The Ultra Rich Playbook [Legal and Tax-Free] | Ep 718

This episode focuses on strategies used by the ultra-rich to build wealth and manage taxes legally.

1. Income generation combined with strategic investment is key to building wealth.
2. Understanding how to leverage public and private equity can significantly boost financial growth.
3. Employee Stock Ownership Plans (ESOPs) and dividend recapitalizations are effective for managing wealth with tax benefits.
4. Achieving high net worth involves careful planning, understanding of financial instruments, and judicious investment.
5. Hormozi emphasizes the importance of education in finance and leveraging professional opportunities to maximize income.

1: Introduction to Wealth Building

Alex Hormozi shares his personal journey and initial strategies for wealth accumulation. He explains the foundational strategies used by the ultra-rich. Alex Hormozi: "I got my first hundred million dollars by age 32."

2: Deep Dive into Strategic Wealth Growth

Detailed explanation of using ESOPs, dividend recaps, and leveraging public equities. Alex Hormozi: "ESOPs can be incredibly beneficial, allowing you to retain control while offering stock to employees tax-free."

3: Application of Strategies to Personal Goals

Hormozi translates high-scale financial strategies to more attainable financial goals like achieving a $10 million net worth. Alex Hormozi: "Using these strategies, even personal wealth goals become more attainable."

4: Closing Thoughts and Advice

Summary of the episode's key points and additional advice on leveraging opportunities. Alex Hormozi: "You have to make bets, and you want to make the bets that you feel like you have an information advantage over other people."

1. Consider learning about ESOPs to manage business equity in a tax-efficient manner.
2. Explore dividend recapitalization if you own a business as a way to manage debts and improve cash flow.
3. Invest in understanding and leveraging public equities for long-term wealth preservation and growth.
4. Regularly reassess your investment strategies to align with current financial goals and market conditions.
5. Engage in continuous financial education to better understand and leverage market opportunities.

"The single greatest and most valuable skill that a human being can have is the ability to come to their own conclusion..." Today, Alex (@AlexHormozi) shares his strategies for achieving a net worth of over $100 million through smart investing and value generation. Learn how the ultra-wealthy build their fortune with unique insights into income generation, passive investing, private equities, and the importance of selecting high-leverage opportunities.

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.

People

Alex Hormozi

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Gymlaunch, Acquisition.com

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$100 Million Offers, $100 Million Leads

Content Warnings:

None

Alex Ramozi
How the ultra rich get rich and avoid taxes legally. And if you don't know who I am, my name is Alex Ramozi. I got my first hundred million dollars by age 32. And I did that by taking $42 million in distributions from my first big company, Gymlaunch. And I ended up selling that company for 46.2 million.

I reinvested that 42 ish million in distributions into a portfolio of companies that today@acquisition.com. just over $200 million a year. And so that's my evidence to why I have something worth saying about this. Now, that being said, I'm going to split this video into two parts. One is the four strategies that the ultra rich use in order to get wealthy.

And then the second half, I'm going to explain how you can use those same four strategies to reverse engineer a $10 million goal. And the reason I use $10 million as the net worth goal is because $10 million at four or 5% per year, which would be basically a risk free investment strategy, you'd be able to live like the top 1% in today's market. So you could move these dollars up as dollars get inflated and all of that kind of stuff. But for now, these are the big four strategies. And so these developed over time as my understanding of money improved.

And so for me, I now want to make a billion dollars, or at least be worth a billion dollars. Ha ha. Lots of zeros. Okay? So the first version of this that I thought in order for me to be worth a billion dollars was to make $1.5 billion.

I know a lot of zeros in income, all right? Because after taxes, which would be 67% taxes in the US, which is the highest federal tax rate that you have to pay, you'd be left with $1 billion overall post tax, okay? That's the zero leverage version of making money. So this is just income generation. All right, v two of this is thinking, okay, well, if I make a billion dollars or I make income every year, I'm going to invest a certain percentage of that income into making money for me passively.

And so this feels harder than making $100 million per year and reinvesting that money at 9%. So the clear point here is, I'm just saying, this is just the s and P, this is just the market. This isn't doing anything fancy. You're just buying indexes of the s and P 500. Now, at $100 million a year, in ten years, you would make $1 billion.

