How the Top 1% of Home Service Businesses Use DEBT

My name is Mike Andes. I'm the founder of Augusta Lawn Care. We have over 150 locations around the world. Today, I'm going to be sharing with you the secrets to be able to use debt to grow your business and scale into a massive company.

Now, over the past year, I've traveled to over 30 small businesses around America, all inside this book. And the one common denominator between the ones that went bankrupt and failed was the fact that they all had debt. Today, we're going to be talking about how you can use debt to grow your business and it doesn't kill you.

And you'll want to stick around because at the end of this video, I'm going to share with you the exact difference between using cash in your business and how much more money you can make if you use debt.

But before we get started, let's talk about why I actually hate debt. Most of my videos on YouTube, you'll actually hear me talking about buying your first vehicles and trucks with cash and buying used vehicles and not getting a bunch of loans. And instead of spending your cash on equipment and trucks, I usually recommend that you go and actually spend that money on marketing. Why? Because if I go do marketing and get customers, I actually build enterprise value. If you just think about from this perspective of balance sheet where you have assets and you have liabilities, if I am going to go buy a truck, it's an asset. No, you took cash an asset, and you just turned it into a hunk of metal, another asset. So you didn't actually build any value. And if you get customers, if you assign contracts, if you get more paying customers and jobs, that actually builds the valuation of the business. What's crazy is that piece of metal, that truck, that piece of equipment you just purchased, as soon as you buy it, it's actually depreciating. It's going down in value as soon as you drive it off the lot. And another reason I recommend people not going to a bunch of debt when they're first getting started on trucks, equipment, getting flashy things, is because just statistically speaking, the people watch my videos, most of them won't be in business in five to 10 years. So probably not a good idea to go get a whole bunch of debt on stuff that's actually going down in value. Now you'd be like, seriously, you're telling me to not get new trucks, not get debt, not get new equipment? But when I look around at all of my competition, all the biggest players in the country and the biggest players in the home Service industries, they all get new trucks every year. They have new equipment, they talk about their lines of credit and how they use it for tax purposes. So how are you telling us to just focus on spending money on marketing and advertising the beginning of the business and not getting debt? Well.

Those large businesses that you're comparing yourself to, they've been in business for 10, 15, 20 years. Even my local shop, Augusta Lanka, my very first one, we've been in the business for 10 years and just now we are starting to get brand new trucks, brand new equipment. And so instead of comparing yourself to them, ask yourself, what, what did they do when they first got started? And a lot of times you hear stories of them pounding the pavement, knocking on doors and getting customers. But now the reason that they're using debt is because they actually know their seasonality. They know when their revenue spikes and they know when it dips. They've been in business for so long, they understand their cash flow and their demands and by now they're very profitable. And it's actually very tax advantageous to have the debt and get new trucks and equipment. Why? Because a lot of times when you buy a truck, you, you have a five year depreciation cycle, which means at the end of five years, you no longer can take a deduction against the asset on your taxes. So if you're really profitable, having a section 179 or things that you can write off and depreciate is really valuable. And that's why a lot of times larger companies will buy new trucks every five to 10 years. But here's the thing. If you're a new business owner and you're not profitable, having a bunch of section 179 and a bunch of depreciation and isn't going to help you at all. Because if you're not profitable, you're not paying taxes anyways. Once you've been in business for 10, 15 years, know exactly what your cash flow looks like throughout the winter, throughout the off season, throughout the busy season, then you're able to accurately predict what your profits are going to be because you've seen it 10, 15 times. And that's when I give the green light to go out and get more debt. Also, for these established really big companies, their biggest cost is labor. And having their labor sitting around waiting on broken pieces of equipment or a truck that went down is extremely expensive to them. If you're just getting started, you don't have enough work to stay busy and things breaking down doesn't impact you at all. Because you're not busy full time. And so going on, I gotta get a great truck and a really nice piece of equipment because it needs to be in operation all the time. But if you're only working 15, 20 hours a week and you don't have a full schedule, having new equipment isn't going to save you any sort of labor expense or time whatsoever. So focus on getting the customers to fill the schedule so then it actually matters whether or not you have dependable trucks and equipment. Now, we've talked about how big businesses in the home service industries use debt. Another big impact on home services is private equity. They're moving more and more into the home service industry and they use a ton of debt and they actually use what's called LBOs or leveraged buyouts. They'll go in and buy out a company and they'll get 70 to 90% of the purchase price in debt, and they'll go to banks and investment firms and other private equity and raise a fund. And this is how I like to think about it. And you know, in this example, you don't have a lot of debt. It's pretty, you know, balanced system here. But if we have a leveraged buyout where maybe 90% of of the equity of the business is debt, and then there's 10% and LBO or leveraged buyout, how I think about it is they have 10% equity, 90% debt, but watch what happens, the impact that having this sort of leverage in the business creates. Now, all of a sudden, when they make a change in the business, it has a huge impact on the other end because they have this leverage and that is the debt we're talking about. So you might be saying, well, if the smart guys, the guys in private equity are using debt, why would we not use debt in our small business? Here's the thing, these private equity firms have done this hundreds of times. They have some of the smartest people running numbers and analyzing exactly what the financials need to be in order for a leveraged buyout to actually occur. And keep in mind, in the lbo, a leveraged buyout, there's a huge amount of risk. Why? Because if something happens at the business, like an economic collapse or something bad happens, whenever you institute any sort of leverage or debt in a business, there's a huge risk of something bad happening. If anything in the business potentially falls apart, they lose a massive customer. Economic recession happens. The amount of pain and the collapse of the business is far greater and the likelihood of bankruptcy is much greater because of this leveraged buyout. And because of debt in general, you're increasing the risk that you have in the business. The impact increases, but also the risk.

