[00:00:00.000] - Chris
Wow. How many of you have listened to the Head, Heart, and Boots podcast? I can't tell you that reaction, how much that means to us. Welcome back to the Head, Heart, and Boots podcast. I'm Chris.
[00:00:11.200] - Brandon
And I'm Brandon. Join us as we wrestle with what it takes to transform ourselves and the businesses we lead. This new camera angle makes my arms look smaller than yours.
[00:00:20.920] - Chris
I'm noticing that and I really appreciate it. I thought you did that on purpose.
[00:00:24.020] - Brandon
No, I don't. I didn't, and I am not happy with it. Well, my friend, welcome to the show again, dude. We've been looking forward to getting to some financial chat with you yet again. We appreciate you taking the time to lend it to us, man. So thanks again.
[00:00:38.480] - Jim
Hey, man, the fact that I'm brought back to this environment to talk about maybe the most boring thing in business, I'm honored.
[00:00:47.200] - Brandon
It's funny, man, that you say that. I think for a lot of us, I think the entire money scape is just very... It can be super intimidating. But man, I got to tell you, the last I don't know, two or three years, probably more than ever, I've got this weird nerdism that's kicked in in terms of trying to gain more understanding on what in the heck the numbers are telling us and what we can leverage those numbers to do. It's weird. I think I've actually turned a corner where what it was a little bit of gritting my teeth and knowing just enough to keep me out of a good bar fight is starting to turn into a little bit of the thrill of the hunt. I I don't know. I've probably caught some weird sickness that you can explain away, but I don't know. I think I'm turning a corner. Yeah.
[00:01:37.640] - Jim
Well, I think what you're realizing is I was being slightly facetious that this isn't boring, man. When you get into this side of the business, this is actually, in my opinion, I'm fully biased. This is fun. I think there's just this weird perception that this is like counting debits and credits and bookkeeping, and that's just not true.
[00:01:56.160] - Chris
I have a theory about this, why most owners don't want to talk about finances, Because in the area of finance, it feels like there's always this high level of deferred gratification. The thing you're talking about is rarely going to feel like it's yielding you anything today, tomorrow, this week. It's like Any benefits you might be driving from this strategy or making this change or that feels like it's so far out there where you're actually going to feel any benefit from it, that it's difficult for us as owners and entrepreneurs to stay engaged with it long enough to really take take action on these things.
[00:02:31.660] - Jim
This is probably more societal issue than anything else, but entrepreneurs have the upper echelon of this problem, and that is the idea of diligence and prudence and sticking with a plan for a long period of time without having the shiny object syndrome. A lot of what you're talking about, I think, is how do you define a plan, which I think most people wrap their mind around that, but then stay the course through execution, because inevitably, there's going to be the dips in the valleys and the mountains and all that stuff that you have to ride through to get to the other side, which is really... Because any time you do a strategic plan, if you're running an EOS or some system like that, you always focus or fixate on the end. You're intrigued by that, but then It's the doing. It's, I got to go back to the field tomorrow and swing the hammer. Now, I'm back in the cycle of all the things that just distract me from the thing that I really should be focusing on.
[00:03:28.000] - Brandon
Okay. I I'm going to hang in this pocket for just a minute.
[00:03:31.590] - Chris
We're getting ready to speak on this actually next week in Florida.
[00:03:34.660] - Brandon
I just think this is super interesting. Okay, I would love to get your opinion on something. We've been in some circumstances here more recently where we're talking negotiations for the first time in quite some time. And part of that is we're trying to unify as a squad behind, okay, clearly we're playing a long game here. Just like you said, ultimately we're fixated on what we can do in the future. But and, and there was this a little bit of recognition of as hard charging as we all are, we also are human beings and sometimes grinding year after year with no obvious or momentarily payout from that grind, I don't care how badass you are, you can start to lose some motivation. And so, fortunately, we just have a really strong friendship and relationship. We're good communicators. We're able to talk about that honestly and be like, Okay, what can we implement to give us a little motivation, let's say on a yearly basis or under some core metric, to get us all fired up. We do a hard sprint, and there's a moment where we can just take a breath and be like, Okay, that was really fun, and we won a little bit.
[00:04:50.700] - Brandon
All right, let's dial in and get ready for the next push. In your conversations with companies, when you're trying to help them model out three-year, five-year of your plans. Does that topic of putting in some, I don't know, treat in route that you apply or encourage people to deploy?
[00:05:11.880] - Jim
Yeah. I think it's two things. One, There's a tactical thing I'm going to call for this conversation, incentive compensation. Then I think there is a mindset component to this. I think, man, I'll be honest, I think they're equally important, especially if you're talking to the entrepreneur business owner, the person that has to deploy all this and is also reaping the rewards of it. They're making the decision to, let's say, put incentive compensation plan. They're also the ones that, let's face it, they could pull the strings to jump some hoops earlier than they should, but they have to deploy actually this level of contentment in them. I think one of the things I talk to some of my entrepreneur friends about is this idea that you have to get very good, in my opinion, in entrepreneurship to live in both having significant ambition and significant contentment. If you can't balance those things, man, ambition is a great driver, but you'll get really, really effed if you don't live with some level of contentment. That's not complacency. I think those are two different things because along the way, you'll jump the gun. You'll jump the gun. You won't stay the course.
