Why Your $3M Business Still Feels Broke

Welcome back to another edition of the Home Service Millionaire podcast where we talk about all the problems and the opportunities that you have as a 1 million plus dollar home service business owner. Between 1 million and 5 million is really what we're targeting today. We're talking about why your $3 million business still feels broke. And I've been there, I've had where I'm making around $3 million a year in revenue between a couple of my businesses, the gym and my first Augusta location. Right around $3 million in revenue between the two and still feeling broke. Going to talk about today, the producers created five wonderful options on the DACA for us to talk about. I haven't seen them yet, so let's jump right in. The first one is if your revenue tripled since a million dollars, why hasn't your take home pay tripled too? Mmm, little spicy. Spicy. Okay. So many times you go from a million to 3 million. The challenging part is the fact that you do have to add overhead and infrastructure. At a million dollars you can absolutely get there in 5 to 10 years by slowly growing, staying in profit mode, having very high pricing, having five, six employees that are making 150 or so dollars an hour. It's possible it's going to take a lot longer to grow there. You're not going to get into a market with 70, 80% close rates and low prices and then raise them like it's a function of you will grow slower. And so at a million though, you can make a very, very good living with 5, 6, 7 employees doing very high priced work with a 30 to 40% close rate. It's just going to take longer and you're not going to have the ability to have mid level management because at a million dollars, I will say this time and time again, I'll die on this hill. A million dollar business cannot sustain having an operations manager, a general manager, estimator, sales admin, office manager, operations operations manager and a general manager. In my opinion, a $3 million business has a general manager at the top, has an estimator or sales manager, a operations manager leading the crew out in the field and then an office manager. So four people overhead that same business at a million dollars in revenue will not be profitable. There's almost no way that you can pay top talent for people overhead. We're talking, when I say top talent, I'm talking like people making like at least $70,000 a year, serving like all these customers and all of these employees. You're looking at like $250,000 in straight overhead salaries. And so there's no way a million dollar business can really do that profitably, Especially if the owner isn't the GM and like working there all the time. And so what happens is many times a very profitable $1 million business, in order to get those 3 million needs to get mid level management. That is the unlock is being able to find great team members. That is your estimator and salesperson, is your operations manager and is your office manager. Those are the unlocks to go from 1 million to 3 million. It's also a huge commitment from an overhead perspective. And you're definitely going to have to usually upgrade your shop space so all of your overhead goes up when you go from a million to 3 million. And it's not like it just goes up a little bit, it usually doubles, triples or quadruples. And a lot of times in order to unlock a million to 2 million, you have to do that same investment. That's why a lot of times between like 1 million and 1.5 million, I see a kind of a wilderness of profitability. It's usually that size of business is requiring the mid level managers to keep growing. But once they get them, great, like they, once they get to 2 million, 2 1/2 million, $3 million, they'll be profitable. But getting there like is tough. That's a very tough spot to grow the business. And so if your revenue has tripled and your take home pay hasn't tripled, it's likely because your overhead expenses and the infrastructure required to get to $3 million simply was required as an investment. And I would say that you should be at 3 million now. You've grown there. Go into profit mode, raise your prices at $3 million. The nice thing is when you raise price by 10%, you had $300,000 to the bottom line. That's what like I love growth because when I grow, if I can continue to grow and keep like holding my breath in terms of not going to profit mode, if I'm able to hold my breath long enough, assuming I don't implode and go out of business, if I can grow that business of size and then turn the profit knob on when, when I'm doing 3 million, it's a huge impact. Like I talk about profit Mode at say 500,000, great. If you raise your prices by 20%, we're adding $100,000 to the bottom line. Very good. If you raise 20% at $3 million in annual revenue, that's $600,000 to the bottom line, that's a very good paycheck. And so I'm a huge fan of keeping in check the percentages of overhead as you scale. So it's like, okay, look, right now 5% of our revenue is going towards rent, 3% is utilities, 9% is office wages. Okay, great, that's at a million. Let me make sure I can try to keep that those things in check and monitor those as I go get from 1 million to 2 million especially and all the way up to 3 million. I'm just trying to track percentages of revenue because