Dan Peña - 50 Billion Dollar Man Dan Pena QLA - Quantum Leap Advantage Advanced Part 8 (Audio)

Key Takeaways

realize you're never going to realize the worth of your business make it tangible till you sell it because otherwise it's just a number on a piece of paper it's never only a number on a piece of paper now sometimes the number on a piece of paper that you value your business is significantly higher than the reality is and it becomes tough to sell because you know you put down on your net worth uh statement uh my business worth5 million EUR or1 million EUR half but in reality it's worth 2 three four times cash flow maybe four five six seven times e or five or six times after tax earnings it's some ratio of those formulas nothing more if you're in the internet business the ratios are higher but for bricks and mortar business for real estate business which is close to bricks and mortar you're not selling at any of these 50 60 70 multiples selling at multiples that are you know reasonable less than 20 probably less than 15 and maybe even less than 10 but you you put on your net worth statement and your Bankers have seen on your net worth statement since 1995 or 1999 a his business is worth5 million EUR or2 million EUR or3 million EUR when the fact is they never equated to how much cash flow it's bringing in how much iida or how much uh after tax revenue so when you come down to to sell to decide to sell it it can be a sobering experience a sobering experience and I've been to this many many many many times trying to explain to owners across the kitchen table the old days that the business isn't really worth $1 million the business is only worth $3 million and then they take an example from the stock exchange the stock exchange well look at this company does kind of what we do kind of what we do and it's selling at 17 times earnings so if you take 17 times earnings my earnings my business is worth yeah but it's worth to selling at 17 times R earnings because it is selling on a liquid exchange where you can buy and sell every day you're you've got your little business in bahav on no exchange and there's no liquidity so business have no liquidity sell at much less multiples much much much less multiples but everybody uses the stock exchange multiple game myself included everybody does yeah I have a question then um I have no experience with exiting uh residential fund portfolios we're absolutely planning on doing this um okay do you when you exit let's say a resi or a commercial portfolio do you get that 4 to 8X uh multiple on cash flows and then my next question is no the answer is no keep talking go ahead how how is uh is there an equity on is there a multiple on the equity or are you selling it for present value because it's a real estate play it's not present value okay present value and normally a discounted present value discounted present value which is a lot less than you've been telling everybody I don't mean you but everybody's telling everybody and that's why you see portfolio sell at discounts to uh market value on public funds Reit a perfect example Real Estate Investment Trust normally sell it a discount to the uh the market value because one the um uh they're factoring in the market you may be holding them at your your um you may not be having to uh hold them at a mark to the market where you're marking them up marking them up monthly or quarterly to the current market value of the portfolio you're marketing it at what you paid for it I paid €0 million for this piece of property the fact that it's only worth 4.6 million you know isn't reflected on your balance sheet so your balance sheet is X and you're selling a uh 60% below X because the market is valuating the share price to reflect the reduction in value the True Value so most of these deals sell at a reduction now there's times when they sell at premiums this is not one of them yeah I mean in Germany for example 3 years ago uh residential portfolios were TR at a SL Premium to the individual values because there was a lot of foreign investors who wanted to buy only chunks of 10 million or more so if you put them together you created a premium now it's the opposite yeah make your business a turnkey operation now the Germans would be good at to systematize everything we need it procedures systems processes and we must follow them exactly okay but systematize everything I mean and when we get to the time and this is going to take you 6 to 12 months to get do all this stuff that I'm talking about unless it's already set up that way which is not likely but turn to you as much as you possibly can so when the people come in there is less expertise what expertise is needed is systems processes and procedures expert not expert that you can know how to follow the systems the processes and procedures not that you have to invent them empowering employees that to make mistakes we've said this on you know tell I'm sick and you're sick of hearing it but you want when I'm going around talking to the employees and asking them oh how is it to be right work here and what do you know and what are you allowed to do and oh yeah Robert really gives us a lot of latitude you know and we you know and um we don't make any mistakes but he allows us to grow as managers and we really grow that's what I want to hear that's not what I hear that's what I want to hear because then you realize that well we want we shouldn't have too much trouble with employees you're always going to have trouble you know when foreign buyers come in you always have problems culture a lot of your your famous culture and then we bring in an expert like the Impaler and you know to work on the culture we bring McKenzie and and the Impaler in they work for the people they work for the people um but that's what you want to hear but normally I I I interview the um um the guy that reports to the CEO the guy that reports the CFO the guy or gal that reports the co reports to not that the actual one then I rep uh I I I talk to you know I go and spend I go and have drinks and dinner with the sales and or marketing team drinks and dinner preferably drinks we can skip the dinner uh with the sales and marketing guys uh and then I sit down with the