[00:06:24.020] - Jim
I think that's the mindset component of it. Then, let's talk the tactical I think to your point, there's that saying, longing fulfilled is sweet to the soul. There's this idea that you can't defer gratification forever and lead people in doing so. It's a very hard, maybe not even worth wild thing to do. We like this idea of incentive compensation to say, Hey, and you have to simplify this, how can we lay out, let's say, two, three, four things in our business where every quarter, let's say once a quarter, we can identify that if these metrics were hit, I'm going to give you some examples, then everybody gets a piece of the pie. The piece of the pie, because we're defining it ahead of time, we know what that's going to be. As an example, for me, very simply put, let's say revenue, that's one. We're talking small business. Let's say revenue is a metric that we want to hit. But then let's talk about profitability as well. How about gross profit? So that our product service delivery operationally is a profitable sale. Then what if we talk about net profit so that it's not just that the product and service is profitable, but that whoever's in charge of or responsible for accountable to the bottom line is playing fairly?
[00:07:48.360] - Jim
I think this hits entrepreneurs right in the heart because guess what? You're accountable for that. You can write any check you want. But the truth is that managing your net profit or EBITDA, if you're listening to that, and that maybe you're slightly more advanced down this path, you understand that. You are responsible for the bottom line, not just for your own future exit or future evaluation, but you're also responsible for that to make sure that your men and women who are on your team are being taken care of along the way. Then the last component to this is cash. I will say, especially we're talking to the restoration industry as a whole, we all know that cash conversion is a challenge. Managing your AR outstanding is a challenge. What are you putting in place proactively to say, I want or we need 90 days cash on hand from an operating perspective, which let's just, as a benchmark, say that's best in class. How are you managing that and what are you putting into place to make sure that your team has a path forward to achieve that? If you hit those four metrics, maybe we take 10% of that net profit, we divvy it up.
[00:08:57.540] - Jim
Maybe there's a way to do that because if you're protecting cash, you now have the liquidity to make sure that that carrot isn't continuously being dangled, that actually you've let it off and somebody gets a bite.
[00:09:10.020] - Brandon
Oh, that's interesting. You said several things there that I think get missed when this topic is brought up. And I think it's that piece right there of this inevitable, don't worry, guys, next quarter, next quarter, it's going to happen. We've been winning. Don't worry, trust me. That's interesting. You And addressing that right out of the gate of we want these things to be done in these finite sprints where there's an open date, a close day, there's finality to it, and we start a new surge, a new push, a new set, potentially of new rules or metric associated with that. Dude, I don't know about you, but that comment about the... It's almost dichotomy between being content personally, but then being really driven still via ambition for a bigger vision, the possibility, what could we potentially do? I hate to say it, but there are times where I feel like those two things run too closely together for me. There's a bit of a mental check that you got to do on a consistent basis of- Yeah, we've had to.
[00:10:16.640] - Chris
Yeah.
[00:10:17.050] - Brandon
Why are we doing this? Yeah, it's like...
[00:10:19.570] - Chris
Because there's certain things that I think you dream about and you want, and it's easy to get fixated on the next level, whatever that is for other people. It's like the ability to take three months off and travel the world with your spouse, or it's to have the new super boat in the Lakehouse. And the money is potentially there that you could pull the trigger on some of those things, but it would completely upend your plan by doing it now versus enjoying what you have right now. We do. We talk about this a lot. It's so easy to get so focused on tomorrow that But today feels like shit because it's like, and you forget just how much you have to be grateful for. I mean, it's a gratitude thing, right? We're almost talking about mindfulness in a way, right?
[00:11:10.080] - Jim
It's so necessary as business owners, entrepreneurs. I deal with it myself. Again, I think the weird thing about this conversation is you need ambition. You can't go without it. It is an absolute requirement. I would argue it's 10X the need of any the average person. You need ambition. However, if you run fully on ambition for far too long and you never grasp contentment, you're really exercising your organization potentially and putting the organization, which, by the way, we're talking about people, families, at extreme risk. I think left unchecked, that's a dangerous spot to be in. Again, for your listeners who are entrepreneurs, I think this is why community is so, so important. Get yourself surrounded by the right people who can give you some honest checks and balances, whether that's internal in your organization or external or a combination of both. I need that, man. I need that. No one is exempt from that challenge.
[00:12:12.560] - Brandon
Yeah, I think that's one of the things I've probably grown in the most over the last handful of years is just being honest with myself about the outside influence or support and accountability I actually do require. Instead of me being all like a butt hurt about that and or looking at it as weakness, just recognizing, no, the wisdom is in the fact that you're aware of it and you're doing something to change the environment to make sure that it doesn't continue to plague you or prevent you from succeeding. But it's a hard pump to get over because it does feel like you're admitting it. It is. I think.
[00:12:45.120] - Jim
Well, and that's like going back to the tactical plan I laid out. It was high level. But let's say it's the perfect plan. Well, that's only one element of it, right? The accountability to execute and have the patience to wait until it's executed upon or if it's not to defer it. That's the other side of it. You have this strategy to develop something that's profitable, cash flows well, all that's important. But then there's the execution of it and the accountability that you need to surround yourself with so that if something's off track, it's not just we're not paying out the incentive compensation. Something's got to change. What's not working, it's as much of an indicator of future performance as anything else. That takes a whole... This is not a one-dimensional thing. This is very much... It's why we call it incentive compensation. We're actually trying to incentivize the right behaviors, the right motives, all the above so that, yes, the reward is compensation, but it's much bigger than that.
