The Game with Alex Hormozi
Critical Advice for Businesses Making Less Than $10M | Ep 824
Mon, 13 Jan 2025
Welcome to The Game w/ Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned and will learn on his path from $100M to $1B in net worth.Wanna scale your business? Click here.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition Mentioned in this episode:Get access to the free $100M Scaling Roadmap at www.acquisition.com/roadmap
Chapter 1: What is key man risk and why is it important for businesses?
Welcome back to the game. Business owners making less than $10 million per year cannot afford to make this mistake. And it's a problem that limited me and my ability to sell my company. And there's four parts to this mistake, and it starts with something that I like to call key man risk.
If a single person is vital to how your business operates and if they were gone, the business would cease to be able to exist or be able to be as profitable as it is with that person. And so this key man risk can exist at the founder level. So it might be you, like if your business, if you leave for two months, which by the way is a great test of this,
If the business cannot sustain its level of productivity, like if all of a sudden the sales go to zero, or they cut in half because you're the only good closer, or all of a sudden you're not even getting leads because you're the only good marketer, or because the product can't be delivered because you're the only person who knows how to do it, right?
In each of these situations, there's key man risk. And that can be, of course, you, the owner. In the beginning, it's more common that it's you. And then over time, that key man risk can be an employee who works for for you.
It's just as dangerous for a public company that has an employee who has zero stock in the business, who happens to own all the passwords, for example, to every single dedicated system. Like if that person leaves, it could do material damage to the business. you've got these functions that occur in the business on a regular basis. And there may be multiple people that can do these functions.
And so the opposite of key man risk is redundancy, meaning if one of these people disappear, we still have a flow for, let's say, dollars to go across this bridge. It can still kind of make its way through. All right, so let me tell you a story. So... One of the key man risks that existed in gym lunch, and we had multiple. So the thing is, is that this can happen at any function.
So this could happen on the marketing side. If only one guy knows how to generate leads or if that person left, you would get half the leads or a third of the leads, that would be key man risk. If only one guy knows how to sell like you and that guy closes 80% and no one else can close 20, that would be material. That would be key man risk.
If only one person can do the delivery, that would be key man risk. And so I'll give you an example of the delivery. And so when I had Jim launch, I was kind of the innovator of the product and the service. I came up with the solutions for the Jims. And so for an acquirer or a private equity firm who wants to buy this business, or whoever else you might want to sell a business to,
Having one person, especially if it's the person who's going to leave when the business is sold, is a huge, massive red flag for them because they're like, wait, we're buying this production, but it's with this key cog in the machine and you want to have us buy this thing and remove the cog.
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Chapter 2: How can redundancy help mitigate key man risk?
is more likely to continue and so the business itself becomes more valuable and you can sleep much better at night knowing that if one of these things goes down, my team is still fed. And so when we make this investment, here's one of the big no-no's, is you don't do two news. Like what's two news? So you don't wanna have two news. So what does that mean?
Well, if you're gonna start a new channel, that's one new. What you don't want to do is put a new person on a new channel because then you don't know which new is the problem. Because even if you take you and maybe you're really good or your best person and you put them on the new channel, well, there's already the newness of the new channel and you won't know.
But if it's somebody you know who's really good, then at least we're working through the channel itself. Otherwise, you could be stuck paying lots of money for a long period of time not knowing if you're solving the right problem.
which is why I'm such an advocate for founders to have deep understanding of the core processes of the business, which for me are understand how you get customers, which is going to be marketing and sales, and understand how you deliver value.
Now, if you wanted to outsource IT, if you wanted to outsource accounting, if you wanted to outsource HR or payroll processing, those are things that I don't see as core to the business. You can of course bring them in-house when the cost makes sense.
But in terms of the core economic engine of the business, those are the things that you, the founder, the entrepreneur, want to understand intimately. If I am going to start a new channel, I do these two things first in order to give myself some breathing room.
I get a little more cash flow, I get a little bit more from what I'm already doing, and then I have one new, which is the new channel, and then old person. Now it doesn't actually have to be old, but it's somebody that I know. This can be tough because you're like, wait, wait, I don't want my original channel to go down, which is the most common thing that happens in this situation.
My recommendation is transfer the skill on the first channel first, to someone else, make sure that they can handle that without decreasing performance, ideally it goes up, then and only then you can then make the investment into the second channel where you're the old guy and the channel's the new thing. to bring somebody in to help you with this, I think that's a great idea.
Like if you're a larger business and you're like, I can't actually just like figure out cold outbound, that's fine. But you basically have a thought partner and you guys are working through it together because you'll have more context on the business overall. And maybe they have more context on the methodology that you're going to use for the second channel.
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