[00:00:00.100] - Chris Nordyke
Wow. How many of you have listened to the Head, Heart& Boots Podcast? I can't tell you that reaction, how much that means to us. Welcome back to the Head, Heart& Boots Podcast. I'm Chris. And I'm Brandon.
[00:00:12.520] - Brandon Reece
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.
[00:00:21.120] - Chris Nordyke
I'm noticing that and I really appreciate it. I thought you did that on purpose.
[00:00:24.070] - Brandon Reece
No, I, I don't.
[00:00:25.750] - Chris Nordyke
I didn't.
[00:00:26.410] - Brandon Reece
And I, I am not happy with it. Well, my friend, it is that time of month again, or time of year, or I'm not sure how you say it, but it's year and month. It's time to get some money knowledge from the man, the myth, the legend, Jim Emerich over at Fractional CFO or Backbone CFO. Dude, so I think I've not— you, I don't know that I'm saying your last name correctly and I've known you for a long time now. Can you make sure I'm correct?
[00:00:54.110] - Chris Nordyke
Yeah.
[00:00:54.920] - Brandon Reece
Emerich.
[00:00:55.470] - Jim Emerich
Okay. Like a K, but a CH, but it's, it sounds like a K.
[00:00:59.390] - Chris Nordyke
Okay.
[00:00:59.690] - Brandon Reece
So we're in the zone. It wasn't a complete butchering. Okay.
[00:01:02.930] - Jim Emerich
Well, that's good.
[00:01:03.470] - Brandon Reece
I feel better about that. Dude. How's life been, man?
[00:01:06.370] - Jim Emerich
Life's great.
[00:01:07.530] - Chris Nordyke
Yeah.
[00:01:07.690] - Jim Emerich
Life's really good, man. We like, today's actually the last day of summer for us. Like as a family, kids go back to school tomorrow. So it's kind of sad, but it's good. Life's really good.
[00:01:18.570] - Brandon Reece
Nice. Nice.
[00:01:19.630] - Jim Emerich
Yeah.
[00:01:19.710] - Brandon Reece
So you guys all jump in about 2 weeks ahead of us on the West Coast. Some people are like a month ahead of us, I think.
[00:01:25.310] - Jim Emerich
No, my kids started yesterday.
[00:01:26.450] - Brandon Reece
Oh, they did?
[00:01:27.190] - Chris Nordyke
Corvallis schools. Yeah.
[00:01:28.150] - Jim Emerich
Wow. Okay. Yeah, we're actually late around here. Most of the schools started earlier in the week or last week. I don't know why we're so late. I have no idea.
[00:01:36.610] - Brandon Reece
Right on. Right on. Okay, dude, I got a question for you. See if this is gonna, this is gonna ramp the direction of the conversation.
[00:01:43.510] - Jim Emerich
Oh, I just changed it. Like it. Nice.
[00:01:45.890] - Chris Nordyke
What's that?
[00:01:46.230] - Brandon Reece
Yeah, the change of, of, yeah. Well, it may not, it may just end up taking us right back to where we were, but I've been watching some of the content that you've been doing, and I've noticed there's a little bit of a shift in the theme. And I was wondering if some of that is based on some kind of lived-through experiences that, that seem to be coming in groups, or if it's an annual thing that's shifting kind of the direction of some of the stuff that you've been talking about. And I know that there is some crossover. But a lot of our audience hasn't necessarily heard some of that content unless it's you on the show. Does my question make sense or am I making this up?
[00:02:25.540] - Jim Emerich
So yes, there's definitely been, and it's really been probably the last couple of months from a content standpoint. So myself and our marketing assistant Jordan have been working on really just looking at like making sure we're speaking to the real pain points of the, of the folks that, that we work with and that, that listen to us and hopefully get some value from us. But there's definitely been some intentional change. Specifically around, I would say, 2 things. One, the, I'll say a little bit of the size of the businesses that we're working with more frequently these days has changed some of how, what we always talk about, how it applies. So the implications and the application of the same principles, but that's changed a little bit. And then secondly, I think we're, over the last, this has probably been 6 months now, speaking to a really large audience from a trades perspective. Yeah. Whereas a year or 2 years ago, focused a lot more on restoration. And that's still certainly a core component of what we do and who we're talking to and working with. But I think the trades at large, you know, it's just been an audience where we're diving, diving more into.
[00:03:33.470] - Brandon Reece
So right now, based on what you're experiencing, and that was kind of the vibe I was getting, is what are like right now the top 2 things, pain points? And I'm wondering, because we're at the end of extension, tax extension season, I'm wondering if any of these things overlap, but what are the one or two top themes right now that you're seeing specifically for the trades and the blue-collar industries in general?
