I Compared Painting Businesses at 4 Stages (When Growth Pays Off)

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Are you profitable?
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Is your marketing profitable?
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Should I put more into marketing?
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Should I put less?
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Sometimes you have to get an outside perspective like a CPA.
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Getting an accountant who can do some financial planning analysis with you.
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Actually, I know a firm that does this.
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It's a profitable painter CPA.
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If you've got to be a few years, yeah.
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Wish I knew one.
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Welcome to the Profitable Painter Podcast.
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In this podcast, we help painting business owners know their numbers and what they mean and say big in tax.
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Today I'm here with Cody Hall, business development representative of Profitable Painter CPA.
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He's grown and scaled a few businesses.
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And uh we're here today to talk about the different stages of your painting business.
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So from startup all the way to sellable asset, those different stages, and what should you be doing from a financial perspective at each of these stages?
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Yeah.
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And I think that from your perspective, you're gonna really nail home the finance and the numbers side of thing.
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But what I'm here for is to talk about what do those experiences feel like?
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Because numbers don't always match what we are experiencing as entrepreneurs.
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So the emotions, you're a very emotional guy.
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Yeah, I never thought I would be the emotional expertise on this podcast, but uh, I think in this room, I'm thinking I'm gonna carry that torch for us.
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Yeah.
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No, I think you I think you wear it well.
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Hmm.
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All right.
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So let's let's get into it.
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So what first of all, what are the different stages?
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First of all, we got startup, right?
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So starting your painting business, we put that between$0 and$350,000.
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And so at this point, you're wearing all the different hats, right?
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Then you get into$350,000 to$1 million.
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We call this the build stage.
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This is where you're you have painters on the job site, but then you start hiring other positions.
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So your admin, your production manager, and taxes start being more of a thing.
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You got to pay attention to financials start being more of a thing.
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Then you get into the one to three million dollar range, which is the swamp, as coined by Alex Schermozzi.
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So the swamp is where we have some data to share with you on what this looks like, but it's named the swamp for a reason.
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Like this is where folks, their profitability goes down, they start making less money, things get more complex, you have to make some big hires during the stage, and so it gets a little rocky, and you got to trudge through the swamp to get to the last stage, which is sellable assets.
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So this is where you're at$3 million plus, and you're building an asset for yourself that you can potentially sell or keep and make money off of.
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But this is where you got to start thinking about diversifying your wealth, think more about taxes, tax planning, that sort of thing.
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So those are the four different stages, and uh we'll jump into the first stage.
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Yeah, which I I have to say is the most exciting.
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Uh a startup is just, man, when you start a business, you start making money, it is just euphoric, right?
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You the possibilities are endless.
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Uh, and you say this in several of your your speeches, like you're basically doubling, right, every year in these particular phases.
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So um oftentimes when we hit challenges in these phases, it can be kind of like our first punch.
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Oh, yeah.
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There's punches at every single stage, but definitely uh for from from my experience, the first year was so rough.
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Like it was I was uh I was a defeated man.
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I was only 18 years old when I started my painting business.
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And I had come my dad ran a painting business when I was a kid, and so I had been around it for years, and so I was like, oh, this is gonna be easy.
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I've I've painted for years, I've been on the job sites, I know what I know what's up, but man, that first year was rough.
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I mean, I did every mistake you could possibly make.
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Uh I remember one time I hired I had I had one crew going and I was moving to two crews.
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So this is like the first year I needed a second crew to start because I had promised, you know, some customers that their job would be started or whatever.
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So I was like, I had to I had to hire a crew.
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I hired a crew, they're working out fine, but then they ended up quitting for some reason.
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And then I I had already scheduled a customer, so I needed to hire another crew as quick as possible.
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And I did basically the first person that applied, I hired them right on the spot.
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They could breathe and they had a pulse.
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And I didn't test them at all.
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I just asked, You ever painted before?
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Yeah, yeah, of course, yeah.
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And so I get all the materials and everything.
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I take them over to the job site.
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I say, like, hey, uh, so this is the house we got to paint.
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Here's this is so bad.
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Here's the paint.
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Um, I gotta go to the other job site and get them started.
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So just go ahead and like start painting you know, the this color.
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So I leave and I go to the other job site and I get them started, come back, and when I it was like uh a crime scene, it was just paint is everywhere.
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They're resting the rollers on the brick, like that's how they're like resting their it's like dripping down the brick, not painted brick.
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This is like pristine bricking.
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Yeah, this is like and there's paint everywhere.
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There's they had spilled paint on the roof.
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There, it was just like every possible nightmare situation in like the hour I was gone had happened.
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And uh those are those are the good experiences, and not only that, you made that mistake and you still had to pay the guy.
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Well, I obviously I fired them immediately.
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I don't I don't remember painting them.
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I'm pretty sure I just probably not legal.
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This is not legal advice, but but uh yeah, that was terrible.
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Anyway, so the yeah, the startup phase it can be can be exciting, but it's also you're you're experiencing everything for the first time, so you're hitting all these roadblocks.
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What I think is really exciting about it is on the simplest way is you're keeping most of the money you make.
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And I think that that is a little bit of a lie, right?