[00:13:44.350] - Brandon
Go ahead. Yeah, I was like, immediately, I was like, Oh, I got a thought. I was just thinking, Chris.
[00:13:47.690] - Chris
I think Brandon and I need a little workout like hand signals or something.
[00:13:50.500] - Brandon
Or not drink as much coffee. Yeah, probably.
[00:13:54.020] - Chris
Give us a little bit of a visual of how you've seen clients execute on this. Because I think Brandon and I, we They had an opportunity to meet an entrepreneur that had a manufacturing business where they used open book management and they rewarded people once a year based on the company's profitability. They had this whole process of showing them the books. It seems like in order to get maximum buy-in from the team, they have to understand how they contribute to that and have some progress reporting beyond just their own individual one-on-ones to know, are we on track? Is our gross profit number, where is it at, and what's How do you see my role in that? How have you seen some of your clients execute on a program like that?
[00:14:34.140] - Jim
My first ever experience with this was when I was actually an in-house CFO for a manufacturing company where we ran what was called a monthly S&OP meeting, sales operations and planning. In that meeting, as a CFO, it was my job to coordinate and quarterback the meeting. But as the meeting S&OP sounds like, it involves literally every leader in the organization at the executive creative level. It wasn't just a meeting to have a meeting. It was very much a report out of those four areas of the business, including finance, where we're each responsible for three to five metrics in our organization that we were responsible for maintaining and had to report out. And oh, by the way, everybody's bonus was tied to each other's performance. So we were all in it together to make sure that, and this is a great example of this, sales and operations are, in my experience, typically at odds with each other all the time. It's just a reality of any business that involves scheduling and planning and people and everything else. But for us, let's say sales, execution or backlog was a metric that they were responsible for, close deals, backlog, etc.
[00:15:50.720] - Jim
Then on the operations side, we have this idea of, well, there's capacity planning and there's output, there's quality metrics that we're all, again, having to be met. When all that's happening, and of course, the production people want to constantly push back because they're responsible for on time delivery and let's say quality, well, they need to have this harmonious relationship with sales and say, Listen, If we're going to plan on more sales, we need to have more capacity, which, oh, by the way, I have to go back to finance to make sure that we have the financial capacity to, let's say, put on a second shift or hire another work sell group where we have another lathe or machinist or whoever. It's this constant back and forth to make sure everybody's in alignment so that we have the right amount of cash and working capital, we have the right amount of push from a sales perspective, and we have the capacity on the operations side. Oh, by the way, throw in a human resources element because we got to go higher. It's like a whole dance that has to constantly happen. But the point is, to go back to your ask, and we had to create tremendous, I would almost call it a embarrassing level of visibility into the because guess what?
[00:17:01.240] - Jim
It wasn't always pretty. Hey, guys, we don't have nearly as much cash on hand as we thought we were going to for X, Y, Z reasons. And by the way, the owner couldn't do something silly. Or if he did from, let's say, an owner's draw or cash perspective, it was going to be highly visible that all of a sudden, our planned cash position was now changed because of something outside of business operations. And those were very difficult conversations to have, but it forced the of transparency.
[00:17:31.520] - Brandon
Boy, that's interesting because I think you may have just brought up something that... I mean, this is my gut. It doesn't mean it's true, but I think in that small to medium-sized business where many of us are still operating our company, essentially as a complicated checkbook, I think I've seen plenty of scenarios where there is a plan and the owner is struggling with that discipline, and all of a sudden, there's a surprise check request to the controller or whoever the case may be. At the end of the day, that controller is employed by that individual just like everybody else in the roster. There might be some verbal pushback, but really, what are you going to do? Now all of a sudden, a $20, 50, $120, $1,000 purchase is made, then honestly, that's cash that probably had a plan and some strategic value to the business. Dude, I've seen that a lot. I've witnessed it, I've experienced it. I've been at the end result of not having a resource when I needed it based on the role that I had in the company. I've also been the idiot that made a decision that wasn't quite forward-thinking enough.
[00:18:44.940] - Brandon
I put my team in a similar position. Do you run into that a lot? Is that a behavior you guys have to coach or get people to move through?
[00:18:54.300] - Jim
Absolutely. Two examples come immediately to mind. I'll preface both of these very very real examples by saying, in both cases, you're dealing with an entrepreneur. You're dealing with people that are moving quickly. I think most people have good intentions in mind. I'll preface all of these two examples with those three things. One had a good outcome, the other one did not. These are both real-life client examples of ours. I'll start with the bad example. That is a business in the trades that we worked with for maybe eight, nine something like that. It was a healthy engagement. The business was doing fairly well. I'm going to say right around 10 million in sales. The owner was correctly trying to diversify the investments that he had in other things. As an example, real estate. He went out and he bought some investment properties that he was planning to flip separate from the business and do whatever he was going to do with. There were some assumptions made about financial situations that were going to happen within the business, a couple of big projects that were supposed to be finished and collected on. That weren't. But he already committed to buying a couple of properties and needing to put about $150,000 cash investment into fixing both up.
