EP266: The Blueprint to Build A Multimillion-Dollar Business

APPLE PODCASTS | SPOTIFY

Creating a multi-million dollar business today is easier than ever, and at the same time, difficult for those who don’t know how to break the cheat code.

Today’s episode is for those who are looking to start a business that will eventually exit from millions of dollars or those who have already started the business but recognize that they need to pivot.

How do I know this? Because I’ve done it myself three times in the past six years, and I sold those businesses for 45 point 2 million. I’m gonna break down exactly how you can use these strategies to create a multimillion-dollar business.

This is what I call the three things that you need to create a multimillion-dollar exit.

Now the first thing is that when you start a business, you have to think about the exit in mind.

The problem is, most people, when they start a business, they’re thinking about what computer to use, and what software to get.

All these things are great, but the problem is they forget that as they’re walking there may be a black hole here that they will fall through because they didn’t think about the exit ahead of time. Instead, what you should be doing is, when you’re walking through this path, you have to already think, Hey, this is about to happen.

Can I exit here?

If I can exit here, how much money can I make at this point in time?

This is the critical point you don’t want yourself to be to walk down this hole, because you’re looking down, not paying attention to this big black hole over here, and you fall into it, right? So when you want to start a business, the first thing you need to do is you need to look up.

I need to think, what is my exit strategy?

How am I going to get to my end goal?

Because for most of us, the end goal isn’t to have this business forever, right?

The end goal is to create a legacy for our family and ourselves, and so that’s why this is such an important point.

Have an exit plan in mind. So exit strategies are important, but you need to have multiple exit strategies, because you have to be flexible, because there’s gonna be different things that come into your business that really get you or maybe knock you off the base, right?

In our fashion war, when we first started, we were really focusing on only sustaining our business, really trying to keep our heads above water, capping it kind of like an oscillator has a head of underground, right?

We didn’t look up at all, and that’s the biggest lesson that we learned when we were in our fashion business. We were making multiple millions of dollars in revenue in this business.

But once our customers shut down all their resale stores, because we didn’t focus on the exit at all, our business became obsolete.

And that’s there was no value to be sold, right?

Like, this business was worth nothing at that point.

And that’s the biggest mistake that we actually learned because if you never have an exit, you’re gonna end up in a situation that eventually something’s gonna happen that comes along your business that makes it so that it’s not valuable anymore.

This isn’t just about a single-digit million-dollar business that we had.

This isn’t just something that happened to our business.

We know someone who actually was generating, like, over a billion dollars in revenue in their business.

And you know what happened? We spiritually asked him. Someone came approached him, wanted to buy his business for $1.2 billion at the height, right at the height of his business.

And you know what he said?

He said, “No, this is my baby. I’m gonna keep it forever.”

Well, forever, forever, ever that doesn’t actually exist.

Because you know what happened?

Eventually, several years later, his business actually just went down the drain, and they ended up actually having to file for bankruptcy, so that 120, $2 million billion dollar exit became $0 with debt tagged onto it.

So that’s why it’s so important that, like, we’re not holding on to these properties or businesses just because we want to, or we feel like, hey, where this is our legacy. It’s our baby. You have to actually focus on the real number, right?

Like, is it profitable?

Will it make me Gen will we generate a whole bunch of money for me?

If it doesn’t, then don’t focus on it.

Make sure that you keep those exit strategies in mind, and make sure that you’re really flexible with it.

Boy, did we learn our lessons.

And from that point on, once we got into multifamily apartments, we completely changed that approach, right?

When we moved to multifamily apartments, what we actually figured out was, hey, every plan, every business we’re gonna buy, we need to focus on what’s our exit.

We’re not emotionally attached to any of these properties.

We don’t care about it at all, right?

We focus on the investment returns, and we don’t hold on to these properties longer than necessary.

Our goal is to maximize the profitability, not to keep the business as our baby, because we know that the massive companies like I told you earlier that actually collapsed because they thought they were holding on to their baby, and then eventually it wasn’t something that they can actually sell.

The second thing that you have to know is, how much is your business worth to others?

What’s its valuation?

So there’s two ways of calculating this.

The first one is ibida versus noi. So EBIDTA is used for businesses, red traditional businesses, noi is used for properties, like multifamily, apartment businesses. So both helps the business determine the business value.

It being focusing on how much income the property is producing or the business is producing. So ibida, it stands for earnings before income tax, depreciation, amortization. Noi stands for net operating income.

When you focus on EBITDA for businesses, typically, it’s based on industries.

It’s called the multiple.

How much multiple will you get from the earnings?

For instance, if it’s a tech business, you’re going to have a higher multiple than, for example, a restaurant business, right?

If you have a plumbing business, it’s going to have a lower multiple than maybe some other type of.

Businesses that have a really high growth ceiling.

The cool thing about net operating income, which I think is a more precise number, is because it’s based truly on the performance of the property.

It’s not based on just some sort of random industry standard. Because if you’re focusing on business in the United States, for example, every region, every city, has a different valuation for that business, right?

