Why Contractors Will Stay Poor

More than 90% of home service businesses will never hit $1 million in annual revenue. In this video, I will give you the reasons why they will stay poor and what you can do to become a home service millionaire. My name is Mike Andes. I'm the founder of Augusta Lawn Care. We have over 170 locations around the world. What's unique about that is I get to see what's working and what's not working in many markets in the U.S. canada and Australia. I'm going to share those insights today and tell you exactly what is keeping many people from making good money in home services. The first that keeps contractors poor is the shiny service syndrome. You can always make more money by adding more services. It's one of the easiest way to grow revenue. Because if I add more services to an existing customer base, there's some percentage of them that already need the service. And a lot of times, 3, 4, 5% of your customers that are asking for another service is enough for you to think, my goodness, everyone is asking for this other thing. If I do mowing and everyone's asking me for fertilization, weed control, that actually might be 5, 10, 15% of your customers, but it will seem like a lot. And for that reason, we will keep adding more and more and more services. And before we know it, we have a business that has 10 businesses inside of one and they're all separate kinds of services like weed control and spraying and fertilization is very different than mowing, even though they're somewhat related. But offering every single thing to everyone under the sun is a recipe for disaster. Rarely does it transform a business unless adding another service has the opposite demand curve of your existing and primary service. For example, a I'm a big fan of adding another service like snow removal to a existing core service of something like lawn care or landscaping. Why? Because during the spring, summer and fall, mowing and landscaping services will be in high demand. During the winter, when that demand falls off is also the exact same time that snow services is in high demand. So as long as adding the other services, a completely opposite demand curve of my core service, then I'm a fan of adding more services. But the vast majority of home service business owners just keep adding more services that also are busy at the exact same time as their core service. Now, the problem with adding more services is that it adds time to train new employees. Now, McDonald's is a great example of a company that has simplified everything inside their business and they've simplified their menu, they simplified how they prepare the fries and the burgers. And it's not even to say that they're super high quality, but the consistency and the ability for them to simplify what needs done by a new employee allows them to hire 16, 17, 18 year olds. And within a matter of days, those new employees are producing $120 on average per hour at McDonald's. And so if you're like, oh, I can't do that for home services, well, if you're charging 80, 90, $100 per hour, you can absolutely train up new team members in a matter of a week or two, assuming you don't have 50 different services. By keeping your services reduced and smaller, you're able to train new employees fast and get them to profitability much faster. In an economy where it's very hard to find labor and the labor market is difficult and unemployment is very low, you'll need to take new employees and even if they for three, four, five, six months, make them profitable as fast as possible. If you have a whole bunch of different services and a whole bunch of different complicated services that you are offering your customers, be able to get an employee to actually train up on all of them and be efficient and profitable. Could take months.

And if it takes months for a new employee to become profitable, it's likely when there's churn in the labor market like there is now, you will probably never actually achieve profitability and you'll constantly be burning through people and profits. The other thing about adding more services to your existing business is it dilute your marketing effort. So if you have, let's just call it 10 different marketing campaigns. If I'm trying to market 10 different services, I'm only have one marketing campaign for each service. Instead of focusing on one or two services and being able to really blitz the market now by having very, very concentrated marketing effort, I am viewed in the eyes of the customer as the expert because they kept seeing the same message from me. And my results became much better because I kept having the same call to action, the same offer to the customers for the same service. Instead of trying to just scatter shotgun all of the different options and offers and different services I can offer. And customers get confused. Another lie that home service business owners buy into is the Section 179 myth. Now everyone wants to say that at the end of the year they need to go buy trucks and equipment, and they do it under the guise of writing things off when they say that they're taking a section 179. In other words, they take all the full cost of whatever that truck or piece of equipment is and they write all of it off in one year instead of taking the usual five or ten year depreciation schedule that is associated with the lifetime of that piece of equipment or that truck or that asset. Now, the reason that the section 179 is completely overused is honestly because we want to buy fancy stuff. But the reality of the situation is that the standard deduction on Your taxes is $29,200 for a married filed jointly. So if you have a partner filing together, $29,000 right off the top is going to be reduced from your income and your take home pay. So you got to take that out of your profit. Okay? What that means is you can actually profit up to $123,500 and then take that standard deduction and still be