WEBVTT
1
00:00:00.211 --> 00:00:07.078
Today I'm going to talk about why in your home service business, you might actually not want to be optimizing for profitability.
2
00:00:07.499 --> 00:00:11.443
And you might actually want to be optimized for growth and enterprise value.
3
00:00:11.944 --> 00:00:12.885
But there's stages.
4
00:00:13.445 --> 00:00:17.630
And a lot of times people ask me how much money should I be taking out of my business?
5
00:00:18.110 --> 00:00:20.092
How much should I be investing back into my business?
6
00:00:20.833 --> 00:00:23.454
How much of a salary should I be taking from my business?
7
00:00:24.014 --> 00:00:40.038
I'm going to talk about the different stages from zero to two, three million dollars 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.
8
00:00:40.578 --> 00:00:43.638
So the first when you first started, it's all about survival.
9
00:00:43.998 --> 00:00:50.120
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.
10
00:00:50.860 --> 00:00:57.884
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.
11
00:00:57.904 --> 00:00:59.745
Because growth sucks cash.
12
00:00:59.785 --> 00:01:00.646
I talk about this all the time.
13
00:01:00.886 --> 00:01:02.947
You got to market and get the customer.
14
00:01:03.287 --> 00:01:04.128
You advertise.
15
00:01:04.308 --> 00:01:05.208
You have a website.
16
00:01:05.448 --> 00:01:08.070
You then got to get a truck and equipment to be able to get the work done.
17
00:01:08.230 --> 00:01:09.971
Then you got to go hire someone to do the work.
18
00:01:09.991 --> 00:01:11.312
So all of this takes money.
19
00:01:11.712 --> 00:01:13.353
And as you continue to grow revenue,
20
00:01:14.053 --> 00:01:43.060
to think that you're going to 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 big 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 going to need a shop space you're gonna need you can't no longer park at your in your garage of your neighborhood and the hos freaking
21
00:01:44.080 --> 00:01:45.421
So there's gonna be more overhead.
22
00:01:45.441 --> 00:01:46.782
Now you're gonna need someone to answer the phone.
23
00:01:47.102 --> 00:01:48.983
Now you're going to need someone to do sales.
24
00:01:49.003 --> 00:01:51.265
Like as you grow the business, there's more expenses.
25
00:01:51.665 --> 00:01:52.526
So growth sucks cash.
26
00:01:52.926 --> 00:01:57.809
But when you're first getting started, usually from zero to $500,000 in your revenue, you're just surviving.
27
00:01:58.070 --> 00:02:02.152
You're just trying to get more customers and put every dollar back into the business.
28
00:02:02.212 --> 00:02:07.676
And usually you don't actually really worry too much about like what your salary is because there's not a lot of profit.
29
00:02:07.916 --> 00:02:09.878
You don't really worry about taxes because,
30
00:02:10.518 --> 00:02:11.499
there's not a lot of profit.
31
00:02:12.119 --> 00:02:16.023
And you're not worried about being an S Corp or an LLC because you're not making a lot of profit.
32
00:02:16.583 --> 00:02:28.113
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.
33
00:02:28.413 --> 00:02:30.134
If you're in Canada, they just have corporations.
34
00:02:30.555 --> 00:02:37.581
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.
35
00:02:38.121 --> 00:02:40.043
And at this time, you start having a salary.
36
00:02:40.324 --> 00:02:43.428
So you've moved from survival to having a salary.
37
00:02:43.868 --> 00:02:44.329
Let's go.
38
00:02:44.669 --> 00:02:54.441
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.
39
00:02:55.503 --> 00:02:55.743
Great.
40
00:02:56.323 --> 00:03:18.573
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 US, it's called W-2 income, you're gonna get taxed higher on that money than if you were to just take distributions as an owner because you gotta pay for social security and all the other crazy government programs they convinced us that we have to pay.
41
00:03:19.233 --> 00:03:20.813
But if you take a W2, you're paying them.
42
00:03:21.374 --> 00:03:27.435
Now, you don't want that number to be so low that you start thinking, oh my goodness, my business is so profitable.
43
00:03:27.475 --> 00:03:30.436
I'm making $100,000 in profit and I'm taking a salary.
44
00:03:30.716 --> 00:03:33.797
But I look at their salary and they're making $1,000 a month salary.
45
00:03:34.037 --> 00:03:42.140
This next tier of business is the business can actually afford to pay me a salary as if I was rehiring my replacement that would run the business without me.
46
00:03:42.620 --> 00:03:44.302
So now I might have a million dollar business.
47
00:03:44.542 --> 00:03:46.303
I've been in business for five, six, seven years.
48
00:03:46.584 --> 00:03:47.604
I put it into profit mode.
49
00:03:47.644 --> 00:03:49.706
I'm raising prices and optimizing the business.
50
00:03:50.106 --> 00:03:51.788
I'm paying myself now a salary of $100,000.
51
00:03:52.068 --> 00:03:59.434
And after I pay myself a salary, there's still another 50, 60, $100,000 of profit left in the business.
52
00:03:59.975 --> 00:04:03.238
Now I can confidently say the business is profitable.
53
00:04:03.758 --> 00:04:10.161
Not just me putting more hours or me being underpaid, but the business is profitable if I was to replace myself as the owner.
54
00:04:10.481 --> 00:04:15.683
And I would say maybe 5 to 10% of business owners get to this level.