Now, that's because this post taxes, you'd have 600, sorry, $67 million post tax income that you then invest at that same 9%, which would get you your billion dollars after a decade, you're like, okay, well, making $100 billion a year in income versus making $1.5 billion in income over however long period of time. This feels a little easier because now I'm using two things. I'm generating income, plus I'm using public equities. All right? So I'm using passive investment strategies for things that are readily available to the public for everyone.

The v three version of this, it gets spicier and spicier every time, is that you make $100 million per year and you own the asset, you own the business that makes this much money, and you sell it at, call it twelve x. When I say twelve x, it means twelve times earnings, which a company of this size, it'd probably be fair that it would get that kind of multiple because it's so big, which means that you would make 1.2 billion, which would leave you post tax with around $1 billion. Now, what people don't talk about this as a total side note and as somebody who sold multiple companies, is that everyone has this big dream to sell a company and get the check. But what they don't tell you is that you then have a check, and then you have to do something with the check. So now you have to translate that check back into equities.

So you just sold equities and you get money, and then you have to buy equities yet again. And so then you have to think to yourself, am I going to get a better return on this billion dollars than I do within the existing business or asset that I ended up selling? And I'm going to translate these zeros down to the $10 million goal that we're talking about in a second. But I just like to show what it looks like at scale, so that this can, just, so you can see how the big ultra rich stuff actually happens in the real world. Now, this is the V three version.

This is income. So that's the scale. Plus private equity. All right, so this was public equity. This is private equity.

All right, so a little bit different. This business isn't available on the market. There's institutional buyers who raise funds, and then they will give you a check for the business. That's V three of this. Now, V four of this is very sexy and has three different sub strategies.

All right? And so in this instance, you have your business that makes $100 million per year. And so you choose one of three paths. Path one. So we'll go a, we'll go b, and we'll go c.

So at the top level, you can do something called an ESOP. An ESOP is an employee stock ownership plan where you sell between 33 and 49%. Mind you, this is a minority stake in your business, and a bank will finance your employees backstopping that debt with the equity that you sell them. So employees are here, bank is here. So employees get the equity here, bank is here, and then there's you.

And so the bank gives you money and lends it to the employees to pay you, using the stock that you gave them as collateral. Now, what's interesting about this, at least in the United States, and I'm sure there's different functions like this internationally, is that this payment, at least in our tax laws, is tax free. And so you get a smaller multiple because banks will always pay less because they have to think about risk and not upside than potentially a private equity buyer would. But this is tax free to the owner, which is pretty sweet. Now, one of the other nice things here is that you still maintain control of your business because you still own majority.

And so if you do it in this way, you can help your employees get wealthy. You get a tax free check, they get to participate in the growth of the business. And oftentimes ESOPs can go well, because then now you have a huge team of people who are also incentivizing, growing the business, and, quote, act like owners, but they didn't need to come up with the money. It's like, here's your stock, and then they go straight to the bank, and then the bank gives them the loan to pay you for the stock you gave them. It's kind of how it works.

Okay, that's version a of this. Now, the way this works, though, is that you just traded the equity and you get cash for what you gave the employees, but you still own the asset. And so the asset is still worth what it is in the private realm. So if you add those two things together, you still have a billion dollars, but you get the liquidity and you keep the control. The version B of this is something called a dividend recap.

So, dividend recap is using the same bank structure that you'd have with an ESOP, except you just cut the employees out of it. You just go directly to the bank and say, hey, how much will you loan me using my entire business as collateral? Now, if you think, huh, that's weird, think about it like buying a house. If you buy a house, you go to the bank, you put x percent down, and they give you debt for the rest of it, and then you pay that debt off. And so the business actually works the same way.

So if you have no debt on the business, or even if you do have debt on the business, you go and say, hey, we can reliably produce this much income and so we could pay off this level of debt. And so then a bank would say, okay, well, we'll give you four times or five times your total EBITDA or your earnings for the year, roughly, and we'll give you that as debt. So if I make $100 million a year, they might give me a $500 million loan that they know that my business will be able to pay the interest off on, which for them makes sense because they're just getting paid to give money that they loaned out. Right. And then you have terms associated with that debt.

