Lessons Learned from Failed Partnerships | Ep 712

This episode delves into the essential lessons Alex Hormozi has learned from failed business partnerships, particularly focusing on what to avoid and how to structure them for success.

1. Ensure partners bring something unique to the table (skills, time, or money).
2. Equity distribution should reflect each partner's contribution, not be automatically equal.
3. Clear, upfront discussions about roles and contributions are crucial.
4. Partnerships should be formed based on complementary, not identical, skill sets.
5. Regular profit distributions are essential to maintain personal and business financial health.

1: Introduction

Alex introduces the topic and discusses his general perspective on business partnerships.
Alex Hormozi: "The wealthiest people in the world see business as a game."

2: Early Partnership Experiences

Alex shares lessons from his first gym partnership, emphasizing the importance of complementary skills.
Alex Hormozi: "They have to have something you don't."

3: Equity and Contributions

Discusses the pitfalls of inequitable equity distribution based on unequal contributions.
Alex Hormozi: "You lose the most equity on day one."

4: Structuring Partnerships Properly

Advice on how to structure partnerships effectively to avoid common mistakes.
Alex Hormozi: "Equity doesn't need to be equal."

5: Ensuring Financial Discipline

Alex talks about the importance of discipline in profit distribution and reinvestment for growth.
Alex Hormozi: "Profit is a discipline."

1. Identify Unique Contributions: Before forming a partnership, clearly identify what each partner uniquely brings to the business.
2. Discuss Equity Early: Have open discussions about equity distribution early to match contributions and avoid future conflicts.
3. Complement, Don't Duplicate: Seek partners who complement rather than duplicate your skills.
4. Set Clear Roles: Define clear roles and responsibilities for each partner from the start.
5. Regular Profit Distributions: Implement a strategy for regular profit distributions to maintain financial health.

"You have to be able to allocate time money effort into the thing that's get you the most back.” Today, Alex (@AlexHormozi) shares valuable insights past failed partnerships, emphasizing the importance of equity, contributions, and disciplined profit generation for business success. He provides practical advice for entrepreneurs on wise spending, navigating equity distribution, and making strategic decisions for sustainable business growth.

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 on his path from $100M to $1B in net worth.

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Alex Hormozi
If you just keep running your business and keep taking the profit and buying shit you don't need in the business, you're not running a profitable business. You're not reinvesting in growth. You're just not making money because you don't have discipline of spending.

The wealthiest people in the world see business as a game. This podcast, the game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a billion dollar portfolio. My hope is that you use the lessons to grow your business and maybe someday soon, partner with us to get to $100 million and beyond. I hope you share and enjoy.

I have had failed partnerships in my career before I started making money and doing what I do now. And there was a long period after those partnerships where I had zero partners for a very long period of time where I made all my money. I seem like I am against partnerships, but I am the opposite of that. I love partnering people arguably too much. And so I had to make a hard rule for myself that I was no longer going to do this.

And I'm only defining those partnerships as partners that I made money with. As in, like that we generated business, generated revenue in businesses. And when I talk about how I've had many failed businesses, many of them were with partners, all right? And there's nothing wrong with that. It's just that I didn't know how to do them well.

So I'm going to give you the nitty gritty of every lesson I learned from all of them. So the first partner that I ever took on was an advisor, told me, hey, use your partner with this guy to start a gym, my very first gym. And he said, he's already got a gym in the neighborhood you want to be in. You can start with his clientele base and just go into a bigger gym and come together. And I was like, okay, that sounds good.

And he's like, yeah, you guys both have the exact same skill set in the exact same business. You guys should just split it. And then I will take 10% for putting the deal Together. So you'll be 45, he'll be 45, and I'll be ten for advising and putting this whole thing together. And we both said, sure.

Now, guess what the worst way to start a business partnership is. You both have the exact same skill sets, and you both bring the exact same thing to the table. We're both bringing work and very little capital to the table where we have the same business that we're trying to do. And guess what? Most people do when they start a business.