[00:20:15.040] - Jim
While he had made that commitment, he was on the hook for it outside of the business. We had planned through these projections for a couple of things to happen. They didn't. We had suggested that we halt certain capital leaving the business for for future reasons. Again, best intentions. He thought he can make both things work with a float. Hey, it's only going to be 30 days. I'm going to do a refinance. It's going to come back, the whole nine. It didn't. He took the 150,000 out of the business, which was, in this case, significant. It compromised payroll. It compromised some hiring plans that they had to get some of these projects through. Long story short, we had to part ways. A, there was a financial issue, and then B, there was an alignment issue, meaning that this particular business wasn't capable of receiving correction and humbling themselves to say, You know what? I can't compromise the main thing to do this other thing. The reverse of that, or I'll say a better story with a better ending. We had a client, still a client today, who engaged us about a $20 million distributor. So healthy business, growing, doing really well.
[00:21:25.520] - Jim
So he had this particular, going back to financing. So I want to educate here to a covenant with a bank to keep certain metrics in line to keep this loan that the business had. And this particular covenant was called debt to equity ratio. So he had to keep his debt to equity within certain boundaries in order to continue to facilitate this loan that he had with the bank. It was a line of credit. He was missing the mark. He was outside of covenant a couple of quarters in a row, and then they hired us, the client hired us to help align that. We had to do two very hard things. One, go to the client and say, Hey, client, you can no longer at any point take distributions ever until you talk to us, or else this won't work. It's not going to work. Well, we can take distributions, but they have to be planned, and they have to be done when there's the right level of retained earnings, number one. Number two, he took, again, going back to good intentions, he was taking most of that distribution out to start a second business in the trucking industry.
[00:22:30.180] - Jim
Again, great. We were able to then tell the story to the bank, Hey, said client is not taking out this money to go buy a boat. He's actually starting another business. We were able to tell a story to the bank to derisk the situation so that although he was outside of financial covenant, they weren't going to call the loan. They just gave him basically a recourse to say, Hey, now you need to take the next two quarters to rectify this, which he did. He submitted himself to the situation, funded his other business. Thankfully, he hired us. We were able to communicate to the bank, but he made the changes, and I'll give him a lot of credit for doing that. He took that on the chin and said, You know what? We're going to submit to financial projections and say, We'll take the distributions when we can. So again, I think that goes back to humbling yourself and being able to be content while still having ambition.
[00:23:23.940] - Brandon
Yeah, that's good. I think it is good to the fact that you noted, in most cases, you're right. This is not people being intentionally silly or lacking integrity or any of those things. We're trying to make good instinctual decisions in entrepreneurial blood, like fire first, and then at some point we might start aiming. That makes a lot of sense. There was something else that you said just a few steps back that I just I want to circle around one more time. You made this comment about how we can set a plan in front of our people, let's say, in some profit sharing, distribution type methodology or something like that. But then if I remember correctly, you made some comments around the responsibility of owners or leadership to be really integrated then in the performance that it will require in order for us to succeed and hit that metric. I wrote this note like, a level of effort has to match the value of the why behind the incentive. The reason I want to double click on that is that I think we often in a room somewhere, annual planning, strategic planning. We come up with a solution that we think is creative and it's exciting and we believe, oh, there's going to be a lot of motivation behind this.
[00:24:41.520] - Brandon
It's going to get the team all rowing on the same side of the deal as we are, all those things. But then the leadership doesn't drive. It's like, hey, we've given you an incentive. We're going to wait at the finish line and anticipate that the incentive is enough to motivate you and equip you to succeed. But then there's not that level of commitment through the journey to ensure the majority, if not everyone, is able to obtain and or win to get the benefit. I think, and part of it, I just want to get your perspective on this, but what I've experienced in situations like that is the the post-outcome is so detrimental. It's like you've just basically told your team indefinitely, anytime I'll throw a carrot in front of you. The value of this carrot is a question mark at best. It's meh, instead of being really exciting. Have you seen that? Can you just share a couple of examples, maybe of a time it went really had in a time where it was married up with the right level of effort and did exactly what it was supposed to.
[00:25:51.120] - Jim
Man, that's so critical, isn't it? Again, I think a lot of this in a small business context, it's so personal, too. It really is. I think that is as you were talking, one prime example comes to mind. A small company we were working with, back in when I started Backbone, our first year up in Philadelphia, and they were in the commercial real estate business on the professional service side. This is not a restoration example, but they started running on the system EOS, which is great. If your listeners are familiar with EOS, entrepreneurial operating system, they create a lot of visibility in the organization. This idea of scorecards or creating transparency around things like cash and revenue and profits and even on the sales and operations side. So took a lot of those steps, created a lot of transparency, which requires the leader to be vulnerable due to some just personal choices outside of the business. The owner got very, very, very distracted, very distracted away from the business. In this case, the owner is responsible for sales and business development, as most entrepreneurs are at the heart of it. And because his eyes were taken away and He was distracted well off the ball, the checks and balances that were appropriately set up, he was the one falling on the sword time and time again.