Right. Now, if your business is growing, then it makes a ton of sense to do that. You de risk a little bit as an owner. And the key point here is that the business carries the debt, not you personally. And so you as a person, the owner of the business gets to take the $500 million, but the business pays the debt off.

And so let's say five years later, maybe the business pays all of the debt off. You got the $500 million and you still own the business, just like owning a house at the end of paying it off works the same way. Kind of cool. Now, the third version of this is one that people are a little bit more familiar with, which we kind of used earlier, which is public equities, meaning you go public with the company that you have. And so now when you go public, you only have to sell a small percentage of shares in order to make them available to the public.

And by doing that, the remainder of the stock that you have starts to have an actual marketplace value. And so the value of this, and this is one of the biggest benefits of going public, is that you don't have to sell 33% to 49% of your shares. You could sell 10% or 5% of your shares, and then the other 95% has a market value in real time. And so then you can still go to those same institutions, banks, et cetera, and say, hey, I want you to loan me. And the thing is here you can do it piecemeal.

You don't have to go through a six month process or twelve month process to get one specific amount. You can say, hey, lend me 5 million today, lend me 20 million tomorrow, lend me you, you know, 100 million on this other day. And you can do that process in 24 hours because you have equities that are publicly available, which they can collateralize, meaning they can then take that if for whatever reason, you don't sell. And so most of the times, banks will loan up to 50% of the value of the stock that you have. And so if I have a billion dollars in stock, I can get a loan up to 5000, $500 million.

And so this is exactly what Elon did when he went to buy x. He just took a loan out of his wallet and then just bought it in cash. Kind of cool, right? And so the idea here is that these are three different ways that you can use. And you're like, okay, well then what's the meta strategy for V four?

V four is you have an income producing thing, plus you understand debt, because all three of these strategies use a bank or an institution to front the capital. And the main thing with all three of these is that you actually retain ownership and control. And so as my understanding of money and markets improved, I started to understand different ways that I could achieve my billion dollar goal. Now, if you're like, okay, Alex, that sounds great, but you said there was something about the ultra rich and avoiding taxes. Well, let's talk about the taxes and let's translate it to the $10 million goal.

Okay, so here, this is tax free. Pretty nice with the ESOp thing, the dividend recap. Also, this isn't tax free because you have to take it as a payment, right. So that one you still have to pay taxes on. Here, it's tax free because it's a loan against your public equities.

Part of me feels like dividend recap might be tax free. Not sure on this, but the public equities, absolutely. The loans that you take against them are tax free because they're loans and you pay interest on them. And then you have to pay loans back. And that's the big thing.

And there's a big, you know, I'd say a little bit of a misconception around this. It's like, oh, these rich people, they should be paying tax on unrealized gains. Well, until someone gets money for something, I think that it's like having someone pay income tax on a paycheck they haven't gotten yet. I feel like that's a little bit ridiculous. On the other hand, with the public equities piece, you still have covenants that you have to be responsible for to whoever gives you the money.

And so it's not like you get the money and you can do whatever you want with it, you have to pay it back. That's how loans work. Now, the only way that this works long term is that your business continues to grow. If the business goes down, then you're in deep shit, so you can lose it all. And so there's risk that's not being appropriately valued when people say, oh, these rich people just take loans off their stuff.

But this is fundamentally how you can do it and get liquidity or cash from something that you own that's valuable. Okay, now, if you're like, all right, Alex, that sounds fantastic, but I'm not trying to make a billion dollars right now. I'm trying to get to $10 million over the span of my life, ideally as fast as possible in net worth. And the reason I use $10 million is that because at 5%, you can make about 500,000 a year, at least in the US, which would be about the top 1% in terms of earnings. Pretty sweet.

Now, as a side note, this you also pay less taxes on. So this is usually going to be something called qualified dividends, meaning you only pay 20% on this rather than paying income tax. So you actually get more for your money when it's off of passive distributions. Okay, cool. So if we're using these four strategies here, v one of this is just the pure income method, which means that over the span of your life, you're going to need to make $15 million in income.

