Journey to 500K: Scaling Your Painting Business the Smart Way

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision.

This is Daniel, the founder of Bookkeeping for Painters, and this is Richard, tax director with Bookkeeping for Painters.

How's it going today, Richard?

It's going good. We're towards the end of summer. Kids are going back to school, so my house is going to become quieter, which is nice.

Yeah.

Yeah.

Well, peace and quiet while you work. That's always good.

Yeah. Yeah. We are gonna be moving into fall eventually. It's coming, but I'm gonna enjoy the sunny days that we have left.

Yeah. Well, Today we're going to be talking about scaling from $0 to $500K. Like, what, what should you do if you're just getting started out with your painting business? What steps should you take, or what steps can we recommend from a financial and tax perspective to make sure that you are going in the right direction in your painting business? And this comes from working with hundreds of painting businesses and I've run a couple of painting businesses myself. So hopefully this will get you started off on the right foot.

Yeah. So this is kind of like if Daniel, if you decided that you were going to open a painting business from scratch, this is what you would start off doing immediately.

Right, exactly. I would try to give you, hopefully give you some advice on how to avoid some of the pitfalls. And some of the things where you should be focusing your energy so you can get from $0 to $500K as quickly as possible. So we're going to talk about selecting the right entity to set up your business, setting up the— figuring out what your niche is going to be, what you're offering, and what you should be doing for marketing, or some ideas. How, how much of a return on investment should you be getting from your marketing, how should you be pricing, what kind of numbers should you be seeing on your profit and loss, and also from your production from your crews. And then we'll also go through some tax considerations as well.

Awesome. No, this is, this is very exciting. So I think this is going to be extremely valuable, uh, for our listeners, especially if they are just setting up their business, or maybe they're thinking about setting up a painting business, uh, sounds like they're going to get a pretty good blueprint on, on how to get started.

Yeah, and it could even— for folks that are currently in business that are, they're still below $500K, this might be helpful for you. Um, I just did a call earlier today with a young painting business owner, and he was kind of pulled— it felt like he was pulled in many different directions. and I give him some advice to basically kind of narrow his focus to try to get to the next level. So hopefully that even helps for folks that are still, you know, between 0 and 500 for some of the stuff we'll cover. So I think the first place we could start off is kind of entity selection. If you're going into business or maybe you're just getting started and you're not sure where you, what entity should you kind of create for your business. We can give some general guidance here. Obviously, it depends on the state you're in, but in a lot of cases, an LLC makes sense, which is a limited liability company. And what this entity does is basically create a separate entity from yourself that limits the amount of liability that you personally are responsible for. So if the business gets sued, you know, that could help with some protection so you don't lose all you own. Obviously, I'm not a lawyer. This is what the lawyers say LLCs help with. But the other thing to keep in mind is, you know, sometimes depending on the state you're in, an LLC might not make sense. I know Tennessee maybe is one state that might not make sense, or maybe California because of the cost. So it's something that you might need to consult with, a legal professional to get you started on that entity selection if you're not sure. But look, taking a look at what entity makes sense to start out with.

Yeah, I like the idea of a limited liability company, LLC, for most people. Most states, it's fairly inexpensive. You know, we're talking maybe less than a couple hundred dollars to get set up, maybe less than $100 a year to maintain. Now, there are exceptions. Daniel mentioned California, but I think if you're choosing between like an LLC and a full-fledged corporation, starting with an LLC is the way to go. As your company grows, you can choose to be taxed as a corporation later on, and we'll talk more about that later. But keeping things simple and keeping things inexpensive as you're first starting out would be, you know, would be my focus. And again, you know, it is going to depend on where you live. Daniel, you mentioned Tennessee. You know, there are some tax considerations. You get opened up to new taxes when you form an LLC in Tennessee. So, you know, be mindful of what you're doing there. But generally speaking, I would absolutely agree that LLC is a good idea.

