Why Keeping Wealth Is Harder Than Making It, According to Alex Hormozi and Chiron

Hormozi begins by noting that when businesses get much larger, cash gets significantly lumpier. He points to his company's reputation as built largely on a $46.2 million sale.

He and co-host Leila say that one of the hardest parts of entrepreneurship, once money starts coming in, is figuring out what to do with it. They describe this as 'the game beyond the game,' meaning what you keep, not just what you make. They say they tried a million different things and mostly lost millions of dollars, and they want viewers to avoid the same losses.

Hormozi says the guest, Chiron, helped the company change its thinking about the game beyond the game. He says Chiron advised the company on exiting its first business for $46.2 million and later helped reduce its taxable income by 80% and add several layers of asset protection. Acquisition.com later launched ACQ Ventures, which has completed over 60 private deals.

Hormozi describes Chiron's own history as four exits, starting with a $50 million exit in his twenties, followed by time at business school, work at Goldman Sachs, an investment in Telus that was later sold for an undisclosed amount, and a family office that completed many deals. He says Chiron exited a roll-up for $198 million, retired, then returned to become CEO of Real, growing it from $200 million to a billion dollars in enterprise value in 30 months. Chiron has now joined acquisition.com for his next billion-dollar company.

Hormozi recalls that one of the first things Chiron asked when they met was, 'What are your money algorithms?' Chiron then explained them as the pre-made decisions a person has about how they deal with money. The reason, as Hormozi relays it, is that money creates many decisions, and those decisions are hard to make when someone is actively working in a business and cannot easily split attention.

Chiron, speaking in the video, says that with unlimited time he would share the 40-plus frameworks he has used directly in his family office and wealth management. The video focuses on what he calls the big three, which he says most changed the speakers' behavior. He says he developed these over five exits and learned much of it the hard way, through lost money, lawsuits and very large tax bills. The most important concept among the three, he says, is understanding debt and leverage, and the first of the three big ideas he describes is the active-passive continuum.

Hormozi says Chiron encouraged him to stop feeling bad about modest returns. Chiron said that if they earned 15% a year they were fine, and 20% would be amazing. Hormozi says he had been measuring his investments against 100% and treating anything less as a failure, and that his 100% dreams were becoming 0% returns.

Hormozi says he read five or so books on real estate before visiting an operator who claimed to earn high returns from passive real estate. The operator's business occupied a building, and the family office was in the same place, where 45 people managed the money. Hormozi concluded that there is no such thing as passive income, because it carries the same team and operational issues as any business. Chiron says the biggest lesson he took was that if something is passive for you, it has to be active for someone else, and that this distinction is what most people miss. He describes the active-passive relationship as a barbell, in which one side of the risk is tied to your active business and the other side is passive for you but active risk for another person.

Hormozi says that when he was younger he asked why he could not do both. He says he later realized that if he spent 30% of his time generating or managing passive income, he would earn more by putting 100% of his attention into the active business and letting someone with the relevant skills handle the passive side. He describes himself as a control freak and says that trying to learn both at once was very stressful.

Chiron added that Sean, a third person in the conversation, encouraged the speakers to consider how much risk they wanted to take. Chiron says Sean argued that the speakers were maximizing risk in entrepreneurship and that surplus money should go toward building a nest egg or fortress, which Chiron compares to building the castle and then digging a moat around it, so the empire is not risked for a pot of gold. Chiron says taking less risk with the fortress has allowed the speakers to take bigger bets on the entrepreneurial side and earn better returns there.

Chiron says a lot of the deal work involves volume, comparing it to a business with a customer funnel. He says looking at a thousand deals and picking the best one is similar to converting 2% or 5% of leads. Hormozi says the average retail investor only gets access to mass-market deals that return about 7 to 10%, and that this is what they believe the S&P 500 returns and what they believe the market is.

Hormozi says that once someone becomes an accredited investor, a different set of deal flow opens up. He adds that private deals have historically outperformed public market deals by over 50 to 100%. He also relays Alex's point that a business generating a million dollars on a $5 million topline would need a $10 million business to get twice the return, and that net worth is a function of how much one puts through the front end of the business.

Chiron describes an illiquidity premium, meaning higher returns for holding money in an investment for a longer period. He says the average retail investor does not realize that their 401ks, IRAs and defined benefit plans are already illiquid. In his account, those accounts are illiquid for 35 years, not just the three to five years that people are willing to accept for a riskier investment. He says this is the difference between the rich and everyone else, because the rich recognize how much better private market deals are on a risk-adjusted basis.