And then after your 67% tax rate, you'll be left with $10 million. Okay, that's v one. Not a lot of leverage, but you can do it that way. The v two version of this is that you make your $1 million per year. Per year.

Oops, there we go, $1 million per year. And you make. And you still pay your taxes on that, but you invest that post tax at 9%, and then after ten years, you have $10 million. So a total interesting side note on this is that with ten years, then at 9%, and given that the tax rate that exists in the US is that on a ten year time horizon, you can measure how good someone is at investing their money based on what their value of their portfolio is ten years later, relative to what their income would have been untaxed. And so if I made a million dollars a year, in ten years, I should have $10 million if I paid zero taxes.

But since I pay 37% taxes, or anybody who would make this would pay 37% taxes, then every year they're actually making $670,000. And so if you invested that 670 at 9%, then you'd make, at the end of that period, $10 million. So you'd actually be back where you started because you had to invest to make up the difference in taxes. And obviously the first year of that ten is significantly more valuable because of compounding than the last year of that ten. I'm keeping this simple and not getting into living expenses and things like that, which obviously would complicate this.

Okay, so that is income. Income plus passive investing. Income plus active investing. So v three of this is that you make $1.2 million per year from an asset, meaning you own a business that, let's say it does $10 million in revenue and it does $1.2 million in distributions or owner earnings. All right?

And let's say that you can sell this thing at ten x, all right, so less than the company over here, but the only way you'd be able to sell a company at this value, which you can at this size, reasonably, you know, if it's a business that truly is an asset. So right now, there's H Vac companies that are selling at 1012 14 x. There's dental offices, there's accounting firms. So these are real businesses that can be sold if you're in the right market. Again, I'm going to use simple illustrations here.

So this would then give us $12 million that you would get pre tax, and then you pay your capital gains taxes that you'd have to pay within the US, which would leave you with $10 million. Now, again, same as before, okay, I had this thing that was passively making me $1.2 million a year, $100,000 a month. Well, what am I going to buy with my $10 million that's going to replace this thing? Sometimes thinking the second step ahead can influence whether or not you want to sell this overall. But I do like to make the point.

So this one is income plus our active or private equity. So we had public here, we had private here. And then v four is going to look a little bit different because we have this $10 million goal. And so I want to tell you a different strategy that I think is wildly underrated, which is you can go and become an employee at a company or a partner, depending on how you want to see this, of a company that then goes public for a billion dollars that you own 1% of and that you earned over five years. And what's cool about this particular path is that you get all the benefits of this path over here, is that you can take loans against the stocks that you that are worth 1%, and you too can live like the ultra rich and take those loans tax free.

Now, you can't do an ESOP because you're not the owner of the business, but you can do, in my opinion, the most attractive of the three of these things, which is that you can have in real time, access to liquidity or cash to buy the things that you need based on the value of the asset you have. And so let's say that you start working in a business, they say, we'll give you 0.2% per year times five years. And you do the five years, and over that time period, the company goes public for a billion dollars. Da da da, 1 billion. Well, you get the idea then your stock is worth $10 million.

But here's the nice part, is that you paid probably a very, very, very gracious tax amount to get this or these options associated with the shares, and then you have something that is worth $10 million that you can then take loans against. All right? And so these are the four strategies from the ultra rich translated into normal income goals. Now, I want to zoom out for a second because I think this will be helpful for everyone. No matter which of these paths you choose or the versions of the paths that you want, you'll notice some common themes.

The first one is that you have to be valuable. Like, you have to learn how to provide value to the marketplace, either as an employee or as a small business owner, or as a larger business owner overall. But either way, you have to learn how to generate income. And the way you generate income is by solving problems for other people and learning skills. And so a lot of time I see dedicated to content from people who don't talk about the most important thing, which is, sure, you can have all these passive investment strategies, but if you're working off of $35,000 a year, it's never going to happen.