55
00:04:15.964 --> 00:04:23.187
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.
56
00:04:23.747 --> 00:04:31.891
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.
57
00:04:33.139 --> 00:04:33.580
Great win.
58
00:04:34.000 --> 00:04:34.420
You crushed it.
59
00:04:34.441 --> 00:04:35.822
You're literally already in the S tier.
60
00:04:36.283 --> 00:04:37.364
But what's the next step?
61
00:04:37.464 --> 00:04:43.891
And today I wanna talk about what's that next level for an entrepreneur or business owner once they've passed this phase.
62
00:04:44.192 --> 00:04:50.098
Where the business is profitable, it's kicking off cash beyond what the owner needs to survive personally.
63
00:04:50.319 --> 00:04:51.420
It's like, well, where did I put all this money?
64
00:04:52.621 --> 00:04:56.143
First thing I want you to do is max out your tax advantaged accounts.
65
00:04:56.723 --> 00:04:58.063
This is going to be your IRA.
66
00:04:58.384 --> 00:04:59.804
This is going to be your 401k.
67
00:05:00.405 --> 00:05:02.045
And you're like, I don't know how to set up this stuff up.
68
00:05:02.465 --> 00:05:06.007
Use AI, go talk to someone that knows how to set the stuff up.
69
00:05:06.287 --> 00:05:15.351
If you have a payroll processor like QuickBooks or Gusto or ADP, they will help you set up the 401k plan for your employees and for yourself.
70
00:05:15.431 --> 00:05:19.153
And you don't have to match the 401k right off the get for your team.
71
00:05:19.693 --> 00:05:23.215
You can just say, hey, we offer the program, and then you're able to participate in it as well.
72
00:05:23.615 --> 00:05:29.999
This allows you to be able to invest for retirement and be able to put money aside in a tax-advantaged way.
73
00:05:30.279 --> 00:05:40.045
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.
74
00:05:40.325 --> 00:05:44.368
And so what we start thinking about is how do we do things in a tax-efficient manner?
75
00:05:45.008 --> 00:05:47.049
One of the best ways to be able to...
76
00:05:48.190 --> 00:05:53.234
get benefit without paying a whole bunch of taxes is putting money into an IRA or a 401k.
77
00:05:53.514 --> 00:05:59.339
Now, I don't want to get into complications, but there is a traditional IRA and there is a Roth IRA.
78
00:05:59.839 --> 00:06:03.462
There is a traditional 401k and there is a Roth 401k.
79
00:06:03.903 --> 00:06:04.543
Here's the basics.
80
00:06:05.124 --> 00:06:08.767
Traditional means I put money in and I don't get taxed on it today.
81
00:06:09.407 --> 00:06:09.647
All right.
82
00:06:09.848 --> 00:06:18.358
So if I make $100,000, I put $10,000 into my 401k, I'm only going to get taxed on $90,000 when it comes to the tax man.
83
00:06:19.119 --> 00:06:24.946
That's a traditional 401k or traditional IRA, a Roth 401k or a Roth 401k.
84
00:06:26.027 --> 00:06:45.623
IRA is I'm going to pay tax today on the hundred grand 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
85
00:06:46.123 --> 00:06:47.904
401k or Roth IRA.
86
00:06:47.964 --> 00:06:56.089
And if you're like, well, I can't do the Roth 401k because now we're making two or $300,000 and I can no longer participate because of the requirements.
87
00:06:56.129 --> 00:07:03.073
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.
88
00:07:03.693 --> 00:07:05.876
Again, don't get worried about the details here.
89
00:07:06.337 --> 00:07:17.953
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.
90
00:07:18.473 --> 00:07:19.375
So that's like the next stage.
91
00:07:19.655 --> 00:07:20.616
Okay, what do we do after that?
92
00:07:21.177 --> 00:07:23.799
Because I know that down the road, I want to start a second location.
93
00:07:23.919 --> 00:07:25.981
I know that down the road, I want to buy another business.
94
00:07:26.061 --> 00:07:30.345
I know that down the road, I want to start expand into this new service area.
95
00:07:30.445 --> 00:07:30.846
Okay, great.
96
00:07:31.266 --> 00:07:32.807
But what do I do with the cash in the meantime?
97
00:07:33.428 --> 00:07:37.491
This is where I believe putting the money into an index fund is very valuable.
98
00:07:37.972 --> 00:07:41.795
Now, personally, I invest into a mix of different index funds.
99
00:07:42.095 --> 00:07:43.397
When I say index funds, think.
100
00:07:43.977 --> 00:07:45.598
a bundle of a whole bunch of stocks.
101
00:07:45.898 --> 00:07:49.100
So instead of being like, I'm going to go buy Apple, I'm going to go buy Nvidia.
102
00:07:49.320 --> 00:07:50.321
I'm going to go buy Google.
103
00:07:50.601 --> 00:07:55.384
Instead of doing that, I'm just going to buy an index fund that has hundreds or thousands of stocks inside of it.
104
00:07:55.845 --> 00:07:58.006
So it's not going to go up and down like crazy.
105
00:07:58.026 --> 00:08:00.187
It's not going to have a bad report and drop 20%.
106
00:08:00.688 --> 00:08:08.873
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.
