Why I DON'T Want My Business to Be Profitable

Today I'm going to talk about why in your home service business you might actually not want to be optimizing for profitability, and you might actually want to be optimized for growth and enterprise value. But there's stages, and a lot of times people ask me, how much money should I be taking out of my business? How much should I be investing back into my business? How much of a salary should I be taking from my business? I'm going to talk about the different stages from $0 to $2, $3 million in annual revenue as you grow your company, as to what you're likely doing when it comes to taking money out of the business and where we should be thinking about deploying that money in a capital-efficient and tax-efficient manner. So the first— when you're first getting started, it's all about survival. You're just trying to grow the business and hopefully you can take enough money out of that business to make your personal expenses work. You're usually starving yourself personally in terms of your budget to be able to put every dollar back into the business so that it can grow. 'Cause growth sucks cash. I talk about this all the time. You gotta market and get the customer. You gotta advertise, you gotta have a website. You then gotta get a truck and equipment to be able to get the work done. Then you gotta go hire someone to do the work. So all of this takes money. And as you continue to grow revenue, to think that you're gonna double, triple the business and be like 60, 70% profitable is crazy unless you're a solo operator. But if you're growing a business, with a bunch of employees, it is likely that the more you grow, the faster you grow, the more capital or money that the business is going to need in order to be able to buy the equipment, buy the trucks, hire more people, get a shop space, not this big, but like you're gonna need a shop space. You're gonna need, you can no longer park in your garage of your neighborhood and the HOA's freaking out at you. So there's gonna be more overhead. Now you're gonna need someone to answer the phone. Now you're going to need someone to do sales. Like as you grow the business, there's more expenses. So growth sucks cash. But when you're first getting started, usually from $0 to $500,000 in annual revenue, you're just surviving. You're just trying to get more customers and put every dollar back into the business. And usually you don't actually really worry too much about like what your salary is because there's not a lot of profit. You don't really worry about taxes because there's not a lot of profit. And you're not worried about being an S corp or an LLC because you're not making a lot of profit. Now, once you start making over $40,000, $50,000, of bottom line profit from the business, take home out of the business, that's usually when you start needing to think about switching from an LLC to an S corp. That's if you're in the US. If you're in Canada, they just have corporations. But when it comes to the US, usually that's when it starts making sense from a tax perspective to switch from an LLC into an S corp. And at this time, you start having a salary. So you've moved from survival to having a salary. Let's go. We have migrated from just trying to survive and pinch every penny and take every dollar we possibly can from our personal life And shove it back into the business so we can continue to grow. Great. And when you're taking a salary, usually you're trying to take out as little as possible because any W-2 income— that's if you take a salary in the U.S., it's called W-2 income— you're going to get taxed higher on that money than if you were to just take distributions as an owner, because you got to pay for Social Security and all the other crazy government programs they convinced us that we have to pay. But if you take a W-2, you're paying them. Now, you don't want that number to be so low that you start thinking, oh my goodness, my business is so profitable. I'm making $100,000 in profit and I'm taking a salary. But I look at their salary and they're making $1,000 a month salary. This next tier of business is the business can actually afford to pay me a salary as if I was hiring my replacement that would run the business without me. So now I might have a million-dollar business. I've been in business for 5, 6, 7 years. I put it into profit mode. I'm raising prices and optimizing the business. I'm paying myself now a salary of $100,000. And after I pay myself a salary, there's still another $50,000, $60,000, $100,000 of profit left in the business. Now I can confidently say the business is profitable, not just me putting more hours or me being underpaid, but the business is profitable if I was to replace myself as the owner. And I would say maybe 5% to 10% of business owners get to this level. And that is where the business is profitable, even if you were to pay someone else the actual salary required to replace you in the business. This is when you can confidently say you're no longer working in the business, working on the business, because the business is profitable whether or not you