Gateway Drug Businesses
Buy a business simple enough to explain to your grandmother, so you learn the whole game on a small board.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 94%
Sanchez's entry-level asset class is deliberately unimpressive. A gateway drug business is one so simple you can explain it to your grandmother and could probably run even if you have never run a business: laundromats, car washes. The reason she picks cleaning clothes and cleaning cars as her canonical examples is a filter — if you cannot understand those, you probably should not be in business at all. The properties that matter are few employees, few moving parts and little change, because they let you get a small taste of winning and get addicted to the game. The explicit trade is that you will not make much money, and she says so plainly. What you buy instead is the complete curriculum: you learn to run a P&L, to market, and to make money, and every business shares those characteristics. Then you sell it, because a business is sellable, and move up. She borrows the private-equity framing of level one-to-ten games and level one-to-ten operators: Musk is a level-ten operator playing a level-ten game, but he did not start there either. The one hard rule is that your first deal must not be a bad one, because a bad first deal means you never do a second.
Origin
Sanchez spent fifteen years in finance, investment banking and asset management, then took a breather during Covid and started writing online about the things she actually did — owning laundromats and car washes. She assumed nobody liked the idea; it turned out to coincide with people leaving big cities, escaping 75-minute commutes and getting interested in community businesses.
Core principles
- 01Simple enough to explain to your grandmother is a real selection criterion.
- 02Few employees, few moving parts, little change.
- 03You are buying a curriculum, not a return.
- 04Your first deal is never your last deal.
- 05Never do a bad first deal, because then you will not do another one.
- 06Spend more time learning how to do a deal than doing the deal.
How to run it
- 1
Apply the grandmother test
Screen candidate businesses by whether you can explain them to your grandmother and could plausibly run one having never run a business. Laundromats and car washes are the canonical passes.
Pro tip If you cannot understand cleaning clothes or cleaning cars, Sanchez's read is you should probably work for someone else.
Watch out Complexity in a first deal converts a learning exercise into a survival exercise.
- 2
Learn deals before doing deals
Sanchez teaches a roughly 90-day period spending 20 to 40 minutes a day learning how to buy businesses — a 90-day M&A MBA. She wants people to learn valuation, negotiation and due diligence before they are exposed.
Pro tip The payoff outlives the deal: you will be able to negotiate anything for the rest of your life and you will speak the language of money, which is equity and ownership.
Watch out Without it you cannot value the business, negotiate correctly, or detect that the seller is lying.
- 3
Run the 100-to-1 filter
Look at roughly a hundred businesses the way you would look at a hundred houses on Zillow — this I like, this I do not — until you know what actually matters to you, then filter down to the one that fits right now.
Pro tip Think in three-to-five-year increments, exactly as you would with a job.
Watch out Buying the first thing you see means you never developed the preference function the filter is supposed to produce.
- 4
Run it, learn the whole stack, then sell
Operate it while keeping your W2 if needed. You will learn to run a P&L, to market and to make money — the characteristics every business shares. Then sell it, because that is the beautiful part of a business.
Pro tip Sanchez notes an Airbnb business or similar low-headcount asset serves the same function.
Watch out Treating the first business as a destination rather than a rung is what makes people disappointed in its modest returns.
- 5
Level up the game
Scale to better and better games. In private-equity terms you are moving from a level-one game to a level-ten game as you become a higher-level operator.
Pro tip Musk plays a level-ten game with a level-ten operator, but he started figuring it out like everyone else.
Watch out Jumping straight to a level-ten game with level-one operating ability is the standard failure mode.
In the wild
Sanchez bought a window-cleaning business called Pinks with a company called Resi Brands, specifically to check whether she was full of it. She calculated that a business needs $384 a day, five days a week, to do $100,000 a year, and tested whether she could pre-sell that much window cleaning to start it.
→ They hit it. She filmed the attempt for YouTube and treats it as proof the maths is real rather than theoretical.
Look up the average laundromat revenue in Charleston, South Carolina — around $200,000 — and the average profit margin, around 15%, giving roughly $30,000 profit a year.
→ That number lets you make a no-brainer offer: I will not touch your $30,000, but if I double it can I have 15-20% of the business, and if I do not double it I get nothing.
Common mistakes
Expecting a gateway business to make you rich
Sanchez concedes directly that you are not going to make much money, because anybody can do it. The return is the curriculum and the taste of winning, and expecting otherwise guarantees disappointment.
Doing a bad first deal
She calls this the only rule in buying businesses: never do a bad first deal, because then you will not do another one. Structure to decrease your risk of bankruptcy rather than to maximise the first return.
Buying before learning how deals work
She is visibly nervous talking publicly about this because people hear 'buy a laundromat' and skip the 90 days of learning valuation, negotiation and due diligence.
Is it for you?
Best for
First-time business buyers with modest capital who want to learn ownership on a forgiving asset before playing a bigger game.
Not ideal for
Experienced operators for whom a laundromat is a distraction, and anyone who needs the first business to replace a large income immediately.
From the transcript
“gateway drug business is a business that is so simple that you can explain it to your grandmother”
“the Only Rule in buying businesses in my opinion is that you never want to do a bad first deal because then you won't do…”
“you should spend more time learning how to do a deal than actually doing the deal”
From the episode
Codie Sanchez: They're Lying To You About How To Get Rich! How To Turn $1,000 Into $1M! Hard Work Doesn't Build Wealth!
Codie Sanchez