under $94,000, which is only 12% of tax in the federal side of things. So if you have some state, maybe a couple of percentage points more, but essentially, if you're taking the section 179 and you're making like 100, $110,000 in profit from your business, you're actually only saving like 12%. So until you start making hundreds of thousand and you start getting into higher tax brackets that are in the 24, 25, 30, 35% tax bracket, a write off from a section 179 doesn't really save you a lot. Like if I said, hey, you get 12% off everything, would you go crazy, start buying and spending all of your profits at the end of the year? Probably not. And so the section 179, although it sounds appealing to say I got as a business expense and I wrote it off, in reality, most small business owners, they have such low profits that the section 179 doesn't really do much for them. In fact, if you have no profits in the business and you lost money, section 179 does nothing because it red is your income and you're not going to get below zero. So ultimately, the hype around the section 179 is usually completely overblown. And for most home service business owners, they're getting like a 5, 10% discount when they think they're saving a bunch of money and instead they just blow all their profits at the end of the year. The third thing that keeps home service business owners poor is that we buy into the monthly payment myth. Now, if you go to any dealer, any sales rep is going to tell you, well, this one piece of equipment is just $1,900 per month if you just get one job. Recently, I went to a turnaround, and sure enough, this landscaper had tree division. And inside that tree division, he had a tree chipper that was over $100,000. It was 19 inches on the back, had a winch diesel engine. This thing was massive. He used it maybe once a month, maybe. And they also had two boom lifts, and they would go up like 60, 70ft in the air. Huge piece of equipment. Now, the one boom lift was $1,900. And sure enough, his response when I said, do you really need that? Was, I just need one job every single month to make sense of it. And he's right. Like, if you get a $20,000 job and let's assume you're 10% profitable at the end of the year, like 10% you paid for that one piece of equipment. But this is what we forget so often the times. If, let's just say he has that $1,900 piece of equipment, that is, the payment is $1,900. That means he needs to generate, assuming he has a, you know, 20%, 19, 20% profit margin business, assuming that he would need to make about $10,000 in revenue to get enough profit to cover that equipment. Because ultimately, you're paying for that piece of equipment, that loan payment, from the profit of the business. And so, yes, if you could just get one job, it would cover that. But what the problem was is he got 10 of those type of pieces of equipment, and. And so now all of a sudden, he actually was spending $35,000 a month in just loan payment, but all under the guise of, well, this one piece of equipment, this tree chipper, and this boom lift and this truck and this trailer. If I just get one more job, and now all of a sudden, you need to produce 100, $120,000 a month in revenue just to break even on being able to pay off your debts. Now, the thing about buying more equipment and more trucks is it's not just the payments. It's also the fact that you have to insure that equipment. You have to store that equipment, you have to maintain that equipment. So that diesel engine, if it breaks down, you're getting a to come fix it. You have to get a bigger storage space and more shop space just to house that equipment. Even though you're only using it once a month, you're paying an extra couple hundred dollars a month in just space that you're renting. Also insurance. If you're adding a massive tree chipper, Or a boom, you could be doubling or tripling your insurance premium. All still under the guise under the notion that if I just get one job a month, I'll cover the nineteen hundred dollars. There are other costs that are usually fixed expenses. And that's why having those payments rushes you during the off season, because your revenue dips and all of a sudden you, you're paying out so much in payments every month, you actually lose money during the off season. What I really want to focus on is asset utilization. If I'm not going to be using a piece of equipment at least three to four days a week, I'm going to try to rent it. And I know it hurts to spend money on rentals. But keep in mind, when I pay that rental fee, I don't have to cover insurance extra costs on that piece of equipment. I don't have to store it at my shop space. I don't have to maintain it. If it breaks, I take it back to the rental place and they fix it. They do. The oil changes like oil filters and tires and brakes on pieces of equipment that are large can be tens of thousands of dollars. So until I'm using a large piece of equipment the majority of my day, the majority of my week, I'm not going to buy that piece of equipment. The reason I get worked up over this is because the middlemen and these manufacturers of equipment and trucks is what sucks out all the profit from the home service industry at the end of every single year. And again, it's usually tied to the second lie about Section 179. It's like, oh, you got to come write things off when reality, if we just focus on making more profit and using our current equipment more often, we'd make much more money. Now, this owner that I was talking about that bought this lift, $1,900 per month. At the same time, he made 40% of his revenue from maintenance. And all of those trucks, all that equipment, and all of those trailers were completely paid off. And here's the math on it. He was paying $35,000 per month in loan payments on big equipment. He was doing about $100,000 in monthly revenue, which means he was doing $60,000 per month in revenue of projects and $40,000 