Why Most Businesses Fail to Break the $500K Mark [Warning!]

Hey, everyone, it's Mike Andes, and today I'm talking to the home improvement business owner that is doing between zero and $500,000 in annual revenue. If that's you, I highly recommend you pay a lot of attention over the next few minutes as I'm going to summarize a longer form video that I made at landscape business course and on mbaforantrepreneurs.com where I talk about the most important things that you need to know if you're going to grow your business past 200,000, 300,000, $400,000 in annual revenue. This is all also the reason why so many people you see in business on social media will grow their business to three, four employees and then retreat back to being a solo operator. This is what keeps most people in the home improvement industries under $200,000 in annual revenue. Not to say that's a bad thing. Absolutely not. And there'll definitely be people in the comments saying, only way to do it is do it solo, do it yourself. I definitely can sympathize with that. But if you're wanting to grow a business that can run without you, can run on systems and can run while you're on a vacation or doing things with your family or giving yourself a little more flexibility so you don't have to do work in the business, this is extremely important to know. I'm gonna run the math of why people run into issues once they cross $200,000 in annual revenue and why they'll go to 3000-004000-00500,000, and they'll retreat back to being a solo operator. Because here's the thing. I've talked about this before. I. I truly believe that between about $200,000 in annual revenue to about $500,000 in annual revenue in this range, there is not a lot of extra profit being made in this area. Between 200,000, you could say 250,000 maybe. But in this area, I call this the wilderness. Okay? The reason this is the wilderness is because this is where everyone wanders around and they literally don't make any more profit at 200,000 compared to 500,000. And so people get disillusioned because they're like, why am I working over here as maybe one employee? And I'm making $200,000 in annual revenue and I'm making a good living. I'm making 70, $80,000 home in profit that I can live on. And over here I have five, six employees. And yet over here, I might be making the exact same Amount, I might be making the same 60, 70, 70k take home pay, whereas over here I'm making the same exact amount. Why is that? Okay? Why is my profit the exact same at 200,000 to 500,000? Let's go ahead and take an example. Run the math here. Because I want you to stay till the end. Because I'm gonna talk about what you can do to avoid this issue. And if you look on social media, especially in the home improvement space, in every single industry there are what I call micro influencers. And I would consider myself a micro influencer. Okay? In these industries, these influencers have a following. And what they do is you will see them document their business as they grow. One employee, two employees, very exciting. I'm gonna work on the business now. I'm gonna be able to scale up. It's exciting. You get three, four employees and all of a sudden you'll see them switch. And in one year things will kind of fall apart. Things start to get, they get really stressed out. They usually have some sort of burnout and they go right back to being a solo operator. Not to say that that's bad. I think that some people should actually stay at being a solo operator. That's where they should stay. Person that wants to grow beyond that. I want to make this example so you're prepared mentally and financially for what's to come and so you can get past this stage of the wilderness. Let's go ahead and use this example. I'm going to make this up on the fly. So if I make some bad math mistakes, forgive me. Let's go ahead and assume that we are charging the customer $80 per hour, okay? And we're going to start our business now in this example, I'm going to use lawn care, landscaping, but you could literally use, for any home improvement business, we're going to charge $80 per hour. Now we are going to work our brains out, alright? Because we are working hard by ourselves out in the field every day we're going to complete 40 hours every single week, okay? And this is hours of budget, hours, hours actually on the property we're probably working 50, 55 hours. But hey, we're a solo operator. We're kicking butt. We're super efficient. So this is literally making you $3200 per week.