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I think the startup phase gets us into a little bit of a lie because you're like, wow, if I made a hundred bucks and I'm the only employee, yeah, I made a hundred bucks.
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Yeah.
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Yeah, you're the margins on this phase, if you're doing wearing all the hats, it really should be like 80%.
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Because you're if you're painting, you're doing the sales, you're doing production management, doing the admin, you really should be taking home like 75, 75% or so.
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So yeah, you're making a high percentage of the the net profit is going to you.
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The uh the biggest things that you gotta dial in though for this phase are one production rate estimating.
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That's a big one.
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Realizing like you have to have a structured way to estimating because right now in this phase you might be doing all the things so you know like how long it's gonna take you, but you gotta get in the habit of estimating it for someone else to to do it.
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And you might be a really good painter, but maybe the people you hire are not quite as good.
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So making sure you're using production rates, which allocate for how much time it's gonna take a average painter to paint a given surface.
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That way you're building in some buffer there and not just you know relying on you you yourself to be the superman and like painting everything super fast.
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So production rate estimating is key in this phase, so you get in the habit building that good habit so that you can start bringing on paint painters in the latter half of this phase.
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And then the other big thing is markup, marking up the the jobs, the direct cost of the job so that you're actually making money.
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And this is the thing I see startup painting businesses screw up a lot.
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You know, uh the typical advice is to shoot for a minimum of 50% gross profit if you're residential repaint.
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If you're doing GC work with a general contractor, you know, you can usually shoot for a little bit lower, maybe 35%, 40% gross profit.
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That can still work because you don't have any marketing spend.
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But residential repaint, typically 50% gross profit.
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So that basically means you need to double the cost of what it's gonna cost you.
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You'd multiply that by two to charge the customer twice of what it's gonna cost you to produce the work.
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So that's a that's a key thing, is dialing in that markup because it's not of a big of a deal in startup, but you're not gonna get out of the startup phase unless you're you're pricing correctly.
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Correct.
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And I think that's what we're talking about.
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We're talking about businesses that want to scale when we're discussing this ladder.
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It is very easy to make money as an individual sole proprietor, right?
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You don't have to deal with people, you don't have to deal with marketing and some of these challenges that we'll experience and chat about here in a moment.
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But oftentimes, and you said it, like pricing for someone else to do the job.
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When you said that, I was thinking exactly the next phase, that transition, like, okay, now it's getting ready to, I'm running a painting business that I'm myself not really painting in.
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Yeah.
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Yeah, Ski, the the whole if you, you know, and some people don't want to scale, they just want to have a profitable one-man show, that's fine.
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But if if you want to actually grow this beyond yourself, you do need to price so that you can bring other people on.
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And so a good starting point 50% gross profit if you're in residential repaint, or 40% if you're working with a GC.
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So pricing for for profitability, using production rate, estimating, making sure you're marking up those jobs correctly.
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And then on the tax side, making sure you're compliant.
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That's the focus there.
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You stay out of jail, right?
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You want to have some books, you want to file your tax return, nothing fancy, you don't need a CFO, right?
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At this point, you just you just need to make sure you stay out of jail, pay your taxes, that sort of thing.
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So uh just getting with a local CPA or something, or profitable paint.
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Actually, you know, have your profitable painter CPA actually works with painting businesses.
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So that would be perfect.
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Like we actually have a startup package called the painter startup accelerator that will help you, you know, stay compliant.
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But you just want to have some basic books, basic tax return, get that handled, nothing fancy.
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And uh then as a last note for the stage from a financial perspective, like what financial things you should be aware of is this the S-corp election.
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So once you start hitting$70,000 and bottom line that profit, that's when you should start considering the S-Corp election.
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Get with your uh professional on whether that's gonna make sense for your specific situation.
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But that's another financial piece there as we get out of the startup phase.
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Yeah, and I think the biggest thing that I'd hit on there is just the fact that you should consult somebody.
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All right.
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You know, there are way too many professionals in the industry, uh, and paint specific is well supported compared to the other in-home services, is there is someone you can ask, so you don't have to guess about the S-Corp.
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You don't have to guess about uh how much you should be making.
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So well said.
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All right.
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So the next phase is the build stage.
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So the build stage, we're looking at$350,000 to$1 million in revenue.
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And this is where you start.
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So at this point, you have crews, right?
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You have paint, you're you're off of the brush, you have crews that are helping you at this stage, but you're still wearing all the hats.
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You're still doing the admin work, you're still doing production management, you're still doing sales, still doing general management.
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So you're still wearing a lot of the hats.
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But this stage is where you start taking some of those hats off and putting them on other people.
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So the first one is usually after the painters themselves, you start looking for an admin to help you out with some administrative costs, specifically answering your phone.
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That's a really helpful thing.
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Get that phone out of your pocket, get it into someone else's hands, I can actually answer it because you're busy doing a whole bunch of other things.
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And that's a that's a a key here.
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So what you should what should you pay an admin person?
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I mean, depending on the skill level, you know, and and if you're outsourcing it or if you're paying them by the hour, it could range.
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But just like as a general rule, if you're looking at your profit and loss as a percentage of revenue, somewhere between two and four percent, depending if they're like full-time or part-time.