107
00:08:09.233 --> 00:08:11.675
So I might put it inside of either a,
108
00:08:12.355 --> 00:08:13.636
bonds, i.e.
109
00:08:14.236 --> 00:08:24.343
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.
110
00:08:24.664 --> 00:08:27.045
The S&P 500 is a good example of an index.
111
00:08:27.586 --> 00:08:30.608
And you can buy these on Robinhood, Fidelity.
112
00:08:30.788 --> 00:08:33.410
There's a whole bunch of different apps when you can just put money in there.
113
00:08:33.950 --> 00:08:57.735
and you can move from your personal checking account when you have enough money put it in the 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 three four five percent a year but at least it's not getting ate away by inflation all right
114
00:08:58.235 --> 00:09:07.085
The reason I believe in this is it keeps you patient when it feels like you want to do something in three or four years and you're like, man, I don't wanna put money in a savings account.
115
00:09:07.165 --> 00:09:08.687
I'm gonna put it back into the business.
116
00:09:08.787 --> 00:09:10.609
And all of a sudden you start buying equipment you don't really need.
117
00:09:11.391 --> 00:09:18.733
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.
118
00:09:19.453 --> 00:09:25.854
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.
119
00:09:26.354 --> 00:09:33.816
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.
120
00:09:34.336 --> 00:09:38.777
And in my opinion, the great way to use an index fund or even buying bonds
121
00:09:42.239 --> 00:09:52.528
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 gonna be there
122
00:09:53.632 --> 00:09:57.613
But in the back of your mind, you know that inflation is eating away 3%, 4%, 5% a year at that.
123
00:09:57.733 --> 00:10:00.734
And that's not good for like who wants to lose 3% or 4% or 5%.
124
00:10:01.514 --> 00:10:03.655
And you feel like, oh my gosh, I got to invest it somewhere.
125
00:10:03.995 --> 00:10:07.376
And that leads to trying to hurry things up and making bad decisions.
126
00:10:07.856 --> 00:10:09.157
Or buying stuff you don't need.
127
00:10:09.417 --> 00:10:10.877
Or hiring people you don't really need to have.
128
00:10:11.097 --> 00:10:12.418
But you're just like trying to spend the money.
129
00:10:13.058 --> 00:10:24.744
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 one, two, three years and build this war chest of cash.
130
00:10:25.224 --> 00:10:32.607
Because if you're making extra 50, a hundred thousand dollars of profit outside of your salary that you don't really need, you want to invest it, but it's like 50 grand.
131
00:10:32.627 --> 00:10:34.708
I'm not going to like go buy a bunch of real estate, 50 grand.
132
00:10:34.728 --> 00:10:36.809
Like I'm not going to go like start a new business.
133
00:10:36.830 --> 00:10:38.610
I'm not going to start a new location with 50 grand.
134
00:10:39.111 --> 00:10:39.451
Okay.
135
00:10:40.011 --> 00:10:42.752
How do I make sure that that continues to grow in value?
136
00:10:42.892 --> 00:10:50.416
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.
137
00:10:50.796 --> 00:10:54.618
And that's what I see people do a lot of times when they start putting money aside because of inflation.
138
00:10:54.898 --> 00:10:56.499
They're like, I gotta spend the money, I gotta invest it somewhere.
139
00:10:56.539 --> 00:11:02.702
And you start doing dumb stuff or never creating a chest, a war chest of cash that they can deploy down the road.
140
00:11:03.262 --> 00:11:06.725
And so that's the next level is we are now starting to invest inside index funds.
141
00:11:07.005 --> 00:11:16.113
We're starting to invest in potentially some treasury bonds to be able to make some money while we're staying patient for two to five years before the next big swing.
142
00:11:17.073 --> 00:11:17.314
All right.
143
00:11:18.227 --> 00:11:20.228
That means that in two to five years, you're probably gonna deploy it.
144
00:11:20.328 --> 00:11:25.149
You're probably gonna use it in your business because you can still send an index fund, make eight to 10%.
145
00:11:25.449 --> 00:11:29.130
But if I'm patient and I'm willing to wait two to five years, I'm putting money aside.
146
00:11:29.230 --> 00:11:31.911
It's slowly growing inside of a stock portfolio.
147
00:11:32.051 --> 00:11:32.371
Great.
148
00:11:32.751 --> 00:11:34.932
But then eventually I'm going to make a big swing.
149
00:11:35.012 --> 00:11:35.732
I'm gonna start another business.
150
00:11:35.752 --> 00:11:36.873
I'm gonna buy out my competitor.
151
00:11:36.953 --> 00:11:37.813
I'm gonna start another location.
152
00:11:37.833 --> 00:11:38.853
I'm gonna invest into real estate.
153
00:11:39.133 --> 00:11:41.134
And now I have the cash to do so.
154
00:11:41.794 --> 00:11:44.175
But all of this has been said to say this,
155
00:11:45.898 --> 00:11:48.323
When you're first getting started, you're thinking about survival.
156
00:11:50.087 --> 00:11:53.755
Then as the business grows, you start thinking about how much money can I take out of the business?
157
00:11:54.517 --> 00:11:55.038
Your salary.
158
00:11:56.350 --> 00:12:01.691
As you move into the next phase, you have to start thinking about how do I actually invest this money tax efficiently?
159
00:12:02.372 --> 00:12:12.875
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.
