I thought it would be fun to write some posts about all of the different types of leverage I’ve run across over the past fifteen years. I’m going to use real anecdotes - most of which come from my life as a consultant or from things I've seen friends do.
When I say leverage, what I mean is opportunities to exponentially multiply the value of time.
Einstein supposedly said “Compound interest is the 8th wonder of the world. He who understands it, earns it…he who doesn’t…pays it”. When people hear this quote my guess is that their minds immediately jump to stocks (especially on Commonstock/Fintwit!). And when people think about leverage their minds usually go to using margin or options to lever up a stock portfolio. Less often but still frequently real estate probably comes to mind.
But the world of compounding – which is insanely magnified by leverage (as I defined it above) - is so much vaster than public securities and real estate. And as I’ll show in my next series of posts the potential returns of other forms of leverage are in many cases far higher and less risky than Yoloing options.
There will be 6 topics in this series (though I may combine some into the same post), each looking at a different form of leverage.
• Buying a business. I’m going to run through some napkin math on return potential from purchasing a business for $5m with an SBA guaranteed loan and seller financing (most common structure for small business acquisitions in the US). As a rule of thumb you're going to need 20% equity in an SBA guaranteed deal - so that's $200k for a $1mm business and $1mm for a $5mm business. In my life as a consultant I’ve probably looked at over 50 different businesses in the $1mm-$10mm valuation range, and done enough work to get smart on maybe 15-20 (usually because a transaction/financing was taking place), so I’ll also use this as an opportunity to comment on some of the things to keep in mind if you’re wanting to explore buying a business yourself. I’ll also comment on some of the incredible tax benefits – if you aren’t already familiar with them this will really blow your mind.
• Owning a business. In this section I’m going to do two things. First I’m going to provide some interesting examples of operating leverage. Second I’m going to provide some examples (real anecdotes) of how owning a business gives you optionality, and will over time multiply by orders of magnitude your opportunities to “get lucky”.
• Having a following (social media, newsletter, etc). The reason I started my Substack was because I kept seeing examples of how effectively (and profitably) people monetized followings. I have no idea at this point how I will monetize my Substack, but it has already provided enormous value and introduced me to awesome people, and as I’ll explain in this section is surely giving me lots of optionality for the future. I’m going to discuss five monetization methods I’ve seen: 1) Selling products; 2) Selling subscriptions; 3) Selling advertisements; 4) Fundraising (e.g. to make one or a series of investments, start a fund, etc); 5) Selling services. One particularly interesting anecdote I'm going to run through is a Youtube creator who started an ecommerce business, grew it to multi-million $ revenue in the first year - and who has ridiculous profitability due to having effectively zero customer acquisition costs (CAC), and discuss a bit about how creators have far more pricing power than faceless products.
• Digital advertising expertise. The anecdote for this section is ecommerce rollups – which are a particularly hot space for HNW individuals right now. If you are an ad-guru you can monetize that expertise at a firm or as a consultant and get paid hourly/salary. You can start a marketing firm (more leverage than hourly, but it’s a competitive space and definitely doesn’t offer the most leverage possible). Finally, you can use those expertise to raise money for a rollup/aggregator. I’ve now run across multiple examples of companies who started out as small agencies but who have transitioned to having most of their business focused on buying ecom companies (essentially turning into small PE firms and making tons of $$ in the process)– I expect this trend to continue at an increasing rate over the coming years in no small part due to changes in the ad market (especially Amazon's). Becoming an ad-guru is not easy, but neither is it inaccessible to most people. It's something you can start working toward part-time and even monetize as a side hustle.
• Real Estate. In this section I'm going to provide a brief overview of at least 3 different types of deals that are less well known. First, change of use – essentially buying a property that is priced as if it’s one thing (farmland or forest say) and then turning it into something else like home lots or commercial/mixed use. Second, sale-leaseback – specifically buying a vacant (and hence underpriced building) and then using your own business to occupy it – signing a long term lease with yourself and then selling the building at a market level cap-rate. Third, conservation easements - essentially you can contractually obligate yourself to never develop a property (though you can still use it for other purposes like hunting, recreation, etc), and in return receive enormous tax benefits - this is something developers and even individuals do when they buy some land but don't want to use the whole thing (for example you want to build 10 houses and have some nice green space around a pond - might as well monetize that green space if you're not going to build on it)- and is a way to immediately pull out capital in the form of tax credits.
• Being a financial advisor as a side-hustle. My view is that many people who are at least moderately financially savvy would be well served getting their series 65 (the license you need in the US) and becoming a financial advisor. As I’ll explain with some basic napkin math this is something that has incredible long term compounding potential, interesting optionality, and can be done with only a few hours of work per week. Even if you absolutely suck at “selling”, you are virtually guaranteed to build a 6-figure passive income stream if you do it long enough - this may be hard to believe but it's absolutely true.
Going to get started on the first post now - if anyone has other interesting examples of "leverage" I'd love to hear them! Also happy to answer any questions about any of the above if anyone has them and wants to learn more, feel free to ask in comments or DMs.