Chiron also says that only business owners can access these private market deals, because they have the accredited net worth to qualify. Hormozi recalls that about 11 or 12 years ago his banker warned him that he had $9 million sitting in a checking account and called it a liability. He says he did not know what to do with the money and let it sit, a reaction he believes many people have out of fear.

Hormozi says that, once people start making money, they often feel they should keep it in the bank and hope it stays, or they begin to feel it burning a hole in their pocket. The moment someone says they have a deal, the person is tempted to start writing checks. Hormozi says that when he wrote checks this way, he thought about how much revenue, profit and after-tax income he had to earn to write a $100,000 check, while the check itself took two seconds to write.

Hormozi says he did not know any better at the time. He and the speakers then describe the principle that every dollar should have multiple uses. Hormozi's example is that investing in a friend's startup is one use of a dollar, and the question is what other use that dollar has. For the speakers, buying $100 million worth of real estate has a second use because it reduces taxes. Having multiple uses forces a person to work out how far a dollar can stretch instead of giving in to peer pressure.

Hormozi says most people do not know how to analyze an investment when it is presented to them and mainly act because of peer pressure or because the money is burning a hole in their pocket. Chiron offers a quick heuristic called the investment X-ray, with four categories: capital preservation (whether the investment will make or lose money), tax efficiency (whether there is a tax advantage), yield or cash flow (whether it pays cash while held), and growth (whether the money grows over time). Chiron says he usually gives each category 25 points, for a total of 100.

Chiron applies the scoring to three examples. For Apple stock, he gives about 20 of 25 for capital preservation, zero for tax efficiency, little yield with a 0.04% dividend, and strong growth, so roughly 50 of 100 overall. For bitcoin, he says capital preservation is uncertain, there is no tax efficiency or yield, and growth is 25. For real estate, he says the scores are decent in each category, and Hormozi adds that the speakers prefer this to maximizing one category at the expense of others. Chiron says the framework lets someone ask the right questions about how capital is preserved, what tax treatment applies, what cash flow the investment produces during the hold, and what its growth assumptions are.

Hormozi says he used to size bets very loosely, taking about a quarter of his total money for each deal whenever one appeared. He says Chiron changed how he thinks about this. Chiron says sizing is the number one mistake most people make because they have never been taught how to do it. He adds that although the speakers can explain how they size their own deals, the right sizing depends on each person's situation.

The speakers add that sizing differs by the kind of exposure. They say they are willing to size a larger amount into real estate because it provides capital growth and tax efficiency. Chiron says that when speaking with a financial adviser, the sizing question is the most important one to ask. He also warns about FOMO, the urge to buy the whole universe of stocks or crypto. He argues that this creates complexity that feels like diversification but is in fact an antidote for ignorance, because people do not know what to do and so buy everything.

Chiron says the point is not what you make but what you keep. He says that in a sense you are in a partnership with the US government, or any government depending on where you live, and that most entrepreneurs have never read that partnership agreement. He says the tax code is an incentive machine, not a penalization machine. In his explanation, the government cannot invest in every project it wants for the country's benefit, so it offers tax incentives to private entrepreneurs to invest in underdeveloped opportunity zones.

Chiron describes the opportunity zone incentive as a 10-year tax horizon, under which an investor who puts money into an opportunity zone and keeps it for 10 years pays no taxes going forward. He calls the best trick in real estate a sequence in which a property goes up in value and is exchanged under a 1031 exchange into an opportunity zone, after which all taxes are wiped out after 10 years. He says that across a 15-year period, one could legally pay zero taxes. He says most people fear taxes because they do not remember three rules: know the law, follow the rules, and document the truth. He also mentions the Augusta rule, which lets someone rent their home to their business for up to 14 days a year.

Chiron says that thinking about deferred taxes as a return made the idea clearer to him. He says that if you make $1 million and live in a tax-free state in the US, you keep $630,000 after tax. If you do not have to pay taxes, you get $370,000 extra, which he describes as a 58% return in year one. He says he would be very interested in an investment that let him put $630,000 in and get $370,000 back immediately.

