Should You Use Debt to Grow Your Lawn Care Business?

Hey everyone, this is Mike Andes and you're listening to Landscape Business course podcast. Today we are going to be talking about a four letter word that for some is the bane of their existence or the cause of their freedom and that is debt. Before we get into today's show though, a big thank you today's sponsor which is Jobber. If you haven't already go to getjobber.com im/Andes a n D E S that's my last name. One of the things I like about Jobber is the integrations that it has. So this is one of the reasons why I recommend it for companies that are not super, super small, but then there are not over a million in revenue. So you all know that I really recommend Lawn Pro that We use with landscapebusinesscourse.com for small, small companies under $152,000 in annual revenue. Then I recommend service Autopilot for companies that are seven figures in between that million to a million in revenue. That's where I recommend Jobber. And one of the reasons for that is the integrations. So I'm going to read you some of the integrations that they have. Number one, QuickBooks. If you already are doing QuickBooks, it seamlessly integrates with QuickBooks transfers all the data, your reporting, etc. Mailchimp. So if you have a Mailchimp account with all of your client data in there with all their email addresses and all of that all baked right into jobber, Mailchimp integrates very nicely. PayPal and Stripe, same thing. So I met someone the other day, they were doing all of their payments through PayPal and then they would literally manually report those transactions into their CRM as hey, if you get Jobber, if you get Jobber you are able to seamlessly do that from the CRM charge cards, send those invoices and get the paid by PayPal and not have to be going back and forth. Same thing with Stripe and even Zapier, which if you're really familiar with kind of integrations things, Zapier is the king of all integrations because it literally can integrate with hundreds and hundreds of different applications. If you're using another CRM, if you're using other Word Doc or other types of word processing or other sorts of applications online software, that's the place to go. So get jobber.com im andy and you get a big discount in the next six months of using the software. Now today we are going to be reading a question that came in on Landscape Business course, Facebook Group and we're going to be talking about debt, when you should use debt, when you should not use debt. Because I've seen debt ruin landscapers businesses. The major reason is because their cash flow in this industry goes up and down. There's times we do really good, there's times we do really bad. There's jobs that we do well, there's jobs we don't do well. And in a smaller business, especially where you haven't figured out the systems for cash flow, this could be a huge issue. Or it can also be the thing that gets you to make your business bigger by utilizing debt correctly. Alright, so we're gonna talk about when to use debt and then when not to use debt. And I'm gonna base it upon a question that came from Nathaniel David Fancher on the landscape business course group on Facebook. But before we jump into that question, before we talk about this four letter word that gets so many people agitated, some of them get pretty passionate about talking for or against debt or you should use debt or you shouldn't use debt. Before we get into that, I want to make sure that everyone signs up for a webinar we're having this Saturday. So this Saturday there's a webinar you can sign up on. Landscapebusinesscourse.com webinar this webinar is going to be designed for people that are below $500,000 in annual revenue in your landscaping business. So if you're doing.