Now we don't necessarily have year round work. Most home improvement industries are somewhat seasonal. So I'm going ahead and assume that we are going to work 40 weeks in the year, alright? We have a bit of a down season. So if we do the math that, that's 120 times 4. It's $128,000 in revenue, and that's all from labor. Now let's go ahead and just for the sake of this example, say that on top of the 128,000 in revenue for labor, we probably have another. Let's just call it $20,000 in. Let's call this cost of goods sold. This would be like your materials, any sort of extra cost, like dumping fees that you charge a customer. So your total annual revenue literally being so low. And some people are gonna say, I'm crazy for saying this, but you can absolutely do this. And that is $148,000 in annual revenue by yourself. Now, keep in mind, you're extremely efficient and you're working crazy hours. The amount of hours you're going to have to put in to get 40 hours on the job site means that you're probably going to work 50 hours, 55 hours plus then do work when you get home. So you're working like crazy. Now, out of this $148,000, obviously this is gross revenue. This is not net profit. This is literally just the top line revenue. Let's go ahead and look at some of the expenses that you're going to have from this business. First and foremost, let's just go ahead and assume about $12,000 for your truck. And that's going to be like $1,000 a month. Brakes, tires, fuel, all of that good stuff. Now let's go ahead and say about $100 a month, $200 a month for insurance. Let's just call that $2,000. Let's go and get some shop space. Maybe three, $400 a month. Let's call that $4,000. Let's do it. Titling insurance, making sure you have a good bookkeeper, all the rest of it. Let's go ahead and do $10,000 for that. We get a good accountant, a good lawyer, we get everything set up in terms of our legal, maybe an llc. What else have we got in the business? We got miscellaneous things. These are going to be things like for a lawn care business, you got blades, you have your trimmer line, you have fuel cans, little trimmer tools. Things like that are expendable. I'm not talking about the initial start of the business. Right. That $12,000 for that truck, by the way, is just $1,000 a month in equipment or the maintenance of the truck, the fuel for the truck, et cetera. I'm talking about expendable this is not the initial outlay of the buying trucks, et cetera. But let's just go ahead and assume with like trimmer line and all these other expendables that we kind of gloves things that we might break occasionally. Let's just go ahead and call that like $500 a month. Let's call it $6,000. Okay, great. So let's do 6,000. That's 16, that's 20. That's 34,000. So $34,000 in expenses. There we have it. Okay, I'm being pretty conservative, but let's just go ahead and run the math on this. So if we take $148,000 in annual revenue and we take out $34,000, that means our net profit for the business. Let me go and take a red marker here. Is going to be what, 30. It's going to be 18, 118, 100 and is that right? 114, 114. $114,000 in profit after taxes. You're probably going to take $90,000 home in take home profit. Not bad. Now you are working absolutely like a dog, absolutely crazy hours. You will need to work 60 plus hours a week just to keep this up because 40s on the property, another 10, 15 driving around, getting the job done, another 15, 20, potentially even doing estimates, et cetera. You are working like a dog, but you are bringing home some serious bacon. So let's go ahead and see what happens now as the business begins to grow and we start to get in some employees because this is what starts to happen. Let's go ahead and assume now that this person's gonna make $300,000 in annual revenue and they may get their first employee. Very exciting. Getting focused on the estimates, the marketing, very excited about the fact that you need to work on the business now instead of in the business. And that's all fine and good. However, let's go ahead and look at the math on this because check this out. Let's go ahead and do this one before. So over here we had $148,000 was our revenue and we had a profit of 114k in profit. Okay, what this implies, if we go ahead and do the math, let's go ahead and take our trusty calculator out here. We're going to take $114,000, $114,000. Divide that by $148,000 and we're going to get a 77% profit margin. Okay, let's go. This is the reason why you're so profitable when you're solo and maybe one employee. Because even if I get one employee, I'm not going to be 77% efficient. I'm not going to be 77 percent profitable. I should say, however, I am going to be like 40, 50% profitable even after I pay their wages. Because even if I have to pay someone out of this, pay them 20, $30,000, a part timer, still not making a bad profit margin. I might be 50, 60% in profit margin even if I have a part time helper occasionally. So again, I get one employee, things are going great. Let's go ahead and look at the numbers with one employee. This is what draws people into growing the business. So now let's go ahead and see. With this first employee, I'm now able to have $200,000 in annual revenue. So now this is one employee, $200,000 in annual revenue. But you're not going to make $114,000 in profit. Why? Because. Because now I've gotta get a second truck. Doubling the cost of my