chairman the third day chairman stroke CE because now I got a good feel for what's going on because the guy that reports at CFO is less likely to me Etc down the down down the road down the line of all those other positions and the market and sales guy unlikely to lie at all especially when they've been drinking and um and then I know just how cohesive a group of individuals there is and then we sit down and with with the chairman and or the CEO sometimes I you know some and if they've got an organization all over the place we send people off to to talk to all these groups CU you know my offer my offer subject to due diligence but we buy your business for1 million EUR subject to yada yada so then we spend a week or two investigating the various sites if there's one site one manufacturing unit that's more important than the rest then we spend more time there you know we'll send Engineers to look at the you know the quality of the machine me uh Etc and um and quite often we come back with information the chairman and the CEO and the board don't know when you increase spending Authority spending decreases um what we normally do after we buy business is we inre we we increase the spending authority of the people that have spending Authority within the business to show them that we trust them more and spending normally goes down normally goes down because it's many times it's the first time that anybody's everever given them an increase in spending Authority now some businesses don't have spending Authority some businesses the CEO has to still signs every goddamn check I just looked up one here you know about three months ago CEO has still signed every check I have not signed a check since 1984 in any business I've ever been involved I'm not a signatory in the bank accounts I I I can't even get money in out of the banks any of the banks and now my own personal Banks I can't do because they're all in trust and stuff but I don't want to be involved with the money I want to see the money on you know account sheets spreadsheets but I don't want to be involved I don't want to be able to write a check and so I give full responsibility my assistance at Power attorney they can write checks out of my Banks I told you that Leanne has about millions and million my old assistant from Houston has B millions and millions of dollars worth the [ __ ] for me over the years and um the um because I really don't want to be involved in the day-to-day operations I only want to be looking at for deals and looking for money and bought in for when there's big problems and then which I'm very good at story now my speciality the gry group is risk management that's my that's what I that's what my specialty is risk management and it's normally after the fact when they [ __ ] something up and then I come in and you know how do we manage newspapers how do we do this how do we manage the shareholders how do we manage the board even you know because I've been in some big pots of boiling oil before and I know what to do and what not to do because I've you know done it wrong myself so when I see these things and U and I see that one Bishop resigned yesterday one Bishop admid being a pedophile today resigned I mean there's going to be some big big people fall we haven't had a cardinal yet uh but uh and uh if we have uh anybody in the Vatican takes the the knife I mean the Pope's at risk especially for 25 or years he was a hatchet man for the other Pope the pope you know previous Pope and so um good German boy was a bat singer and so um you know because I'm a Catholic even though I I think it's awful the [ __ ] that they let go on the church I think it's too big a blow for the Poke to fall I mean it would Shake I don't know what it do the church but other clubs have fwn back in 300 and 1100 and Y all so the PO I'm sure the church is big enough to withstand the Poke falling but it would be a sad day a sad day um every job of the company should be turned into a business CEO the third floor example the rich Carlton Hotel chain is one of the more officially efficiently run hotel chains in the world for a reason for every floor of richz Carlton the head chamber m is the CEO of that floor She can make decisions up to $2,000 to make a guest happy it's probably more than that it's probably three or four $3,000 it used to be $2,000 15 years ago and she runs the floor if there's a problem she can fix it if Sean's got a problem she can fix it she can upgrade him to a suite on the fifth floor she can do this that to make him happy often times people in the trenches don't make decisions because they don't have the same information my experience is people below the board level below Senior Management level make better decisions than Senior Management if they're given all the information because they actually know the impact of the customer because these Pricks haven't dealt with the customer in a long long time like we're talking about abuse you know where where you are I mean these guys haven't they haven't you know been abused by anything body other than their mistress in a long long time and so um and so I'm I'm a full disclosure guide I mean uh our in our organizations everybody knows how much how much everybody gets paid everybody knows the bonus system uh they don't have access to the bank accounts but I mean they have access to all kinds of information we have an open door policy open door policy so there rumors are bad enough in companies you know which company is this all the companies I'm so if you give them enough information they'll make better decisions than managers every organization's got somebody that ostensibly is irreplaceable nobody's Irreplaceable I told you the story about putting your hand in the toilet you displace water you pull your hand back out the water FS back back in everybody's that way and I guess the pope would be too you know unfortunately and so uh but they're all don't and we all have a tendency because we have a lot of confidence in one person to give them a lot of responsibility and more and more responsibility and that person is hesitant to say I can't handle it all you I'm G to get some to Michael I'm get some to Robert because then they're afraid of the person that gave