6, 7, $800,000 in revenue or a million plus or 2, 3 million, this is not gonna be the webinar for you. We are talking about how to get from 100, 200 to 300,000 in revenue to get to the half million dollar marker. In a couple weeks we'll do one to get to a million and beyond. But for today, for this coming Saturday. So if you're listening to this, you only have a few days, a couple days actually to register. So landscapebusinesscourse.com webinar sign up It' evening and it's gonna be a live webinar about an hour long. I'm gonna be hosting it. Gonna be live and you can ask me questions throughout the webinar and as we talk about different steps that you need to like a checklist of the things you must do to get to 500,000 and beyond in your business. You can ask questions and I can answer them live. So check it out. Go to landscapebusinesscourse.com webinar it's completely free. I will be pitching Augusta Lawn Care Services and the franchise and how we can help you at the end of all these free webinars because I believe in it and that's how I am able to do these webinars and make sure it's giving value to the franchisees too. So check that out. Landscapebusinesscourse.com webinar I'll see you on Saturday. I can't wait for it. Now let's jump into the question coming from Nathaniel so I'm gonna read it. It's actually very very long. I don't think I've ever read a question this long on the podcast, but I wanted you to kinda get some backstory and it sets up the framework for the discussion about debt very well. So I'm gonna read the whole thing. I'm not very good at reading off of a screen, so I'm sorry it's small print here on Facebook, but let me go ahead and read this and hopefully you can get some context for the conversation we're having today. So I'm just gonna read the whole comment. Mike not sure when you will see this comment, however anyone else also feel free to chime in. So a little backstory on my business. First, my brother and I started a lawn care business in 20182018 here in Southern Connecticut. We have done strictly just lawn treatments and aeration overseeding. We both have full time jobs. Our first year we did everything we could to sell and perform the work efficiently. We were able to gain a contract with a large HOA worth $5,000 per application for four applications, so 20,000 a year. This served as our foundation income for the season and we ended with 70 residential customers and four commercial. We did about $70,000 in revenue including cash jobs. We paid ourselves nothing and spent any profit on marketing and equipment. Year two our father is out of work and a master carpenter by trade. We hired him to perform the bulk of the applications while my brother and I kept our full time jobs. We were also able to onboard an additional 50 residential customers with overturn. I think with Churn we are currently at 140 customers including our big HOA. Now with two to three months left on our season, my brother moved out of state on a rotation with his engineering job. So if there is any work left at the end of the week that needs to be done, I work the weekend to perform as necessary. Given our plan for growth next season, it is inevitable we will need another employee. Myself and my brother have differing views on how we should be financing our third year. We are starting to plan our goals and what it will take to reach them. Having just recently discovered your podcast and course these past few weeks, it has opened my mind to new ideas and concepts I absolutely feel will benefit the company. For instance, we will be offering mowing to our current customers to increase our customer value next year, which could more than double our revenue alone. Now with growth also comes more costs and I am personally of the belief that if you can manage covering costs out of pocket to do so to avoid any debt. My brother on the other hand is a big rich dad, poor dad, student and believes in leverage and that we should be utilizing a bank finance loan to create leverage for ourselves. I am not fully versed in the concept of this and at the end of the day I just see it as decreasing our overall profit margins by throwing a hefty debt on our backs. This plan will include another truck trailer and mowing equipment, not to mention another employee or two and possibly a storage facility as we will outgrow our home garage. Given the situation, what advice would you give if any? Your insights and knowledge are much appreciated. Thank you. So first of all, before we jump into the conversation of today's episode, which is debt, I want to just give some more directed advice to Nathaniel. A couple ideas because I don't know enough details to give you super specific like you should do X, Y and Z. Let me give you a couple ideas. And one of the ideas actually came up from another member, Gerardo, who said why don't you stay in the treatments only business? Basically because in general treatments have a higher profit margin than mowing. So you know, one of the ideas is, hey, instead of expanding so quickly by literally doubling or tripling your revenue by adding mowing services on a service that's actually lower margin, why not focus on just the overseeding, the aeration and the treatments and just keep doing that? That's higher profit margin. So that's one idea. The thing is though, I like adding the mowing here because it's so easy. Like literally, if you have 140 customers that you do treatments for, I bet you anything you can get 50 or 60 of them to sign up for mowing services. And yes, you will absolutely double or triple your revenue by doing that. And when you start adding those mowing services, there's additional cleanups, little projects, mulch installations that they'll start asking you to do because they see you every week instead of four times a year. So you they start to ask you to install the mulch, rake out the beds, pull the weeds, trim the Bushes, which are also higher margins. So there's a trade off there. So that's the first thing is like regardless of the debt, should you even do, should you add mowing? That's a question to have. Should you even hire an employee? Can you, instead of next year hiring an employee, can you just not work at your job? Because it's gonna be hard to find an employee that's going to be able to work solo like your dad is currently. Cause he's great, you know him, you trust him, he's a great worker. But to find an employee or that's going to be able to do the same thing and operate that same way, it's going to be tough. So it might be better just an option. Again, I don't know your circumstances, how much you get paid currently at your job. Like if you're leaving a $150,000 job, this is a little bit different advice, but let's assume that that's not the case. I would suggest maybe stopping your job next year and going into the mowing, doubling your revenue, but not having any additional overhead because you don't have employees. You don't have to go and get a bigger shop. Still do it from your, your garage. So those are some ideas solely based on just business model. Like can you not slow down your growth, but can you cut down your overhead in the growth step by take, you know, becoming full time at this and working with your dad and staying at your home garage. Can you do that? I think you have a lot of profit margin if you do that. You'd be able to stack dough next year. If, if you were able to do the work yourself, be as efficient probably as two employees that were not being managed, you'd probably be able to do all the work that they would be able to do. And their two salaries combined would probably, I'm guessing, just almost equate to what you're making on your job currently. So maybe quitting is something you might want to look into just to kind of ease into the full time. It's hard to start ramping a business up like that with a bunch of employees. Especially having your dad involved as an employee and, and you running a business or running Your own job 8 to 5, doing your thing outside of the business, that's a tough one to sell to employees. It's a tough thing to do to manage those employees very well. Just from. Again, just based upon the information I have now. So that's from the business side. Those are some of the questions I would ask. Do you need to hire people. Can you do it yourself? Can you go full time yourself and stop your job? Can you not go get another shop and reduce the overhead, stay at your existing location at your garage currently? And.