insurance, doubling the cost of what I'm spending on car payments, doubling the cost of my fuel, everything's gonna go up. I'm also gonna pay wages. So I've gotta pay someone 30, $40,000 for the year to have them be my employee. And I have to spend money on advertising to find those employees. And now I'm not gonna be able to do 40 hours out in the field. I might only be able to do 30 hours out in the field on a customer's property. Cause I'll go do more estimates and I've got to train, manage, hire, interview, try to find a new employee. Because guess what? First employee doesn't stick around for about two or three weeks. I've got another one and I got another one. And I'm always interviewing, I'm trying to find somebody else. And so I don't get my 40 hours in, I only get 30. And now I've got to hire them and they don't get 40 either. They get 25 or 30. So all of a sudden I don't go up to 300,000 in revenue, I only go up to 200,000. And yet now my profit might literally be $120,000. A little bit more than before, but not a lot. But this is the thing. If I look at my profit margins, it just went down to 60%. So our margin is decaying. And this is normal. As you grow a business, as you scale up, your margins typically go down because you're having More overhead, you're having, more insurance, you're having wages. And this is what happens now as we cross the $200,000 marker, watch what happens to our profit margins. And this is why people, they look very excited about this because guess what, it's a nice spot to be at this stage. 200,000, 250,000, you got one, maybe two employees helping you out. Good profit margin, 40 to 60%, very doable. But now let's go ahead and bump it up to say, four employees. Now at four employees, you're so busy doing estimates, managing the crew, hiring people, answering the phone, doing emails, just doing customer service, people that are unhappy, all this other stuff that you do, zero work in the field. There's no 40 hours of you doing work in the field. And instead of being a revenue producing machine and literally producing $148,000 in revenue by yourself instead of that, now you have four employees that you're just managing all the time. And you actually are an overhead expense to the business. You cost money because you drive around all day in your truck and you're not producing any revenue. The most efficient, most profitable person in your business, which is you, that was the best at doing the work, is no longer out in the field working. Instead, you're trying to manage other people that get maybe 50 or 60% of what you would have got done in a day. That's what they're performing at. So now with these four employees, we're going to go ahead and do $400,000 in annual revenue. But because we have four employees now, we have four trucks now, we have a bigger shop space. So our rent went from three or $400 a month at a storage facility. Now we're paying $1,200 a month for a shop space because we're, we need the extra land to be able to park the trucks, have some space to dump. We've got to make sure it's locked up. So we got a fenced area. We're paying way more in rent, we're paying way more in insurance. Because now your general liability is at no $100 just for your trucks, you're paying five, $600 a month. Now for your general liability, you might be paying 500, $600 a month because you got four employees and you're doing other jobs, you're doing bigger services, you're offering services outside of the basic stuff you were doing by yourself. And this is the trap that people fall into. So at $400,000 in annual revenue and now all of A sudden we have all these employees, we have all their mistakes, and things are happening. And guess what? We only make 60k. And if we actually do the math on this, this is a. Is it 15%? I think it's 10, 10, 15. I think it's 15%. Yeah. I think it's a 15% profit margin, which, honestly, if you actually look at the industry average for lawn care landscaping companies, if you run a 10% margin business, you're kind of not great. But okay, 12% is the average. 15% is actually half decent for a larger company. Obviously over here, not the case. But when you start hitting a million plus, 15% margin is fantastic. But 15% margin here just so happens that my profit, because this is my profit right here, is actually going down. I'm making half as much in profit at 400,000 annual revenue because guess what? What? I stopped becoming a producer of revenue of 148,000, and that went to zero. Instead, now I actually cost the business money because I'm driving around. I'm spending money on gas and fuel and an extra truck to keep everyone busy. I might even have to go get an office person, answer the phone, do emails. My shop space, now I gotta get an office space and pay for utilities and Internet and computers. All this other stuff. All of that is costing what's called overhead. These are things that are not attributed to the actual job getting done, which before that's the only thing we were paying for. Cogs, cost of goods sold, direct labor, direct materials. No longer is that what we're paying for. We're paying for what's called overhead. Things that have nothing to do with the actual job itself. The office person is overhead. The shop space is overhead. All the extra insurance is overhead. All the extra fuel is overhead. This is what's eating your profits for lunch at this size of business. And you're only now making $60,000 