And with multifamily apartments, because we’re focusing specifically on the NOI.

We’re actually focusing on the property’s performance versus just generalization, and how we calculate net operating income is value, is value equals net operating income divided by cap rate, right? We’re not just going straight multiple.

We’re actually getting the NOI from this. If you have a million-dollar NOI and you have a 5% cap, that’s a $20 million property right there, right that’s the math. And so the cool thing about multifamily also is that the valuation isn’t just strictly based on the revenue that the property generates, which is rental income and other income, but the other thing that really kicks us into high gear is what we call appreciation, and that goes way beyond revenue.

So again, the EBITDA of a business is how much money that business is making.

So if you’re selling a service or a product, a plumbing business, how many toilets are you fixing?

A restaurant business, how much food are you selling?

That revenue actually is used as a multiple right?

But for multifamily apartments, again, it’s more than just a service we’re providing.

We’re not just providing clean, affordable housing.

Tenants are paying rent.

We’re charging for other income possibilities as well, but we get to do this other cool thing, called appreciation. Unlike any other businesses, the department doesn’t just have revenue as a source, right?

So the first appreciation, so APP, is appreciation.

The first one is a unique thing.

It’s called Organic appreciation.

What is organic appreciation?

So this is based on you having to do nothing, and the value of the property keeps increasing.

You say, Palmy, how is that possible?

You know how they say, like, if you keep the money in the bank, inflation is going to eat away at this value.

Well, the opposite thing actually happens with multifamily apartments.

As inflation increases, that also increases the rent, right? So the person who’s coming in and renting the apartment now has to pay a little bit more, because, hey, we’re tacking on cost of inflation to it.

We may pay a little bit more in payroll, maybe pay a little more in labor or other equipment expenses, but we sure make up for it by making sure that we increase our rent proportionately, if not a little bit more.

This also has to do with the demand of the area, where typically we see that rent growth, organic rent growth, is actually a little bit higher than inflation in our own specific portfolio, and is not atypical results at all. So this one is an organic appreciation that happens naturally.

You don’t have to do anything, you come back, you buy a property, you hold it in the right area.

Five years forward, there will be appreciation. So the tech second type of appreciation is called What, what is called force appreciation.

So this is yet another way that valuation is increased in multifamily apartments.

Forced appreciation sounds kind of harsh, but it’s not as valid as it sounds. So forced appreciation, just imagine this. You buy an apartment, man, the paint is chipping away, and the landscaping is horrible.

All the plants are dying.

The roof’s leaking. There’s no signage. People can’t even find the leasing office, right? So what we do as multifamily apartment owners, is when we take over a property, we’ve put in a budget. Hey, we’re gonna have to repaint the entire building. We’re gonna have to fix the roof.

We make sure we buy all new signage.

We may even change like the branding of the property. Come in, and we put in all new landscaping, all of which will actually help us force appreciate in two ways.

The first way is direct.

Maybe it actually, there are other things like, maybe we put in EV charging station, right?

EV charging station that the tenants have to pay money to use that’s actually increasing the value of the property.

So force appreciation is like me physically, or we do something that actually increases the value versus the organic that we didn’t have to do anything, right? We sleep. If we wake up five years from now, Austin Powers out.

Cryogenic freeze come back?

It’s like, Oh, for that 1 million became 1 billion, right?

So in this case, forced appreciation is the action done by the operators to increase the valuation the property. So the first way is, hey, the revenue the property’s already increasing is already generating that increases the valuation. Then we focus on appreciation.

The first way is organic, which means you don’t do anything, and it actually increases in value, then we focus on a forced appreciation, where the operator actually steps in and does things that actually help increase the value of the property, so indirect and direct income can be generated. So when you’re selling a business versus real estate, when you’re selling a business, again, you’re thinking about multiple.

EBITDA, right?

Multiple on the EBITDA.

So for a tech company, you may say, Palmy, how much EBITDA?

How much multiple on an EBITDA does those tech companies typically sell for?

So typically, 10 to 25, times, right?

That’s typical restaurants, four to eight if it’s doing well, if it’s a small mom-and-pop, maybe even less, maybe three, right? So those are the growth factors when it comes to real estate valuation because it’s based on NOI divided by cap rate that varies from market to market.

Now, the way we buy multifamily apartments is exactly the same way that private equity does, which is leveraging other people’s money.

We raise a significant portion of the money that’s used to actually purchase these properties, and in return, it actually improves our profitability upon exit. Right?

This is the way that a lot of people can generate a higher return because you’re putting a little bit of money into the deal, but you get to control it.

A really big piece of asset. Super easy example, if you raise a million dollars and you end up selling the business for 10 million, you get a 10x return, right?

So as general partners, we actually get compensated for putting the deals together, for putting these multifamily apartment deals together, and as a result, we typically get about 20% of the money that we raise of the equity. So for example, here’s an easy math. If you raise ten million don’t be shocked by these numbers.