[00:27:09.400] - Jim
The organization really saw that because of the transparency it was created. And as a result, as you can imagine, the business did not scale nearly as fast as they wanted to, and a lot of the core leaders left. He couldn't retain right talent because good people, the right people, right seats, they're going to see that. There's going to be a misalignment core values there to say, Hey, you're not doing what you say. You're not practicing what you preach. And he knew it. And again, I think that's where you take the right steps to create the visibility you need. You get vulnerable, you show your cards. And if you don't follow through, the downside of that is, man, everyone clearly sees that your eyes are not on the ball. You're not really committed. And you're the owner. You're the entrepreneur. If you're not, how am I going to be?
[00:27:58.800] - Chris
It's not going to Are you a business that's under 5 million in sales? And you're just now getting ready to try and scale your company up and hit some of those targets you've always wanted to hit. But now you've got to build a sales team? Or maybe you just hired your first sales rep, but you don't really know how to manage them. How do you manage, lead, train, develop a sales rep? Floodlight has a solution for you now. So we can actually assign your sales rep a turnkey VP of sales that will help them create a sales blueprint, their own personal sales plan for your market. They'll have weekly one-on-one runs with that sales rep to coach, mentor them, hold them accountable to the plan. And they'll also have a monthly owners meeting where they'll meet with you or your general manager and review the progress of that sales rep, their plan to actual results, what performance improvement they're working on with them. Also let them know, Hey, you might, they're doing really well. Maybe we should think of hiring a second sales rep. They're going to have that one-to-one advice for you as an owner or senior leader on the team as well.
[00:28:54.770] - Chris
How great would that be to have a bolt-on sales manager for your one sales rep, and only 2,500 bucks a month. If you're interested in talking more about that, reach out. Let's grab some time and let's talk shop. Our floodlight clients this last year in 2024 generated over 250 million in revenue, supported by, advised by an industry expert who's owned and operated a business just like you. So take action. Don't kick the can down the road. Start with our business health and value assessment, and let's unlock the next chapter of your success story.
[00:29:28.320] - Brandon
It's interesting to me. I think that's been a theme that we've been wrestling with more so than ever is just the level of effort that's required from leadership physically, physically, mentally, and emotionally to secure the outcome with their people. I just think we all live in a world where we just want to roll into a business and everybody's been taught one time how to do what they do. The idea is we'll just start collecting checks because everybody's carrying the weight on their shoulders. The reality of it is I We just have not witnessed very many companies where that is an actual proven strategy and they actually end up getting the outcome that they're seeking. The level of consistent input and contribution to the support of those individuals, it's required. I think when you look at the teams that succeed at scale, their leaders are just keyed in on the right level of effort at the right cadence with the right people at the right time, and that is what creates the result. It's not only the incentive. There's got to be these other the supporting tissue that it feels like has to be present to make those things work.
[00:30:35.560] - Jim
No doubt. I think things like we started off the conversation talking about incentive compensation, and I think that's an incredible tool, but that is not the strategy. I think those are two very different things. It's a great thing to introduce when the strategy and the people are correct, because now it's an accelerator. That's a great thing to do. If you're already in a place where you have momentum, you have team, maybe it's not a finished product, but this is something that's going to accelerate the vision. Thumbs up, yes, let's go for it. But to just like, if using the example I just did, if that person just put incentive comp to just put a bandaid over the things that were really fundamentally wrong, it wouldn't have worked.
[00:31:18.520] - Brandon
Yeah, that's huge. It's a great reminder. I'm falling in love with the idea of executing on a profit sharing type platform. I I believe there's a great deal of momentum that it can create inside an organization. But I think, again, what you just highlighted and affirmed is there's got to be a real clear strategy on what kinds of things under the hood will be in place to ensure the likely outcome of folks being able to participate in that win is as high as possible so that there's real long term value. It's a huge reminder. Chris, coming into this, you wanted to tackle a couple ideas. Why don't we? Because you know me, dude. I'll just keep going. Yeah.
[00:32:04.380] - Chris
Well, we started out the Convert really just pre-show. We were talking about where we wanted to go today. I think that there are some people listening to the show today that they're like, Hey, We have a controller in-house or we've invested in working with our CPA or our accounting firm to really get our finances dialed in. We're very intentional about that. What do you have to teach me? Or where else do we go? Once We have clean financials. We have a really good chart of accounts. We're leading from the numbers. We're holding people accountable to core metrics within the business and their impact on the company. What are the financial opportunities for us to continue to level up? What do you see with your clients, Jim, in terms of where do you take a company that has their shit together, so to speak? What are the opportunities in front of them once they have that in place?
[00:32:59.560] - Jim
That's Yeah, it's a great question. Man, my head goes to three different places, but I want to start with this idea that there is an absolute difference between creating a lifestyle business and an enterprise value company. I will say when I'm in my sales process, and the very first call I take, we call it a discovery call. One of the things I'm trying hard to suss out is the person I'm talking to, are they Are they in and creating a lifestyle business, or are they trying or attempting to create enterprise value? The difference between those two things is dramatic. I'll give you an example. I was talking with a prospect after an event this past week out in Arizona. It's a construction company. They've been in business since 1984. Three Brothers own the company. It's a legacy business. They've been doing three and a half million in sales for 10 years. The Three Brothers are, I don't know exact age. They're not far from retirement. They're starting to see now that they have a problem on their hands, that they've created a fantastic lifestyle. It's paid for their kids' college. It has given them great personal comfort.