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But uh, that's just a rough rule of thumb there.
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And I think what most people get wrong in this phase is applying the same thing that made them successful in the startup phase to the growth phase.
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Because in the startup phase, we oftentimes think the cheapest labor is my labor.
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And it's true, right?
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In the growth phase, you really start having to start the idea of what does it cost for someone else to do this?
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And we're talking about two to four percent of revenue, like that's great.
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Because if it's less than that, you're getting a bargain.
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If it's more than that, consider your costs.
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But when we're getting other people to do things, right, that's when you start having to mine your pennies because now your labor actually costs cash flow.
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Yep.
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And that's why having a good foundation and startup phase, production rate estimating and marking up correctly is key to actually allow you to be be on solid ground going to the build stage.
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So hiring the admin, the other key hire in this phase is usually the production manager, which typically folks are looking to hire a production manager somewhere between 600k and 1 to 1.2 million.
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So usually it's made right towards the end of the stage, hiring your first potentially six-figure position, which is a production manager.
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And so getting that right is key.
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Um, making sure that you're finding the right person, which that's like the biggest thing, is making sure you find because this is the production manager role is they're gonna be interacting with your customer most of the time.
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Like you're you might sell the project, but you're gonna hand it off to them to actually make sure it gets done correctly and and have a great experience.
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So this is a huge role.
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So you really I think people underestimate how much interviewing and recruiting they need to do to get someone right for this role.
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You know, I I as someone who uh I'll be speaking this month at a conference on recruiting and hiring.
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Um, I think oftentimes I have two approaches to hiring.
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Either A, it's a role that has low impact, low risk, and I can fire immediately after doing my I do my week in the life, right?
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Look, I'm fired next.
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Very rare roles, right?
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Wouldn't apply to this.
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But then you have the roles that are like they're carrying the weight of the company on the shoulder.
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And you really have to do your due diligence, whether it's multiple interviews with you and other key stakeholders in the business, it's references, as well as something that I love that you do at the organization here is a day in the life, actually walking side by side with them to see what execution looks like.
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And there's a process to do this legally so that you aren't pulling a Daniel and leaving a guy that you hired yesterday at the job site, and so that you're not, you know, wasting time and money.
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Yeah.
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Yeah, day in life is great.
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You just pay them like a contractor for like a week or two, and just hey, this is what it's gonna look like day to day.
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They get to evaluate if it's a good fit for them, and then also you get to evaluate if it's a good fit for you.
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And so that for this role, definitely recommend doing that because uh getting the production manager hire wrong, which it usually is, you just expect like the first person you hire in this role is not gonna work out, but try to mitigate as much as possible.
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Uh but yeah, getting that as as well as you as good as you can.
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And then as far as the way you compensate, two-thirds base, one-third bonus is what I usually say.
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You usually you want to pay a uh production manager about four to seven percent of what they produce.
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And it's a big range because the admin might be doing a good portion of their job depending on what their roles and responsibilities are, and also your crew leads might be doing a portion of those roles and responsibility if you have strong crew leads.
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So, but roughly four to seven percent of what they produce is a good benchmark to start with.
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So admin hire, production manager hire, and then the other piece, financial move, is looking at tax planning.
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So, up until this point, you probably haven't made more than six figures, but you you are probably starting to make more than six figures.
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Once you you're doing revenue of 500K, 750, 1 million, you're probably entering into the uh six-figure club in terms of your take-home pay.
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And so this is a great opportunity to start thinking about taxes not just as something that happens to you, but something you can actually impact by getting with a professional to help you save money in taxes.
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So this could be the we already mentioned one strategy, which is the escort collection.
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But once you do that, there's plenty of other strategies you can start layering on top of that to save big and tax.
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And I think one thing that people often think is they have to go talk to somebody.
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But what I actually like most about the Profile Painter book is that you don't need to talk to a Daniel or anybody, and you can just go through here and read at your own pace.
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I'll be honest with you, most people who read this do the audio book, which I highly recommend because most of you guys are driving to some job site.
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But if you read this book, it'll give you free directions to understand is S-Corp right?
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Where are you in the tax world and when you should start thinking about different strategies?
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So that's the cool thing about your book.
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I think you did that inintentionally quite well.
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Yeah, you can get the audio book on audio audible, but uh you can get the hard copy, or not the hard copy, you can get the soft cover copy on my website for free.
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Just cover the shipping because it is helpful to have the actually a physical copy of this because I do cover a lot of like key ratios and numbers that you want to know.
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I keep it on my desk to be honest with you.
00:17:04.150 --> 00:17:05.590
Yeah, it's a good definition of the code.
00:17:05.830 --> 00:17:06.549
Brings a tear to my eye.
00:17:07.750 --> 00:17:09.029
It never gets open.
00:17:11.190 --> 00:17:11.750
Awesome.
00:17:11.910 --> 00:17:12.230
Okay.
00:17:12.789 --> 00:17:19.590
So admin hire, production, production manager hire, start thinking about tax planning.
00:17:19.750 --> 00:17:25.670
Also, during the build phase, is it's good to start getting some help analyzing your numbers.