Now these smart guys at private equity are always trying to figure out what is the return on Investment or ROI. In other words, if I put $100 in this business, in this system, what's my return going to be? And instead of thinking about the debt structure or a leveraged buyout, let's just look at your business and what happens when you actually know the return on investment. If this is your business, I like to think of it as a black box. Your whole business model looks like this. Alright, we have equipment inside of your.

Business, we have.

Systems inside of your business. This could be office and admin systems, marketing systems, the way you training. And we also have skilled labor. This is what makes up the black box of your business. And the whole goal of having a home service business is that you take your business and you create better systems. You get more skilled labor, you get better equipment, et cetera. And then you take dollars in the form of marketing dollars and you invest into your business and you buy trucks, you spend money on marketing, advertising, wages. And then we're expecting some sort of return from the bottom of the black box. So if I can put $5,000 into the top of the box and on the other end, I get $50,000 coming out on the other end of the box, that would be a good return on investment. Unfortunately, the reason a lot of home service businesses go bankrupt is they can put $10 into the business and at the bottom they get $9. That could be a pricing problem, that could be a systems problem. They could be the fact they have bad equipment, things are breaking down. It could be the fact that their labor is super inefficient. But ultimately your business is broken and you have a bad business. If for every dollar you put into the black box, you don't get some sort of return on investment. And the greater that return on investment, the more you get back from every dollar you invest in the business, the higher likelihood that your business can take on debt. And use the example of more leverage in the business. By doing that, you'll be able to grow faster and this black box, your business will be worth much more. Much more. All right, so we've talked about why big businesses use debt. We've talked about why private equity and the smart guys, they use debt. But you're like, mike, just tell me, is a debt a good thing for my small business? All right, to show you this example. This is going to tell you what the pros and the cons are. In a nutshell, when we look at growing a business, we have what I call the 4L framework. What that means is I need liquidity. That's the first liquidity. And that's just cash. I need money to be able to grow my business. I'm going to invest that money into spending money on marketing, advertising, Facebook ads, Google Ads, every door, direct mail, door hangers, whatever. I'm going to turn that liquidity into leads. That's the second L of the 4L framework. And then if I get a bunch of leads, guess what? You need more employees to be able to go service those customers and actually generate the revenue. So that creates labor.

