Watch This Before Starting Your Second Location

I built a $50 million home service business with nearly 200 locations. And I've seen what happens when growth looks good on paper, but the math doesn't back it up. 2026 will expose who's scaling smart and who's been floating on cheap money. I'll show you how to spot that fake growth, cut the fat and build efficiency that actually drives profit. We'll hit five hard hitting questions and every one to $5 million owner must ask. From inflation adjusted growth to debt traps, false productivity bonuses and bloated overhead. All right, let's start off with number one. My revenue's up this year, but profits are flat. Am I actually growing or is this just inflation wearing lipstick? So keep in mind, if you're in growth mode and you're growing top line revenue, there is a good chance that you're making infrastructure investments in that would then inhibit further profitable growth in terms of your profits going up. So keep that in mind. Growth sucks cash. And if you're sucking out cash from a business because you're buying trucks, you're hiring more people, you're marketing, you're expanding your infrastructure in terms of office space, you're going to have less profit. But if you say, hey, I didn't buy more trucks, I didn't hire more people, my revenue went up, but my profit's still exactly the same. I would then look at overhead. I would, I would be looking at the things that are creeping up that are not direct cost. Direct cost being labor on the job site, Direct labor as well as materials. Those are like the two major factors. Subcontractors are also ruled into your cogs or cost of goods sold. But those direct costs might be the same. But if your overhead is trickling up, this can allow your revenue to increase. But profits don't go anywhere. And you're like, well, why is that happening? My guys are just as efficient or even I'm buying them more trucks and equipment, they're being more efficient. Why is this happening? This is overhead creep is what happens when I see a million dollar business with one person in the office and an owner and then all of a sudden they get to $2 million and there's four people in the office. Doesn't make a lot of sense. There's more overhead people per dollar in the business. And so I'm always very careful of my overhead creeping up as I grow revenue. And that's why a lot of times I see a business that does 1.2, $1.3 million in revenue, making the same amount of profit. And as a business doing 6, 7, $800,000 in annual revenue is because they've added more overhead and this causes profits to go down. Does that mean you should never grow? No. Does that mean you should not invest in overhead like a shop space or an admin person? No, but there is many times a reason why there is increases in profitability and then a bit of a plateau. Increases in profitability and a plateau. And so I want to consciously go into a plateau of profitability now, knowing that what I'm doing so I don't get discouraged because I know if I'm going from a million to 2 million and I'm going to need to hire a salesperson, I'm going to hire an office person, I'm going to upgrade the amount of space that I have in terms of my office. I'm going to have the same or lower profit for that period of time. But that infrastructure is required to get to 3 million. And so that's why intentionally growing and having a plan in place is important, because people otherwise like, I'm growing. At one point I'm 1.2, 1.3 million revenue, I'm making the same amount of money I was two years ago. It's like, yes, that is common because you had to invest in, in either fixed assets or more overhead to be able to continue growing the business past $1 million. Number two, with rates coming down, should I take advantage and borrow more? Or is it that just setting up for another hangover when the market tightens? Okay, so I would never say because interest rates are coming down, you should go out and borrow more debt. I would say if you need more assets or you need more capital to grow the business, I would then at that time make a decision. And that is when I need the capital and I have a good use for it, or when I need the truck and I have a good use for it, or when I need the equipment and I have a good use for it. The question just becomes, do I buy it now with cash or do I go out and finance it? I would never tell someone to go out and buy more trucks. Grow and expand your business simply because interest rates are low. Because unless you're getting fixed debt, like if you're using lines of credit, which is basically going to change their interest rates based upon what the going rate is very, very risky. The only time I would say that you should ever think about getting more debt in a low interest and rate environment is when it comes to trucks and equipment. Because your monthly payment could literally be 20, 30% lower simply because your interest rates are a few percentage points lower on the debt. And so the buying decision of should I buy with cash or debt? Starts to become very, very interesting when I need them. And so I would never say take out more debt because interest rates are coming down. I would say when the buying decision is necessary to increase your capacity or continue expanding the business, I will make the gain time decision based upon the rates then. And when I get equipment, when I get trucks, I'm usually getting fixed debt so I can make a game time decision like, okay, what are the interest rates today? Not I'm going to go out and get $150,000 line of credit. And because the interest rates are low, well, if that line of credit goes from 6% to 9%, you could very easily be paying an extra $501,000 a month in straight interest simply because interest rates have gone up. What happened to some people