Why Some Businesses Can’t Be Saved—And How to Know if Yours Is One of Them

An owner inside of Augusta Nation is thinking about buying a business. They sent me the numbers. I'm going to break them down today and see if making this acquisition makes sense. My name is Mike Andes, I'm the founder of Augusta Lawn Care. We have over 150 locations around the world and do over $50 million a year mowing grass. Today we're going to be going over actual numbers from a real business that's for sale and one of the owners is thinking about buying. So first off the monthly revenue for last month was $48,000. That was top line or gross revenue. Next thing I know is that they have five full time employees out in the field. I also know that they have three non revenue producing employees. Three of those which consisted of an office manager, a GM and the owner. These three NRPE's also known as non revenue producing employees, they cost the business about $5,000 per person in salary every single month. Not their wages but actual salary, which means they were year round. So 5k per month. We have to multiply that by three and we get approximately $15,000 in just wages per month for non revenue producing employees. Okay, this is the problem. When I take 15,000 and I divide it by 48,000, that's like 31% of their revenue is literally just being spent on the cost of non revenue producing employees. That is a recipe for an unprofitable business. During their off season they would do less than 40,000, sometimes as low as $20,000 in revenue. Which means now that $15,000 per month in salaries that they're paying their general manager, office manager and the owner, that none of them are producing any revenue for the business. Now in the off season that could be like 60 plus percent of their revenue going out the door just to wages for non revenue producing employees. Let me just say very quickly if your numbers are anywhere close to this, you will never make money in home services. Because this is the thing. 31% is just the cost of the wages. If we actually bake in the cost of other admin. This is the equation that I want to actually talk about today. And then as your admin you want it to be ideally under 15% of your gross revenue which means no more than 15% of this number do I want being spent on admin related things. The rent of the facility, the cost of my office person, I want that around 15%. I do not want this much money going out the door to non revenue producing employees. So with that in mind, what would I have done if I would have bought this business. And this is what I recommended to the owner. Thinking about buying the business. We're still going to $48,000 per month in revenue, but we aren't going to have any more of these three non revenue producing employees. We are going to X this off the equation. In other words, I'm looking to have no more than one non revenue producing employee for every five revenue producing employees in this case. In this example they had 3 to 5 ratio, bad ratio also because I can't divide this out to make it easier for you because like really it's like 1, like 1, 2, 1 point, almost 1 point, 1.45 something. All right, that's not the ratio. I want one person in the office to every five people out producing revenue. And if you can beat this number and get it to like 6 or 7, you're gonna usually be very profitable. And the percent that you spend on admin and non revenue produced employees will go down. And so this is a general rule of thumb, a ratio that I like to hit. Now if I took this business over, this is exactly what I would do. I would first off let go of my office manager. All right? The reason for that is cause I do not want a $5,000 in salary fixed expense, okay? This is a monthly cost for the wages of the office manager. I'm going to get rid of them and I'm going to go hire command center in this case or any sort of outside firm that can take the cost per minute. And it means that I might pay 6 or $7,000. But then during the off season I might only spend like $1,000 to get all of my admin done. And, and I won't have to pay this fixed cost of her salary. All of the stuff that comes along with having an actual physical office, I'm gonna get rid of this person and I believe save at least 20 to 30 thousand dollars in the year. And most importantly, make this a variable expense. Variable expense. Which means as I get busier I will pay more. Cause I'll probably pay by the minute or by the hour for an answering service or a virtual receptionist to be able to take all of my calls and handle my admin? That's the first thing I'm gonna do. The second thing I'm gonna do is why in the world do I have a GM that's not producing revenue and an owner that is also not producing revenue? The goal should be to number one, get rid of the gm. There's no reason to have this person doing non revenue producing tasks. And I would argue at this size of this, with only five employees, it is not a full time job just to do sales. If you have five people on the field working and I can delegate out my admin, so I don't need this office person anymore. My G is going to go back into the field and produce revenue or I'm going to fire them if they don't like it. And then I, as the owner, I'm actually going to make money. And ideally I'm going to cover the cost of my wages to the business. And if I was not the owner in this case and I actually had a general manager running this location on the other side of the country, this would be the gm. And we call this at Augusta the working GM model, which means they're going to be on the field, working command center doing the admin work. No one is sitting inside of an office or driving around doing nothing all day long and everyone's producing revenue. And that's how you make a very efficient and profitable home service business. If you're spending more than 15 or 20% on your admin, be careful because this ratio come up to bite you. And if this starts to get close to 1 to 2 or 1 to 3, you could be in a world of hurt. I'm Mike Andes. Check this video out here. It'll be great.