show up to the office. Great win. You crushed it. You're literally already in the S tier. But what's the next step? And today I want to talk about what's that next level for an entrepreneur or business owner once they've passed this phase where the business is profitable, it's kicking off cash beyond what the owner needs To survive personally. It's like, well, where do I put all this money? Okay, first thing I want you to do is max out your tax-advantaged accounts. This is going to be your IRA. This is going to be your 401. And you're like, I don't know how to set this stuff up. Use AI. Go talk to someone that knows how to set this stuff up. If you have a payroll processor like QuickBooks or Gusto or ADP, they will help you set up the 401 plan for your employees. And and for yourself. And you don't have to match the 401 right off the get for your team. You can just say, hey, we offer the program, and then you're able to participate in it as well. This allows you to be able to invest for retirement and be able to put money aside in a tax-advantaged way. Because the biggest thing I don't want to happen, once you're making $150,000, $200,000, $300,000 in profit annually, the last thing I want is 30%, 40% of that going to the government. And so what we start thinking about is how do we do things in a tax-efficient manner? One of the best ways to be able to get benefit without paying a whole bunch of taxes is putting money into an IRA or a 401. Now, I don't want to get into complications, but there is a traditional IRA and there is a Roth IRA. There is a traditional 401 and there is a Roth 401. Here's the basics. Traditional means I put money in and I don't get taxed on it today. All right. So, if I make $100,000, I put $10,000 into my 401, I'm only going to get taxed on $90,000 when it comes to the tax man. That's a traditional 401 or traditional IRA. A Roth 401 or a Roth IRA is I'm going to pay tax today on the $100,000. But then the money that I put into this account is going to grow tax-free. And when I retire, I can take it out without paying any extra in taxes. For the vast majority of people, assuming that you think tax rates are going to go up, assuming that you think you're going to make more money in the future, You'd be better off using a Roth 401 or Roth IRA. And if you're like, well, I can't do the Roth 401 because now we're making $200,000 or $300,000 and I can no longer participate because there are requirements. There's something called a backdoor Roth where you're able to put it into a traditional account and then you swap it over into a Roth the next day. Again, don't get worried about the details here. All I'm trying to do is take the cash that's coming out of the business and Continue to invest it, but do it tax efficiently where I'm not going to have to give Uncle Sam 30% or 40% of every dollar I make from the business. So that's like the next stage. OK, what do we do after that? Because I know that down the road I want to start a second location. I know that down the road I want to buy another business. I know that down the road I want to start expand into this new service area. OK, great. But what do I do with the cash in the meantime? This is where I believe putting the money into an index fund is very valuable. Now, personally, I invest into a mix of different index funds. When I say index funds, think a bundle of a whole bunch of stocks. So instead of being like, I'm going to go buy Apple, I'm going to go buy Nvidia, I'm going to go buy Google. Instead of doing that, I'm just going to buy an index fund that has hundreds or thousands of stocks inside of it. So it's not going to go up and down like crazy. It's not going to have a bad report and drop 20%. I don't want that. But I do want a place where I can put my money, where it's not going to sit in a bank account and make me 0.01% interest and get ate away by inflation. So, I might put it inside of either bonds, i.e., debt to the government, where I get at least 4% or 5% a year, or index funds, where it's a group of stocks that on average go up 8% to 10% a year. The S&P 500 is a good example of an index. And you can buy these on Robinhood, Fidelity. There's a whole bunch of different apps. When you can just put money in there and you can move from your personal checking account when you have enough money, put it in these index funds. Now, you're still going to get taxed on this money, but at least it's sitting there earning some sort of money beyond just getting ate away at inflation. If you have no idea what you're doing, just buy bonds. Those are going to be short-term treasuries that you can still get the money out, but you're making 3%, 4%, 5% a year. But at least it's not getting ate away by inflation. The reason I believe in this is it keeps you patient when it feels like you want to do something in 3 or 4 years. And you're like, man, I don't want to put money in a savings account. I'm going to put it back into the business. And all of a sudden you start buying equipment you don't really need. You have trucks sitting at the shop that you don't really need because you just had the cash sitting