160
00:12:13.215 --> 00:12:19.296
It's where seven figure entrepreneurs in the home service industry get the skills and leadership required to get a 10 million plus.
161
00:12:19.776 --> 00:12:24.818
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,
162
00:12:25.698 --> 00:12:26.638
I highly recommend it.
163
00:12:27.119 --> 00:12:36.382
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.
164
00:12:37.023 --> 00:12:41.364
And so if that's a venture to you, click the link down in the description and I'd love to see you inside home service boardroom.
165
00:12:41.484 --> 00:12:42.405
All right, back to the video.
166
00:12:42.705 --> 00:12:54.910
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.
167
00:12:56.007 --> 00:12:58.069
This is what the rich people know.
168
00:12:59.611 --> 00:13:03.034
I don't really need income, I need enterprise value.
169
00:13:03.975 --> 00:13:04.576
Let me explain.
170
00:13:05.376 --> 00:13:16.227
If I make an extra $50,000 in salary and I increase my salary for my business, out of that $50,000, I'm probably paying 10 to $15,000 in taxes out of the 50.
171
00:13:17.048 --> 00:13:17.949
Not super efficient.
172
00:13:19.170 --> 00:13:33.074
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.
173
00:13:33.494 --> 00:13:37.335
This is why someone, billionaires, have a whole bunch of stock,
174
00:13:38.015 --> 00:14:01.213
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 i only take a hundred thousand dollar salary and i'm a ceo of 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
175
00:14:01.853 --> 00:14:03.373
You don't want to be paying a bunch of taxes.
176
00:14:03.954 --> 00:14:16.197
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.
177
00:14:16.477 --> 00:14:24.840
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.
178
00:14:25.887 --> 00:14:30.010
This is why you'll hear some people when they talk about growing the business, they don't really care about profits.
179
00:14:30.650 --> 00:14:38.255
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.
180
00:14:38.275 --> 00:14:43.019
They have real estate, they have other side businesses, they have plenty of stock portfolio with dividends coming their way.
181
00:14:43.279 --> 00:14:46.581
They're like, hey, this business, I'm not trying to take cash out of it.
182
00:14:46.841 --> 00:14:49.223
I'm not trying to make it really profitable.
183
00:14:49.623 --> 00:14:54.547
And for most people, 99% of business owners making a profitable business,
184
00:14:55.107 --> 00:15:03.479
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
185
00:15:04.365 --> 00:15:10.027
The next level is very much a matter of every dollar I take out of that business I'm getting taxed on.
186
00:15:10.368 --> 00:15:18.971
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?
187
00:15:19.111 --> 00:15:21.472
Do I just continue to market and advertise?
188
00:15:21.672 --> 00:15:27.075
Because if I can buy a customer for $50 and they're worth $5,000, what does that do the valuation of my business?
189
00:15:27.175 --> 00:15:27.655
Oh my goodness.
190
00:15:27.675 --> 00:15:28.015
I should keep
191
00:15:28.135 --> 00:15:29.296
buying a whole bunch more customers.
192
00:15:29.536 --> 00:15:33.158
Well, if I do that, I'm gonna go buy some trucks and equipment and hire more people and get a bigger shop space.
193
00:15:33.478 --> 00:15:40.043
And this growth, it's almost like you're kicking the can down the field by never actually realizing the profits from the business.
194
00:15:40.123 --> 00:15:42.764
But by not realizing the profits, you never pay taxes.
195
00:15:43.064 --> 00:15:51.510
And you build the enterprise value of the business to the point where you have a four, $5 million company that is worth a very good amount.
196
00:15:51.550 --> 00:15:54.392
And you could always, if needs be, pull the profit lever.
197
00:15:55.132 --> 00:16:00.918
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.
198
00:16:01.638 --> 00:16:05.462
And then they're going to raise prices to be able to cover the cost of that debt.
199
00:16:06.063 --> 00:16:10.888
And so if you can build the engine, because what most people don't have is the four or $5 million business.
200
00:16:11.388 --> 00:16:14.789
If you build that engine, you might not be super profitable, but you're growing every single year.
201
00:16:15.150 --> 00:16:26.414
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 to someone else and they can use the cash flow to be able to buy your business and put debt on the business.
202
00:16:26.434 --> 00:16:29.435
This is what, this is the whole playbook of private equity.
203
00:16:29.575 --> 00:16:35.298
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.
204
00:16:35.938 --> 00:17:00.958
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 way that when i put 50 grand into my business on the other end
205
00:17:01.598 --> 00:17:03.018
I'm going to get a whole bunch of customers.
206
00:17:03.258 --> 00:17:04.019
I'm going to get a truck.
207
00:17:04.319 --> 00:17:06.319
I'm going to be able to grow the enterprise value.
208
00:17:06.339 --> 00:17:09.680
My business by a hundred thousand, 200,000, $300,000 business.
209
00:17:10.260 --> 00:17:13.821
And that enterprise value doesn't get taxed.
210
00:17:14.021 --> 00:17:20.222
And I know for a lot of people, they like, oh yeah, sucks to be the person that is making 300, $400,000 in profit in their business.
211
00:17:20.542 --> 00:17:22.583
You also stinks is writing six figure checks.
212
00:17:23.083 --> 00:17:47.100
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 two five 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
213
00:17:47.640 --> 00:17:53.467
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.
214
00:17:53.708 --> 00:18:05.182
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.