them that responsibility well if you can't handle it maybe want we replace face you with somebody that can handle it and and so instead of me saying to the person above me that gave me the responsibility you know that's great and I appreciative and and you know I'll do I I'll do whatever it takes but I mean there's only seven days in the week and only 24 hours in the day and I can't possibly be manage all this and I I need to manage you know I need to split up the management I need to separate some of my duties to somebody else and they and and and they should understand um but nobody's Irreplaceable your your business should be fully explainable in a 50-page manual firers like to see the level of organization but remember structure follow strategy not vice versa minua never makes any money it only makes manure running a business at a micro level and hoping for macro results doesn't work and stay big picture focused so you want a a a document that's a sales document but it's a document it's also an operational document so the person can take that 50 pages if they buy the business and it doesn't have all the detail but it's got enough detail to run the business it talks about your business model it talks about the seasonality of your business model it talks about the geographic distribution of your business model it talks about potential um changes in your business model um uh and that so when if and when um I exit from the business you know that with the the four or five key people not Irreplaceable but key people you can still run the business uh successfully economically one of the things I I normally first do when I first go in is I try to find the one two or three most key people to the organization not Irreplaceable and I sit down with them I nor do this before I buy the business and I say you know what are your goals what you know if you had it to do all over again what would you do last five or 10 or 15 years and I listen to him and I still remember sitting down with a guy he told me I I want to die I want to uh leave here or die with dignity when I leave the company dignity and I asked him what's the biggest bonus you've ever uh received and he said $20,000 a year and um if I remember the numbers uh correctly don't you represent in in most years the last 20 years 60% of the profits of the company your division says yeah sometimes 80 and the most you ever made is $20,000 I said okay and so when when I when I um bought the business I had um a drink with him and I handed him an envelope they had $100,000 cash in it and I said this is the beginning of my thing the beginning this will not be part of your tax of a tax [Music] package we worked like a dog he worked like a dog and I did it to two or three others in the business and I mean we never had a problem we never had a problem my accountants and everybody pissed and moan pissed and moan how are we going to count for $100,000 where are we supposed to put it what wh which slush fund would you like me to debit so I up having to put the100 [ __ ] thousand on myself cash because the Cooper and Li said we got to make a footnote [ __ ] your footnote I'll put up give me the money myself and uh and ultimately I took it out of the next fee for Cooper and liver and they knew it because I beat him up on the fees and coincidentally it came to about $103,000 and the partner in charge knew he wasn't an idiot even I called him an idiot all the time and he says I know this is just a coincidence and I said what and he says that there's we're fighting over $13,000 in the bill after you already beat us up on the bill and now all of a sudden there's $103,000 you don't want to give us no no now it's worse than that Ronnie we didn't give you it's not that we we don't want to if you check the the accounts we didn't give you we reduced the bill by 103 I I forget why it was 3,000 but you know time value of money or something I knocking for another three grand do not concentrate on structure and systems uh to the extent that you lose your vision it's very easy to get into an organization when you buy something uh oh no when you're selling or buying that when you're putting down on paper they lose sight of the vision when they're buying and when or selling when you're buying a business you know you don't want to get tied up there's time enough to understand the structure uh in systems procedures and processes I mean what you're looking for are you buy assets for value for money and you don't want to ever buy any assets you're on the buying side now you don't want to ever buy assets if you don't think you can make you can make them more valuable you don't want to just swap dollars and I always say when I'm looking at these numbers always swapping dollars here is in my imagination and most of the time when I say that I'm right not all the time because there's a there's a German reason that isn't apparent to me and it's not in the footnotes it's not so oh I said okay okay well but it still looks like it could be swapping dollars so I I don't want to you know in the next monthly accounts you know let's make sure that everybody's aware that Dan doesn't like swapping dollars I don't like putting up a dollar to make a dollar my my own personal threshold for paying is three to one the very minimum over what time frint whether a day I'm not putting up a dollar unless I'm making $3 and my company Ru of th is $5 put up one to make five because we're not always going to make five if our goal is you know last time when I look at these things our goal is 11% cash on cash so [ __ ] what I wouldn't roll I wouldn't turn on my [ __ ] computer for 11% I wouldn't roll out of bed and I piss I wouldn't roll out of bed to go to the B I just piss on the floor 11% cash on cash I can't be to tell you how many deals I get oh oh my got a 7% cash on cash or 11% please please I don't have a weak C but get the get the fibulator get the things J me just for fun I mean I mean no nobody with any money why would anybody it's only and the other thing I I I forgot to tell you I just [Music] started several years ago a guy that Shamy Dylan introduced me to who's a m aboto the shaer as I used to call was a a a real estate guy and he was doing scams in Dubai when