme example to illustrate the point. Well, if they had figured that out, then one just about everybody wants you know passive or close to passive side income. So, total number of people that we could sell this to, a lot. Amount of value that someone's getting, a lot, $50,000. And in this case, it's actually quantifiable. How much does it cost us? In this instance, we'd have to figure out what the cost of the rig would be, but let's say it was, you know, small. Let's say it was $500. Well, then this business becomes incredibly interesting as an opportunity. And then the fourth or sorry, the third is what are the competitive dynamics? Well, if there's no one else who can offer this, then we're off to the races, right? But on top of that, how new is the space? Are there a lot of new people coming into it? Are there established uh people who are killing it that would try and price us out etc. And in this space for example everything's brand new and so the competitive dynamics are great and it's massive you know it's very quickly growing and will continue to grow probably for the first year of so in this instance it' be like wow this is a very interesting business that I would want to participate in or learn more about. And so if you're thinking through these lenses and I'll talk about the TAM thing in a second about why I don't think it's necessarily as good as people used to think in terms of assessing the value of the business. Uh, I'll talk about that in a second. But if you're using these three lenses to think about your own business, you can ask yourself, okay, is there a way that I could make this, you know, applicable to potentially more people so that I could have a total higher number of units or bigger audience that I could sell to? Number one. Number two is, is there a way that I can reconfigure this thing so it either makes the customer a more valuable outcome and or it costs us less to fulfill that outcome, right? So, we increase the gross profit per unit sold. Is there a way that I can reconfigure what I'm doing? Right? And I'll give you a couple rules of thumb here that I like, which is if I'm doing any kind of service business, I like to have 80%

or higher gross margins. All right? So, what that means is if I'm selling something for $1,000 a month, it has to cost me less than $200 a month. And for those of you who are new to making money, people will get their panties in a wad about that, but like profit is what drives business. All right? And it's not that all of that gross profit that's before cost of doing business goes to the owner. That's just everything that you have to chip down away from. So, you're starting at 80 and let's say you want to run a business that runs 50% margins. Well, then that means you've got 30% there, right? If in that $1,000 a month example, I got 300 bucks a month to cover everything else that I do in the business. That covers marketing, that covers admin costs, that covers payroll, that covers that uh that covers, you know, HR, finance, all of these other fun, legal, whatever, all the other functions of the business. So, the thinking is 80% is minimum. And the thing is, especially smaller businesses think for some reason that that's like charging more is bad, right? And you got to get out of that because if you want to help more people, you need to have gross profit in order to scale. If you look at the biggest companies that exist out there, they sell something that's very valuable that costs them almost nothing. So think about Google, right? They sell ad space, it costs them almost nothing besides the actual like their incremental cost of running an ad is virtually zero, right? And they charge a king's ransom for it, right? Facebook, same thing, right? They charge for eyeballs that cost that like they have onetime cost of building. Then after that, the incremental cost of showing ads to more eyeballs is almost nothing. So it's all margin. You look at the phone company that I was explaining earlier. They have their onetime cost of building the thing, but then the additional cost of adding one more user is almost insignificant, right? But they can still charge a great amount of money for it. This is the reason software is something that people find incredibly valuable. It costs one time to build it and then after that the incremental user is almost all profit. Now the only other type of business that's like this with a close to 100% gross margin is information and education businesses which is why Leila and I like these types of businesses because they have uh they have the same u margin as software businesses except you don't have the cost of development. The downside is that those types of businesses tend to um have higher churn because the increased value or the value declines over time when someone learns a skill from this type of business. That being said, there are ways of reconfiguring the business to increase the stick of the client with by pulling out the things that are consumable versus not versus one times consumable. Um, and I'm going into the weeds here, but hopefully you'll enjoy it. So, something that's a one-time consumption would be something where I have now gotten the skill from the thing or I've learned the process. And this is especially true with learning or e-learning type businesses that someone comes for a skill, they learn the skill, and then the value of training for the skill decreases because they already have it. Duh, that makes sense. But the thing is a lot of times when people are learning something there are other components that surround them that are consumable on an ongoing basis. So the information is one time consumable as long as they learn the skill. But then there become other things that are consistently consumable. So community is consumable as in like I want access to it this month. next month. Accountability is consumable. I consumed it this month to get to point B, but now I want to consume it again to get to point C. Um, an additional piece would be if the type of skill that you're teaching someone creates new problems, which most times if you're good at teaching something, all problems create solutions or all solutions create more problems, right? And so when we solve the old problems, we get new ones. And that's why we as business owners should always just see problems as blank checks for us to cash in at our own desire, right? There are problems everywhere and they just have a dollar amount attached to them. And the question is, do we want to go and cash that check in and solve that problem? Right? Like that's how you can perceive problems in the world in terms of opportunity for these types of business, which is why we like them is that we can pull these pieces out and then create something that has really high margin and has high LTV and continues to build enterprise value over time by selecting and peeling these pieces apart. And so finally, I want to talk about why I think TAM is not as good of a, you know, indicator for the potential size of a company. Well, look at some of these original companies. So look at Facebook. when they started out, it was like supposed to just be a college, you know, network thing, right? It was supposed to be, you know, Facebook, I think is what the actual term was way back in the day, uh, for like a yearbook, right? And so that's literally what the name of the thing was, right? And so somebody might look at that initially. Obviously, people could see where it could potentially go, but they saw that and be like, well, maybe the TAM, the total journal market is just college students. The reason that I think it's interesting is that businesses and founders expand in vision over time. And the the time when a vision is a visionary or a founder has run out of vision or run out of future is the moment that the business dies or they sell it because they just don't know what else to do to grow it. Right? What happens a lot of times is that if we can if we can, you know, continue to increase and eat up the total market that we have defined for ourselves in our business. A lot of times adjacent, you know, or adjacent markets or silos all of a sudden become more and more attractive. We find out that there's a lot of similarities or that we find out there's another need and then we can branch into yet another silo. Now, if you're like, I that's the exact decision I did and I went from 100,000 to 200,000 a year. No, that was dumb. Like, that's not the point of this. Like, you could just scale one avatar to probably, you know, 100 million a year before doing that. That's not the point. The point is that in a on a long enough time horizon, businesses also through mergers and acquisition, things like that, they can buy up other companies that are adjacent, close to them, etc., and expand the total market they have. Which is why I don't necessarily think of it on a long-term time horizon, but I do think about it on a short-term time horizon. So, if I'm looking at like the next 3 to 5 years, then I might be like, "Okay, we're not going to change avatars in the next 3 to 5 years. " But, do I think that this thing over the next 20 years could eat up more and more of the pie by expanding who we're potentially serving? If the answer is yes, then the original TAM or the current TAM is not necessarily what the future TAM is going to be. And so, that's why I don't see TAM as valuable as I think it is purported to be. If you're new to the channel, welcome. You hopefully can think through those three different opportunity kind of vehicle frames in terms of like how can I look at my TAM in a way that potentially could sell more customers. How can I increase the value versus the cost of what it is that I'm delivering? And is there a way that I can enter a space that is more unique or newer which I can either do by going into the clearly new spaces or by trying to redefine what I'm doing in a new way. Right? And if we can do those things then we increase what I would consider the opportunity size of what we are pursuing and then ultimately make more money. All right? And so that's what I'm thinking about when I'm looking at these companies that we're, you know, potentially uh investing time and money into. Otherwise, hope you have an amazing day and I'll see you guys in the next vid.