Yes. And with creating that separate entity, whether it's an LLC or a corporation or whatever it is, you're going to create some business bank accounts because you want to keep your, your business and your personal life separate. And that includes bank accounts. So you'll need to create those actually before you create your bank accounts. You'll need to most likely get an employer identification number in most cases as well, which is basically a tax ID. From the IRS that once you set up your, your LLC or your corporation with the state, you'll go to the IRS website. You can type in IRS EIN or employer identification number, and you can get your, your LLC or your state, uh, you get your, get your LLC or your corporation employer identification number from the IRS. That's basically like a Social Security from a Social Security number for your business. And then you'll, from there, you'll use that to create your, your business bank accounts, um, under that new company and that new employer identification number.

Yeah, especially if you're going to have employees and pay them wages, you will definitely need an EIN, uh, you know, that, that's separate from your Social Security number.

Yeah. And then another thing to look at for sure is insurance, general liability insurance, obviously workers' comp. Most states require that as well. And I don't know, you have any other thoughts on insurance for a business, a painting business starting out, Richard?

Yeah, I mean, you want to have proper coverage. We don't foresee accidents, and that's how we sometimes get in trouble. We never expect to put a ladder through somebody's window or spill a gallon of paint on their Persian rug, but unfortunately these things do happen. So we want to make sure that we have insurance coverage so that if something bad does happen, we're not liable to make these payments. Now, some people will say, well, I've got everything locked up in my LLC, and that is solid protection against any kind of judgment or lawsuit or claim against my personal assets. They can sue the business, but they can't touch my personal stuff. And in concept, that, that is— there is some truth there. But in reality, oftentimes really good lawyers can do what they call pierce the corporate veil where if they can convince a judge that you are somehow personally liable, they might be able to go after your personal assets even if you have your LLC in place. So LLC, good idea. It is not a silver bullet. What I recommend is a good umbrella insurance policy that will cover you for all sorts of problems. You know, $500,000 or $1 million makes a lot of sense. They tend to be somewhat affordable. You know, you obviously have to make that decision. But what you don't want to have happen is somebody, you know, file a claim against you and now your home or your vehicles or your retirement savings are at risk. You want to make sure that you're protected.

Absolutely. And even another thing to consider for insurance-wise is disability insurance, which basically means if you become injured in such a way that you cannot work anymore, you're covered and you actually get insurance pay, insurance proceeds if that happens. Because if you think about it, your greatest asset is your ability to work. Yeah. And, and that, that earns you hundreds of thousands of dollars through your lifetime, maybe millions of dollars through your lifetime. So that's probably your biggest asset. And so it, it can definitely make sense to get insured for that. So if you become disabled in some way where you are unable to do what you do, you can actually get insurance for that. It's called disability insurance. And that's a big one too. To consider for insurance.

Yeah, definitely a good idea.

All right. So now, now that you got your, your entity set up, you have your EIN, you have your separate bank accounts, your insurance is squared away. Now you're in a good foundation starting off, but now you need to start making some money. So some things that I've seen folks do successfully and that I've tried myself is really narrowing in who are you serving and what are you offering. So what is basically your niche? You know, it sometimes is not enough to just say like, I, I'm, I have a painting business. I mean, that can work, but it can work even better if you can kind of niche even further into your certain service. Like maybe you're really good at cabinet refinishing. Or really good at exterior painting, interior painting, you know, residential repaint. You can get really niched down. And this helps for one, narrowing down who you serve, who are you serving, and also your marketing message. So if you're doing cabinet refinishing and you're just really awesome at that, you, you, it's easy to refer you because you're like the guy. Or gal that is super awesome at cabinet refinishing. And so, and that's what you focus on. That's what you do all the time. And so you can be referred easily, maybe in different Facebook groups or around the neighborhoods. Like, this is the, this is the person you need to see if you need your cabinets refinished. So it helps in terms of word of mouth and then also helps you narrow down your marketing message. Where you can just say, hey, if you need your cabinets taken care of, I'm the person because I, that's what I focus on. That's my expertise. So identifying, you know, a service line that you really want to focus on can, can help your marketing and you narrow down who, who do you need to get in front of to offer this. And so that goes into who are your ideal customers. So You know, there might be certain neighborhoods that are, you know, that value services that you offer. So maybe just to keep on with the cabinet refinishing, maybe it's a neighborhood that is a historical, historically wealthy neighborhood. So maybe it's older homes, but there's a lot of cabinets that need to be refinished. But it's a higher income neighborhood. And that could be a really prime target for this hypothetical situation to do some cold calling or get into the Facebook groups where this neighborhood, these folks in this neighborhood hang out in, or do a direct mail campaign to this type of neighborhood. So you just need to figure out what are you offering and where the folks are, that need the service that you are offering so you can get in front of them.