Now, at every single one of these stages, as I grow my business, this becomes my next constraint. At first, I needed money to start my business. That's why everyone in the comments like, well, if I just had more money, I'd be able to grow my business more. You're right, you need liquidity, the first L in the 4L framework to grow the business. But then you take that money and you turn it into more customers, more leads. And then once you do that, you now need to go get more employees. So at first it's gonna be like, I don't have enough money, then I don't have enough customers, no leads are coming in. Then you get a ton of leads, and I can't find any employees. These are all constraints to growing a business. Now, as you get more employees, guess what you're gonna need? You're gonna need leadership. If I can spell lead, er, ship.

And this is gonna come in the form of managers, et cetera, to be able to manage the laborers. Now what happens in a growing business is this process, this cycle just keeps spinning. Because as soon as I get a bunch of good management in place, now, they cost a lot of money. They're extra overhead in the business. So guess what? I need more liquidity. I have to raise prices. And this process keeps spinning the 4L framework. And that how a business continues to grow. Now here's what's crazy. If I can just take a bunch of money and plop it on each of these constraints of the business, it solves the constraint much faster. For example, if you only have $2,000 to start your business, it's going to be hard to get a bunch of leads. But guess what? If I go, hey, get a bunch of debt, $20,000, it's a solve liquidity immediately. And I Can go get more leads and say, well, I got all these leads now, but now I can't find any laborers. No one wants to work for me. Well, guess what? If you had enough money, if you go out and get some debt and pay people 5 or $10 more per hour, I happen to think you'd get more laborers. And you say, well, I got lots of laborers, but now I'm overworked. I can't get anyone to be able to manage these people. It's difficult. I'm working 70, 80 hours a week. Guess what? If you had more money and you went and got more debt, you could just throw it on this problem and solve it. You can go hire someone, overpay them, and get great leaders. Ultimately, when it comes to growing a business, money is sort of the grease to this engine, and it'll spin faster. And so the hack, the way to do this faster is go out and get debt to grow the business faster. And this is simply in one sentence. You could say, getting in debt allows you to grow the business faster. Why? Cause this money solves the constraint in the business at any cycle of growth and allows you to continue growing. So now let's compare what your business is going to look like if you use debt or if you bootstrap the business. Bootstrapping is just a fancy word for saying, I don't use debt, I just use cash, and I use my own funds instead of the banks with loans. So these are little treasure treats. You'll also find more of these@bluecollarsummit.com you might want to check them out. Now, when we look at growing your business using debt versus bootstrapping, this is what it's going to look like in terms of the growth of your business using debt. You can see these little lines here. This is what I call capacity. This, you could say, is one truck, two trucks, and you could go as high as you would want. It's how much revenue can I do before finally, I literally cannot get any more customers. I can't grow the business anymore without buying another truck because this is my capacity. And I literally am working this thing five, six days a week full time, 10, 12 hours a day. Well, if you have debt, guess what you do? You go buy another truck, and then you hit another capacity limit. You're like, oh man, I'm still growing. The business is doing fantastic. Well, if you're using debt and you just go finance the truck, guess what you do? You buy another truck. And this is what allows you to be able to grow really, really fast. Cause you don't have the constraints of, of having too little of capital. Now this is what happens if you bootstrap and you don't take any debt is when you hit this one truck capacity limit, you might actually have to stop and you have to stay here for a little bit. Because at this stage is when you're going to raise prices and enter what I call profit mode. Now, inside of when you have debt, you don't need to be in profit mode because you have plenty of cash set aside and you just keep going into debt to be able to continue growing. Whereas if you're bootstrapped, you don't have the ability to get debt. You're gonna go into profit mode when you're at capacity. In other words, in order to get more customers and grow the business, you'd have to buy more trucks, hire more people and get more equipment. Well, I can't afford that. I don't have any debt. I don't want to go into debt. I don't have the loans and the capital to go get a second truck. So you stay in what I call profit mode instead of staying constantly in growth mode. Growth mode is simply when you hit capacity, you buy more trucks, equipment and hire more people. And you're able to stay in growth mode much longer if you have debt. Because at every one of these stages I just go buy more trucks, hire more people and buy more equipment. Over here I'm staying in profit mode. I'm stacking money aside before finally I'm able to then buy the second truck and continue to grow the business. So this takes much, much longer. And so this is a way of looking at debt makes your business grow faster. Not really. What it does is every time you hit a constraint, you're able to buy trucks, equipment and hire people because you have the capital available. If you don't, you're going to have to stay in profit mode. You're going to have to make some money yourself. Stack that aside maybe for a year or two and then you can continue to grow the business once you have enough capital to go buy the second truck, hire more people and get more equipment. Now after this you're probably like, well, I should get a ton of debt, I should stay in growth mode, continue to grow my business, kill all my competition. Well, let's talk about some of the dangers of debt, because I like to think about debt as potentially being a short term solution to a long term problem. The long term problem is you might have an unprofitable business and if you have a whole bunch of debt, it's like eating candy and being like, I feel great. Yeah. After you eat the candy bar, it feels great for like what, 20 minutes? You get a sugar high, you're like, mmm, so good.