a lot of times what goes from A million to 2 million is all of a sudden massive jumps in like admin wages, rent, insurance, all the overhead expenses just jump up. Software, you usually have to invest more in software like tracking equipment, dash cams, all these other things that you usually didn't have to have when you had like five, six trucks. Now when you get 10, 15, 20 trucks, you start investing in these other things. You need a mechanic, you need a bigger shop space, you need to have a commercial space though you can have an office in person. Like there's all these other layers of admin and overhead that gets added. And so I'm usually trying to look at it from a percentage of revenue perspective and trying to just monitor it. Just start with monitoring because just realize that it is going to bloat as you go from a million and cross that marker and you hire mid level managers and have to expand things like your office infrastructure. All right, number two on the docket, are you scaling payroll faster than profit and turning into the employee of your own company? So look, as you grow past a million, you should be paying yourself a W2. If you're an S corp, you have to pay yourself a W2. Now am I going to, if I'm an owner operator, am I going to be paying myself an exorbitant W2? No, but I am definitely. Let's just say I pay myself 60 grand. You know, to replace yourself. You're probably have to pay 100/plus thousand dollars at that size of business, easily for salary of someone that can manage 20, 30 employees. However, I might take $60,000 a W2 employee. And I'm going to be making sure that if I was to pay myself 120,000, the business still profitable. Because I need to make sure that if I get hit by a bus or something happens to me and I did have to hire someone for 120 grand a year, the business would still make money. And unfortunately, even in a million Dollars in revenue. Many businesses are propped up by a business owner that is working 14 to 16 hour days. And that's fine in the beginning when you're growing, like trust me, I have worked many hours. Like, trust me, the only reason the business got through is because I worked crazy amounts are and bled through my eyeballs. So like I understand that. And there needs to be a season for that. When you start getting two, three, four million dollars. The problem is you can't outwork your deficits because the size and scope of the business is such that even if you work out in the field all day long, even if you did sales all day long, you would not be able to outwork an unprofitable business model. And so that's why I'm such a big fan. If you're going to scale 3 million, make sure to a million you're really profitable. Because then you scale a profitable model instead of taking an unprofitable model and I guess pour the juice on this bad boy. That's very, very risky and many times leads to a business owner doing 2 million in revenue working 16 hour days. And they can't outwork, they can't outrun the pace at which the business of size now because at a smaller business you can always make the business quote profitable by just working more. Even at like 6, 700,000 annual revenue. If you really needed money, you, you could just go out in the field and do more work. When you're running a 3 million, $4 million operation, you going out and doing more work is like a drop in the bucket. You spending more leverage time on leadership and getting your whole crew to be 15% more efficient could lead to way more impact on the business. And so it's much more difficult to just immediately flip a switch at a larger size business and become profitable by working more and more. And so I would highly recommend that if you're feeling like an employee, that's okay. I don't really care, you know, whether you feel like an employee. It's much more rather of scaling payroll. And so I'm gonna be making sure that even if my paycheck as a general manager was paid out to someone else and I needed someone immediately and had to pay them twice as much as what I'm currently taking, that the business can still be profitable. And I've got, I've gotta realize that me being in a quote unquote employee out in the field like a technician is like the lower lowest leverage task. Me being a manager is better. But at a 34 million dollar organization. I need to be focused on architect time. That is creating systems, creating the fixes for all the problems in the business. Because I know that If I have 30, 40 employees and I can make them slightly more efficient, it has like a two or three times more impact than me out going out and doing the work or me going out and doing the sales. Me out and going doing door hangers instead. Focusing on the system that makes great door hangers very valuable. Instead of me going on being a technician, creating the systems that make the technicians a great technician and make them super efficient, make them getting above base pay on P4P. That is very valuable use of my time at a three, $4 million organization. All right, number three on the docket. Is your $3 million business actually funding growth or just subsidizing higher salaries and nicer trucks? So here's the thing. As you grow a business in size, you will be looked on as from employees and the public as having the resources to be able