Yeah, I think that's really important and sometimes it's easy to overlook, you know, we're thinking about our marketing and our advertising, we're thinking about money and Facebook, but if we don't know what our niche is and who our customers are, then we won't really know how to appeal to them. If our customers are, you know, middle-class people who don't like the color of their cabinets, then we're going to know that our Facebook ad should show a before and after of, you know, golden oak cabinets that have been transformed into, you know, a nice white color that's very popular right now or whatever. That's the kind of ad that is going to speak directly to our ideal clients and filter out the ones who aren't ideal. And we'll spend you know, less money and get a higher return on our investment if we know who we're gonna reach. But it all starts with figuring out, you know, what is our niche? Yeah, I think sometimes, like, especially when we're first starting out, like, you know, we'll take money from anyone who is willing to pay us, we'll do anything, right? But that's not really a good strategy for the long term. Because if we don't focus in and we don't become an expert in our niche, then we won't ever be able to really command those really high-end prices for super professional work. Do you recommend maybe like, like finding your niche right from the beginning, or is that something that we can kind of develop as time goes on and we learn more about what we're good at and what people are looking for?

I would say from the beginning, other people might have different opinions on it, but I would say figure out what, what you're going to offer. It might, you know, at least come up with a certain hypothesis in the beginning. You might test it and might figure out maybe it needs to be changed, but have something to start out with, like a goal. Like, I want to focus on these things and these are the folks I serve. That might adjust, you know, as you learn more, but I think having a direction to move in is, is probably the best move. And, um, once you have that, I was, I was actually talking to a, a young painting business owner, um, today, and, you know, he's doing just around $100,000 per year. And he was kind of throwing out ideas like, hey, I'm looking at, you know, I'm doing residential repaint, uh, interiors. Um, that's what I like to do, but I was also looking at maybe doing some commercial as well. I was going to try to get into that and, uh, and maybe doing some exterior work. And, uh, and but right now he's not really making a lot of money in what he's, he's doing. So, and he has an opportunity to actually double down on what he does well with interior painting, but he was kind of getting distracted with, oh, maybe I need to go get more, get work from another type of service line going commercial. I mean, which is fine, but it's kind of separating your efforts. Like you're gonna have to try to go get, figure out the, commercial sales process is a lot different. You got to go after different people, different decision makers. Uh, it's a different type of marketing that you need to do, and you could do it, but if you're only doing, you know, under— if you're under $100,000, there's plenty of opportunity in the residential repaint interior work because he was— he lives just outside of Dallas, so there's plenty of work to be done there. The— and for interior residential repaint. So he doesn't need to go commercial yet. Uh, maybe once he hits $1 or $2 million and then he needs to grow his, uh, his revenue more, he can look in the commercial. But at this level, it's really— you could just focus in on one, maybe two things at the most, really one thing. And, and that kind of leads into the marketing. So once you have the niche nailed down, who you serve, who are you serving, What, what are you offering them? Then you need to figure out, okay, how do I get in front of these folks? What do I need to do? Do I need to run Facebook ads? Do I need to do organic Facebook marketing? Do I need to be in Nextdoor and using Nextdoor? Do I need to go cold calling? Do I need to run direct mail campaigns? So you could, and then folks can get, there's a lot of things you could do. And you could definitely do all those things. But what I've seen a lot of folks do that when they do it well at this level, they are just doing one thing really well, one channel really well. So maybe it's just Facebook ads or maybe they're just really good on Facebook organic, like they're doing, getting into the Facebook groups where they're, their neighbor, their, the neighborhoods, that they want to target, or maybe they're in Nextdoor as one that folks are using now.