1
00:00:00.211 --> 00:00:07.078
Today I'm going to talk about why in your home service business, you might actually not want to be optimizing for profitability.
2
00:00:07.499 --> 00:00:11.443
And you might actually want to be optimized for growth and enterprise value.
3
00:00:11.944 --> 00:00:12.885
But there's stages.
4
00:00:13.445 --> 00:00:17.630
And a lot of times people ask me how much money should I be taking out of my business?
5
00:00:18.110 --> 00:00:20.092
How much should I be investing back into my business?
6
00:00:20.833 --> 00:00:23.454
How much of a salary should I be taking from my business?
7
00:00:24.014 --> 00:00:40.038
I'm going to talk about the different stages from zero to two, three million dollars 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.
8
00:00:40.578 --> 00:00:43.638
So the first when you first started, it's all about survival.
9
00:00:43.998 --> 00:00:50.120
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.
10
00:00:50.860 --> 00:00:57.884
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.
11
00:00:57.904 --> 00:00:59.745
Because growth sucks cash.
12
00:00:59.785 --> 00:01:00.646
I talk about this all the time.
13
00:01:00.886 --> 00:01:02.947
You got to market and get the customer.
14
00:01:03.287 --> 00:01:04.128
You advertise.
15
00:01:04.308 --> 00:01:05.208
You have a website.
16
00:01:05.448 --> 00:01:08.070
You then got to get a truck and equipment to be able to get the work done.
17
00:01:08.230 --> 00:01:09.971
Then you got to go hire someone to do the work.
18
00:01:09.991 --> 00:01:11.312
So all of this takes money.
19
00:01:11.712 --> 00:01:13.353
And as you continue to grow revenue,
20
00:01:14.053 --> 00:01:43.060
to think that you're going to 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 big 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 going to need a shop space you're gonna need you can't no longer park at your in your garage of your neighborhood and the hos freaking
21
00:01:44.080 --> 00:01:45.421
So there's gonna be more overhead.
22
00:01:45.441 --> 00:01:46.782
Now you're gonna need someone to answer the phone.
23
00:01:47.102 --> 00:01:48.983
Now you're going to need someone to do sales.
24
00:01:49.003 --> 00:01:51.265
Like as you grow the business, there's more expenses.
25
00:01:51.665 --> 00:01:52.526
So growth sucks cash.
26
00:01:52.926 --> 00:01:57.809
But when you're first getting started, usually from zero to $500,000 in your revenue, you're just surviving.
27
00:01:58.070 --> 00:02:02.152
You're just trying to get more customers and put every dollar back into the business.
28
00:02:02.212 --> 00:02:07.676
And usually you don't actually really worry too much about like what your salary is because there's not a lot of profit.
29
00:02:07.916 --> 00:02:09.878
You don't really worry about taxes because,
30
00:02:10.518 --> 00:02:11.499
there's not a lot of profit.
31
00:02:12.119 --> 00:02:16.023
And you're not worried about being an S Corp or an LLC because you're not making a lot of profit.
32
00:02:16.583 --> 00:02:28.113
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.
33
00:02:28.413 --> 00:02:30.134
If you're in Canada, they just have corporations.
34
00:02:30.555 --> 00:02:37.581
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.
35
00:02:38.121 --> 00:02:40.043
And at this time, you start having a salary.
36
00:02:40.324 --> 00:02:43.428
So you've moved from survival to having a salary.
37
00:02:43.868 --> 00:02:44.329
Let's go.
38
00:02:44.669 --> 00:02:54.441
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.
39
00:02:55.503 --> 00:02:55.743
Great.
40
00:02:56.323 --> 00:03:18.573
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 US, it's called W-2 income, you're gonna get taxed higher on that money than if you were to just take distributions as an owner because you gotta pay for social security and all the other crazy government programs they convinced us that we have to pay.
41
00:03:19.233 --> 00:03:20.813
But if you take a W2, you're paying them.
42
00:03:21.374 --> 00:03:27.435
Now, you don't want that number to be so low that you start thinking, oh my goodness, my business is so profitable.
43
00:03:27.475 --> 00:03:30.436
I'm making $100,000 in profit and I'm taking a salary.
44
00:03:30.716 --> 00:03:33.797
But I look at their salary and they're making $1,000 a month salary.
45
00:03:34.037 --> 00:03:42.140
This next tier of business is the business can actually afford to pay me a salary as if I was rehiring my replacement that would run the business without me.
46
00:03:42.620 --> 00:03:44.302
So now I might have a million dollar business.
47
00:03:44.542 --> 00:03:46.303
I've been in business for five, six, seven years.
48
00:03:46.584 --> 00:03:47.604
I put it into profit mode.
49
00:03:47.644 --> 00:03:49.706
I'm raising prices and optimizing the business.
50
00:03:50.106 --> 00:03:51.788
I'm paying myself now a salary of $100,000.
51
00:03:52.068 --> 00:03:59.434
And after I pay myself a salary, there's still another 50, 60, $100,000 of profit left in the business.
52
00:03:59.975 --> 00:04:03.238
Now I can confidently say the business is profitable.
53
00:04:03.758 --> 00:04:10.161
Not just me putting more hours or me being underpaid, but the business is profitable if I was to replace myself as the owner.
54
00:04:10.481 --> 00:04:15.683
And I would say maybe 5 to 10% of business owners get to this level.