[00:03:56.310] - Jim Emerich
So it's interesting you start there. I see, and like, when we talk, I always go through our, like, what are the last, like, half a dozen conversations I've had personally with business owners doing this stuff? And this was actually this week and last week, a recurring theme that I'm seeing is business owners willing to pivot. Even those, and if you're listening in the restoration space, I had 2 calls in the last week where founders, owner-operators running, and one was a $7 million operation, the other was a $9 million, who have expressed explicit desire to not get out of restoration, but to bolt an adjacent activity on the side of it.
[00:04:35.960] - Chris Nordyke
Mm-hmm.
[00:04:36.330] - Jim Emerich
For, I think, 2 reasons, both of which make sense. I have differing opinions on both, but One is like just a referral mechanism back into the referral or into the restoration space. And the secondary is just a pivot in terms of expansion, like an altogether different business. So, so this is a pivot, but not quite as dramatic with a $9 million, $9, $10 million, I'll call it a facilities management slash contractor who was kind of put in front of long-term contracts to do improvements on commercial Facilities. They're even looking at pivots, right, to not get out of construction, or, but to even go into like more home remodeling, because they have the crews, they have the capability, they have the market share, those kinds of things. So I'm just seeing this, this theme of business owners willing to pivot when they got something right, they have some capability, but they want to attack a little bit more market share, maybe a little more geography, and they're looking at different avenues to do that. So really interesting, presents a whole world of new fun challenges, a lot of opportunity, but a lot of like buyer beware conversations I'm having as well.
[00:05:44.390] - Brandon Reece
That's super interesting. I'm wondering, you know, one of the things that we've seen and we've seen more of on the restoration side, and I wonder if this is relevant. Obviously, we've, we had a budding relationship with one Tom Plummer that started years ago. And they, they were kind of, I would say, at the front of some of these franchises that are pursuing partnerships specifically with restoration companies for mutual referring, right? Obviously. But then there's also this element of that, depending on how they develop these other service lines, they can be a little bit more cash-friendly in terms of pay terms and things like that, because they're not pursuing payments through insurance bodies and things like that.
[00:06:23.510] - Jim Emerich
True.
[00:06:23.640] - Brandon Reece
But I think the other thing though is almost a It feels a little bit like the trades and home services are starting to approach this similar to maybe what we've seen from SaaS companies and some white-collar companies where they're trying to control more of the ecosystem with that particular client. So they're looking at it and saying, okay, we can spin up these other ways to market and find new relationships, or we can solve more problems for this gained audience that we've already spent years or whatever creating. So what, what are you seeing as some of the reasoning behind that? And then obviously we need to start talking about what are some of the things surfacing from a financial perspective that maybe these teams weren't quite ready for or didn't quite have their head wrapped around it before it started to infuse that in the business.
[00:07:14.030] - Jim Emerich
So it's really interesting from a, I'll call this more a strategy conversation that certainly can dovetail into every functional aspect of the business, but Like if we just look at it at the highest level, so the way I've been taught, and I'll just, I might butcher this a little bit, but essentially when we're talking about a gained audience or a platform, there's a lot of power in that, right? As you scale your business. So, and this is true in any industry. So I look at like 4 levels of that. So you have your direct, I'm going to just go sell to you, you and me, we're going to do a transaction. Then there's an individual where I make a relationship with one person who has maybe multiple relationships that I can sell through. So that's cool. Then there's an ecosystem. That's the next level up. That ecosystem is really what I would call a platform. So taking advantage of a brand who has hundreds, maybe thousands of members or affiliates or et cetera, et cetera, within it. So that's going up another level. And then the 4th and final is called structural. And this is really unique.
[00:08:17.710] - Jim Emerich
This one is, it is the winner and it is the pathway to ultimate scale. And that is, can you get your product or service to a point where it is mandated to be used by your customer.
[00:08:28.280] - Brandon Reece
Oh.
[00:08:28.920] - Jim Emerich
Required. So think of it this way, like, and I'll pick on my own kind of adjacent industry as an example. There's a, everybody knows what the CPA is. So inherently, when you go to, to be a tax accountant, you get a CPA.
[00:08:43.780] - Brandon Reece
Why?
[00:08:44.600] - Jim Emerich
You have to. Like, you're bored. You don't actually have to, but most people think you do. And we'll, we'll leave those reasons to the side for a second, but it is the standardized pathway to be an accountant. So if you're selling the CPA credential, so to speak, right, you're going to lobby for that to remain forever. Because there's an entire market structurally bound to require that to happen for me or you or anyone else to be a tax accountant. And I think, and we know some different players, even within the restoration space who have captured That level.
[00:09:20.480] - Brandon Reece
They—
[00:09:21.020] - Jim Emerich
it is a requirement to use their service or their product. And that to me, when you look at those 4 levels, any business, any company, restoration trades included, can look at their own environment of selling and look at it through that lens. And I didn't make that up, by the way. I completely stole that and plagiarized it from scaling.com. So like, that's not my idea.