Do you even want to get into mowing by focus and just focus on the, the higher margin treatments, aeration, etc. So that way you don't have to go get a bunch of equipment and other things like that. So that's a whole different discussion as to what you should do. I'm going to talk about debt because I feel like this question sets up the debt question better than me just hypothesizing about what you should or should not do when I don't have a lot of information on your current job and your pay rates and things like that in your area. So I just kind of give some of those ideas for the business side. Now let's talk about debt, because the big question here is should you leverage, should you go into debt to finance the growth of your business? So as all of you have heard on the podcast, I've said it before, growth sucks cash. In other words, if you're wanting to grow most of the time, it's gonna take a lot of cash. That means you have to have your cash flow on point. Because if you don't have your cash flow on point and you're growing, that means that the cash gets sucked out, cash flow comes down and your business, you go out of business. And literally some people grow themselves out of business by having bad cash flow. Cash is sucked out of the business because of growth and, and they're left with no money out of business. So that's a problem. So I'm gonna go over four different ways, when you should go into debt or when you could go into debt, or when you could use debt to be a good thing. So I'm gonna talk about those things. Now. These are the way I look at debt. This is not the. I'm sure there's other ways of looking at it. There's other formulas, there's other varying risks, levels of risk that people are willing to take. But for me, this is how I determine whether or not we should take debt in our businesses. Now, quick caveat. We run a pretty cash only business at Augusta besides a couple big pieces of equipment, and those are 0% down for a few years. And so literally under $40,000 in equipment debt is what we have. It's all 0% loans and it'll be paid off in the next couple years. It's under 30 even maybe. Anyways, at Anytime Fitness, I have an SBA loan. Cause I bought the business, I got an SBA loan, so I have leverage there to buy the business and it profits enough to pay the debt service. Anyways.

That'S just kind of background information. I'm gonna talk about the four different ways that you can use debt to grow your business and when I.