55
00:04:15.964 --> 00:04:23.187
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.
56
00:04:23.747 --> 00:04:31.891
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.
57
00:04:33.139 --> 00:04:33.580
Great win.
58
00:04:34.000 --> 00:04:34.420
You crushed it.
59
00:04:34.441 --> 00:04:35.822
You're literally already in the S tier.
60
00:04:36.283 --> 00:04:37.364
But what's the next step?
61
00:04:37.464 --> 00:04:43.891
And today I wanna talk about what's that next level for an entrepreneur or business owner once they've passed this phase.
62
00:04:44.192 --> 00:04:50.098
Where the business is profitable, it's kicking off cash beyond what the owner needs to survive personally.
63
00:04:50.319 --> 00:04:51.420
It's like, well, where did I put all this money?
64
00:04:52.621 --> 00:04:56.143
First thing I want you to do is max out your tax advantaged accounts.
65
00:04:56.723 --> 00:04:58.063
This is going to be your IRA.
66
00:04:58.384 --> 00:04:59.804
This is going to be your 401k.
67
00:05:00.405 --> 00:05:02.045
And you're like, I don't know how to set up this stuff up.
68
00:05:02.465 --> 00:05:06.007
Use AI, go talk to someone that knows how to set the stuff up.
69
00:05:06.287 --> 00:05:15.351
If you have a payroll processor like QuickBooks or Gusto or ADP, they will help you set up the 401k plan for your employees and for yourself.
70
00:05:15.431 --> 00:05:19.153
And you don't have to match the 401k right off the get for your team.
71
00:05:19.693 --> 00:05:23.215
You can just say, hey, we offer the program, and then you're able to participate in it as well.
72
00:05:23.615 --> 00:05:29.999
This allows you to be able to invest for retirement and be able to put money aside in a tax-advantaged way.
73
00:05:30.279 --> 00:05:40.045
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.
74
00:05:40.325 --> 00:05:44.368
And so what we start thinking about is how do we do things in a tax-efficient manner?
75
00:05:45.008 --> 00:05:47.049
One of the best ways to be able to...
76
00:05:48.190 --> 00:05:53.234
get benefit without paying a whole bunch of taxes is putting money into an IRA or a 401k.
77
00:05:53.514 --> 00:05:59.339
Now, I don't want to get into complications, but there is a traditional IRA and there is a Roth IRA.
78
00:05:59.839 --> 00:06:03.462
There is a traditional 401k and there is a Roth 401k.
79
00:06:03.903 --> 00:06:04.543
Here's the basics.
80
00:06:05.124 --> 00:06:08.767
Traditional means I put money in and I don't get taxed on it today.
81
00:06:09.407 --> 00:06:09.647
All right.
82
00:06:09.848 --> 00:06:18.358
So if I make $100,000, I put $10,000 into my 401k, I'm only going to get taxed on $90,000 when it comes to the tax man.
83
00:06:19.119 --> 00:06:24.946
That's a traditional 401k or traditional IRA, a Roth 401k or a Roth 401k.
84
00:06:26.027 --> 00:06:45.623
IRA is I'm going to pay tax today on the hundred grand 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
85
00:06:46.123 --> 00:06:47.904
401k or Roth IRA.
86
00:06:47.964 --> 00:06:56.089
And if you're like, well, I can't do the Roth 401k because now we're making two or $300,000 and I can no longer participate because of the requirements.
87
00:06:56.129 --> 00:07:03.073
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.
88
00:07:03.693 --> 00:07:05.876
Again, don't get worried about the details here.
89
00:07:06.337 --> 00:07:17.953
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.
90
00:07:18.473 --> 00:07:19.375
So that's like the next stage.
91
00:07:19.655 --> 00:07:20.616
Okay, what do we do after that?
92
00:07:21.177 --> 00:07:23.799
Because I know that down the road, I want to start a second location.
93
00:07:23.919 --> 00:07:25.981
I know that down the road, I want to buy another business.
94
00:07:26.061 --> 00:07:30.345
I know that down the road, I want to start expand into this new service area.
95
00:07:30.445 --> 00:07:30.846
Okay, great.
96
00:07:31.266 --> 00:07:32.807
But what do I do with the cash in the meantime?
97
00:07:33.428 --> 00:07:37.491
This is where I believe putting the money into an index fund is very valuable.
98
00:07:37.972 --> 00:07:41.795
Now, personally, I invest into a mix of different index funds.
99
00:07:42.095 --> 00:07:43.397
When I say index funds, think.
100
00:07:43.977 --> 00:07:45.598
a bundle of a whole bunch of stocks.
101
00:07:45.898 --> 00:07:49.100
So instead of being like, I'm going to go buy Apple, I'm going to go buy Nvidia.
102
00:07:49.320 --> 00:07:50.321
I'm going to go buy Google.
103
00:07:50.601 --> 00:07:55.384
Instead of doing that, I'm just going to buy an index fund that has hundreds or thousands of stocks inside of it.
104
00:07:55.845 --> 00:07:58.006
So it's not going to go up and down like crazy.
105
00:07:58.026 --> 00:08:00.187
It's not going to have a bad report and drop 20%.
106
00:08:00.688 --> 00:08:08.873
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.
107
00:08:09.233 --> 00:08:11.675
So I might put it inside of either a,
108
00:08:12.355 --> 00:08:13.636
bonds, i.e.