That's like debt. It tastes good in the moment, but in the long term solution, you need to fix the business. The long term solution is going to the gym, picking up some dumbbells, getting some kettlebells, building your immunity, building up some muscle, increasing your metabolism. But no one wants to do the hard work required to actually build the muscle and increase their metabolism. Go to the gym, that's hard work. Creating a profitable business is hard work. The problem I find so oftentimes with debt is people are looking for short term solutions to feeling good. And guess what, if you had debt today, all of a sudden, all the pain you feel of not making payroll will be fixed. But you're likely just pushing it down the road because you never actually did the harder work and the more long term pain of building a business that's profitable and, and that in the long term is what we're really trying to achieve. I think of debt as being a very powerful tool. That's why literally the entire country, the United States, was built on the back of debt. It's very powerful. But if you put in the hand of a kindergartener, it can be extremely dangerous. And so when it comes to building your business, you've got to figure out if you're using the tool to stay in growth mode, continue to grow the business, or if you're just taking a short term pain pill, that's going to lead to a lot more pain down the road because you have an unprofitable business and this will blend into a bunch of debt, no profitability, and now you're stuck. And that's what we call bankruptcy. Now, in my personal opinion, I like to use debt for really only one part of the business and that is to fund the assets required to continue growing the trucks and the equipment. A lot of times that's also the debt that you can get the lowest in interest rates on and the best terms because it's collateralized. If you don't pay, they'll come pick up the equipment, they'll come pick up the truck. I like to use that kind of debt if I'm going to use any debt at all to be able to get the assets required so I can continue to grow the business. Now, one word of caution here, and that is this, if your bank is not wanting to give you any sort of debt. This is a good indication you're probably not ready for it. They're not going to hand you this axe over here that they're not gonna allow you to have the candy bars. If they don't see the discipline of going to the gym and working out and staying healthy, if they don't see you actually protecting safety in your finances, they're not gonna give you the axe. They're not gonna give you all of that debt. So instead of trying to make the whole goal and purpose of being a business to qualify for the loan, realize that there's underwriters and all of these processes that are put in place, like the small Business administration and that whole qualification process is put in place to make sure that you don't take on too much risk and that your business is actually profitable enough to pay off that debt in the long term. All right, so now we're going to look at a real example of a business that got started and they started a lawn care business. And we're going to go through the entire budget and see the impact of what debt does to a business. Now, if we're going to start this hypothetical lawn care business, we're going to need trucks, we're going to need mowers, we're going to need blowers, we're going to need equipment. We're going to need advertising dollars for every door, Direct mail door hangers, Facebook ads. We got a dump trailer, and we got. We need some working capital. So I'm going to create this budget, and this budget altogether, we're going to have as $120,000. Boom. So we're going to assume, because we have plenty of cash, we have two trucks which are $30,000 a pop. We got our dump trailer, $8,000, a ramp rack on the back of the truck, which is $4,000. Two of these bad boys, we got a bunch of hand tools. We got marketed. We're spend $20,000 in marketing so we can grow really fast and fill up the two trucks with the several employees right off the rip. And we're going to make sure I have $18,000 in cash reserves. Now, this is a very close to the exact budget that was created when this business was getting started. Let's look what happens over the course of the first few years in business. First year in business, they're going to generate $200,000 in revenue. You say, well, that's nothing. They're investing $110,000 