Hormozi says the change in how the company recognizes revenue versus expenses transformed its financials and was arguably a bigger change to taxable income than the real estate strategy. He says a mediocre financial executive is the most expensive hire a business can make. He says the company has had two eight-figure tax bills that came on top of its normal tax bill, one of them an extra $12 million in one year and another an extra $17 million in another year, with zero notice. Hormozi says that, when done correctly, the company paid less taxable income in its last two years than in its first years of Gym Launch.

Hormozi says all Fortune 500 companies run on accrual-based accounting, and that they do so so they can separate what is revenue and what is expenses. He describes the mechanism as deferring revenue into the future while taking expenses today, which reduces taxable income today and pushes the revenue into the future. He calls this completely legal and says all Fortune 500 companies do it.

Hormozi says that after running a public company he realized how beneficial this was, and that the company had a similar revenue profile, so it should be able to do the same. He says that as an entrepreneur's revenue grows, talking to a CFO or accountant makes sense, because they need to work out which items are reclassified as revenue or expenses, whether an item can be done now or later, and what the roadmap is. He says a business may not be ready for this now, but the tax deferral has great value in the future.

Hormozi gives a worked example: if a business is twice as big next year, its expenses double, but the revenue being recognized comes from the half-size prior year. As a result, the business has more cash than it needs because the tax it would have had to pay that year is available to it. He says this gives an extra 12 months of return on that money, which is a significant benefit for businesses paid on net-30, net-90 or net-180 terms.

Hormozi says that, especially for rapidly growing companies, taxes can be almost indefinitely deferred because the expense base doubles while revenue remains a year behind. He says this makes growth significantly more capital efficient. He notes that, as a growing business, tax can become a large drag on growth if not managed.

Hormozi says that if viewers take one thing from the discussion, it should be this point, because it transformed the economic engine of ACQ and allowed the company to take far more outsized bets than it otherwise could have.

Hormozi says that when growing fast with the earlier company, the company had to pay quarterly tax payments based on the previous year, when it had half the infrastructure. Having twice as many people made the cash more meaningful, and a 40% revenue increase was not enough of a delta to offset the tax, so the company was pouring money into taxes because its accounting was not done correctly. He says this was painful, that he did not have the right advisers or understanding at the time, and that as a plumbing business with 10 to 20% margins he would have been out of business if he had run it that way.

Hormozi says the operating stress of having to do something by December 31 is removed by the new approach. He says that when they invest in a business and review the CPAs and wealth advisers it has, those advisers are often subpar, and he calls them strip-mall CPAs. He advises anyone watching to be careful whom they trust with these matters and to listen to people like Chiron who actually understand them.

Hormozi says an entrepreneur should understand enough to tell whether they have the right advisers and to tell them what they want done. For a business earning below a couple million dollars a year, he says the relationship should run the other way: the owner gets the information and tells the adviser what should happen. If the adviser cannot do it, the owner needs a different adviser. Chiron says that when he was a banker at Goldman and observed the wealthiest families and billionaires investing, the key lesson was that they separated the function of a tax preparer from that of a tax strategist. The preparer files returns, while the strategist's job is to work out how to reduce the family's tax bill.

Hormozi says he realized his own tax strategy had been poor because he had relied on a tax preparer rather than a tax strategist. He says he had previously told people to pay as much tax as they could because that meant they were making money, and he held that position for many years. He says that this works to some degree early on, when the amounts are smaller, but that as businesses grow, cash gets much lumpier, and seasonality matters more.

Hormozi says the company could have made three or four times the money it earned around its $46.2 million sale if it had applied these methods, and he calls the seven years that produced that money painful to think about. He says a 10% swing is not a big deal on a $1 million business, but it matters far more at $10 million, $20 million or $200 million. He also says acquisition.com has grown much bigger because it had more cash flow to reinvest, since it was not writing huge checks to the government.

Hormozi says the speakers are launching a first wealth workshop series that reveals what they call the entire ACQ playbook for entrepreneurs. He says it is aimed at accredited investors, because it provides access to what they can do from a private deal perspective and from a tax perspective. He says the workshop covers how to restructure a business, manage taxes and set up investing so it creates wealth for the investor and family, and is not only about increasing income.

Hormozi explains that the accredited tier exists because much of what Chiron will cover does not apply to people earlier in their journey. He says that if someone is not at $250,000 a year in net income or a $1 million net worth excluding their house, much of it will not apply to them. He says the further someone is from that line, the more tiny tweaks add up, and that 5% on $100,000 is nice but 5% on $50 million or $100 million is far more valuable. He says the workshop is for people in that situation and is what the speakers wish they had had.