109
00:08:14.236 --> 00:08:24.343
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.
110
00:08:24.664 --> 00:08:27.045
The S&P 500 is a good example of an index.
111
00:08:27.586 --> 00:08:30.608
And you can buy these on Robinhood, Fidelity.
112
00:08:30.788 --> 00:08:33.410
There's a whole bunch of different apps when you can just put money in there.
113
00:08:33.950 --> 00:08:57.735
and you can move from your personal checking account when you have enough money put it in the 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 three four five percent a year but at least it's not getting ate away by inflation all right
114
00:08:58.235 --> 00:09:07.085
The reason I believe in this is it keeps you patient when it feels like you want to do something in three or four years and you're like, man, I don't wanna put money in a savings account.
115
00:09:07.165 --> 00:09:08.687
I'm gonna put it back into the business.
116
00:09:08.787 --> 00:09:10.609
And all of a sudden you start buying equipment you don't really need.
117
00:09:11.391 --> 00:09:18.733
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.
118
00:09:19.453 --> 00:09:25.854
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.
119
00:09:26.354 --> 00:09:33.816
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.
120
00:09:34.336 --> 00:09:38.777
And in my opinion, the great way to use an index fund or even buying bonds
121
00:09:42.239 --> 00:09:52.528
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 gonna be there
122
00:09:53.632 --> 00:09:57.613
But in the back of your mind, you know that inflation is eating away 3%, 4%, 5% a year at that.
123
00:09:57.733 --> 00:10:00.734
And that's not good for like who wants to lose 3% or 4% or 5%.
124
00:10:01.514 --> 00:10:03.655
And you feel like, oh my gosh, I got to invest it somewhere.
125
00:10:03.995 --> 00:10:07.376
And that leads to trying to hurry things up and making bad decisions.
126
00:10:07.856 --> 00:10:09.157
Or buying stuff you don't need.
127
00:10:09.417 --> 00:10:10.877
Or hiring people you don't really need to have.
128
00:10:11.097 --> 00:10:12.418
But you're just like trying to spend the money.
129
00:10:13.058 --> 00:10:24.744
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 one, two, three years and build this war chest of cash.
130
00:10:25.224 --> 00:10:32.607
Because if you're making extra 50, a hundred thousand dollars of profit outside of your salary that you don't really need, you want to invest it, but it's like 50 grand.
131
00:10:32.627 --> 00:10:34.708
I'm not going to like go buy a bunch of real estate, 50 grand.
132
00:10:34.728 --> 00:10:36.809
Like I'm not going to go like start a new business.
133
00:10:36.830 --> 00:10:38.610
I'm not going to start a new location with 50 grand.
134
00:10:39.111 --> 00:10:39.451
Okay.
135
00:10:40.011 --> 00:10:42.752
How do I make sure that that continues to grow in value?
136
00:10:42.892 --> 00:10:50.416
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.
137
00:10:50.796 --> 00:10:54.618
And that's what I see people do a lot of times when they start putting money aside because of inflation.
138
00:10:54.898 --> 00:10:56.499
They're like, I gotta spend the money, I gotta invest it somewhere.
139
00:10:56.539 --> 00:11:02.702
And you start doing dumb stuff or never creating a chest, a war chest of cash that they can deploy down the road.
140
00:11:03.262 --> 00:11:06.725
And so that's the next level is we are now starting to invest inside index funds.
141
00:11:07.005 --> 00:11:16.113
We're starting to invest in potentially some treasury bonds to be able to make some money while we're staying patient for two to five years before the next big swing.
142
00:11:17.073 --> 00:11:17.314
All right.
143
00:11:18.227 --> 00:11:20.228
That means that in two to five years, you're probably gonna deploy it.
144
00:11:20.328 --> 00:11:25.149
You're probably gonna use it in your business because you can still send an index fund, make eight to 10%.
145
00:11:25.449 --> 00:11:29.130
But if I'm patient and I'm willing to wait two to five years, I'm putting money aside.
146
00:11:29.230 --> 00:11:31.911
It's slowly growing inside of a stock portfolio.
147
00:11:32.051 --> 00:11:32.371
Great.
148
00:11:32.751 --> 00:11:34.932
But then eventually I'm going to make a big swing.
149
00:11:35.012 --> 00:11:35.732
I'm gonna start another business.
150
00:11:35.752 --> 00:11:36.873
I'm gonna buy out my competitor.
151
00:11:36.953 --> 00:11:37.813
I'm gonna start another location.
152
00:11:37.833 --> 00:11:38.853
I'm gonna invest into real estate.
153
00:11:39.133 --> 00:11:41.134
And now I have the cash to do so.
154
00:11:41.794 --> 00:11:44.175
But all of this has been said to say this,
155
00:11:45.898 --> 00:11:48.323
When you're first getting started, you're thinking about survival.
156
00:11:50.087 --> 00:11:53.755
Then as the business grows, you start thinking about how much money can I take out of the business?
157
00:11:54.517 --> 00:11:55.038
Your salary.
158
00:11:56.350 --> 00:12:01.691
As you move into the next phase, you have to start thinking about how do I actually invest this money tax efficiently?
159
00:12:02.372 --> 00:12:12.875
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.