Exactly that. So lesson number one are partnerships. They have to have something you don't. So they either have to have time you don't. They got to have money you don't, or they got to have skills, you don't.

That's it. If they don't have one of those three things, one of you isn't needed. Lesson number one, they got to have something you don't. Lesson number two, you lose the most equity. Day one.

So most people are so anal about how they want to sell their company for this amount of money, and blah, blah, blah, blah, they're thinking about their equity, what profit isn't? They're so stingy on these one or 2%. But day one, they lop half off and give it to somebody. They off two thirds off and give one third here and one third here because they've got three buddies and they say, hey, well, there's three of us. Let's cut the pie into thirds and we'll go into business together.

Doesn't work that way because oftentimes the economic contribution is not equitable. Now, again, I said earlier, you got time, money, skill. If you look at time, money scale between all the people that are going to get into business together, if you have more than one of those and they have more than one of those, well, how much is each person contributing? Now, part of that comes down to negotiation, being really honest about it. But people want to avoid these hard conversations early on because they're like, well, hey, if it works out, we make a lot of money, it's not going to matter.

I fucking promise you, the more money you make, the more it's going to fucking matter. I promise you. I promise you. You're afraid to have the conversation when you make $0. Try making 4 million a month with that same partner and think that it's not going to.

Like, it's all going to be cool when you're writing them a check for a million bucks every fucking month and they do nothing. All right? Like, think about it. I'm not living that from experience. So, point being, you lose a lot of equity.

Day one, equity doesn't need to be equal. So, for example, if you did want to bring partners in, you could have a 95 five split. Just make sure that what people are doing, what they're investing in, time, money and skills, is appropriate for their contribution. And believe it or not, I think you just have to start with that frame, which is, hey, guys, let's be honest. In this business, our contributions won't be equal.

And so I don't think it makes sense for equity splits be equal, and if they balk at that, then thank fucking God you said that on day one, so you don't have to deal with it later. Now you have this fear, well, what if I can't do this business without them? I promise you, you can do the business without them. Every successful business I had during the period after my nine failed partnerships, I did on my own. Okay?

And so not on my own with Layla, my OG ride or die partner. So I give half no matter what. But that was the lessons that I learned from my first two partnerships. The second two partnerships that I had, I basically brought in advisors, and this actually had nothing to do with the individuals. This was purely on me for not knowing any better.

And so when I got into business with these guys, I gave away too much equity too soon based on what they were going to contribute versus what I was going to contribute. And so I was going to run the business all day, every day. I was going to be there. I also invested capital, and I was also the one who knew everything about fitness, and the individuals didn't know either of those things and weren't going to be spending all their time in the business like I was. And so they didn't take a salary because they had other income streams.

They were far wealthier than, far older than I was, and I didn't. And so I had saved up about $70,000 in the first six months or so of my business. So you're like, wait a second. You were making money and the business was growing, and then you brought partners in? Damn straight I did.

And then I sold two thirds of my business for the cost. It cost me to start it, not for what it was making me. So every month, I made two thirds of what I got paid for the entire two thirds of my business because I was a moron. Not really. I was inexperienced, and I didn't know any better.

And so, again, they were wonderful people, and they still are great people. I didn't know better. Like, it was me paying down ignorance debt. So when you're getting in, you want to be really clear on who's putting the time in, whose skills and expertise are being leveraged and where the money's going to come from. And if you're the one who's in the business, you should get paid as an employee as well.

Like, there's ownership and then there's working in the business. Now, if you own a business, and business itself is sellable then that business has employees and then those employees like over time, if you're an employee of your business, which you should be in the beginning, if you move out of the employeeship, you're going to have to replace yourself with someone who has to get paid there. So if you're saying, hey, I want to be 50 50 in this business, but I'm going to be working in your not, for example, which happens a lot, you say, I'm 50 50, but I need a manager salary because this is what this would be. And that basically makes up for the fact that you're doing the job and taking the risk on now, over time, you can replace yourself. Now you're both owners outside of the business.