00:17:25.910 --> 00:17:37.190
In the in the startup phase, as long as you're compliant with your book, you have a set of books, you have a tax return, you are producing jobs profitably by doing job costing, you're in good shape.
00:17:37.270 --> 00:17:40.870
You don't need anything fancy, you don't need fancy dashboards, you don't need a CFO.
00:17:41.510 --> 00:17:47.110
Once you get to the$350 to$1 million range, that's when you start to need some professional help.
00:17:47.190 --> 00:17:54.710
If you're not an accountant or not, you don't have a lot of experience with it to help you understand those numbers on a deeper level.
00:17:54.870 --> 00:17:58.870
Because usually at this point, folks are for, for example, hiring marketing firms.
00:17:59.030 --> 00:18:01.670
They're spending a lot of money on marketing if they're trying to grow quickly.
00:18:01.830 --> 00:18:07.590
And so having someone in your corner that can do some financial planning and analysis to help you understand your numbers.
00:18:07.670 --> 00:18:08.390
Are you profitable?
00:18:08.470 --> 00:18:09.750
Is your marketing profitable?
00:18:09.910 --> 00:18:11.910
Should I put more into marketing or should I put less?
00:18:12.070 --> 00:18:13.670
What which channel is working for me?
00:18:13.830 --> 00:18:19.270
Those sort of questions can, or how should I compensate my production managers or uh admin person?
00:18:19.430 --> 00:18:20.710
How should I structure things?
00:18:20.950 --> 00:18:23.350
You start getting a lot of these questions at this stage.
00:18:23.510 --> 00:18:31.590
So getting a an accountant who can do some financial planning analysis with you, which uh actually I know a firm that does this, it's a profitable painter CPA.
00:18:31.670 --> 00:18:32.550
If you're it over.
00:18:32.870 --> 00:18:33.110
Yeah.
00:18:33.190 --> 00:18:33.270
Yeah.
00:18:33.430 --> 00:18:42.230
It's one that's uh so you can actually work with us and we will work with you to help you understand your numbers and what they mean to make better decisions to get you to the next level.
00:18:42.550 --> 00:18:55.590
And you know, conceptually speaking, I think that what most people miss about the FPNA process, the financial paneling and analysis, is it's not just for someone who's a big organization, it's someone who wants to maximize their current state as well, right?
00:18:55.670 --> 00:19:04.950
Because regardless of your revenue size, there is a, as we've talked about so far, there's really profitable startups that are making a 80% of their overall revenue.
00:19:05.110 --> 00:19:05.270
Right?
00:19:05.430 --> 00:19:12.550
So maximizing where you are at in this particular ladder of companies can be useful in the FBA process for everybody.
00:19:12.710 --> 00:19:13.350
Yeah.
00:19:13.670 --> 00:19:18.390
All right, let's get into the next stage, which is the swap.
00:19:19.110 --> 00:19:20.710
One to three million in revenue.
00:19:20.870 --> 00:19:25.910
This was coined by Alex Ramosi, who's I'm a I'm a big Alex Ramosy fan.
00:19:25.990 --> 00:19:30.150
I've I've been fortunate enough to actually work with him one-on-one, uh, which was pretty cool.
00:19:30.310 --> 00:19:33.030
Got to go over to acquisition.com, spend the day with him.
00:19:33.110 --> 00:19:34.630
He's like a machine, this guy.
00:19:34.870 --> 00:19:44.150
He's like uh we we spent, it was me and eight other business owners in a room for eight hours straight.
00:19:44.310 --> 00:19:57.270
And we had one break for 30 minutes where we we got lunch and and uh he literally didn't stop, like he was on the whiteboard, you know, doing plans and pitching ideas and stuff like that.
00:19:57.430 --> 00:19:59.510
He did not stop, he did not go to the bathroom.
00:19:59.670 --> 00:20:03.190
Uh the only time he drank or ate was during that 30-minute break.
00:20:03.430 --> 00:20:08.070
He didn't go to in the uh he went to the bathroom, he didn't go to the bathroom, leave the room for eight hours.
00:20:08.230 --> 00:20:09.190
Like it was just like me.
00:20:09.350 --> 00:20:11.110
I went to the bathroom like 10 times during that whole thing.
00:20:11.270 --> 00:20:15.110
You know, I've met people I've only met one other man like that, Rudy Reyes.
00:20:15.350 --> 00:20:17.510
If you ever watched the show Generation Kill, no.
00:20:17.670 --> 00:20:19.110
Oh well, I'm sorry, it was before your time.
00:20:19.350 --> 00:20:19.430
Yeah.
00:20:20.790 --> 00:20:21.750
No, you're that young.
00:20:21.910 --> 00:20:27.430
Uh and I used to do conferences with him uh in the military side of things, and I would say, I'm like, dude, do you ever eat?
00:20:27.590 --> 00:20:29.350
He's like, I run off qi energy.
00:20:29.670 --> 00:20:34.150
And I was like, I imagine that's how you're describing Alex, it's like a thousand miles per hour.
00:20:34.230 --> 00:20:35.830
But yeah, it was crazy, crazy to see.