in profit. And now instead of having the physical pressure and pain and stress of working 50, 60 hours a week, now you're working 50, 60 hours a week,. But you're not working physically hard. In fact, you're actually gaining 20, 30 pounds because you're driving around all the time doing estimates, not actually doing physical labor. But at this stage now, all of a sudden, you have the stress of all these employees that call out, they call out sick, they do bad job. Now you have to fix their problems. You're running after them, and you're always making sure they're not slacking off, and you have to fire them. And then all of a sudden, they don't show up, and you're trying to hire more people, and you're caught in this vicious cycle of psychological stress and financial pressure, because now, all of a sudden, you're not taking home as much pay. Now you have to pay workers compensation. Now someone gets hurt on the job, and you have to deal with all these issues, and people are complaining, and then they want more money, and then they're not working hard, and then they make a mistake on someone's job, and they make a $5,000 error. And you can't go to the insurance because you already did that last month. And now all of a sudden, if you do it again, they might drop your insurance. And these are the type of things that wear down on you as a business owner. To everybody, including myself, I now have eight locations that I own of Augusta Lawn care and over 120 locations that are franchised. I went through this. Everyone goes through this. And if you're struggling right now and you're in this stage, I promise you, everyone has gone through what you're going through. Now let's talk about what you can do to get out of this death spiral. Because as you grow this business, it'll get more and more psychologically damaging and hard and stressful and less and less financial rewarding. And that's why people give up. And they're like, forget this. Forget making $60,000 in profit, dealing with all these employee issues and customer problems. I'm just gonna go back to becoming a solo operator. And for some people, that is the right thing to do. For some people, this is actually. I actually think for a lot of people, this is where they should stay at 200,000, 250,000. One employee, they can manage that employee. Have their eyes on them all day long, make sure that they pay them very well. They do not allow churn. Not a lot of psychological issues. They're working more in the business. For some people, this is really where they should stay at. But if your goal is to grow the business beyond that and build a business that runs without you and provide jobs for your local community and build a business that you can pass on to your family down in generations, here's the thing that you got to be focused on. There's definitely ways of being able to prevent this type of burnout. There's ways to prevent this sort of psychological damage. As you go through that wilderness of 200,000 to $500,000 in annual revenue, first and foremost, it's very simple. Prepare for the wilderness. Know that it's going to come. So what that means is have enough.

Dry powder. What I mean by that is have enough money to be able to scale the business from 200,000 in annual revenue to $500,000 in annual revenue very quickly. Because there's not going to be any additional profit because there's a lot of overhead that comes in that space. You're not going to work in the field anymore. You become an overhead expense. You have to upgrade your shop space and insurance and get an office person and all these other things. So you're not going to, you know that you know you're not going to make any more profit. So what do you do? Have enough dry powder, which means you might stay at $200,000 or $250,000 for a year, two, three years and stack some money up so you can go get a couple trucks, get a few employees and very quickly spend money on marketing and get to the place of 500 plus down the road. But make sure you have enough dry powder so that financially you're not going to have to give up in that period of time. And you can do it quickly even if you have a little bit of waste, Even if you don't figure everything out just perfectly in your marketing and you don't hire the exact right people, have enough dry powder to at least take some of the financial pressure away that it's going to be there. If you don't prepare for the wilderness of 200,000 to 500,000, the next thing you can do, simplify services. The reason that most people simplify services, the reason that most people give up during that period of time is because the reason they're growing their top line revenue is because they're adding more services. Because when they were so low they just did mowing for example, and now they're adding bush trimming and mulch installs and paver patios and retaining walls and excavation. They're using a big flail mower on an excavator. And all of a sudden they're doing all these projects and they're growing top line revenue, but not profit. But what's causing them to eventually quit down the road isn't actually so much. I see the financial issues, it's the psychological problem, pressure. And by simplification of services there's less intimidation that comes with these massive projects that you can lose your shirt on, massive contracts that you can make hundreds of thousand dollars on, massive commercial maintenance package. And so