[00:34:17.680] - Jim
However, this is the big however, what's after that? What is the thing when I say, I don't want to... The one brother is the estimator, the one brother is the superintendent, and the other brother is the BD guy, and they're equal partners. So when those three pieces leave, what happens to this business?
[00:34:37.120] - Chris
There's no business. It's gone.
[00:34:38.500] - Jim
There is no business. There is zero there. Now, that sounds obvious, and It is. They're becoming acutely aware that they have a very big problem on their hands because like most contractors, I think the most recent survey I saw from SEPA, which is the Institute of Exit Planning, Certified Exit Planners, that 98% of small business owners have most of their wealth tied up in their business. If we agree to that, this is a very, very big problem, where if you only create a lifestyle business and you don't plan for enterprise value, you're going to get to this point. We've done a lot of research and we've figured out everybody dies, or you're going to figure out how to get rid of your business before then. In that transaction, well Wealth has to be released, or unless you have some other means of generating income. But what we are assuming right now is most people, most business owners, have to get wealth released from their business at some point. If it's not If it's not transferable, if it's not scalable, and if it's not sustainable beyond you, like the example I just gave with the three brothers, you're at a loss.
[00:35:53.310] - Jim
You've created something that built a lifestyle and nothing more. And that lifestyle can even be very temporary in this case. So I'm trying to figure out when I'm talking to somebody, are they trying to build a lifestyle business or a business that has enterprise value? Do they understand the difference between the two?
[00:36:12.100] - Brandon
For you guys, this is more just a personal question about Backbone, will you guys partner with those two different profiles, or have you guys just found that really the best relationships for you are those folks a little bit more strategic and long-focused or what?
[00:36:29.360] - Jim
Yeah, It definitely is the enterprise value focus. But that being said, going back to the example of the Three Brothers, if they decide we're willing to reinvest now, we're willing to convert this from a lifestyle business to an enterprise value business, we would be a player. But until they make that decision, I was up front with the guy on the call, I said, Listen, just telling you right now, you're going to have to triple your revenue. Are you willing to do that? Because unless you do that with significant significant margin, you can't afford, forget us, you can't afford anything. You have razor-thin margins, and all you're paying for is your current lifestyle with your brothers. And until you get away from that mindset, forget backbone CFO, You'll never scale. So if you make the decision, though, yes, I'm willing to reinvest. I'm willing to go and triple my revenues, but I have significant margin to continue to make that reinvestment into the systems, the people, the processes, the brand. I mean, you guys know all the things that go into it. It's an endeavor. For those guys, they've been on one track for 30 years to break that.
[00:37:38.780] - Jim
I could see it in his face. He knew the answer, but the contemplation, right? Oh, my Gosh, I've been doing it one way for so long. I'd have to hard stop right now and pivot, and that's going to be painful.
[00:37:53.960] - Brandon
This reminds me of something that I got stuck on. I'm in a little bit of a Tommy Melo kick right now. If anybody pays attention, they've heard me say it. I think my team is going to slap me the next time I use the term. One of the things I was getting keyed in on is, I think his personality at times is you either love him or you hate him. I think when people get serious about listening to what he's promoting, the reason they hate him is because he's saying things like what you just said, and they're very uncomfortable from an ego perspective on what that would require and draw from them to make happen. One of the I was just going through his book and I was going through a section where he's talking about a live meeting he's having with several other single trade business owners, probably HVAC guys or something along those lines. No, it was garage door companies. He was talking about his pricing. I'm going to just butcher the number, but let's say he's like, Yeah, all in. Opener and door parts, let's say it costs us a thousand bucks.
[00:38:53.400] - Brandon
How many of you charge 10 grand to install that garage door? Nobody's hands go up. He's Okay, what about nine grand? He keeps going down. Finally, somebody in the audience gets really pissed off and they're like, Dude, there's no way we're going to rip people off that way. He goes through this dialog about he's going back and forth with the audience and he finally shuts them down by asking them this series of questions. None of them could say that their business is near that. He's talking about, do you pay 20% more than anybody in the industry? Do you have a profit sharing for your people? Do you have new trucks for your tech? He's going down these identifiers that you have a bonafide organization that's scaling, that can draw and keep really good talent. It's profitable. It's got cash surplus, all these things. Nobody in the room could say that they have that. The reason they don't have that is because they're not charging enough. He basically destroys this mentality of try to race to the bottom of cost because that's how you protect the client. He basically broke them down and said, your client's not getting any of the things my company's giving them.
[00:40:04.700] - Brandon
That's why I'm 300 million and you're struggling at three. You got a charge to have a business that can create the things and the outcomes that you're trying to create. I think that's part of what you're alludinging we're getting to here is that we need to understand what it is that we're trying to build and then understand the economic model that's required in order for us then to create that thing. For a lot of us, that model is more intimidating than we anticipated once we dissected or break it down. Has that been your experience? Am I tapping into something?