This is very typical and doable for apartment investing. So you raise ten million right, and you put 100k into the deal. Let’s say that it’s a 20% right equity that you get, which means that you get $2 million for putting this deal together.

Now you only invested 100k into this deal. That means that you made 2 million which means that’s a 20x multiple.

Do you see that?

So you raise ten million you get 20% curated interest for putting the deal together. That equals to $2 million and you only invested 100k so that means that you got a 20x multiple just for putting the deal together. That is not the end of it.

In multifamily apartments, when we sell, we hope to double the profit and double the past investors’ return.

So if they get 2x return, our 20x 2 million becomes 4 million. Okay, that’s why handwriting is kind of messy here.

But basically this is 4 million.

That means that for the original 10 million that you raised, you got 20% equity, which is 2,000,020x already of the amount that you personally invested into the deal. Now the property actually sold right?

It made 2x return for their passive investor. It doubled their money.

It also doubles your money, which means your 20x becomes 40x this is why using OPM is so important because in this sense, you’re going to be able to accelerate your wealth so much faster because you already focus on having the exit in mind. You knew we were able to get this.

The third thing is, is your business sellable?

Guys, not all businesses are sellable.

Let’s compare two different types of businesses. So the first business is really transactional.

The founder is involved. She’s involved in every single part of the business they are in, the operations, process, delivery, and marketing. So the growth is not really predictable, right? And so that’s one of the key focus that people focus on. Is the business predictable? The valuation of that business is going to be down the drain if it’s not predictable. Not predictable, and if the founders truly is inside the business, it’s unsellable.

It’s worthless to other people, even if you see value in it, other people are not in order for a business to be sellable, it has to have intrinsic value to someone else, not just you. So the key here is to build a business with intrinsic value that creates assets that appeal to a large group of people. For this type of business, otherwise, it’ll be worth less.

This first business that I just showed you, that I demonstrated, however, is worth zero because the founder is complete inside the business, and it’s not sellable because it’s not predictable. So business up to a multifamily apartment business, it has performance and has growth. So for example, let’s say the business generated 1.5 million in net operating income with a 6% rent growth.

NOI will increase to 1.59 million, and in five years, it will grow even more.

This model actually fits what we’re looking for, right? Because it’s an existing business.

It has a current income, it has an existing infrastructure. It will appreciate in value, it generates cash flow, and guys, best of all, it also has massive tax savings.

And guys get what it also is a business that will increase in income and is totally scalable. We can raise rents across the entire portfolio, across the entire property, not just individual units, but as leases become renewed, or tenants move out, the valuation will actually increase. So at this point, you maybe say, okay, so how do we know if a business is worth selling, worth exiting?

So here are three boxes that you need to check off.

Number one, it has had recurring or predictable income, right? It’s growing. It’s profitable with cash flow. So apartments, are growing because it’s in an area where in rent, rents are increasing.

It’s obviously profitable and it’s predictable, thus the valuation will actually keep increasing. And because with based on noi, it’s really going to be measured based on the property’s performance, just not on conjecture. And because of general partners.

We’re putting the deal together. Again, we’re making multiple exits, just because we’re actually able to get 10 to 20 to 30 to 40x multiple depending on the deal. So that’s the two different types of businesses.

So the two types of businesses, so why are they valued so differently? Again, it’s due to the fundamental principles of value creation, an unpredictable income stream, business with no guarantee of growth, lower valuation will happen, right?

That’s business number one. But the syndication model that we went over with apartment building, we’re buying a massive business without personal investment or significant personal investment, probably even less investment than you would if you would buy a restaurant or a plumbing business. But yet the profitability is significantly higher, as you can see with the multiple.

So you can own assets that you invest very little money in, but you can actually gain millions of dollars from it.

And we talk about growth and scalability. You may say like, Hey, Palmy, 20 to 40. Extra 10 sounds amazing. Well, that’s not it, right?

Imagine if you purchase one or two more multifamily apartment properties per year for the next 10 years.

Guys, that’s actually our plan to become 100 millionaires, right?

Centimillionaires.

That’s what they call them, how, because we’re going to be able to buy multiple of these properties per year.

In comparison, there’s absolutely no small business, SME type business that can compare in the valuation of multifamily apartments like the level that it can achieve is not the same, right?

If you do this correctly, you can scale your business to multiple millions, 10s millions, or 100 millions.

There are even billions of companies that are out there doing this. It all has to do with the simplicity of the model, right?

Of OPM, having been on both sides, we can say that world syndication, private equity, or using other people’s money isn’t more complicated than running any other type of business.

Yes, of course, there are legal hurdles in their relationship management, but it’s a simple business that you have to focus on at its core.

It’s not about building a new app or trying to create a cure for cancer, right, which would be so difficult, but when you focus on doing just multifamily apartments, providing clean, affordable housing that meets basic human needs, it’s a simple business, and it’s a business that can get you to multiple million dollar exits in just a couple years. 💓