00:20:35.910 --> 00:20:39.990
But anyway, he is uh yeah, he's super smart.
00:20:40.150 --> 00:20:44.070
Anyway, he calls this this stage one to three million in revenue, the swap.
00:20:44.470 --> 00:20:59.430
And I I I you know I wasn't sure what he meant by that when I first heard him talk about this, but when I started looking into the data, um if if we can actually put up the chart, Phil, uh, this is a really interesting chart.
00:20:59.590 --> 00:21:09.190
So I just took a sample size of data from our current clients to see what it looks like in terms of profitability by stage.
00:21:09.350 --> 00:21:17.990
So we have startup from zero to 350, then the next one is build, and then then the swamp is that third one, third grouping, and then the fourth grouping is sellable asset.
00:21:18.150 --> 00:21:28.710
So you'll notice that in the beginning, in the startup phase, your your net profit, your gross profit, and your discretionary, which is your total um earnings coming to you, it's the highest.
00:21:28.790 --> 00:21:30.550
And that's because you're doing everything, right?
00:21:30.630 --> 00:21:39.510
And so that makes sense that you are gonna be making as a percentage of revenue, you're gonna be making the most amount of money as a percentage, not as a dollar amount, but as a percentage of revenue.
00:21:39.750 --> 00:21:41.590
Then the next phase, it goes down slightly.
00:21:41.670 --> 00:21:49.590
This is because you bring on painters, you hire admin, production managers, so it goes down a bit on discretionary earnings.
00:21:49.750 --> 00:21:52.790
And then in the swamp phase, it goes down again.
00:21:52.950 --> 00:21:56.950
And this is because you're often bringing on a salesperson as well.
00:21:57.110 --> 00:22:03.350
And so this is the lowest phase in terms of profit overall profitability and money you're taking home as an owner.
00:22:03.510 --> 00:22:05.750
It actually goes up in the next stage sellable asset.
00:22:05.830 --> 00:22:16.070
But I just thought it was like a perfect illustration of how the swamp is named aptly because it it is basically the complexity in your business that goes up substantially.
00:22:16.230 --> 00:22:20.230
Then you have to bring on all these higher paying um roles to help you do.
00:22:20.790 --> 00:23:10.020
Do this, but not quite higher paying enough.
00:23:10.100 --> 00:23:16.180
Uh, you're still doing all the manager type roles and responsibilities there, but you're you're getting some help.
00:23:16.340 --> 00:23:24.340
Your efficiency goes down in terms of uh you're because you're dealing with all this complexity, you're still ironing out processes, you're growing.
00:23:24.500 --> 00:23:29.780
And so the swamp ends up being like kind of crappy when it comes to overall profitability.
00:23:30.340 --> 00:23:40.900
Yeah, and I and I think profitability on a percentage basis, and you know, to quote you earlier, you said that yes, your overall percentage revenue may be going down, but you could be making more money, yeah.
00:23:40.980 --> 00:23:41.140
Right.
00:23:41.300 --> 00:23:52.260
Because, you know, in my most recent business that I scaled, you know, I was making, you know, mid-six figures, and that was a lot more money than I've been making at the beginning of the swamp.
00:23:52.500 --> 00:23:57.300
But when you looked at it from a percentage basis, you're like, it is percentage-wise far less.
00:23:57.380 --> 00:23:59.300
And I think that's what we get wrong sometimes.
00:23:59.540 --> 00:24:01.220
We think scale is linear, yeah.
00:24:01.380 --> 00:24:01.540
Right.
00:24:01.620 --> 00:24:04.180
And it's like, well, it's just one for one, one for one, one for one, one for one.
00:24:04.260 --> 00:24:04.980
But that's not the case.
00:24:05.220 --> 00:24:05.380
Yeah.
00:24:05.620 --> 00:24:11.060
Hopefully you're making more as a dollar amount in the swamp, but it is it is a tough, uh, a tough stage.
00:24:11.220 --> 00:24:15.060
So, what from a financial perspective, what things you need to be aware of?
00:24:15.220 --> 00:24:17.700
One salesperson, this is usually when you're hiring a salesperson.
00:24:18.100 --> 00:24:21.220
Also, maybe even a sales manager towards the latter part of the stage.
00:24:21.540 --> 00:24:26.180
So, a salesperson, usually you want to be paying them around 8% of what they close.
00:24:26.420 --> 00:24:39.300
And then, as for a sales manager, usually paying them based off a gross profit, like as a cut of gross profit, basically, because you want to incentivize your salespeople to not discount and to sell profitable jobs.
00:24:40.020 --> 00:24:42.740
So that's a big, a big thing there for the swamp.
00:24:43.060 --> 00:24:54.180
Uh, the other piece is kind of a mindset thing where you know, when you start your business as residential repaint, usually 50% gross profit margin is what you hear, and you got to shoot for that, blah, blah, blah.
00:24:54.340 --> 00:24:55.060
Which is true.
00:24:55.220 --> 00:24:59.860
But then once you start growing, you never should stop trying to grow your gross profit.
00:25:00.020 --> 00:25:04.660
You should continue to improve gross profit through all stages.