around and you didn't want to have to pay taxes. So you just bought stuff you didn't really need. And I see a lot of people doing this, having profitable businesses, but starting to buy things they don't need simply because they don't know where to put the money. But they know that down the road, I'm going to want to take a big swing, start a second location, start a new business, invest into real estate, and I'm going to need a big chunk of capital. And in my opinion, the great way to use an index fund or even buying bonds is the ability to be able to stay patient and not feel like you're losing a bunch of time with money sitting in a savings account. Because a lot of times when I see people put money in the savings account, I'm not against that. Like, you know, it's going to be there. But in the back of your mind, you know that inflation is eating away 3%, 4%, 5% a year at that. And that's not good for like, who wants to lose 3% or 4% or 5%? And you feel like, oh my gosh, I got to invest it somewhere. I got it. And then that leads to trying to hurry things up and making bad decisions or buying stuff you don't need or hiring people you don't really need to have. But you're just like trying to spend the money. And so a lot of times these index funds or investing in bonds, something that gives you some small yield, allows you to stay patient for an extra 1, 2, 3 years and Build this war chest of cash. Because if you're making an extra $50,000, $100,000 of profit outside of your salary that you don't really need, you want to invest it. But it's like $50,000. I'm not going to, like, go buy a bunch of real estate. $50,000, like, I'm not going to go, like, start a new business. I'm not going to start a new location with $50,000. OK, how do I make sure that that continues to grow in value? I'm making a wise investment with that money and it's not being ate away at inflation, but I don't feel in a rush. And that's what I see people do a lot of times when they start putting money aside because of inflation. They're like, I got to spend the money, I got to invest it somewhere. And you start doing dumb stuff or never creating a chest, a war chest of cash that they can deploy down the road. And so that's the next level is we are now starting to invest inside index funds. We're starting to invest in potentially some Treasury bonds to be able to make some money while we're staying patient for 2 to 5 years before the next big swing. All right. That means that in 2 to 5 years, you're probably going to deploy it. You're probably going to use it in your business because you can still sit in an index fund and make 8 to 10%. But if I'm patient and I'm willing to wait 2 to 5 years, I'm putting money aside. It's slowly growing inside of a stock portfolio. Great. But then eventually I'm going to make a big swing. I'm going to start another business. I'm going to buy out my competitor. I'm going to start another location and invest into real estate. And now I have the cash to do so. But all of this has been said. To say this, when you're first getting started, you're thinking about survival. Then as the business grows, you start thinking about how much money can I take out of the business? Your salary. As you move into the next phase, you have to start thinking about how do I actually invest this money tax efficiently? All right. If this upcoming stage is really where you're at with your business, trying to invest, trying to use the capital, allocate it appropriately, I'd like to invite you to Home Service Boardroom. It's where 7-figure entrepreneurs in the home service industry get the skills and leadership required to get to $10 million plus. And whether you're trying to get $10 million or just optimize your current business and become a better leader and have the business run without you, I highly recommend it. Every single week we get on a live Q&A call where we're just on video and we answer questions about what we're all going through as leaders. And so how we can grow our business to the next level. And so if that's of interest to you, click the link down in the description and I'd love to see you inside Home Service Boardroom. All right. Back to the video. Now, once you've got to this phase where you're making $200,000, $300,000, $400,000 in annual profit, it actually makes sense to think less about profit from the business and think more about enterprise value. This is what the rich people know. I don't really need income. I need enterprise value. Let me explain. If I make an extra $50,000 in salary and I increase my salary from my business, out of that $50,000, I'm probably paying $10,000 to $15,000 in taxes out of the $50,000. Not super efficient. But if I can take that $50,000 and put it into my business and it grows revenue, and by growing revenue, it grows the value of my business, the enterprise value of my business, as it goes up in value, I don't get taxed on it. This is why someone, billionaires, have a whole bunch of stock equity, and what they do, they take loans against the equity. They don't actually take a big salary. This is why people are like, I only take a $100,000 