Would use debt. So number one is when demand is greater than supply. So if I was. If I had time, I would show, on this chart here, I would show a graph of supply and demand. And I'm not going to try to draw it in the air here, but basically, as demand goes up and you have supply, it looks like, if you graph it out, it looks like a cross, basically. And, and essentially, as economies change, the supply and demand changes as well. If supply goes up, the price is going to come down. All right, if demand is here, I really wish I had a graph. But essentially, if demand stays constant. All right, so the demand of a product, just think really easily, like, how many people in your market. Let's do that. Yeah. So the demand stays constant. In other words, the number of mowing customers in your area stays constant. The people who need service, let's say it's 500 people. That stays constant. If the supply. Let's take into account supply, that is your competitors. If supply increases, the price will come down. So what that means is if you have 500 customers, demand stays constant. But supply goes from 10 landscaping companies in your area to 20 landscaping companies in your area. In other words, supply goes up based upon the graph, based upon economic, micro and macroeconomics. If demand stays constant and supply goes up, the price is going to go down. Okay, so I hope I didn't lose you there, but one day I will talk about demand and supply and demand in relation to lawn care and how important to know about that is. However, when demand is greater than supply.

That'S when you should use debt. So what I mean by that is now, when demand for your products or service, when you are selling so many lawn care customers and there's so much demand and the supply, that is the amount of trucks you have, that is the number of employees you have, I. E. The space you have at your shop, all those things that you want to buy to expand and grow your business in terms of going into debt for when the demand for the product and demand for the number of customers, they're coming in so fast and it's greater than the supply that you can give in terms of labor, trucks, equipment, and you need to invest in supply in order to match demand. That's when you can go into debt. Now this is what I find is that people will go, they'll justify themselves saying we're so busy and we got all these customers coming in. That is supply or demand is going up. Demand for their services is going up. So like we need to increase supply, we need to get more trucks, we need to get more employees, we need to get more equipment, we need to buy bigger mowers, we need to go get a shop, we need to hire a manager. Okay, that's all good and fine, but the question I have is.

Is the usage of your current equipment and labor maxed to the efficiency levels? So is it absolutely being used as much as possible? So for example, a factory, if we have a factory that's producing food and they're working from eight to five every day and they're getting, they got, you know, they're growing their business and they're making more and more food, more and more food. The demand for their products is increasing, the demand for their product is increasing. And like, you know what? We need to increase supply. We need increase supply. Cause more and more people are buying our food products. So what do they do? They hire more employees, they hire more employees, they hire more employees. And then all of a sudden they're like, oh my goodness, we have so many employees. We need a new factory. We don't have enough space. Now there's two ways that they can do this. A, they can build another factory that is going to debt, build another fixed asset in the terms of a building. Or they can look and say, you know what, we have a fixed asset. We have a piece of equipment, we have all this equipment, we have this building, all this is in place. Is it really being used to its maximum efficiency? In other words, can we rearrange everything to make it more efficient? But more importantly, is there a way to maximize the usage of this facility without building a second facility, a second factory? In other words, can we start an evening or night shift and have a whole second shift or even a third shift? Can we run this factory around the clock instead of building a second and a third factory? So that's what you got to be thinking about is the factory that you've built in your business, the equipment, the trucks, the employees, can it do more? Can it be more efficient? Can you rearrange things within the business to make it more efficient? Then the question is, alright, someone comes to me and says, I need to buy a new mower. The question is your existing mower, is it being used three hours a day, four hours a day, is it being used eight hours a day? Is it being. Because if it's being eight, ten hours a day, there's a good chance you're maxing out efficiency on it. But if you have a zero turn mower in all your trailers and they get used for one to two hours a day, I promise you, you should not buy another mower. You should not buy another zero turn mower. The reason for that is because it'd be better for you to get all of your big zero turn lawn mowing jobs on one route so that piece of equipment is increased in its efficiency and is used for six or seven hours instead of having four of those mowers being on all of your crews, but only being used occasionally throughout the day.