[00:40:36.400] - Jim
Oh, Mike, I'm not lying. On my calendar tomorrow morning at 9: 00 AM, I have a final call with a prospect in the commercial door space. I'm not kidding. I can't believe you just said that. They're in Oklahoma. I don't know if they're going to listen this or not. Hopefully, they're a client by then. They're doing about... Because I'm giving away the strategy. They're doing about six million in sales, and they're in three different states. Really good model, like a good brand, really good recognition. They're growing. They are flat-lined at the bottom. Flat-lined. On the first call, and I believe the guy is so sincere, it's a husband-wife ownership, they're Guys are executing in these new locations, and he wants to desperately give these guys bonuses. They're growing. They went from $5 to $6 million in the last year. That's a, what, 20% growth. That's awesome. But they're flat-lined at the bottom, and he can't figure it out. The only metric he could tell me on the first call was, Hey, we're at about 30% gross profit. I told him flat out, I said, Listen, my friend, I don't know anything about your books at all.
[00:41:40.560] - Jim
All I can tell you right now, this is free. That will never work. That will never work. In your industry, in a niche construction installation, you need to be 50%, 50, 5, 0, minimum. Minimum, to scale the way you want. He had a really great vision, really compelling. The whole nine, I can feel it, man. I'm talking to this guy. I want to come work for this guy. But if you're pricing that way to scale, you're actually hurting your team. I hate to tell you that, but you are hurting them right now. And you're limiting their opportunities, you're limiting their potential. Forget bonuses. That won't work. And then what makes matters worse is your personal wealth is on the line. Personal assets are on the line. And we got to fix the pricing problem you have right now and probably other things. But just, again, I haven't seen a single spreadsheet yet. I know that's the answer. I know it is.
[00:42:43.460] - Brandon
Yeah. I mean, dude, it is a grind to get your GNA under 30 %. So if you're... I mean, and that's probably not abnormal for any industry. I don't know any other industries other than the trades in ours, but I can't imagine it's easy to get GNA under that percentage anywhere.
[00:43:01.800] - Jim
I mean, even because he had a vision to scale and grow, which is awesome. Just marketing, right? I've done a lot of research on this. We have a couple of fractional CMO partners that our clients partner with. From what we can tell on the home services side, to grow moderately, this is not aggressive marketing, to grow moderately, you're looking at probably 5% of your revenue as a budget line on to marketing. Just marketing. Hang on, that's not explosive growth. That's just you're keeping your SEO going, you're keeping your basic Google ads, all that fun stuff, website admin. You're not talking about anything outlandish, potentially 10%. So again, for this guy, that's $600,000 on an aggressive side, maybe 200,000 to 300,000 moderately that he should be looking to spend. He has no ability to do that at all at 30% gross profit. None, zero. Then we could talk about things like bonusing, and we could talk about... It's just, again, It's not going to happen. It's just not without making some adjustments there.
[00:44:05.280] - Brandon
That's the tool that's a superpower is an understanding how to model your financials from a % of revenue perspective versus a swag based on some combination of what I've done the last few years and what I think I can pull off next year. Because I think what we're talking about here is that when you start to propose a financial model based on a % of revenue, and there's a lot of benchmarks that you can go get your hands on any industry that you're in, obviously with us in our industry, RIA has got some great tools. I'm sure your team's got some great tools and resources. We, of course, have some perspective on that. There's just a lot of access to some data to at least get you the bones put together where you have a baseline to start from. But it's interesting, man, because in our industry, I don't think it's escaping anyone that's been doing disaster restoration for a hot minute that we don't exactly all by default get to choose our own pricing, at least not as in black and white terms that a lot of other industries do. I know some people are hearing this, and they probably default immediately to price victim and not having any control over their pricing.
[00:45:14.160] - Brandon
I don't agree with that. We're not going to talk about that today. But the point is there are some perceived and at times very real restrictions in terms of how we're monitoring our pricing. But it's not too dissimilar to negotiating with a subcontractor in the sense of if you're just negotiating out of whining or a gut response, and you're not talking real data, percentages, concrete information, it makes it difficult for you to defend your side of the coin. One thing that we're What we're really aggressive about when we're talking about project managers is, hey, you're going to get a better price on the work that you're creating a PO for if you understand the perceived hours that are required to get that job done. If you walk in to negotiate with the sub and you know roughly how many hours it should require and you're able to say, that puts your guy or gal earning X dollars an hour, does that seem reasonable to you and your business? That's a different conversation than you showing up and saying, Tell me what you need. Anyways, my point in saying that is what you just walked through where you taught this business owner, look, you got to get out of your gut because most of us live there as entrepreneurs.
[00:46:25.060] - Brandon
That's why we can move so fast. You're starting to define your business and you tell this person, Dude, you've got to earmark 600 grand a year to create just a marketing plan and spend that can help you grow your company. That probably put him on his, I'm going to assume, because that was probably a pretty big number in context of what he was thinking. I guess my point in that, Jim, is just like, is this part of what you're doing with people to shake them out of their fog? Is start to create some concrete model numbers based on % of revenue that is required to move that company towards this goal or vision that they may have?
[00:47:02.080] - Jim
Yeah, it's definitely part of it. So piggybacking off my first comment, because remember, I said two or three things to answer your first question. The first is, do you want to create enterprise value or just a lifestyle business? So let's now assume We're talking to somebody who either is creating enterprise value or wants to. The next thing that I would say has to be done, and we call this a financial control framework, and I talked a little bit about this at the conference that we were at back in August, and that is we believe, five components we have to walk every business owner through in order to answer some of these very fundamental questions on how to scale when the end in mind is building enterprise value. The first one is cash and cash flow. The second one is profitability, and we'll talk about that maybe a little bit more in detail. The third is your people. The fourth is your systems, and the last one is your financial position. Leading with the end in mind, when we talk about position, what we're saying is we want you as the business owner to be fully aware of all the things that I just said.