[00:09:45.450] - Brandon Reece
As far as the 4 levels, you mean?
[00:09:47.210] - Jim Emerich
The 4 levels.
[00:09:48.180] - Brandon Reece
Yeah.
[00:09:48.900] - Jim Emerich
That's not— don't, don't credit that to Backbone. Someone's going to call me and complain. But I think, I think that's really, really unique because you were asking the question and we were kind of talking about the conversation of pivoting. And I think the pivot isn't really what— all these different examples are slightly different, but I think business owners are inherently looking at those 4 levels and they're saying, oh my gosh, I've been doing this one-off selling for 10 years. But this one customer or this one platform, I could sell to 10 different— I can sell the same thing or something similar 10 different ways to that one person or to that one group or to that one customer base. And that, that is asking me like, why the heck am I trying so hard to sell to 10 people if I can sell to one 10 times? So I think that if to answer, I don't know if that answers your question or not, but I think that's the, the pattern.
[00:10:40.310] - Chris Nordyke
Yeah.
[00:10:40.520] - Jim Emerich
that I'm seeing in these business owners, the light bulbs going off. And I will say that it's a simplistic, in a good way, it's a simplistic way to scale. And I think when business owners start hitting a point where they think, oh man, I just got to go get more BDMs and just sell 100 times more than I'm currently selling. And then you get to a point where you're like, what if I didn't do that? What if I sold less, quantified less for more scale?
[00:11:06.160] - Chris Nordyke
Yeah.
[00:11:06.530] - Brandon Reece
Uh, to the same group, essentially.
[00:11:08.700] - Jim Emerich
To the same group. So in other words, I have one relationship, maybe a person in front of that relationship that yields significantly more value than to just say, I'm going to have 10 relations, or I'm going to have 10 people doing the same function, trying to go find the same value in a dispersed environment.
[00:11:25.740] - Brandon Reece
Yeah, that makes a ton of sense from my perspective.
[00:11:28.050] - Chris Nordyke
This really relates, like, one of the things we see a lot in the restoration space is selling of master services agreements.
[00:11:33.690] - Jim Emerich
Yep.
[00:11:34.400] - Chris Nordyke
And using an emergency response plan as sort of a means for formalizing that relationship and going upmarket to executive decision makers over portfolios of properties. It's not bulletproof. It's not quite— in reality, it's not quite structural. There's some, there's some downline relationship.
[00:11:52.850] - Jim Emerich
I would call that ecosystem. Yeah.
[00:11:55.270] - Chris Nordyke
Yeah.
[00:11:55.410] - Brandon Reece
Okay. Yeah.
[00:11:56.150] - Chris Nordyke
Okay.
[00:11:56.710] - Brandon Reece
Well, I wonder too, like, because I was kind of like wrestling with this a little bit because we've had a few new introductions with some folks that are really doing very well in their particular industry. One of them, I'm really eager because I think he's going to be a future guest on the show. I'm going to catch up with him after elk season, but he runs a pretty good-sized electrical company. And he basically has identified himself in his branding as the multifamily partner. So a little, it's in this same kind of conversation where he just has decided to And how much of this has really changed the shape of his business, we don't know yet. That's part of the opportunity I think we have to learn from him. But you can see very intentional with his language, his marketing, what he's doing from a front-facing perspective is very about like establishing this partnership specifically in the multifamily environment and identifying himself and their company as the go-to team for that specific lane or industry. And I think that there's this opportunity between all of these. We're not really on money yet, but I think it's still a really interesting topic.
[00:13:08.370] - Jim Emerich
Yes.
[00:13:08.610] - Brandon Reece
So part of this ecosystem, part of this, like, like you said, whether we've gotten all the way up to structural where it's a mandatory item, it's this space where people are trying to identify a way to get some more traction or momentum in as tight of a timeframe as possible. Because I think in general, and we, and we assumed we would see less of this in the single trades and home services, but in general, right now, the economy is not creating a sense of bullishness for the average operator. Like, I don't know about much about the true finance circles and what some of them are doing behind the scenes, but, but in general, I don't— there's hype, there's excitement, but there's more. It just seems— I'm not going to use the term fear. I'm going to use the term concern. like generic concern. And so I think part of what's promoting this right now is people are just saying like, what can I do to stand out right now? Get some immediate traction to feel like I've got some new wind in my sails. So I don't know. I don't know if you're running into more of that too, as you're starting to have some of these financial conversations, you know, with prospects and your client circle or what.