One thing I really love about Facebook is it's very accessible for people who are just starting out. And even if you don't have a huge advertising budget, you can still buy very targeted ads. You know, with Facebook, you can set geographic boundaries, right? I only want to advertise to people who live within 30 miles of my service area. You can set parameters based on income, age, gender, whoever your ideal customer is, you can dial that in so that those are the people who are going to be seeing your ads and you're going to be getting a good return on investment. And that's, you know, historically, that's something that has usually only been available to companies with a tremendous budget and you can afford, you know, really in-depth research. And with the internet and with Facebook, that has become available to almost everybody now.

Definitely. And there's a learning curve, obviously, the Facebook ads. And there's also, you can outsource this to someone to do it for you. But whichever one you choose, whether it's Facebook ads, Nextdoor, direct mail, you know, direct mail is good as well for targeting. You can target exactly the neighborhoods you want to target. You'll kind of have to make sure you focus in on one, one because that's really all you need at this level to get to $500K or even $1 million. If you get really good at that one channel, that one marketing channel, you, you can do hundreds of thousands of dollars of work, but it will take your focus to get good at that. It's not gonna— the first time you run a Facebook ad or you do a direct mail campaign that you design, probably not gonna be that great. It's gonna take some iteration and work to really figure that out. So that's why— that's another reason why I probably just need to focus on one. Starting out, get really good at that one channel. So, you know, this is what I need to do to get the work that I want, the level of leads that I want to get.

Yeah, because as I said, we've heard horror stories, right? Like, I spent $500 on Facebook ads and nothing happened. So now I'm jumping over to direct mail and I spent $1,500 sending out postcards and nothing happened. So now I'm jumping to buying a billboard and And the reason— it's not that these things don't work, it's just that you haven't gotten good at them yet. Every advertising channel has that learning curve that Daniel, you've been talking about. So I completely agree, figure out something that you're comfortable with, that you like and that you're willing to invest time in. And I mean, obviously don't throw money away, but if you are learning and you're seeing gains, even if they're small gains, you know, figure out how to, how to make it better. And there are business coaches and advertising coaches who can help you really dial in on whatever channel you choose. But a sure way of losing money is to jump around between all these different channels and, and never really give it the effort that it requires to succeed.

Exactly. And, and some, some benchmarks just to throw out there for what should you kind of expect in terms of the numbers for return on investment for a marketing channel. So if you're putting all your money into, say, Facebook ads, you should be expecting about an 8x return or better, which means if you put a dollar in Facebook ads, you should get about $8 out in booked and produced work. So, uh, to say, put $10,000 in Facebook ads, you should get about $80,000 in produced work. So if you're hitting that 8x return on investment, that's kind of a good indicator that you're doing all right with that, or better, obviously. Um, so we talked about setting up the entity, nail down your niche, marketing. Uh, next thing is you need to make sure your pricing is dialed in. So once you're getting those leads, you're going out and you're doing estimates, and hopefully you're delivering the estimate on the spot and trying to close on the spot, because that's going to really increase your closing rates, uh, and, and you'll be able to more efficiently get, acquire new customers. You'll need to make sure your pricing is out. And this is probably one of the biggest mistakes that smaller painting businesses do, especially starting out, is they underprice themselves. Pretty, pretty common. And so one easy way to kind of understand what you need to charge is basically add up how much time it's going to take you to do the job. You know, how many hours, how, and multiply that by how much you're gonna, you would have to pay a painter to paint that house. So let's say it's 100 hours of work, you have to pay somebody $30, $25, $30 an hour plus payroll taxes and, and workers' comp. Let's say it's $35 per hour when you include that burden. So, so 100 hours times $35 is $3,500. So that's what it's going to cost you. And then let's say you have materials of $750 of materials. So $750 plus the $3,500 equals $4,250. So that's what it's going to cost you to do in— to produce the work. To get the price that you need to charge your customer, you basically need to multiply that by 2. And charge them double of what it's gonna cost you. And, and that's gonna allow you to get to be on track to get a 50% gross profit margin, which is, which is a slight, like slightly above average. The average is 40% gross profit margin, but hopefully you're trying to achieve above average. So basically take the cost that is gonna that you have to, how much it's gonna cost you to produce the work, multiply it by 2 to get the price you're gonna charge your customer.