[00:48:05.780] - Jim
How do they impact two things? One, when it's time, your valuation or your market value of your business. That's a position issue. But the second one is I hear business owners blaze there a little bit. Sometimes you're like, I'm 35, man. I'm not selling my business for at least another 25 years. Okay, fine. But I promise you that if you're going to grow your business the way you want to, and we run in similar circles, so I hear this all the time. Hey, we're doing 5, 6 million. I want to go to 25, 30, 50 million. Okay, awesome. I promise someone between there, here and there is going to look at your business. They're called a bank. They're going to have the same exact requirements and perspective of a potential buyer. When they look at your balance sheet and your financial statement and you say, Hey, I would love a line of credit, or I would love to buy that and I need a real estate loan, or I need an SBA loan, or I need a mezzanine loan, or whatever the loan is, they're going to say, Great. Show me your capability of facilitating this debt service.
[00:49:12.280] - Jim
In order to do that, going back to the guy I'm going to talk to tomorrow morning at 9: 00 AM, that guy is going to have absolutely no margin, let alone marketing, let alone bonus plan, let alone incentive comp. To go get debt service to service any level of growth is going to be very difficult. It can be done probably through some SBA product with guarantees at higher interest rates and stuff like that. But along the way, you're going to have to look attractive from outside looking in, and you want to look attractive. Even if you're not looking to sell your business, you want to build with sale or scaling in mind. That, again, goes back to that enterprise value thinking.
[00:49:51.100] - Brandon
That's really interesting.
[00:49:52.040] - Chris
That's a piece I think a lot of people forget about because we do run into clients that are like, Yeah, I'm not into that PE thing. We're not doing that. It's like, well, the mindset, like you just said, is the same. Banks have the same mindset. A PE company is effectively a bank. It just has a different target client, but they're basically doing the same thing and they have the same similar mindset.
[00:50:14.300] - Brandon
Yeah, that's huge.
[00:50:15.270] - Jim
If you're listening to this, you run a business, ask yourself two questions. Can I sell my business if I wanted to today? Could I go get a loan if I wanted to today? I think there are two very simple questions ask yourself. If you don't know the answer to either of those, I think you should really get some help.
[00:50:36.420] - Brandon
Dude, that's a very easy litmus test for us all to consider and probably lean into. By the way, I want to do a little bit of a plug. The components, the five, I think it is components that Jim just talked about. I actually watched that presentation that you did at this year's core conference, and I walked out of that room with a clear understanding. For all intents and purposes, some of this stuff we definitely dip our toe into in terms of encouragement and supporting our company owners. Obviously not to the extent or clarity or vision that you do as an actual true CFO, but it was a great presentation. You guys, you specifically, Jim, have a real skill for communicating things so that the rest of us Neanderthals can pick up on it and understand how to play it back into our business. I do want to give you in backbone a bit of a plug. That was a hell of a presentation. I walked out with a lot more information. Thank Just for your sake, dude, there was a lot of murmuring going on in the crowd that participated. I know I wasn't the only one that walked out with a handful of things that we're able to leverage in favor of our business.
[00:51:42.160] - Brandon
Well worth anybody's time to try to get you to walk them through that. Hey, I want to be cognizant of your time. I'm going to steal more time from you tomorrow. As we wrap things up, give me from your perspective, because we've had you on several times and we will continue to have you on, but in the last, call it 30, 45 days, what have you ran into that's got you, you're focused on it a little bit or it's a theme that's been creeping up that you'd like to share as a warning maybe or an early signal for some of our business owners that are listening, leaders too, for that matter.
[00:52:16.620] - Jim
Man, I think, and this actually is true in my own business, but I see it with business owners I'm talking to, but it's true for me. Then I keep thinking about, how do I remove myself as the constraint to my growth or our growth? Our growth. In my business, in our business, back when CFO, right now, being very truthful and transparent, that's sales and business development. I'm the constraint to whatever we grow, I'm the constraint or the bottle. I'm the cap, which I absolutely hate. When I talk to business owners about fractional CFO work in this side of the business, often I see, I spoke with one earlier before I got on this call, about a $4 million company up in New York growing and scaling. The CEO is in the finance seat. He knows that, forget his skill, forget what he knows, it doesn't matter. What he's best at, his highest and best use is growing that company, and they're doing a decent job at it. But because he's in the finance seat, he is a constraint there, and he's limiting growth as a result. So I would say the thing that I'm seeing more often than anything else, and I'm constantly thinking about, how do I remove myself as a constraint in my business?
[00:53:29.620] - Brandon
Man, that is great.
[00:53:31.320] - Chris
A great reminder.
[00:53:32.020] - Brandon
That is a perfect way to end the sesh. Well, thanks, brother. We appreciate you, man. We respect your experience and your knowledge. You guys are one hell of a team, and we appreciate your ongoing insight. So thanks for hanging with us, man.
[00:53:47.740] - Jim
Likewise, guys. Thanks for having me.
[00:53:51.580] - Brandon
All right, everybody. Hey, thanks for joining us for another episode of Head, Heart, and Boots.
[00:53:56.300] - Chris
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