00:25:04.820 --> 00:25:16.020
And it's most true in the swamp because of all these additional roles that you're hiring and you have at this point, and also the marketing, you're probably spending a huge amount of money money on marketing, especially if you're trying to grow aggressively.
00:25:16.340 --> 00:25:23.220
You need to increase the gross profit to leave room for this increase in overhead and to still have some profit left over.
00:25:23.620 --> 00:25:33.060
And, you know, just to speak from this, I know what it's like to fall into the fallacy that it's okay to take a couple hits, but one thing I learned at that time period, I'm like, well, my gross profit's gonna go down.
00:25:33.140 --> 00:25:33.540
That's natural.
00:25:33.700 --> 00:25:41.780
I kept telling myself that lie, but then I realized that things kept getting tighter and tighter and tighter because I was like, well, I'm just gonna make more revenue, if I just make more revenue, then it'll fix it.
00:25:41.860 --> 00:25:45.700
And it never fixed it because I thought I could sacrifice gross profit for growth.
00:25:46.020 --> 00:25:46.340
Yes.
00:25:46.420 --> 00:25:49.380
And that's where my favorite number comes in.
00:25:49.460 --> 00:25:51.940
And this number is really applicable to this stage.
00:25:52.020 --> 00:26:09.940
If you don't want to be making less money in this stage, you need to be aware of the gross profit to customer acquisition cost ratio, which by the way, I cover in depth in this book, Profitable Painter, which you can get for free at my website, profitable paintercpa.com/slash book.
00:26:10.100 --> 00:26:14.820
We're in the book cover the GP to CAC ratio, gross profit to customer acquisition cost ratio.
00:26:14.900 --> 00:26:18.420
And this is really the key to unlocking the profitability in your business.
00:26:18.500 --> 00:26:28.100
If you understand this ratio on a deep level, you will be able to confidently put money into your business to into marketing into sales.
00:26:28.260 --> 00:26:33.860
You will confidently put a dollar in and expect four, five, six dollars out in the form of gross profit.
00:26:34.100 --> 00:26:36.660
And that's what the GP to CAC ratio is all about.
00:26:37.620 --> 00:26:54.020
So at this point, getting getting a little bit more savvy from the financial perspective, so you understand what is your GP to CAC, not just overall, but by marketing channel, because you can get to using one channel like primarily, you can get to one million in revenue.
00:26:54.100 --> 00:27:01.220
Like if you're doing, you know, meta ads as your primary outbound channel, you can get to a million.
00:27:01.540 --> 00:27:09.300
Usually, once you're beyond uh a million, you usually have to go to multiple different channels to start continuing to grow the revenue.
00:27:09.540 --> 00:27:18.500
So maybe you're doing meta, but you're also doing pay per lead, or you're doing door-to-door, or maybe you're doing direct mail to people you don't know.
00:27:18.820 --> 00:27:26.340
Layering in those different channels can be super helpful to grow the revenue, but you got to pay attention to is this actually making me money?
00:27:26.420 --> 00:27:33.940
Or does one channel really suck and I need to improve it some way, uh, or change my sales process to accommodate it?
00:27:34.180 --> 00:27:35.540
Or do I just need to cut it?
00:27:35.620 --> 00:27:39.780
Which usually cutting it is not the not usually the answer, but you something has to change.
00:27:39.860 --> 00:27:43.140
And you don't know that it works until you look at your GP to CAC ratio by channel.
00:27:43.380 --> 00:27:43.700
Yeah.
00:27:43.860 --> 00:27:44.660
Well said.
00:27:44.980 --> 00:27:45.380
All right.
00:27:45.540 --> 00:27:48.420
So that is the swamp.
00:27:48.900 --> 00:27:58.820
Other financial consideration would be at this point, tax planning, still this even bigger issue with uh you're often paying a lot more in taxes.
00:27:58.900 --> 00:28:01.140
You're making more money in terms of dollar amount.
00:28:01.380 --> 00:28:04.820
So you have to keep this in mind in this stage as well.
00:28:05.060 --> 00:28:08.900
So with that, we'll move to the next stage, which is the sellable asset stage.
00:28:09.060 --> 00:28:10.740
And so at this point, my favorite.
00:28:10.900 --> 00:28:12.820
Yeah, this is a good, this is a good stage.
00:28:13.060 --> 00:28:14.820
I mean, not gonna lie.
00:28:15.140 --> 00:28:24.980
This is where you have a team under you, and you are potentially more at a position to to sell and actually make some money from the sale.
00:28:25.140 --> 00:28:33.620
Like people trying to sell their business below this level, they might get some some money for it, but it's not it's not equivalent to the amount of work you've put into it for sure.
00:28:33.780 --> 00:28:46.100
Like uh, because and there's often really bad terms, like you have to seller financing, you have to stay on board for six months to two years, you know, and there's certain earnouts and all this crazy stuff.
00:28:46.260 --> 00:28:52.660
So you're it's really like you just sold your equity, but now you you have a job of working for somebody else in your own business, which is not really that fun.
00:28:52.900 --> 00:28:59.220
So, but at this stage, sellable asset stage, you can actually sell it, get money down, cash down, and you walk away.