Yeah. I like the idea of building in that little margin of safety there too, because we always tend to be optimistic and we say, well, this job's only gonna take so many hours and so many gallons of paint. And by the time it's done, it's not uncommon, you know, to overrun on our costs, especially when we're still figuring out, you know, what our costs are. So if we shoot for 50 and we still only hit 40, we're going to be okay. But if we have really thin profit margins and we overrun even a little bit, we're not going to be okay. So I like that suggestion.

Absolutely. And, you know, the kind of the industry standard is using production rates to generate your estimate. So Production rates is basically how long does it take to paint a particular surface in terms of hours. And, you know, so you basically measure the surface and then calculate, okay, how— what is the production rate? What is— how long will it take to paint 10 linear feet of railing or 100 square foot of siding? And then you use that production rate to add up how many hours it's going to take to get to multiply by your labor cost with full burden. So production rate's definitely something to look at. Look at the PCA's estimating guide, Painter Contractors Association's estimating guide. If you don't know your own production rates, maybe you can look at their estimating guide. They have a bunch of recommended production rates for how long it takes the average painter to paint. A lot of different surfaces. So that's the pricing. You want to make sure you're pricing at least for a 50% gross profit margin. And the next piece is production. So for production, this is you do the estimate, you give the proposal to the customer, they sign the proposal, and now you're on the hook to produce that work. So if you're hiring crews to work for you, either subcontractor or employee, typically most painting companies use 2-man crews. So to kind of go through the numbers of what to expect for this, a typical crew should be about— with a 2-man crew should produce around 10,000 per week. With current pricing. Just a ballpark. That's just give you an idea. Gonna be different for everybody, but just kind of give you a ballpark. So you're gonna— one crew should be able to produce about $10,000 in work per week, which is about $40,000 per month.

So that's working 40-hour weeks, right? Okay. Yeah.

40-hour weeks. And so $40,000 per month is about, is $480,000 per year. But that's also assuming that they're working every single week, you know, through the year, fully, fully loaded. So one crew should be able to produce a lot, but you know, there are ebbs and flows in there. So. And sometimes you're going to have more work during the summer than you will in the dead of winter. So you might need to get to $500K. You might actually need to have 2 crews, you know, during the summer that are active to be able to get through that work. But just kind of as a, just a ballpark number about 1 crew, and you can do the math to check my math, but $10,000 per week per crew. So that's kind of an idea or some numbers for your production side. Now, obviously, you'll need to make sure, keep an eye on your gross profit. That's kind of the key number here, making sure that as you produce the work that your gross profit is maintaining at 50%. If you are under 50%, or especially if you're under 40%, you need to look at your pricing. See, maybe you might be undercharging folks, or you'll need to look at your efficiency of your crews. Are they producing in an efficient manner?

Yeah. So if you, if you have two crews or a two-man crew, they're doing about $480,000 a year gross, and your profit margins are dialed in, you're looking at between, you know, $200,000 and $240,000 of profit for the year. With just a 2-man crew.