when they use their home equity line of Credit, or HELOC during 2020, 2021 to start their business worked fantastically when they were paying 3,4% on the HELOC, but now they're paying 8, 9, 10 per month, almost doubled. And a lot of that's just going straight to interest. And so it penciled in and looked good when interest rates were low, suddenly did not become looking so good. So I would never, ever go get debt because rent rates are lower when I need the equipment or the trucks. I'm going to ask myself, does it make more sense to lock in this low interest rate than purchasing it with cash? Now, keep in mind, usually when you're lowering interest rates for an economy, it usually means that there's some trouble in the economy. That is, there's unemployment that's ticking up, or there's some other problem in the market. And as we head into 2026 with the Fed lowering interest rates, one of the things that they have to be really careful of is do not ignite inflation. Again, where we are at 8, 9% a year and everything was getting more and more expensive super fast as inflation. They don't want that to happen again. And when they reduce interest rates, it makes borrowing easier. And when you make borrowing easier, people buy more stuff. And so what this is inherently going to do is pour gasoline on the economy. And they've got to be very careful not to lower interest rates so much that the economy starts to go really, really hot and inflation takes off. But what they're really looking at is the labor market. As the labor market gets More and more unemployed people or there's weakness in that area. And what we're seeing with like AI people getting laid off, I think a lot of the unemployment that's happening is not because of the labor industry. It's happening because of white collar jobs, people getting laid off because of AI and a lot of people that were over hired during 2020, 2021, companies like Salesforce and Google and Facebook that are cutting tens of thousands of employees, those are not really going to affect the labor market in terms of home services as much. And so what I'm looking at is the fact that we have interest rates coming down at the exact same time that unemployment is trickling back up. So the dual mandate of, of the Fed is we need to make sure that we have a solid labor economy and we need to make sure that we do not have inflation. And that's the balance that they're always playing. And so as they reduce the interest rates, I want to be very careful not to fall in the trap of getting debt that is not fixed rate. So if you're going to go out and get debt, make sure it's fixed rate and make sure you know that we're usually going into a tough time economically if they're cutting rates. So like when they last cut rates was 2020 during the middle of COVID 19 and everyone's locking down. That was a bad news thing for the economy. We're locking the economy down. So what they do, they cut interest rates. And so whenever I see interest rates being cut, I also think, okay, that must mean that the economy is not doing fantastic and that they're concerned somewhat about the borrowing power or the ability for the consumer to spend money which is going to negatively impact my business. So be very careful about just like immediately spend more money because interest rates are low when there might be a very good chance that the economy is not doing as good and the consumer is less likely to spend a bunch of cash. Now I'm going to make a whole video specifically just about interest rates and what this does to the real estate market and how it impacts home services.

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Number three. I've raised pay and added bonuses, but performance hasn't changed. How do I fix productivity without throwing even more money at the problem? Okay, so it sounds like you've raised a bunch of people's pay, you've added a bunch of bonuses, but performance hasn't changed. The thing that I'm usually looking at in this case is sometimes when someone tries to do like performance pay, they don't do it where every single minute and every single day and every single job actually affects their paycheck. They do it in like bundled terms. So for example, if you beat budget hours or if you are profitable on the job, or like instead of just saying over the course of the entire paycheck, every single minute counts. And so if you can look at your P4P system, your pay for performance system and say, well, someone could make a big bonus but also do a poor job. Also some of their jobs don't go according to plan. Also have damage cases, also show up late. These are the countermeasures as to why you look like things are going well, but then you know that people don't deserve this bonus or they're leaving or they're underperforming. And, and so if productivity is low, productivity being how much output do I get from my team, I'm usually looking at, are there perverse incentives somewhere inside of the bonus structure? For example, you might make bonuses based upon reviews, referrals, etc. Great. But is there any countermeasure for them showing up on time? And so now all of a sudden productivity drops because you have some people showing up super late to work, causing all of the rest of the crew that has been there for 30 minutes already, they have to wait. And that's all hidden because you have bonuses being given out based on referrals and reviews. And so you gotta make a full encompass P4P system. This is why people use P4P and use P4P software. And they're like, it didn't work. And I look into what they were actually doing and they weren't doing the full system, which is you don't get profit sharing if you show up late. And profit sharing is a function of the entire team. Because I don't want someone showing up 30 minutes