But that was a mistake I made, is that for two years I didn't take distributions from the business. We kept opening new locations, which was great on paper, but I didn't take any home. And so I was living on my savings for two years. So you hear about some of the success and you also hear someone like, how I live so cheap. And it's like, how did those things happen at the same time?

It happened because I didn't take any money out. And so rule number three, make sure that if you're in the business and you're doing a job, that you get paid like you're doing a job. On top of that, I would recommend forcing profit. Forcing distributions. Now, if you're a fancy business person, then do fancy business things, fine, you can reinvest the capital, and you know what your rate of return is, whatever.

But for 99% of you, your business is how you're going to make money and feed yourself. So I'd recommend you treat it that way, which is that you should be trying to rip out profit every month because that was the point that you started to begin with. So trying to optimize towards profit and not thinking, I'm reinvesting the business. The amount of times I talk to entrepreneurs who are like, I'm like, how much you take home this year? And they're like, nothing.

And I'm like, why? They're like, I'm reinvesting everything in the business. I'm like, okay, there's a difference between reinvesting everything in the business and not making a profit. Not making a profit is not reinvesting everything in the business. It means that your business sucks.

And it's much harder to say that. And it's way sexier when you say, hey, I'm reinvesting in growth. But if you're actually reinvesting in growth, then I would say, then what's your return on capital? And if you don't have the answer to that question, you're not fucking reinvesting in growth. You're just not making money.

And so reinvesting growth means I've got a location, for example, that makes $200,000 a year, and it costs me $200,000 to open a location. And so every year I take the capital because there is profit, and I take that money that is there, and then I put it to open a new location, and then that one starts making 200,000. And next year I have $400,000 in profit that I now have to allocate. Now, if you just keep running your business and keep taking the profit and buying shit you don't need in the business, you're not running a profitable business. You're not reinvesting in growth.

You're just not making money because you don't have discipline of spending. All right, so profit is a discipline. Like, it's not natural. Money wants to get gobbled up because everyone wants it. And so you have to hold the line and say, like, no, we're not spending this money, period.

So that there is money left over so that we can weather bad days, so that I also can feed myself. You force profit by not spending money on shit you don't need to spend money on. For real. If you're like, man, you have to be comfortable with. Like, that's good enough, especially early days if you're bootstrapping.

Like, would it be great to have an amazing lobby? Sure. But if renovating the lobby is going to cost 25 grand and your business makes 75,000 a year, you have to make the argument that that $25,000 is going to get you a return. You have to translate that into, how's this going to retain customers? How's this going to get more people in the door?

How's it going to be pricing power now? Maybe a nice lobby might translate into higher close rates, but I'll fucking bet you spending $1,000 on training your sales team will do a hell of a lot more than spending 25 grand in the lobby. So, again, this is return on capital. You have to make an argument, like yourself. And so McKinsey, Bain, and Harvard did these big studies on the highest performing companies in the stock market.

Now, what do they have to do with me? I'll tell you. The CEO's that consistently outperform the s and p 500, which is just the index for the whole market are the biggest companies in the market. They thought of themselves as investors first, because if you think about what a CEO does, it's strategy, and strategy, just a fancy word for priorities. And so if a CEO's job is to prioritize, that means that they are allocating resources.

Everyone has limited resources, time, money, effort, skill, whatever. And so we have to allocate it against unlimited options. So limited resources, unlimited options, and we have to allocate it where we get the highest return. And so the people who are the best at allocating time, money, attention are the ones who get the most back. And so if you think about yourself as CEO of your business, you have to be able to allocate time, money, effort into the things get you the most back.

So if I have a $25,000 lobby renovation or $1,000 sales training, I'm going to bring in to get my sales to go up, which of these is going to be a better investment? And so the thing is, do I think the lobby might make us more money? Sure. But is there something else that can make me more.