Ep541: MJ DeMarco – Do Not Sign an Earnout When Selling Your Business

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. To reduce risk in your life, go to my worst investment ever.com today and take the risk reduction assessment I've created from the lessons I've learned from more than 500 guests, fellow risk takers, this is your worst podcast host Andrew Stotz, from a stocks Academy, and I'm here with featured guests MJ DeMarco MJ, are you ready to join our mission?

00:45
Absolutely. Let's

Andrew Stotz 00:46
roll. All right, well, let me introduce you to the audience. MJ DeMarco, is the International Best Selling Author of the Millionaire Fastlane, unscripted, and the great rat race escape. His books have been translated into over 25 languages worldwide. And he's the founder of Hyperion publishing. And the Fastlane business form a global business and entrepreneurial community with over 70,000 users and nearly 1 million contributions. MPJ take a minute and tell us about the value that you bring to this world.

MJ DeMarco 01:25
Sure thing, no problem, I am in the process of delivering a worldwide message that life's default scripts, the message that we are being trained by our government or educational institutions, or financial institutions, pretty much everyone is on board with the script that you are to go to college, here in the states that cost an absolute fortune. You're supposedly supposed to get a job after this. And you're supposed to work for 40 or 50 years. And then maybe if you're a really good investor, or a really good saver, you can retire early when you're 55, or 60, or 65. And I'm here to tell people, that there is an alternative system and structure and framework that you could follow, where you can actually live a life of financial freedom and do it within three years, five years, 10 years. And you don't have to rely on the stock market, you don't have to rely on a job. And we do this through the power of leveraged entrepreneurship. So I've written three books, that detail how this is done, I do not sell anything else. So if you buy one of my books, and you enjoy it, and you get tremendous value, there's nothing more to buy, not before, not during or not after the book is all there is there's no upsells and there's nothing else to learn. It's all completely in those books. So I was able to retire 15 years ago, and just give you a little insight into my life. The word budget is not part of my life. I don't you know, I can walk into a store, walk into a restaurant, and I don't have to look at any prices. If I want it, I buy a living my dream house, I drive what I want to travel when I want it's absolute, total financial freedom, and I'm giving people an alternative.

Andrew Stotz 03:27
And that's really exciting for the listeners, I'm gonna have links to that in the show notes. I know I'm just holding up my mobile phone here my iPhone, because I downloaded the Millionaire Fastlane a year or two ago and started listening to it and going through it. And definitely it's valuable information. I'm just interested about the fast lane Business Forum, which I don't know much about, maybe you could just tell the audience what that is.

MJ DeMarco 03:54
Sure, that's an online discussion forum. That's my platform. It is free to join and it is over 70,000 entrepreneurs, nearly a million million contributions were people who are engaged in this strategy. This lifestyle if you will get to talk and commiserate on a daily basis because anyone who is an entrepreneur will tell you that this can be pretty lonely. And since we're not following life's default script, it's important to surround ourselves with other people who are following a different formula than 99% of world.

Andrew Stotz 04:33
Fantastic. And that's the fast lane forum.com And I'll have the links in the show notes. So that's exciting. And one last thing is there any particular place that you're more active than another whether that's Twitter, Instagram, Facebook, what's the best place

MJ DeMarco 04:49
for sure. My most active is the fast lane forum.com I'm there every single day I'm contributing. I'm also have a YouTube channel that has over 50,000 subscribers I pop in there every once in awhile, I'm pretty engaged with people who read my material. I don't disappear. And you know, never surface.

Andrew Stotz 05:08
Yep. Fantastic. Well, now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to and then tell us your story.