00:28:59.380 --> 00:29:04.180
But there's one big thing you got to get rid of to be able to do that, which is key man risk.
00:29:04.340 --> 00:29:15.140
So getting yourself out of the business, performing some of those primary functions, getting some managers in place, because you're probably still doing some of the managing at$3 million in revenue.
00:29:15.220 --> 00:29:25.860
So getting a sales, sales manager in place, getting someone to manage some marketing, getting somebody to manage the production overall, like the project managers managing those folks.
00:29:26.100 --> 00:29:32.740
So getting those different managers in place so that you can leave the business for a month and it's not gonna burn down.
00:29:32.900 --> 00:29:42.260
The rule the the litmus test is if you can leave your business for a month and it still grows without you, you're probably you've probably eliminated key man risk.
00:29:42.580 --> 00:29:57.460
So when we look to when we're doing business valuations at Profitable Painter CPA, which we do for a lot of our painting businesses, the key man risk reduces EBITDA, the EBITDA multiple by three points, which is the biggest risk uh detractor.
00:29:57.940 --> 00:30:03.620
I feel like I've done this phase out of all the phases, I've done this one the worst every time, right?
00:30:03.780 --> 00:30:06.660
I've had the longest, I've had to stay on the longest afterwards.
00:30:06.740 --> 00:30:08.420
Yeah, I've had key man risks.
00:30:08.500 --> 00:30:10.340
So I feel like this stage just costs me money.
00:30:10.580 --> 00:30:14.020
Yeah, it's it can be rough to get get yourself out of the business.
00:30:14.100 --> 00:30:21.620
Like, but once once you do, then you truly have a sellable asset is where you can sell, get cashed out, and walk away.
00:30:21.860 --> 00:30:29.540
So that's a big, a big uh thing you can do at this stage to set yourself up for success, regard regardless of whether you want to sell or not.
00:30:29.620 --> 00:30:42.500
Sometimes people don't want to sell, maybe they just want to pass on to their to their family, their kids, or they just want to keep it and just print money, you know, and have other people, you know, work in the business while you sip corona on the on the beach, whatever you want to do.
00:30:43.060 --> 00:30:43.540
All right.
00:30:43.700 --> 00:31:02.180
So getting rid of key man risk, uh to improve the profitability of the business, know and actually knowing your business value value is also super important at this stage because you know, not just because you want to sell, but also knowing the business value, then you know, okay, what can I do to actually improve the value of the business?
00:31:02.340 --> 00:31:06.740
Because a business that is more valuable to someone else is also more valuable to you.
00:31:07.060 --> 00:31:12.980
So knowing what the business is worth, but also what levers can you pull to increase the business value.
00:31:13.220 --> 00:31:13.460
Yeah.
00:31:13.540 --> 00:31:18.100
And I think sometimes it's valuable to understand that it doesn't have any value outside of you.
00:31:18.340 --> 00:31:20.580
I think that uh that's a sobering thought process.
00:31:20.740 --> 00:31:30.340
And I believe that when you realize what's I mean, if something's your entire life and you realize that it doesn't have a lot of value like you expect it to have, yeah, that will motivate your behaviors.
00:31:30.580 --> 00:31:30.820
Right.
00:31:30.980 --> 00:31:37.700
And a lot of times it is the key man risk that kind of prevents you from really having a very valuable business, which is why we talked about it first.
00:31:38.100 --> 00:31:42.500
But it's a completely solvable problem once you know, okay, I have key man risk, here are the things I do.
00:31:42.580 --> 00:31:47.220
I need to hire for these roles, and you can it takes some time and work, but you can you can make it happen.
00:31:48.100 --> 00:31:57.700
So the other big financial thing to consider at this stage is you your net worth is likely all tied up in your business at this point.
00:31:57.860 --> 00:32:08.020
So you might be worth millions of dollars on paper, but if you look at your bank account or your investments outside of your business, you have close to nothing.
00:32:08.180 --> 00:32:09.780
And so that's a very common thing.
00:32:09.940 --> 00:32:16.660
You've spent years, maybe decades building this business, but all the net worth is tied up in the business, which is fine.
00:32:16.740 --> 00:32:22.420
Uh, like Warren Buffett says, you need to put all your eggs in one basket and watch that basket very closely.
00:32:22.580 --> 00:32:26.180
So that is completely good to do to build wealth.
00:32:26.340 --> 00:32:29.780
But then once you have the wealth, you need to diversify it.
00:32:29.940 --> 00:32:36.900
Because at that point, you'll all your wealth is concentrated in one business, in one geographic area, in one industry.
00:32:37.140 --> 00:32:38.580
That's a lot of concentrated risk.
00:32:38.660 --> 00:32:47.860
So we need to start getting some of that wealth out of the business and putting it in different places so that you know if something bad happens, we are we are diversified.
00:32:48.180 --> 00:32:48.420
Yeah.
00:32:48.580 --> 00:32:50.980
I mean, as I always say, cash doesn't burn.
00:32:51.140 --> 00:32:52.580
And so, but paper does.
00:32:52.740 --> 00:33:05.060
And so I I I joke when people call themselves millionaires just because I think sometimes we have to soberly understand like it's great that your business is worth a lot, but you really once it gets to the phase where you're like, okay, it's worth something, right?