You know, so I'm using the factor example to be extreme. Like obviously we can't mow at night, we can't have a second shift, we can't have a night shift. However, it's going to bear. Like if you have 10 trucks in your shop right now and you're thinking about buying an 11th one, you gotta really ask yourself, are we actually using all these trucks every day or is they half the time? There's three trucks sitting in the truck in the parking lot, and only once a week do we actually need the 11th truck. Is there a way that we can balance, make things more efficient? Maybe we do 10 hour shifts instead of 8 so that way we can get an extra day and get people, get more jobs in and without having to buy more equipment. So again, that is the one way that I would say that you should use debt is when you've maxed the efficiency on your equipment, you've maximized that supply without not buying equipment, not buying new trucks, not even hiring more people. But you've maxed out the efficiency of all of those things and demand is rising, then you need to increase supply, that is you need to buy equipment, you might need to buy another truck, et cetera. So number two reason when I would use debt, and I know this is a little bit deeper than I usually go, it's a little more nuts and bolts. Usually the sort of thing I would share in more of a classroom environment or the franchisees. Like a lot of numbers and things and graphs maybe, but I think it's a good conversation beyond just like, you should use debt, you should not use debt. Like why? Like when, like give specifics. That's why I'm kind of Making this video, I was a little bit annoyed by some of the other stuff I saw around the lawn care industry about debt. So number two is when profits from machines are twice the debt service. So again, this is my opinion, when the profits from the added equipment or truck or whatever you're buying with the debt, when it doubles the debt service that you're going to be paying. So for example, if you're going to Pay, let's say $500 per month debt service.

On the new truck and trailer setup. But if having that piece of equipment along with all the other expenses that are going to be acquired, you're going to have to staff it, you're going to have to fuel it, you're going to have to insure it. But if the profit is.

Greater than $1,000 or twice the debt service of 500, that's when I would go forward. So for example, let's do the numbers here. $500 is going to be your debt service. I want to make at least $1,000 in profit.

To make this acquisition of debt, to buy this piece of equipment using debt, because I want twice in profit as I get in debt service. Now you got to remember though, let's assume that you have a really good business that's efficient and you're making 20% profit margin. That means that in order to get $1,000 of profit, you need $5,000 worth of revenue. Alright, so now the question is, will you be able to get $5,000 per month in extra revenue.

If you get this piece of equipment, this truck, this trailer, whatever you're buying? Because now you got $5,000 in revenue, 20% margin is $1,000, which is twice the amount of $500 per month that you're gonna use for debt service. So for me, again, this is my risk tolerance that I have twice my debt service in profit, not revenue. Profit per month is what I want to see before I engage in debt. So if you have questions, post below. If you're on YouTube or Facebook, I know I'm not going so deep. Like I could spend literally three or four hours just talking about this topic and explaining very detailed the numbers behind all this. But let's jump into the third reason why I would use debt is if you raise prices to cover the debt service prior to going and engaging in the debt. So for Nathaniel, instead of going and going into debt for $500 per month on a payment, I would go try to raise my prices and make sure that I'm gonna profit an additional $500 just by raising my prices, not increasing the amount of work I'm doing, not increasing labor, nothing. Just increase prices, that is increase my profit margin enough to cover the debt burden. So if you have all these customers and you have 140, can you get an extra dollar per customer per month? That's $12 per year. That's $3 per service. If you're doing four services per year, can you increase your prices by $3 per service and then make the debt acquisition? All right, next thing is, number four is when to use debt is extreme growth. So if you're just growing, like doubling the size of your business every year, this is Augusta. The first few years, like we went from 30 to 180 to 490, like quick growth like that. And then it was like, then it slowed down a little bit, like in terms of percentages, because then we went to like 901 and a quarter, 1.5. So like it slowed down. But like at those first few years, when you're like doubling and tripling your size of your business, extreme growth. You can get debt if you have cash reserves for working capital. Because the problem that people fall into is that they're growing super fast. So what they do is they use debt to get new equipment, get new trucks, get an office, get more employees, and that's great until they hit the winter and they get hit hard with bad cash flow. So if you have cash reserves. So this is what we did when I first got debt, and basically I got debt to basically get in into bigger landscaping stuff. We have three track loader skid steers right now, and we use them a lot. But when we first got our first one, it was $40,000. And we've paid it off by now. But like, I think we got $20,000 worth of debt on it. Don't quote me on that. Something around that. We were growing super fast, and I didn't want to jeopardize our cash reserves by paying for it with cash because I knew we were going into the winter, we bought it in September, and so.