MJ DeMarco 05:21
Sure, my worst investment ever was actually three things that kind of came together. And the first one was a decision. And the decision was way back, I think it was 1999. Or maybe it was 2000, to sell my business. And the offer was $1.2 million. Unfortunately, most of that was what we call in the entrepreneurial field, when you're liquidating an asset, it was called an earn out. An earn out is when the company who acquires your business says, Well, if we do X millions, next year, we will pay you X millions. And so a good $700,000 of this offer was locked into an urn out. And of course, this was 1999 in 2000, when tech stocks were going boom. And, you know, I think it was, I don't know, six months later to a year. You know, tech stocks absolutely imploded, we went into a big recession, a lot of nasty economic outcomes happen there. So which led to my second part of this decision, which was to have this idea after I did sell that company, I ended up getting a half million dollars, which, you know, is a nice chunk of change. And this was way back in 1999. So that was probably a million and a half of today's money. So I had this idea that, hey, I can retire on this. I never have to work another day in my life. Because look at the stock market, it is absolutely going crazy. So you know what I did? I took that entire half a million dollars, which actually, which I didn't know it is taxable, of course. But when you get it, you're not really taxed on it until the taxman comes a month, six months later, whatever the April 15 date is. So I put all that money into tech stocks. And will you know what happened next, the stock market imploded. And I obviously lost most of that money. And the problem here is because I did not pay taxes on that money. I owed almost as much as that what was left in the account. So I ended up having to liquidate, of course. And then by the time it was all said and done, there was virtually nothing left. So I know a lot of people are engaging in this philosophy right now, meaning they have retired early, because the stock market has been absolutely nuts. It's been hyperinflationary, actually in the last 1015 years. And there's a ton of people who say, Well, I'm retiring early, and they have never encountered a 1999 or 2008. So they're going to be in for a rude awakening when that happens. Because usually when it happens, it's not a simple correction of, oh, you know, two months, it recovers. Sometimes this lasts for 234 years. And in that timeframe, you unfortunately need something to live on. You have to liquidate, you have to sell. So you know people said well, you should have just held on to it. Well, I couldn't hold on to it, because I had a live, I couldn't retire an $80,000 You know, for the rest of my life, because at the time, I think I was 30 or 31. So you're gonna live 30 years off $80,000. So that was just a stupid idea. And of course, that was the investment into tech stock. So this kind of put me into a different mode where I realized, you know, you want financial freedom. You need to really have financial freedom, not this. Well, you have to budget everything. You can't drive this, you can't do this, you can't do that. So, yes, it was the worst investment ever. But looking back, I might not be where I am today, if it wasn't for that. So maybe it was the best investment ever. I don't know because it's like, you know, you learn from your failures. And you learn what you don't like and you learn what you know what you can do to adjust. So it was the idea that I could retire early. It was the investment all in tech stocks, and it was the urn out now. Incidentally, I'll do He vertices. I hear from a lot of entrepreneurs who absolutely get screwed on that. earnout. Yeah. So basically, whenever if you're selling a company, congratulation to someone who wants to give you millions and millions of dollars based on something that that happens once they take over, refuse it asked for more money up front, because usually, that urn out all stories I've heard is never have had an urn out. That has succeeded.

Andrew Stotz 10:28
Right. Wow. And maybe I would say that's kind of lesson number one. Is there any other thing? How would you summarize the lessons from this experience?

MJ DeMarco 10:40
Well, you don't want the stock market to control your wealth. That's something I realized, and I learned it real early. So right now, like, for instance, if the stock market crashed by 50%, which is a huge, it's a big economic event. And if it stayed there for years, my life wouldn't change, I wouldn't change one bit. And that's the type of financial freedom that I find powerful and liberating. So I don't have to look at the markets every single day. Now, granted, I do invest in the markets just like everyone else. But it's not tied to my well being it is not tied to my daily life.

Andrew Stotz 11:23
And can I ask some questions about that just to understand, so for instance, some people take the money that they earn, and they invested in, let's say, land. Okay. In they invested in apartment building, and then they can say, I'm not impacted by what's going to happen in the stock market, to some extent, yeah. But okay, the economy could crash. But then you could say, Okay, another person can say, well, I've tried to make so much money, that it doesn't matter if the stock market crashes, because I've got more than enough to live on outside of that. How would you define how you've kind of shielded yourself from the impact of the market?

MJ DeMarco 12:04
Well, sure, I own most of my house, I live in a very expensive house, I got a mortgage on it. But guess what, it's at 2%. So I was gonna pay cash for my house. But when they threw 2%, in my face, I said, that's free money, I can literally make 2% easily, so I can go invest in anything that I want, and get that return back easily. So I have no debt. You know, other than that, I have business systems that are immune from pretty much economic collapses. That's just the way I've structured it. And, you know, COVID, that was a big eye opener for a lot of people, even some business owners were like, Oh, my God, the government shut down my business. And that kind of opened them up to like, you know, that's why I have a something that's called a sense framework that's in my books, it's in all my books, actually. It's kind of a guideline for to insulate yourself from catastrophic events that could wipe you out one day, or at least put you out of business. Because that's not why we want to be an entrepreneur, when you have a job, someone can fire you. So if you have a business, and there's one entity that can put you out of business, then you're kind of just trading a job, you know, you're basically buying yourself a job.