00:33:05.140 --> 00:33:07.060
That diversification is very important.
00:33:07.300 --> 00:33:13.620
And I found, like I said earlier in another podcast, I think it's uh it's a challenge for you to because you become the identity of your business.
00:33:13.860 --> 00:33:21.220
And so sometimes you have to get an outside perspective, like a CPA, which I knew one, um, that could be like, hey, you wake up, great job, good build.
00:33:21.380 --> 00:33:23.220
Let's figure out what real estate looks like for you.
00:33:23.380 --> 00:33:24.900
And you can leverage it for taxes.
00:33:25.060 --> 00:33:42.100
So yeah, sort of diversify putting your your money in different places and a lot of tax strategies you can do with real estate, with putting money into the stock market, a lot of different tax plays to really start leveraging those, you know, uh rich people tax strategies at this point.
00:33:42.500 --> 00:33:52.100
The last financial consideration at this stage, there's many, but a big one, is kind of thinking about when you when you pass away.
00:33:52.260 --> 00:34:10.579
Like what is what is gonna happen in the business, what is gonna happen to your your your financial assets, kind of start thinking about that because at this point you have a lot of wealth, and we want to protect that and make sure it gets passed on to your family in a in a straightforward way that's not gonna cause a bunch of chaos when you pass away.
00:34:10.820 --> 00:34:15.380
And uh we were just working with somebody on this recently.
00:34:15.619 --> 00:34:25.619
He's doing uh almost five million this year, and he has a family, kids, uh a spouse, but he doesn't have any kind of estate planning.
00:34:25.940 --> 00:34:27.700
He doesn't have a revocable living trust.
00:34:27.780 --> 00:34:30.019
I think he has a will, but that's about it.
00:34:30.180 --> 00:34:38.099
And so a will is great, great first step, but it's not enough, especially if you're a multi-millionaire in terms of net worth.
00:34:38.260 --> 00:34:42.099
You gotta have a revocable living trust, which it sounds expensive.
00:34:42.180 --> 00:34:44.420
Like people think, oh, that's just for like super rich people.
00:34:44.660 --> 00:34:48.099
A revocable living trust, you can get set up with a lawyer for like under$500.
00:34:48.420 --> 00:34:51.860
It's not like it's not gonna kill you, um, especially at this level.
00:34:52.019 --> 00:35:01.700
So revocable living trust basically what it allows you to do is to have your assets owned by the revocable living trust instead of you directly.
00:35:01.860 --> 00:35:18.580
And so when you pass away, those assets will go to your family members and loved ones per the instructions in the trust, and it bypasses probate court, which is a really annoying process that your family has to go through if you don't have a uh a trust set up.
00:35:18.820 --> 00:35:23.220
If you if you have a will set up, you still have to go through this probate process, which is super annoying.
00:35:23.300 --> 00:35:24.660
So definitely want to avoid that.
00:35:24.820 --> 00:35:42.500
Have a revocable living trust to have a plan for how your assets are gonna go to your loved ones, and then it also has some side benefits uh as a having that revocable living trust is that it provides a layer of privacy between you and what you own.
00:35:42.740 --> 00:35:46.740
So we were just talking about this uh earlier.
00:35:47.140 --> 00:35:54.340
You know, the United States is very litigious, and if you're gonna hit any level of success, you gotta be prepared to be sued.
00:35:54.980 --> 00:35:58.580
And getting sued doesn't start in the courtroom.
00:35:58.660 --> 00:36:01.220
The the place it starts is on Google.
00:36:01.540 --> 00:36:12.019
Someone looks you up, looks at your assets, and so in order to protect against that, you need to put your assets in something that is not as traceable as your name.
00:36:12.180 --> 00:36:14.980
Like you, Daniel Honan owns this, right?
00:36:15.140 --> 00:36:25.140
You want to put some innocuous trust as the owner of it, and it's harder to tie it back to you, which will make you more resilient against being sued.
00:36:25.460 --> 00:36:28.100
And people will go a great distance to get information.
00:36:28.180 --> 00:36:34.100
I've had people message through uh our combined Airbnb app asking who owns properties.
00:36:34.260 --> 00:36:38.019
I've had people call restaurants and ask for information on the owner.
00:36:38.180 --> 00:36:40.500
Like they tr people are it's an active effort.
00:36:40.660 --> 00:36:42.019
So you have to be careful.
00:36:42.340 --> 00:36:45.860
Well, in my defense, you know, I that dinner we had there was terrible.
00:36:46.019 --> 00:36:49.380
So I was pretty pissed about to my Google reviews.
00:36:51.860 --> 00:36:52.820
Uh okay.
00:36:53.060 --> 00:36:53.300
Cool.
00:36:53.380 --> 00:37:00.580
Well, that those are the four stages startup, the the build stage, the swamp, and sellable asset.
00:37:00.820 --> 00:37:08.740
And those are some of the big financial decisions and pieces at each one of those stages that we see working with hundreds of painting businesses at Profitable Painter CPA.
00:37:09.220 --> 00:37:12.019
And with that, we will see you next time.