So that would be your gross profit. So you're— that's after paying for direct costs. Then you still have your overhead costs like your marketing, your insurance, your bookkeeping, your software. All that, all those overhead costs will also come out of— will be subtracted from that $240,000. So if you're, if you're to kind of at this level, if you have crews that are working on the job site and you're just the owner and you do the sales and the production management, you should be making about 30% of the revenue should be going to you. So just to use the same example, if you had $480,000 $1,000 of revenue, you should be making about $144,000 of that. If you're doing the sales, the production, and then you're hitting your, your 50% gross profit margin, uh, you should be around $144,000, which is pretty good.

Yeah, yeah, especially just starting out, for sure.

So what kind of tax considerations at this level from startup to around $500,000 in revenue? Yeah.

Yeah. So, you know, owning your own business and being self-employed, your taxes are going to be a lot different than they are when you work for somebody else. And sometimes we're not prepared for that. You know, when you work for somebody else, your taxes are withheld every paycheck kind of automatically, and certain things like Social Security tax and Medicare, those costs are split between you and your employer. When you are self-employed, you are responsible to still pay those taxes, but now there's no one to share them with, and you are obligated to make those payments yourself. So kind of a rule of thumb, when you're still kind of small, you're going to want to set aside between 25% and 30% of your profit for taxes. Now, that sounds a little bit high, but keep in mind that these taxes are income taxes and what they call self-employment tax. And that self-employment tax is your Social Security and your Medicare, and that's about 15.3% there. If you're in a 12% tax bracket, you can see there's 27% that you'd be paying in taxes. If you're 15% tax bracket, now you're up to that, that 30%. So having the money set aside is a good thing because it's very easy to, to spend that money. And then we can be pinched when it comes time to file our tax return. So a lot of folks like to have a separate bank account for that. The other part of that is we want to make estimated payments. The IRS is a pay-as-you-go system, which means you are obligated to pay your taxes as you earn the income. And if you're self-employed, that means making quarterly estimated payments. The first one is due April 15th, then June 15th, September 15th, and January 15th. You're going to want to pay in what you think you're going to owe, and that can be difficult to know how much. If you're, if you're setting aside that 25 to 30%, you could pay that in or you could work with a tax professional to you know, project your income and your tax liability and really dial in the amount of those payments so that you're only paying in what you have to and no more. But if you don't make those estimated payments, if you just kind of wait till you go to file your return, two unfortunate things are going to happen. One, you're going to get hit with underpayment penalty. Which is interest the IRS assesses on the estimated payments that should have been made earlier. So you're going to pay more taxes than you need to. And two, you're going to have to write a giant check to the IRS, and that can be very difficult to do. So try to make some kind of estimated payment. You can do it on IRS.gov/payments. And also, if you live in a state that has an income tax, you're going to want to make state estimated payments as well. Cool.

All right, well, awesome. So I think we gave a pretty good foundation of things to consider scaling from $0 to $500K in your painting business. We went through setting up your entity, whether that be an LLC or corporation, getting your bank accounts, your EIN, nailing down what your niche is and who are you serving. Figure out your marketing channel, figure out your pricing so that you're getting a good gross profit of 50%, identifying how much your crew should be producing, and then some tax considerations and staying on top of your estimated taxes. Is there anything else that we can pass on as advice for folks in this, in this situation?

Oh man, I mean, there's obviously, you know, a lot of details and a lot of, you know, more advanced techniques and strategies. But I think this episode is a great one to keep in your library. You've really spelled out like a great roadmap for getting started. And if you are able to hit these 5 or 6 different principles that you talked about, you'll definitely be well on your way to having a profitable painting business.

Awesome. So we'd love to hear from you. If you go to Facebook and type in Grow Your Painting Business, you can find us on the Facebook group and request access and ask your questions. If you are right now starting up your painting business and you have any questions about the entity selection, uh, the marketing channel that you're doing, or the numbers that you're seeing. Definitely let us know your questions. We'd love to hear from you. And with that, we will see you next week.

Yeah, thanks for listening and, uh, have a great rest of your day.