year round, it's so fantastic. And you can lose your shirt on those by adding in services that are complicated, highly skilled. You can become vulnerable now to potentially losing your shirt on a job to employees that know a lot about the work. But you have to hire them and deal with all of their junk because you don't know how to do the work yourself. So simplify your services. And the third thing is exactly what I just did that you'll need to do for your business. That is run the math. Okay, now before I talk about this one, because it's the most important, let's just be very clear. I expect, and I really do think that I deserve a subscribe. Okay. There are thousands of people that are going to watch this video and they've watched many of my videos and never subscribed. It's like when you go to the store and you see the little thing that say, give a penny, take a penny. Now, I am currently giving a penny with the hopes that one day someone is also going to give a penny back in return. Now, this content doesn't cost you a single penny to watch. It's literally right now 11:30pm by the time I finish this video, edit it, put it up, it's going to be one o'. Clock. I do this completely for free. That is my penny that I give. And the only penny I ask for you to give in return is a subscribe. So please do that is the gentleman's agreement. Give a penny, take a penny, I give something. I also expect you to go ahead and give a penny as well, which is a subscribe. Thank you very much. Number three, Comment below if you subscribe for the first time after watching many of my videos because I know there's a lot of you out there. Alright, let's go ahead and run the math. This is so, so important, especially for your first and second employee. Because if you'd run the math of how profitable you are in your business without your salary, very important. Here's the thing. If I would take my 118, what was it? 114,000? Yeah, profit. There you go. Okay, great. That's what I was making in quote unquote, profit in the business. However, if I take away my salary, what I would have to pay someone else to do the work themselves. It gets very interesting because if I was working 60 hours a week and I would pay someone, what is it, $20 an hour? Let's just call it 20 bucks an hour. You're literally looking at $1,200 a week. Add on taxes and insurance, you might be looking at $1,500 per week for someone that's all of a sudden 75,000 that I'm kind of fudging because I'm doing all the labor and down the road I'm not going to be able to do all the labor. So if you actually take your $114,000 in profit and you take away what you would otherwise have to pay someone else to do the work, like, oh, it's not going to cost me $75,000 for one person. You're right. You're going to have to get two people to do the amount of work that you're doing, because you're working like crazy hours. Like crazy, man. So if you take out that 75,000, now all of a sudden you have what, 25. That's $39,000 in actual profit. And this is what you should be counting yourself up against. This is what you should be comparing yourself to. Because now, now when you have the four employees making $60,000, doesn't seem so bad. Why you're actually making 50% more than you were before, because before you were doing all the work yourself. Now, if you were to hire out all the work, do the math of what you're actually making in profit for the business, not for you doing the work, but how much does the business make after you take away your salary? What you're constantly working in the business. There's a dollar amount associated with that. So what would the business be making if you were to go higher out your position and you didn't have to be there? That's truly how much profit the business business makes, not how much you take home, but the business makes after you would have paid yourself. And that is where the most people fail, is that if they actually took out what they would otherwise be paying someone else to work the crazy hours that they're working in the business, they're actually not very profitable. And this is a very, very generous situation. I actually feel like most people are taking 60, $70,000 in profit as a solo operator and like, this is great. And they start growing and they wonder why they literally go to the zero in profit. It's simply because they're not charging enough. They're not running the math on being able to make sure that they're charging a high enough price to accommodate the fact that as you scale up, you're going to have to hire wages. You're going to pay wages and hire people to be able to do the work for you. Very, very important comment below. Which of these three hit home the most to you. And if you've Already grown past 500, 600, $700,000, comment below. Another fourth, fifth what else helped you get through this stage? Because this is where most people quit. This is why the majority of home service businesses stay solo. And if they try to go breach that veil and get a few employees, they'll retreat back to this stage. I'm Mike Andes. If you'd like to support the channel or learn more about me. In the description there's a whole bunch of links. We do a whole bunch of services, including web design, taxes, bookkeeping. We do a whole bunch of different tasks. And I hope it is helpful for you. So check out the description and the links in there and check out mikeandies. Com. We'll see you tomorrow.