to afford the niceties. And so if you're doing well and you're doing a $3 million business at this size, you probably have 20 plus employees. I do believe it's a good thing to invest in the trucks and equipment, mostly from a tax perspective, but also from the perspective of I need to retain talent because the same way it comes with customers, you get to a certain point with this churn. Eventually churn makes your plateau a number of customers. Same thing true with employees. If you can only hire so many efficiently and get them trained up well. If you have a bunch of churn of existing team members, you will plateau with how many employees in the organization you can actually sustainably have. You have a lawn care business and you've considered joining Augusta Lawn Care and converting it into one of the franchise locations. Go check out Augusta Lawn Care Services.com franchise where you can see all the numbers and what the performances of all of our locations. I a lot of times look at trucks and equipment mostly as a retention strategy for technicians. I like it for taxes. I'm a fan. However, I am mostly doing it because even if, even if I could break even or even lose a little money even once I take into account the long term appreciate depreciation from a tax perspective as well as less maintenance. Like there's a lot of reasons now, especially with used trucks being so expensive, used vehicles in general, why new starts to make sense or even getting some debt on it is it starts to make more and more sense now compared to even five, six years ago. Where you could get a truck for a third of the price even if it was a few years old. That doesn't happen anymore. They don't depreciate like that anymore. And so it's a function of, maybe I do get new, maybe I do get a loan. However, I'm usually doing that for retention. And so although it may feel like at a $3 million business, you're buying more trucks, you're getting nicer things, you're having higher salaries. Retail retention is the goal. Like the reason I do the higher salaries, I make sure there's paper performance. I have profit sharing. I have mid level managers that are paid very well. The reason I do that is for retention. Because retention, especially mid level managers and your foreman and your crew leaders has a huge impact on profitability that you don't see. It's like almost impossible, almost impossible to actually quantify the impact on profitability of churn. Almost impossible. You can kind of measure how long it takes to get someone trained up and like the cost of the trainer and the inefficiency of their time and maybe the time of the manager to get them onboarded, things like that. It's very difficult to quantify the difference between having someone for six months and 12 months. But it has a huge impact on the business if your frontline team members last twice as long. And so we constantly think about this from a customer's perspective, upselling them, increasing the lifetime value, the customer. But what about the lifetime value of the team member, the technician? And so this is why a lot of times as I get to 3 million, I start thinking about buying more trucks, getting a little nicer, raising wages a little bit. I offer 401k or health benefits or gym reimbursement. I do that because now my constraint starts to become labor in the 4L framework. So if liquidity isn't my labor isn't my constraint, and leads are not my constraint, the next constraint is labor. And many times that's what you hit when you start hitting 3 million because you need so many labors. And if you're turning through them, that will be the constraint to growth. Not getting more leads, not getting more customers in the door. It'll be keeping technicians long enough. And so I don't think this is a bad thing. I think this is a feature, not a bug. And I think it's a good thing to really buckle down at 3 million and start figuring out and this could be 3 million in one location. This could also be if you have two or three locations that are all producing around 800,000amillion in revenue. Really starting to think through the compensation plan for your GMs, the compensation plans for your technicians, what is percentage on P for P need to be if one's in growth mode, do I have a higher percentage on P4P? Can you have a lower route density? These are the type of things you start thinking about to only do one thing and that is retain technicians. Very hard to quantify. But I can guarantee you a business that does $800,000 in annual revenue or $4 million in annual revenue doesn't matter. And I take the exact same business, same size, and I change one variable and that is one company has six month technicians and the other has year long technicians on average staying with them. I can guarantee you without looking at the profit, without looking at expenses, without looking at efficiency scores, without looking at whether or not they do P4P nothing. I guarantee you the business that has the 12 month technicians will outperform dramatically in terms of profits. All right, number four on the docket as to why your $3 million business feels broke is why do most $3 million owners confuse adding trucks and people with actually building? Okay, so we need to break down some terms. In my opinion, wealth is built using assets.