Like, we like to talk about the one lady who worked at McDonald's for 50 years and saved every penny she ever had so she could end up with a million dollars. But is that really the ideal strategy when maybe taking a weekend and getting a certification can bump you to $50,000 or $60,000 a year, or you just learn outbound sales and you bump yourself to $150,000 a year, five times the earning potential. And so I think that the investing stuff gets really sexy. Cause it feels passive. But you live your whole life.

And so you might as well get five times, ten times more for the time you are guaranteed to have to give. We all spend seconds every second we're alive, and so you might as well get more for them. The second one is, what I wanna talk about is the fallacy, or the three fallacies of Warren Buffett. So, Warren Buffett, a lot of people are like, I just want to do what Warren Buffett did. He just slowly invested.

Right. Well, let me walk you through what the fallacies of Warren Buffett are.

So three fallacies of Warren Buffet. Number one, I'm going to be just like him. Well, did you buy your first stock at age seven, and did you do that weeks after Pearl harbor, when there was literal blood in the streets? Well, if you didn't buy your first stock at age seven, literal weeks after Pearl harbor, then maybe you don't already have the makeup of somebody who's going to be the greatest investor of all time. Something to consider.

The second is, are you going to live through the greatest growth in american history as you start your investing career? Which is exactly what Warren Buffet was able to do. And the third one is one that I actually talk about that I don't hear talked about a lot, which is just luck. And so let me hear me out. I think Warren is brilliant, and I talk about him all the time, and I think there's a lot of things we can learn from him.

But what I see when I look at the top, 0.1%, whatever, the top of the top of the top of the top is that you have all the skills, all the traits, all the. Everything, comma and luck. Because the only way, like, if you were to think of the hypothetical, the number one person on earth, in general, would have all of the things, plus luck, because everyone's going, there is luck that goes around. And so the number one person is going to have everything that's required, plus luck. There's plenty of investors that are brilliant investors that are worth $1 billion instead of $100 billion.

They just didn't get the luck part, or they've been only investing for 30 years instead of 70 or 75 or 85 or whatever the amount of years he's alive. Now, I think these three things are things that are not considered when people are like, oh, I want to do the strategy, and I want to highlight this, because the main theme of all of these is that you have to generate income. You have to make money. It's the only way you can even have the income. So right now, I have a handful of investments that are doing exceptionally well.

But the only reason that I would be able to make those investments is because I have excess capacity in terms of cash capital that I could deploy if you don't. And this is where, like, living below your means to make more so you have the delta so you can get aggressive, is so important, and I think it's really lost in the narrative today. And so the last thing I want to talk about is what rich parents give as the greatest gift to their kids. And so the number one predictor of success long term is the zip code you're born in. All right?

And I find that really interesting and also disparaging in some ways, because it means that it controls for iq, it controls for ethnicity, coach rules for gender. It's the zip code that you're born in. And I see that as mostly due to the associations of other people in that zip code. And so it's like, okay, that means that conditions can create our behavior or shape our behavior. So then what behavior changes happen in a rich environment versus a poor environment?

And I think that it can really come down to one main thing, which is the leverage of the opportunity vehicles that you pursue. And so I remember this clear as day. Cause I came from what I would consider upper middle class. So, my dad's a doctor, but when I went to Vanderbilt, I was exposed to an entirely different level of wealth that I didn't even really knew existed. I'm from Baltimore.

There just wasn't any New York money. It wasn't really a thing. It was a concept I didn't understand. But for them, the opportunity vehicle that they wanted their kids to pursue had leverage, meaning they got more for what they put in. A middle class parent might say, hey, you're a salesman.

Awesome. And you sell cars. Okay, well, you sell cars, and cars cost whatever. And the top, top, top car salesman might make 300 to 400,000 a year. Okay?

Now, some people are like, there's this one guy. Cool, well, good for him. But for most, like, let's call it top 1%, are making three to $400,000 a year. Now, the upper class salesman, or the upper class or the ultra rich, whatever you want to call it, ultra salesman, sells companies. And guess what?

He makes 4% on the deal. And so if he sells a $200 million company, he makes $8 million for one sale. And so, same fundamental skills, obviously. Do a little bit more analysis here. But fundamentally, you are selling stuff, and all somebody who is wealthier does is tries to get more for what they put in, they try and add zeros to the price tag of the things they sell.