Real Estate was going up 10% a month or some [ __ ] and he came to me and um and so uh he told me his poor he had been there 7 months or something and uh so he he came to S and he was an Arab guy nice guy nice guy Muslim guy smart guy and uh he said that um um we're making 7% a month or something that's great that's great and I said okay you made 7% a month and then I asked them um what's your um uh rate of return so far in in the deals that you've done he goes 30% I didn't think about it you know I was drinking it was graduation night and I said 30% so it must be only involved here four four months four months so then I asked him a later how many months you've been there he says 10 10 months 7% a month something doesn't calculate you know I didn't even know get I didn't need to go get my diploma man to figure out that something didn't calculate so now when we're really having a lowed to drink a rep PL snooker and I'm listening to uh Elvis press no no uh The Beetles on the jukebox machine uh and uh some song and so I said hey uh Muhammad come here and and the Beet signs blazing you can't hear anything and people are all [ __ ] up drunk and I say um um H H how is it that you had 30% you've been there 10 months and you're getting 7% a month he says oh because uh the uh we didn't get 7% every month we lost money some months and uh I said oh and and he said that um but we so what he had done is he had annualized the good months and he hadn't accounted for the bad and so um but even 30% a year I mean and this we State Market was going nuts uh and then of course now after the collapse they've all lost all their Equity all the guys guys were going getting on planes from London flying there buying options on the properties because they hadn't built the buildings yet coming back to London and selling them for two three 4 100% more okay and of course now they're all empty some of them are half built and everybody's lost their ass except the guys that took the spread the Arbitrage the guys and really never put up any money and um the U so we you know we have we have we have we have seen these things but guys none of the guys I know with a lot of M ever got involved in this deal some of the guys owned the land that the property was being put on some of those guys that owned the land because I have some Middle Eastern friends that owned the land and they fli the land as quickly as they could to some developer all the developers have gone bankrupt Builders have gone bankrupt everybody's down the toilet so now the government stepped in is trying to resurrect cuz you know they don't went the whole thing you know this uh you know the island of houses of islands or yeah yeah and Elton John paid $50 million for England uh for the the part of England and some other people in and S I look at some of the houses and the global warming is even 1% correct all those are under water that whole thing is dead and in fact if you look at it the water line they started six seven years ago it's moved up about 10 ft up the beach up the beach now maybe that's just an anomaly I don't know but I know from when they started it was 10 ft over there and now in the morning the water's up here so I don't know if it's global warming or not but all I know if it goes up another 15 or 20 ft it's going to be in the living room of all those houses and they're surely not putting cliffer chances and putting that in the in the prospectuses for the people the English investors there's no there's no question about that so I mean we're when I when I look at the I the only people that have not much money calculate rates of return you know annualize rates of return I mean when Donald Trump puts money up for a casino he's looking to make a thousand times his money he's not looking to make 11% cash on cash I mean and so whenever you talk to somebody like that I mean they know that one they've got no money and you always sound better making an annualized rate of return you haven't even been in business 12 months so you got to annualize it and then if you really drill down as I did I mean they're they're not even doing it right they're they're annualizing the best months and some months they didn't invest in yada yada okay pay yourself and your staff first we know that if you learned anything you should remember that that's normally the thing that people remember the best coming out on the seminar and good times and bad that's what they remember they they might not remember anything else I say but they remember that I don't have to beat them up on that as much although I got another email from the Chinese and I said Bo I I wish you guys had been here I could have it would have been like a pingpong match whip the Germans and with you wh the Germans and then wh you and then I said an American showed up from your part of the world CU they're up you're up by there you know they're in Silicon Valley they have an office in Silicon Valley and an office in Shanghai and I said it would have been a thing of beauty it would have been a thing of beauty it would have just been I would have felt like being palor just beating and chopping okay don't always postpone uh your pleasure in definitely um I talk about my dad got rest his soul he just died a few weeks ago actually a few months ago now um he postponed his financial happiness for a long long time and then he finally did enjoy it which I'm happy to say but he could have enjoyed it earlier he could have enjoyed it earlier but he didn't you know he's been working since he's s years old was a Sho shine boy shine shoes his first job uh during the Depression but um when I see the movie and I've seen it two three times in 2012 if I learn got anything from that movie other than um the um that the rich people are the people that got on on the barges at the end it wasn't the poor [ __ ] it was the rich [ __ ] until they let a bunch of poor surfs peasants which would to happen in the real world they would have just left the dot with all those poor [ __ ] but they made the m movie look better they let the poor [ __ ] on okay but rich is good because when it comes down to hav and hav Nots it's the guy with the Monies the money and a guns that are going to make it onto those barges