You be rich with a bunch of cash, but assets bring wealth. Now some people would argue that a truck or piece of equipment is an asset. I would argue it is a tool because it is useless and it brings no value unless it is used for the business. And the business, if ran properly, is an asset. And so how I like to think of it is a lot of times the reason that we get confused with adding trucks and people is because it strokes our ego and it makes us feel good. And at $3 million, you have a lot of trucks, you have a lot of employees, and that group photo that you get with your team makes you feel warm and fuzzy. The more people are in it and the more trucks you have in the background, like the lawn and lot, the classic lawn and landscape, you know, green industry magazine picture with like all the employees up front and all the mowers and all the trucks lined up. Like use one that as many people in there as possible, as many trucks, as big a space in a shop as possible. Trust me, I know it helps warm the ego. And the reason I bought way too many trailers and trucks at the very beginning was because I lined them all up nicely in these nice parking spaces along the road. And I just love the warm fuzzy feeling of people being like, man, you grown so much. Because every time I drive by, there's so many trucks and equip so much trucks and trailers there. And I realized you drove by it in the middle of the afternoon, which means they aren't out on the road making money. And these are tools. And so the same way that no one would brag about having a fan, like, I'm a master craftsman. I have all these wonderful hammers and screws and the nail gun, and I have this saw, like, who cares? I wanna see the output. What is the product? The product in this case is your business. And you need trucks, trailers and equipment in order to create the product, quote the business, the business is the asset. And so I am going to get the sufficient number of trucks and people and systems in place to be able to create a product. And that product is. That is what I get refined on. That's the product, is what I get judged on. And so, yes, what will get fancy in newspaper articles and social media and on magazines will be the picture of you and your crew and your trucks and all that. No one cares. What really is the actual asset in building wealth is the business that runs without you and has systems in place. And so if you focus on the product, what will happen is you'll get less trucks because you want them to be utilized, the tool to be utilized as much as possible. You'll get less employees because you want to make sure they're working full time, year round. And so you'll get less of them. And so instead of the kind of ego, numbers of number of trucks and number of employees, I'd be focused on how do I build an asset? That asset is my business. And that asset value is going to be determined by how much free cash flow I can take out of the business. And I'm gonna be trying to maximize and juice that number as much as possible. Cause that's the determination factor of how valuable that asset is. And that's why people that have a whole bunch of assets don't have a lot of cash, but they're still really wealthy. Why? Cause they have an asset value in a business. Typically they can go loan, get money, like literally get loans against. It's called margin against the stock they have in a business for much larger businesses. But the same, same principle applies as, like build a business that is asset worthy, that could actually be backed up by debt from a bank with your equity. Build that kind of asset. Build that kind of business. All right, fifth and final on the docket today. At what point do you admit overhead creep Leases, managers, equipment is stealing your cash flow. This is why monitoring the percentage of revenue that goes to these different categories is so important once you cross a million. Because I have seen time and time again where a million dollar business has maybe 8 to 10% being spent on admin and then all of a sudden they get to 3 million and we look and they have like five people in the office, a whole bunch of salespeople, a really fancy office space, whole bunch of.

What'S it called, conference rooms. And we got food for the team. Great. All very good. But now we're spending 17% of revenue on non revenue producing tasks and a really fancy shop space. Oh. That we didn't have when we were at. And so be very careful in my opinion, when you go from a million to five that you track percentages that you're spending on overhead, things like your rent and like, well, I'm go buy buy space. Great. I am a big fan. Once you, if you're like I'm going to build a $10 million business, Big Fan of buying your space. Here's the thing, if you run out of cash at 3 million because you were renting for 2 grand and now your mortgage is 12 grand a month, we have a problem because you just 6x the amount of monthly you're expending for that shop space. And so be very careful with bloat around overhead and non revenue producing salaries, non revenue producing subscriptions, non revenue producing infrastructure like pieces of metal and concrete. That's not the business. That is simply the infrastructure required in order to be able to create the product. And I want to focus on the product. And that is does this business make free cash flow? Most billionaires are built off the back of, they build their wealth off the back of equity in a business. They don't. You don't go talk to me like, well, we bought a bunch of trucks, we bought a bunch of equipment and that's why I'm wealthy today. No, the trucks and the equipment and the employees built the wealth in the business equity. And so I'm only focused on that buying, you know, your shop space is not going to make you a millionaire. It's not, anyone can do it. And so if buying a piece of land and putting a shop space on it is going to make you a millionaire, everyone would do it. What's more difficult is to fill that space up with profitable employees, profitable equipment, low overhead structure, great offers, emails that upsell customers, text messages, systems and processes. That's the real business. So I just implore you to focus much more on your time on that than on buying trucks and equipment. So many people don't even get to a million dollars because they focus more on all these tools than do on the product of the tools, which is the business. And that's why you hear me spend 95% of my time speaking about this, because this is where real wealth is built, is the building of the business. That's what so few people can do because anyone can go buy a truck, anyone can go buy a piece of equipment because it's a tool. But very few people are the master that can actually wield the tools, use them to their full extent, have great asset utilization, have systems in place, attract great people, be a great leader to build a great business, and that's an asset that will build your wealth. All right, everyone. We don't overhead creep. We're going to. We're going to. We're going to track the percentage that we're spending on overhead. We're going to track the percentage we're spending on our lease. We're going to track this percentage that we're spending on administrative salaries and all of the overhead in your business. We're track that. So as we pass a million and on our way to $5 million, we don't allow it to bloat and get out of control. My name is Mike Andes. This is the Home Service Millionaire podcast. If you like a question answered or a certain topic discussed in the description below, comment, the producer will see it and they will potentially put it on the next docket.