earlier than someone else. And they get the same amount of pay because they're getting a percentage of labor revenue. And so if they go out and do the work and they're super efficient. Great, they both made the same amount because we divide that money in half across a crew of two. However, if one person showed up 30 minutes late and someone else showed up 30 minutes early, one of them looks like they're really inefficient and their productivity is low. Based on their clocked hours, their efficiency score is lower. And so I'm always looking for little holes in a P4P system or performance based system or any incentive system for someone to be able to take advantage. This is what's called a perverse incentive, which means I incentivize them to do something, they will do it. Like Charlie Munger says, you show me the incentive, I will show you the outcome. And so if you want reviews and you want referrals, they will get them at the expense of other things. Unless your your compensation package encompasses everything. This is why it's so important with P4P to have yellow slips, damage cases, there's downside of profit sharing in order to counteract the fact that people will otherwise game the system number four. How do I know which overhead costs actually fuel growth and which ones are just there to make me feel bigger than I am? Yeah, this is tough because this mostly comes down to personal pride. A lot of times when I take a shop tour, I can tell what people find the most pride in. And if you're really self reflective, just ask yourself. If I was to take a shop tour of someone new to my shop or new to my space, like would I feel, what would I feel inclined to show them? Usually the things that you want to show them the most. The number of trucks you have, the size of the shop space, the size of the office, are things that cost a lot of money and are usually straight overhead. And if those are the immediate things you want to show them instead of here's the system we use to load the trucks efficiently. Here's the system that we use to make sure that we fuel very efficiently. Here's the system that we use to make sure the keys are on the rack in a certain way so that we can save everyone five minutes every morning. Here's the way that we do clock in and how it saved us five minutes. Find so much efficiency and such profitable businesses. When I do my shop tour, they're showing me all the systems they've built to save five minutes here, 10 minutes here, three minutes here. Save a dollar here, save 20 cents here. That shop tour in and of itself shows me as to whether or not the business owners making investments based upon efficiencies gained or their pride. And again, we all have pride, don't get me wrong. And, and when you do a shop tour or you show someone around, it's very easy to show them the size of the shop face the number of trucks. But I fell into this trap early on when we had a shop space that was right against the road and every one of our customers would drive by this one road that we were on by, right by our shop. And I got in this trap of all of a sudden buying way too many trucks and way too much equipment because I just line it all up, the trucks and trailers along the, the main drag along the road. And I just love people saying, man, we see you growing so much. See all those trucks, all that equipment out there. Instead of thinking about the asset utilization I was much more involved in, how does this make me feel or look to the public? Almost every time entrepreneurs get wrapped up and I'll include myself in this because that's what I was doing, get wrapped up in the optics of what their business looks like, they almost always will overspend on overhead, things that are not actually driving bottom line profits. Now keep in mind there's going to be overhead expenses and infrastructure that's required to get to the next level in business. You will not be able to run a $5 million home service business out of a 10 by 10 shop space that is a storage facility, assuming that you're not letting all your trucks go home. However, with your employees, however, I've got to make sure I'm very diligent as to when I upgrade that shop space, when I upgrade that storage, is it allowing me to grow revenue, number of employees, number of customers, extending my capacity, or is it allowing my ego to grow? And so this is why I always think about asset capacity the same way I think about asset utilization. I think about asset capacity, that is how many trucks, how much equipment, how many employees do I have that allow me to grow the revenue to so, so much? I ask myself then, if I buy this truck, if I buy this equipment, if, if I get more storage space, if I get this upgraded shop space will allow me to increase capacity. If the answer is no, it is likely a purchase that is not actually infrastructure for me to grow the business. It is likely me simply wanting to look good in front of other people. Now, if me getting that shop space allows me to double the size of the business, if me getting another truck allows me to double the number of customers I serve, hire another employee, get more revenue, then I absolutely give the green Light to those type of overhead costs because you need that infrastructure in order to be able to serve the customer. I can't go out and serve 400 mowing customers tomorrow if I don't have a truck. I need the truck to unlock the capacity to be able to go get the mowing customers and serve them. And so this is why you need cash to grow. And that's why I say growth sucks. Cash is when you're growing, you have to invest in this type of infrastructure. But if the overhead cost is not going to increase capacity, and I'm not constrained by capacity, this is an ego purchase. Because everyone would say, well, if I buy more