Andrew Stotz 13:26
Okay. That's, that's helpful to understand, maybe I'll share a few things that I take away from your, your experience. The first thing is earnout, I totally agree with you on this earnout thing, I have a friend of mine that I helped him sell his business to Microsoft, it wasn't an urn out. But it was a lock in where he had to be with them for three years. And that's another thing that it's just going to be three years of misery. For almost any time that you're going to have a new buyer come in, it's just going to be heartbreaking to see the decisions, even if their decisions are ultimately the right decisions for the business. It's just going to be heartbreaking. So my advice based upon what I learned from him what I've seen in my life, and now what I learned from you, is if somebody asked for an earnout, don't take it and just have a further discussion. You know, what, why are you? Why are somebody asking for an urn out, they're asking for an urn out because they see there's some risk. Now if the risk is related to the business system that you've got, that's an internal risk that you as a business owners got to fix so that they see that this is a robust system, and you can say, I'm sorry, there is no risk to the operation of my systems in this company. The second one is the risk that okay, something could go wrong six months from now, I'm sorry, but that's your problem. That's the buyers issue and the buyers risk, don't try to put it on me. So in order to make sure that you're in a position to say, I'm not going to play the earn out game, then what you can do is number one, build Is your business. So it's very robust. And they can see the systems that are operating. Or otherwise, you may even have to take a lower price and say, Okay, you see risk, I accept that there are some risk here. And therefore, you know, I'll accept a little bit lower price, the last thing I would say is that the alternative to earn out, and if they're worried that you're going to leave the company, you know, one option is to say, I'll be an advisor, and you pay me as an advisor. And I'll do everything I can to advise the business to make sure that you get there, but I'm not going to be an employee, and all of that stuff. So that's kind of my biggest one. The second one I just want to highlight is, you know, being a person that's been in the market since 1993. Basically, when I started being an analyst, you know, I think you're very, it's very salient point that most people haven't lived through a market crash. And as of right now, we're about three months into the year, it's, it's the end of March. So first quarter is about done. and the NASDAQ is down about 10%. New York Stock Exchange is down about 2%, since the beginning of the year, but remember that these markets are up, you know, NASDAQ is up 140%, since for over five years. And so we've had an amazing Bull Run. And I think you really need to take what you're hearing in this discussion from MJ and think about, are you overexposed to the market? So those are the two things that I kind of take away? Is there anything that you would add to them?

MJ DeMarco 16:28
Yeah. And the reason for that urn out is because you're not going to be in control of the decisions that this new company is going to make. And, you know, for me, I rarely mentioned the company that I sold. And people don't understand why. And it's because the decisions they made after I sold it, the customer service went completely down the tubes, I was just on Yelp the other day, and I just saw one star reviews, it was just horrific type of, you know, type of reviews. And it is disturbing to me that I say to myself, I used to own that company, but now it's complete garbage. And that's what I'm talking about is you have no control over what they are going to do once they take over. And so you don't want, you know, $700,000 millions of dollars tied up into those decisions. So yes, maybe take a lower price, say, Hey, I don't want to $700,000 earner, I want another half a million dollars, or half a million dollars in stock options that are completely liquid liquid aidable because they're maybe they're traded on the stock market. But yeah, I've never heard one positive experience from an urn out, Hey, I just made my earnout. Wonderful. I never heard that. And I deal with a lot of entrepreneurs who sell companies.

Andrew Stotz 17:50
Fantastic. Now, let me ask you, what's a resource that you'd recommend for our listeners? I'm guessing that it would be the forum, but maybe you can answer that question.

MJ DeMarco 18:00
Sure, absolutely. It is the Fastlane form. I'm there every single day I'm contributing all kinds of different discussions on there is free. Nothing, nothing cost, nothing to join all kinds of there's health strategy, there's, you know, it's about a complete lifestyle. It's just not about starting a business and making money. It's about you know, living your best life. And that is really my philosophy, because, you know, there are plenty of millionaires and billionaires who are absolutely miserable. And we're about the whole experience.

Andrew Stotz 18:32
Yep. Fantastic. Well, I'm heading there. I didn't know about it. And now I do. So I'll be there. Last question, what's your number one goal for the next 12 months.

MJ DeMarco 18:43
For the next year, I'm writing another book related to goal setting related to goal setting and productivity.

Andrew Stotz 18:51
Interesting, and there's a lot of books on goal setting and productivity, what would be your kind of angle that makes it unique?

MJ DeMarco 18:58
It's actually a system that is discussed in very briefly in my last book that I wrote the great rat race escape. It is a goal engineering system where you reverse engineer a particular goal. So you're always on path, and you're always keeping sight of why you're doing something because it kind of sets up a decision framework for your life. And I think once you have a decision framework in place, making decisions and avoiding the right things and avoiding the wrong things are making you know, hitting the right things and avoiding the wrong things becomes much easier.

Andrew Stotz 19:35
Yep. And one of the big things about setting goals is making a commitment setting a deadline and all that where are you at as far as where, when can the listeners and the viewers you know, get access to this?

MJ DeMarco 19:49
It's probably gonna be several months away, but if you're at the forum, if you're there for any duration or if you're on the list, if you join, you know, there's a digest we send out you'll get updates from there. And of course, any social media channel, I would let this be known. I'm also developing an app for that mobile application for people who like digital products in order to, you know, see their progress and record everything and get analytics on how they're doing. So it's a pretty exciting project for me, I'm excited about it.

Andrew Stotz 20:21
Well, looking forward to that, that's exciting to hear well, listeners, there you have it another story of loss to keep you winning. If you haven't yet taken the risk reduction assessment, I challenge you to go to my worst investment ever.com right now and start building wealth the easy way by reducing risk. In fact, you've just learned two things about reducing risks about earnouts. And you've learned about potential stock market crashes. And why I say it's an easy way to build wealth because it's simple stuff reduce risk. As we conclude, MJ, I want to thank you again for joining our mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

MJ DeMarco 21:09
No, just you only live once so we're after your dream, whatever it is, and do not live in fear.

Andrew Stotz 21:16
Beautiful, and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying thank you for joining our mission. And I'll see you on the upside.