per month in revenue of maintenance. But this is what's crazy. He was doing $60,000 per month in revenue on projects. And in order to be able to have the equipment required to do that $60,000, he was paying $35,000 worth of loan payments. So my recommendation was why don't we sell all these trucks, all of this equipment, get rid of all of this debt, and just focus on the business that's doing $40,000 a month in revenue, focus our services, increase our marketing penetration into that market, and do it with no debt. Because now he has a whole bunch of trucks and equipment and that's completely paid off. Somehow we think in terms of monthly payments instead of like how much debt are we actually taking on? This business had almost $1 million worth of debt and he wasn't hitting his debt payments. And this all came from the notion of, oh, I'm just going to think in terms of the cost per month on my debt. Be very careful. This is a slippery slope in increasing your fixed expenses, increasing your overhead, and eventually having negative cash flow. The fourth reason that home service businesses will stay poor is because they don't know this one thing. Recurring revenue is what builds wealth. Honestly, if you have to work 12, 14, 16 hours a day and you're constantly on this treadmill of getting new jobs, your business is worth nothing. Because if you were to sell it to someone else, they have no promise of more work in the future. You're constantly trying to get the next job. Now the reason I say that recurring revenue builds wealth is because I look at wealth as the enterprise value of the business. To me, the best part about being an entrepreneur is being able to build enterprise value in my business. Why? Because it's not kicking off cash flow. I'm able to actually improve the valuation of the business without paying taxes on that increase in equity. So increasing the enterprise value of my business, or in other words, the amount of money I could sell the business for is extremely valuable. Now to exemplify this, let's actually look at Apple. Apple 10 years ago was selling about the same number of iPhones as they do today. So really the amount of sales they've got from iPhones kind of plateaued out. But yet in the past 10 years, their stock price has more than 10x. So why? Why is that? Because they started to add services like AppleCare, like iCloud. These are subscription services that people get on and constantly are paying. And the revenue is slowly increased all the way to the point now where Apple's services makes more revenue than all of the Macs, iPads, Apple watches, AirPods and wearables. All of those combined make up less revenue than just the services that Apple sells. Now keep in mind, when it comes to recurring revenue versus one time jobs, usually when you go the recurring revenue route, it's Going to take a longer time to grow the business because you're going to get less cash collected from the customer up front. If I'm able to get $10,000 from a big time job to this week, I'm able to like grow this business fast. I can do two the next weekend, three the week after that. I get a lot of cash up front. And so if I'm able to get a customer for $100 customer acquisition cost and then I'm able to get 10,000 within a week, that's awesome. I can grow the business very quickly. And we fall into that trap. Instead of going after the recurring revenue, Let me show you that going after the recurring revenue is still the better option. For example, Microsoft, 10 years ago the only way you could actually buy Microsoft Office was a one time payment. It was like 150 bucks. Fast forward to this day they have a recurring revenue model where you pay six per month and be able to get all of Microsoft Office. And so the vast majority of users use that recurring subscription. Now in the last 10 years, the stock price of Microsoft has more than 2020x. Why? Because they've gone to recurring revenue. Instead of selling one time downloads and one time software subscriptions, they sell recurring subscriptions and recurring revenue. And the enterprise value has more than 20x in that time because they've switched to a recurring revenue model. By having recurring revenue, I am able to increase my enterprise value. And my enterprise value is how much I could sell my business for. And even if I don't sell my business for a high enterprise value, I'm able to increase my equity. And that wealth is not taxed. The fifth thing that keeps home service business owners poor is they don't understand this fact. Simple and standardized. By doing that, I'm able to build the business to leave. There's a great book called Built to Sell. I like to think of it more as like built to leave. In other words, I want to build the business in a way where I could leave and it would still continue to operate. There are many unprofitable businesses, especially in home services. Their unprofitability is masked by the fact that the owner is working 12, 14 hour days and they don't look that bad. Mostly because someone is working crazy amounts of hours to make sure all the balls of the business get juggled. So the question is, how do I actually fix this? Well, you create systems. Well, how do I create systems? You want to be able to focus on things that are simple and standardized instead of complex and custom. So the opposite of simple is complex, it's complicated. And this opposite of standard and standardized is custom. And what's so funny to me is that in home services we've glorified custom. There are very few custom home builders that have scaled across the country. Why? Because it's very difficult to grow and scale. It's very difficult to be able to grow that business in a way with systems. And it doesn't mean though that you can't build big projects and have big jobs. For example, there are home builders like Lennar and Dr. Horton that have built billion dollar enterprises and have thousands of houses being