and only doing $200,000 in the first year of business, well, the first month deprived 5,000. The next month they did probably 10 or 15,000. And the next month they did about 25 to 30,000. So it was a slow burn. But let's just be conservative. $200,000 in revenue in the first year. Now they only profited 30,000 because it's kind of inefficient. They're kind of getting things started, they're burning through some employees, etc. So they only made $30,000 of profit in their first year. Now in this example, they had to pay a bunch of interest on a loan because out of the $120,000 that they used to start the business, they got $100,000 loan. And so on that $100,000 loan, they have to pay $10,000 or 10% interest as an expense for the first year. Now the second year comes along and the same business now generates $480,000 in revenue. They profited $85,000 for the year in their second year, and again they had to pay $10,000 or ten percent interest on the $100,000 loan they got to start the business. But look how fast they're able to grow because they had all this upfront capital using the debt. In year three, they did $660,000 in revenue. They profited $130,000 in profit, and again, they paid $10,000 of interest expense for the business. Alright, so they did this with debt. They got $100,000 of debt. Let's look at the return on investment for this business. All right, they put in $20,000 of cash on the $120,000 invested up front. They put $20,000 down. They got $100,000 loan and started the business. Now, over the course of these three years, it generated $245,000 in money back to the owner. How did we come up with that? We got 30,000 plus 85,000 plus 130,000. All right, very good. We did $245,000 back and we only invested $20,000. Now, we had to account for the fact there that we did have to pay interest on each of those years. But look at these returns on investment. You're able to get a return investment of over 1000%. The annualized return on investment is 130%. Just for context, usually the stock market goes up like 6 to 10% a year if you're lucky. And if you're going giving money to the government in the form of bonds, you might get 3, 4, 5% interest so to get 130% annualized return on investment is amazing. Now let's see if the exact same results would have happened. But instead of getting that loan, this business owner would have just used cash. You say, well, cash is king. Don't get any debt. I usually agree with you because everything we've talked about today, the risk associated with getting debt, the problems that could come into bankruptcy if you use debt incorrectly and you could really hurt the business. However, watch this. If I use cash and I invested $120,000 of cash into the business, I would get $275,000 out. Well, you say, well, why is it 245,000 here and $275,000 here? Because I had to pay $10,000 of interest when I had the debt. So I actually get a better amount returned to me of $275,000 because I don't have to pay any interest. But go over here to see what our actual return on investment is. My return on investment over the course of three years is 129% still really good, but not 1000 plus percent like it was with the debt. The annualized return investment is 31% instead of like 130% like it was for when I had debt involved and I had a loan. And so the bottom line is both of these businesses would be successful. Both of these businesses grew very well, but when you look at the actual ROI and how fast these businesses were able to grow using debt, it's a pretty substantial amount of difference. And furthermore, If I had $120,000 of cash or say, well, well, then you should just go the more conservative route. Or I could technically start six of these businesses or start in a bigger way and go out and get a loan that was like five or six hundred thousand dollars and get six or seven trucks from the beginning. So it really comes down to what your tolerance for that risk is, because having debt will allow you to grow much, much faster and achieve much better return on investment. You might be saying, okay, great. Well, I would like to have the debt. I'd like to go out and get a loan and be able to grow the business faster. But if I do, I don't have any idea how to actually spend that $20,000 of a marketing budget to get more customers. Well, good news. Watch this video here where I reveal the top 1% of contractors, what they do to advertise and market their business and grow to 10 million-plus.