I didn't want to jeopardize our cash reserves. So I knew I had cash, I knew we were growing super fast. And so I went into debt for that piece of equipment. It's been paid off. It was paid off within six months. However, I want to make sure I got through the winter with cash reserves and didn't buy a piece of equipment later in the year like that. So the only other time I would use debt is when I'm growing extremely Fast. But I have cash reserves for working capital, especially during the winter or for some of you, the summer is your slow time cash reserves. Having working capital during those extreme periods of growth is super important because you're one lawsuit away, you're one bad employee away. You're an accident away from ruining your business if you don't have cash in the bank. So don't jeopardize, don't be like, I'm growing so fast. Do not count on growth to fund your debt. Be like, okay, as long as I can grow at this rate 100% every single month for the next six months, I'll be just fine. Like, I'll grow myself out of the debt. And that's not gonna happen. And it might happen actually, but there's too much risk that one of those months that doesn't happen and you get hit by a bus or like have a family emergency or you lose a couple employees all at the same time. If you're a small business, that really affects you and it might wipe you out. All right, now let's talk about when you should not use debt. And this is the biggest one.

People throw this word of leverage around like, it's not donuts and potato chips. Two things that will make you fat. Two things also that offer a lot of energy. So if you have donuts and you have all those simple sugars, and then you go and have potato chips and you got fats and you got lots of calories, there's lots of energy. All right? What I think about that is like leverage is like there's lots of energy in leverage. You can do a lot. That's the whole point of leverage is like the whole fulcrum moving closer. And like, you put the weight on it, it increases the amount of weight anyways. Leverage, it's great, has lots of energy. Just like potato chips, just like donuts. But guess what? If you're not actively moving and you're not super active and going to the gym and working out and playing sports and you're having potato chips and donuts, guess what? You're going to get fat. Just it's not rocket science. If you eat potato chips and you have donuts and you're not expending energy throughout the day, you're gonna get fat. And if you go into debt and you don't have good cash flow management and you're not able to manage your business well, your business will become fat. And if you don't have the actions, you don't have the expending the Energy to utilize that debt in a correct manner. You will gain weight. Your business will gain weight. And I don't mean like in a good way, like good cash. It will get fat, and it will not be able to operate as nimble and will not be able to act quickly to market conditions and opportunities because you have this massive debt, this weight now on you. So calories are great. The sugar, simple sugars are great, gives you lots of energy in the short term. But if you're not expending it and not utilizing and not managing that debt correctly and act always, keeping it moving and out in the marketplace and growing and bringing in more.

Money and bringing new customers and bringing in more revenue and profit. If that's not happening, you will begin to start accumulating all those calories, accumulating all that debt, and it will slow you down. And when a great opportunity comes, you won't be able to take it because you're in debt and therefore your debt service is too high and the bank won't give you any more money. When a great opportunity came along or perhaps a market condition happens, something horrible in the economy happens. And because you're fat, because you've become heavy with debt, your business now I'm talking about because your debt is weighing you down, you're not able to be reactionary and make pivots or changes in your business. Okay, so this word called leverage is fancy. I believe in leverage. I love leverage. Interest rates are low. Leverage is a great thing right now. That does not mean that small business owners have to take it. People take in the name of leverage. People will take out loans they should never have taken out. They'll buy equipment they should have never bought. They'll buy the nice trucks they should never, ever have even looked at. And I've seen it time and time again. And when you talk to them about it, I'm just using leverage to grow my business. No, let's really take it down. You're using a fancy term called leverage to just.