built. What do they do? They standardized everything. So just because like, well, if I have to do just simple services, I don't want to create systems. In my business you can create systems for very, very difficult projects like building an entire house with the plumbing and the heating and the air conditioning and the flooring and the roofing. All of that can be standardized. By doing this, they create systems. And those systems run the business. Not an entrepreneur or a manager working 12, 14 hours a day, seven days a week. And if you're in that position, you might have to simplify your services. You might have to simplify the way you answer the phones, simplify the way you do estimates, simplify the way you do billing. You might have to standardize the materials that you're using, standardize the way that your estimators address the customer, standardize your follow up process. So by simplifying and standardizing, we create systems in the business and those systems run the business and allow the business owner to build the company away that it runs without them. The sixth reason why home service business owners will stay poor is because they are stuck in growth mode. Constant growth is extremely addictive. Wanting to keep growing, grow revenue, more trucks, more employees, constantly improving revenue. I believe that we should have a finish line to switch from growth mode and into profit mode. The reason you got into business is to make money. It is not to buy more trucks and hire more people and increase top line revenue. It is to make profit. And in my opinion, profit mode is when you stop buying trucks, you stop buying equipment, and you raise prices. When you're using all of your current trucks and they're all at capacity, you're using them all the time. And usually you go buy more trucks, you hire more people, you go get more equipment, you'd spend more money on the business. And that's tempting to keep doing that over and over and over until you realize you're stuck in growth mode. And you're actually going to spend all this money on marketing just to get enough leads to keep all of your crew busy, all of your trucks busy out on the road. Instead, when you hit capacity, instead of buying more trucks, hiring more people, getting more equipment, why just raise prices? Raise prices. And doing that over and over again will allow you to get extremely profitable in home services. This is what we actually have at Augusta Lawn Care and is our model is that we grow as fast as possible to $500,000 in annual revenue. And then for three years, we just raised prices whenever we hit capacity. So it's like, oh man, we can only do 200 customers. Well, we're at 205. Raise prices, and maybe a year later, oh man, we went above 200 again. Okay, raise prices again. By doing this, we're able to increase revenue while keeping the same number of customers without buying more trucks, without buying more equipment, without hiring more people. We want that six to eight crew members on the team, we will be able to go from 500,000 to $800,000 in annual revenue without having to buy more trucks, without having to buy more equipment by simply raising our prices over the course of a few years. And the goal is that we have 800,000 in revenue and, and $200,000 in profit. And once you do that, you just copy and paste, copy and paste, grow to 500,000 in revenue, switch to profit mode, raise prices over the course of few years and make a profitable business. That's profit mode. Being stuck in growth mode usually means constantly hiring, constantly spending tons of money on marketing, and constantly going into debt to be able to fund the equipment and trucks that is required to constantly get more customers by having a finish line. Where you say, when I hit this finish line, and that's your capacity. You've now defined where profit mode starts and where growth mode ends. The seventh reason my home service business owners will stay poor is because they have a serious case of seasonitis. Now, seasonitis is a disease. I made up the name. But all it is is a business that has seasonal revenue. Now, there are two ways to be able to contract this disease of seasonitis. One, you can have a month of revenue that drops 50% compared to your best month. So a big drop in revenue. Number two, you can have negative cash flow for any month of the year. So anytime you actually have a. A negative profit and loss statement where you actually lose money, negative cash flow, you also have a serious case of seasonitis. This is, in my opinion, the thing that keeps so many home service business owners poor. Because if you took out just the off season, you would be really profitable. So the question is, how do I fix the off season? Because H Vac companies have this perfect blend. Why? Because it's hot, they do ac. When it's cold, they do heating. And because of that they have a very balanced supply throughout the year. They don't have massive swings of demand. This is why H Vac has much better valuation and a lot of private equity and venture capital is being poured into H Vac is because they have a much less seasonal revenue flow throughout the year. But if you have massive spikes of revenue and then massive spikes of leads, all followed by a crash and all of a sudden you're laying people off and you have like 10% of the lead that you did a few months before, that sort of roller coaster not only wants to make you quit, but also is horrible when it comes to valuation and profitability of the business. Now if you're a self identified member of the Seasonitis club and you're like, I have seasonal revenue, I have times where I have to lay off my crew. Leads drop, revenues drop. I've actually created an entire workshop, completely free, for you to be able to use. Just go to mikeannies.comworkshop. it walks you through five different ways to cure seasonitis and not have an off season because off seasons will keep you poor.