160
00:12:13.215 --> 00:12:19.296
It's where seven figure entrepreneurs in the home service industry get the skills and leadership required to get a 10 million plus.
161
00:12:19.776 --> 00:12:24.818
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,
162
00:12:25.698 --> 00:12:26.638
I highly recommend it.
163
00:12:27.119 --> 00:12:36.382
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.
164
00:12:37.023 --> 00:12:41.364
And so if that's a venture to you, click the link down in the description and I'd love to see you inside home service boardroom.
165
00:12:41.484 --> 00:12:42.405
All right, back to the video.
166
00:12:42.705 --> 00:12:54.910
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.
167
00:12:56.007 --> 00:12:58.069
This is what the rich people know.
168
00:12:59.611 --> 00:13:03.034
I don't really need income, I need enterprise value.
169
00:13:03.975 --> 00:13:04.576
Let me explain.
170
00:13:05.376 --> 00:13:16.227
If I make an extra $50,000 in salary and I increase my salary for my business, out of that $50,000, I'm probably paying 10 to $15,000 in taxes out of the 50.
171
00:13:17.048 --> 00:13:17.949
Not super efficient.
172
00:13:19.170 --> 00:13:33.074
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.
173
00:13:33.494 --> 00:13:37.335
This is why someone, billionaires, have a whole bunch of stock,
174
00:13:38.015 --> 00:14:01.213
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 i only take a hundred thousand dollar salary and i'm a ceo of 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
175
00:14:01.853 --> 00:14:03.373
You don't want to be paying a bunch of taxes.
176
00:14:03.954 --> 00:14:16.197
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.
177
00:14:16.477 --> 00:14:24.840
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.
178
00:14:25.887 --> 00:14:30.010
This is why you'll hear some people when they talk about growing the business, they don't really care about profits.
179
00:14:30.650 --> 00:14:38.255
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.
180
00:14:38.275 --> 00:14:43.019
They have real estate, they have other side businesses, they have plenty of stock portfolio with dividends coming their way.
181
00:14:43.279 --> 00:14:46.581
They're like, hey, this business, I'm not trying to take cash out of it.
182
00:14:46.841 --> 00:14:49.223
I'm not trying to make it really profitable.
183
00:14:49.623 --> 00:14:54.547
And for most people, 99% of business owners making a profitable business,
184
00:14:55.107 --> 00:15:03.479
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
185
00:15:04.365 --> 00:15:10.027
The next level is very much a matter of every dollar I take out of that business I'm getting taxed on.
186
00:15:10.368 --> 00:15:18.971
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?
187
00:15:19.111 --> 00:15:21.472
Do I just continue to market and advertise?
188
00:15:21.672 --> 00:15:27.075
Because if I can buy a customer for $50 and they're worth $5,000, what does that do the valuation of my business?
189
00:15:27.175 --> 00:15:27.655
Oh my goodness.
190
00:15:27.675 --> 00:15:28.015
I should keep
191
00:15:28.135 --> 00:15:29.296
buying a whole bunch more customers.
192
00:15:29.536 --> 00:15:33.158
Well, if I do that, I'm gonna go buy some trucks and equipment and hire more people and get a bigger shop space.
193
00:15:33.478 --> 00:15:40.043
And this growth, it's almost like you're kicking the can down the field by never actually realizing the profits from the business.
194
00:15:40.123 --> 00:15:42.764
But by not realizing the profits, you never pay taxes.
195
00:15:43.064 --> 00:15:51.510
And you build the enterprise value of the business to the point where you have a four, $5 million company that is worth a very good amount.
196
00:15:51.550 --> 00:15:54.392
And you could always, if needs be, pull the profit lever.
197
00:15:55.132 --> 00:16:00.918
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.
198
00:16:01.638 --> 00:16:05.462
And then they're going to raise prices to be able to cover the cost of that debt.
199
00:16:06.063 --> 00:16:10.888
And so if you can build the engine, because what most people don't have is the four or $5 million business.
200
00:16:11.388 --> 00:16:14.789
If you build that engine, you might not be super profitable, but you're growing every single year.
201
00:16:15.150 --> 00:16:26.414
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 to someone else and they can use the cash flow to be able to buy your business and put debt on the business.
202
00:16:26.434 --> 00:16:29.435
This is what, this is the whole playbook of private equity.
203
00:16:29.575 --> 00:16:35.298
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.
204
00:16:35.938 --> 00:17:00.958
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 way that when i put 50 grand into my business on the other end
205
00:17:01.598 --> 00:17:03.018
I'm going to get a whole bunch of customers.
206
00:17:03.258 --> 00:17:04.019
I'm going to get a truck.
207
00:17:04.319 --> 00:17:06.319
I'm going to be able to grow the enterprise value.
208
00:17:06.339 --> 00:17:09.680
My business by a hundred thousand, 200,000, $300,000 business.
209
00:17:10.260 --> 00:17:13.821
And that enterprise value doesn't get taxed.
210
00:17:14.021 --> 00:17:20.222
And I know for a lot of people, they like, oh yeah, sucks to be the person that is making 300, $400,000 in profit in their business.
211
00:17:20.542 --> 00:17:22.583
You also stinks is writing six figure checks.
212
00:17:23.083 --> 00:17:47.100
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 two five 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
213
00:17:47.640 --> 00:17:53.467
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.
214
00:17:53.708 --> 00:18:05.182
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.