trucks or get a bigger shop, I will be able to grow the business more. Okay, everyone gets the pass. But the next question is, is that actually your constraint? So I'm all for extending capacity, but my next question is, are you actually capacity constrained? In other words, without that truck, without upgrading that shop base, would you be able to grow revenue? And the answer to that is yes. Usually that means you're investing the money in the wrong place. I would rather go work on the constraint of getting more customers to the point where actually have to go buy the truck, I have to invest in the shop space, I have to extend capacity, otherwise I can't grow the business. Number five on the docket, how do I measure whether I'm building true efficiency versus just buying short term speed with more debt, attention and stress. This is why percentage based numbers are so important. Profit percentage, you can be 10%, you mean 15%. Doesn't matter if it's $1 million business, $100,000 business or $10 million business. It's a percentage which shows me a level of efficiency. Now an indicator of efficiency when it comes to home services is how efficient is your labor. And this is why I like to track labor efficiency. Budget hours divided by clocked hours. And so if you're just trying to buy yourself, you know, buy a bunch of trucks, buy a bunch of equipment, get a bunch of debt, taking a bunch of more stress in your time. Just like managing the equipment, managing the shop space, you know, this is the untold cost. More trucks and equipment is insurance. You gotta have storage, maintenance, all of those things in addition to the cost of buying more stuff most will don't even account for. It's like, well, the payments. I'm already renting it a couple times a month, therefore it's basically break even. I actually save a couple hundred dollars a month. But what about the maintenance? What about the fact that you got to store that piece of equipment. What about the fact that now your insurance is going to go up by 20% because you have that piece of equipment in your shop space all of the time? These are the type of things that most people don't take into account when it comes to growth of trucks, assets and equipment. And so I'm measuring efficiency because if I buy a nicer truck and I Upgrade all my 15 year old trucks to brand new trucks, it needs to actually move the needle for efficiency. And you're like, well, it doesn't. It just simply, you know, makes the trucks look nicer. Well, hold on. What if it breaks down far less? By breaking down far less, your efficiency of budget hours divided by clock hours, your labor efficiency should go up. Your profitability percentage should also go up because you spend less on maintenance. If these things are not true, why would I go buy the truck and equipment? Why would I increase the size of the shop space if it doesn't make me more efficient? This is why infrastructure costs, like getting a new shop space, but it's 20 minutes closer to your service area, could potentially be a huge boom to efficiency. Even though there's extra costs and overhead, I'm willing to absorb that. Because if I'm able to save everyone an hour a day and take my P4P from 33% down to 28% and thereby take 5% of margin right back to my bottom line simply because now my crew is closer to the jobs, that infrastructure cost, that overhead is a huge win. So don't take, what I'm saying here is like, oh, don't buy more trucks, don't buy more equipment, don't increase overhead. No, those things are required to grow a business. But I want to make sure that I'm doing so efficiently by buying those trucks, that equipment, getting that shop, I should increase efficiency. If you're not measuring efficiency, labor efficiency, profit percentage, close rate, like thinking about close rate is like just the efficiency of your leads. Like, are you actually getting leads to convert into customers? Is a level of sales efficiency. If those percentages are not being monitored and tracked consistently, I do not give you the green light to go out and get debt. Because adding more debt adds more risks. And if you don't have good numbers, it's like driving a car. If I don't have a good speedometer, knowing my numbers, knowing my profit percentage, knowing my efficiency score, knowing my close rate, if I don't have those gauges on the dash, I am driving. And the last thing I want to do is increase speed. Everyone's like, go fast, go fast. Grow the business. But if you do so without the right metrics, without the speedometer, without the right metrics on your dashboard, you will crash. Or you'll end up in the wrong place. You end up with a business that's massive, overgrown. You're working 80 hours a week. It's not serving you and your family, you're serving it. Why? Because you drew really fast, without any speedometers, without any metrics, without any numbers. And those metrics, a lot of times should revolve around efficiency. Efficiency of your labor, efficiency of your leads, efficiency of the capital that you put into the business. That's return on investment, that's efficiency of capital. And so knowing what those are is the first benchmark before I give someone permission to be like, yes, pour more fuel on that fire. Because everyone wants to grow faster, everyone wants to drive the car faster. But I need the right metrics in place. Once I'm measuring efficiency, I have my speedometer, I know how fast I'm going, I know my air temperature, I know my air pressure, my tires. If I know those things, then I can confidently grow. I can confidently take on more debt if needed and drive the car faster. If you have a question for me on the Home Service Millionaire podcast, go to mikeandys.com? submit a 60 to 90 second video and we'll answer it on the next show.