salary and I'm a CEO of a Fortune 500 company. Yeah, because you have a whole bunch of stock and you take debt against the equity. Because until you sell that equity, you don't get taxed on it. So you can take loans from it all day long And never actually pay taxes. So, of course, you don't want your salary to be high. You don't want to be paying a bunch of taxes. And that's what, as you start getting to certain levels of $200,000, $300,000, $400,000 in annual profit, it might make sense to actually make less money from a salary perspective or taking money out of the business because you're getting taxed so much. And rather figuring out ways— the hard part becomes figuring out ways to deploy the money efficiently inside the business to increase the valuation of the company. This is why you'll hear some people when they talk about growing the business, they don't really care about profits. A lot of times, this is their second business. They're a little older in life. They have other investments. They have other ways to be able to make money and pay for their own bills. They have real estate. They have other side businesses. They have plenty of stock portfolio dividends coming their way. They're like, hey, this business, I'm not trying to take cash out of it. I'm not trying to make it really profitable. And for most people, 99% of business owners, Making a profitable business that just you can take a lot of cash out, 20-30% of revenue comes to the bottom line and you're able to take that out is a huge win. The next level, the next level is very much a matter of every dollar I take out of that business I'm getting taxed on. I would rather the hardest part is now finding ways to continue growth, whether it be another location, whether it be expanding into new service, whether it be do I get more trucks? Do I just continue to market and advertise? Because if I can buy a customer for $50 and they're worth $5,000, What does that do to the valuation of my business? Oh my goodness, I should keep buying a whole bunch more customers. Well, if I do that, I've got to go buy some trucks and equipment and hire more people and get a bigger shop space. And this growth, you never— it's almost like you're kicking the can down the field by never actually realizing the profits from the business. But by not realizing the profits, you never pay taxes and you build the enterprise value of the business to the point where you have a $4, $5 million company that is worth $10 million. A very good amount. And you could always, if needs be, pull the profit lever. Because if you were to sell the business, what usually happens, whether it be private equity or a new buyer, they're gonna go out and get debt on your business. And then they're going to raise prices to be able to cover the cost of that debt. And so if you can build the engine, 'cause what most people don't have is the $4 or $5 million business. If you build that engine, you might not be super profitable, but you're growing every single year. And then you take a year or two, you raise prices, you do get a whole bunch of net free cash flow. And then you have a valuable asset you can go sell someone else, and they can use the cash flow to be able to buy your business and put debt on the business. This is what— this is the whole playbook of private equity. And this is why you will see business owners start a new company, start a new location, and they're really not worried at all about taking profits because they likely already have plenty of streams of income or other income coming in. And they don't want the cash flow because they have to pay taxes on it. What they'd rather do is continue to invest that money back into the business and build enterprise value. The key is, can you deploy the capital in a way that's not just wasting it? You're not just buying random trucks you don't need, but you're actually deploying the capital in a way that when I put $50,000 into my business, on the other end, I'm going to get a whole bunch of customers. I'm going to get a truck. I'm going to be able to grow the enterprise value of my business by $100,000, $200,000, $300,000 business. And that enterprise value doesn't get taxed. I know for a lot of people, They like, oh yeah, sucks to be the person that is making $300,000, $400,000 in profit in their business. You know what also stinks is writing 6-figure checks to Uncle Sam every single year. And so you've got to figure out ways to invest the money back into your business or stay patient so you can put money aside into the stock market, into an index fund, stay patient enough to be able to in 2, 5 years make a big swing, buy a whole bunch of apartments, buy a second location, expand your service area and Take a big swing again. This is how generational wealth is built. And I understand that it might be a small percentage of people that do it. But there's nothing more I wish for each of you watching. And it's the ability to go from survival all the way to building a legacy and figuring out how do I deploy this money to have the highest impact to the most amount of people without paying Uncle Sam an arm and a leg.