If you sell a $500 million building, you get a commission for that, just like you get for selling a $50,000 house. Same concept. You just add scale to it. And every one of these people has the same number of hours per day, which just means they get more for their time. And so, thinking through this, what poor people or middle class people miss that rich people or rich kids, rich parents pass to their kids is which opportunities to say no to.

They don't even consider the, quote, lower class or middle class opportunity. And I think of this on something that I like to refer to as measuring sticks. And so I'll give you a little story to illustrate the point. So, when I was a kid in high school, I worked. I started my first job when I was 15.

In nine months, which is like the legal age that I could start working, I started working as a blender tender king. And as I leveled up and became a lead, and then, I think a manager at some point. And then eventually, I shifted to catering, which I got $25 an hour for, which was awesome back in my day. Anyways, I was hood rich. And the thing is, is that I measured how much money I had and how many Chipotle burritos I could buy, because I knew that Chipotle burritos were about $7.

And so I was like, man, I just got, you know, $200 for this shift. That's like 28 burritos that I can buy now, which is awesome, right? I was super excited about it. And so what happens is the measuring stick that you use to measure stuff, the wealthiest people in the world just have a larger stick in two ways. One is they measure over longer time horizons, and they also use, like, they literally call, by the way, in Wall Street, a stick is $1 million.

So that's the slang among rich people. Like, if you're like, oh, I didn't know that there was slang for a million dollars. There is slang for a million dollars. When you have lots of millions of dollars, you say, give him two sticks. It means $2 million.

And so when you hang around people who talk in increments of $1 million, imagine the opportunities that they're pursuing. And more importantly, for everybody who's listening to this, the many things they say no to. And so this is where you lose years and decades of life, is that you say yes to opportunities that you otherwise shouldn't. And so they're able to be patient or more selective because they know that they're going to get. They want to maximize how many dollars they get out for the effort and time they put in.

And unless something is going to ladder up to remember, we're thinking longer time horizons, something where they can get sticks for their time, then they're not going to do it. They're willing to take a job for 50 or $60,000 a year, or $80,000 a year as an analyst at PwC, Ernst and young, or McKinsey, or an investment bank like Goldman Sachs. They're willing to eat dog shit for that period of time because they know that that's not the plan. This is just the period that they're learning and gaining experience so that they can do the next thing. They see it in stepping stones.

And the vast majority, in my opinion, of people who stay stuck don't have a plan. They don't see where things ladder up to, and they don't reverse their goal into the present. And so no matter what, whichever of these paths you use, one, you have to focus on income generation and learning skills. Two, you want to make sure that you actually say no to the things that don't matter and be very selective about the things that will give you the highest return. Three, surround yourself with people who have bigger measuring sticks in terms of time and money than you, because whatever opportunities they're discussing will likely be higher leverage in the opportunities that you're considering.

And then finally, with regards to the fallacy of Warren Buffett, if you want to make obscene amounts of money, you will not make it the way that someone else has already made it. It will be made in a new way, which means the single greatest and most valuable skill that a human being can have is the ability to come to their own conclusion and have the confidence to act on it despite it being contrary to what other people are doing. Because if it's what everyone else is doing, then it's not an opportunity. Because the funny thing about opportunity is they look like risk while they're opportunities. And the moment they're no longer risky is when the opportunity has closed.

And that's how life works. You have to make bets, and you want to make the bets that you feel like you have an information advantage over other people so that you can come to your own conclusion rather than listening to other people. Have an amazing day. Hope you enjoyed this stuff. That's how the all church do it.

And if you like these kind of deeper business concepts, I have two free gifts for you. I wrote $100 million offers and $100 million leads. These are both available for free on my podcast, which is the game. Alex Ramoza. You can just search my name.

You'll probably find it. I also have these in course, if you like watching rather than listening on my site@acquisition.com, you can just click training and you'll see the courses that we have available. They're all free. But if you do like something hard, you can grab these wherever you buy books and hopefully make a lot more money.