[00:14:18.450] - Jim Emerich
So to maybe tie this into money, but not just like dollars and cents from a profit standpoint, but if we look at enterprise value and maybe, maybe if we connect I would connect this more to that level of conversation than, hey, does this improve my gross profit next month type of conversation? So, and Chris, to your point earlier, I think all of these, the 4 levels I mentioned, I think we could probably split hairs on like what falls where, but I think directionally you are correct in that the MSA pathway is closer to either an ecosystem or structural component. Either way, and going back to the enterprise value piece here, what it's paving the way for is, and this will connect enterprise value, is some repeatability and predictability on revenue generation.
[00:15:06.640] - Brandon Reece
Yeah.
[00:15:06.800] - Jim Emerich
And I think that again is critical. And we're not a backbone CFO in our firm. We're not a transaction advisory firm, right? So we're not going out every day of the week and brokering deals or anything like that. That being said, We've had 4 of our clients in the past year, year and a half sell. And of course, as a CFO, we're, we're kind of lockstep with that process from beginning to end. And one thing that I can say without a doubt, this goes to 3 of those 4 deals being, uh, sorry, 2 of the 4 were private equity. One was a family office, one was a, a roll-up, a strategic. But every one of them, they're the buyers thinking in the same through the same filters. And that starts with revenue predictability. If I buy this thing and I get the keys tomorrow, can I rely on the past P&L for the last 3 years that with some degree of certainty, if it did $12 million last year, I don't wake up tomorrow and it's like a $7 million business, right?
[00:16:04.930] - Brandon Reece
Yeah.
[00:16:05.500] - Jim Emerich
Because that presents a whole lot of risk to any buyer. And again, you might be listening or your listeners might be saying, well, I'm not trying to sell my company, Don't hear me. Don't hear it that way. Hear it in terms of building a company, building a business that whether you decide to sell it or not, you're still pursuing enterprise value because you're going to want to scale. I can't tell you, I can't think of a single prospect or client that I've ever talked to who was like, yeah, I'm not trying to build enterprise value. Everybody is trying, even if they don't articulate it that way. You are.
[00:16:38.910] - Chris Nordyke
Everybody wants options. Good.
[00:16:40.340] - Brandon Reece
Yeah, that's—
[00:16:41.050] - Chris Nordyke
yeah, yeah, they want options. Jim, can we hang in this pocket a little bit? Because I think you're on— you guys have a particular visibility when you talk about 4 clients that have exited in the last year. Yeah. One of the terms that maybe some of our listeners aren't familiar with is quality of earnings. This is part of the due diligence that—
[00:16:57.490] - Jim Emerich
Yes, it is.
[00:16:58.060] - Chris Nordyke
Investors, strategics across the board, if they're smart, they're going to hire their law firm, their M&A attorney, whatever is going to engage somebody like you potentially to come in and audit the books in a very particular way and go through How clean are these financials and how clear of a story do they tell relative to what the business owner has been telling us about how awesome their company is? Right. I'm curious, when you talk about the repeatability of the revenue and these buyers are coming in, what are some of the things they're really honing in on, finding problems with? What do they like seeing? Yeah, like, break some of that down for us as if we're like 12-year-olds you're talking to versus financial professionals or 14-year-olds. Yeah, yeah, yeah.
[00:17:35.820] - Jim Emerich
That's got it.
[00:17:36.360] - Chris Nordyke
I do this, I do this with AI periodically. It's like, whoa, whoa, whoa, whoa, whoa. Explain that to me as a 12-year-old, break that down. And then all of a sudden, it's very accessible. You know?
[00:17:46.990] - Jim Emerich
I love that. So you set— you teed up a lot there, Chris. So let me break that down. You threw out a term quality of earnings. So let me define that. But then let me connect it through a 14-year-old lens.
[00:18:01.580] - Chris Nordyke
I love that. Please, take your time.
[00:18:02.540] - Jim Emerich
Or a simplistic way to how that matters for the business owner. So quality of earnings or QoE, You might hear that terminology if you're either approaching a transaction. When I say transaction, meaning you're looking to sell the business, buy a business, something like that. Whether it's a private equity firm or some buyer might come in as strategic and say, hey, I saw your books, or maybe I haven't even seen your books yet, but you've told me that you have profit of X. I need to validate that. I need to validate that. So they're gonna hire an accounting firm, likely an accounting firm, third party, and they're gonna just come in. And they're gonna look probably over the last 3 years of your business and they're gonna validate what you said you did. I mean, that is really at the end of the day what it comes down to. But now let's connect that to how that matters to enterprise value. The thing we were just talking about, again, from a, you've heard this in conversations at the bar, I'm sure I'm gonna get a certain multiple or a multiplier on my EBITDA or my profit.
[00:19:01.510] - Jim Emerich
So they're validating the profit. And then that multiple that you're going to get against that profit, it has to be determined some way. And there's no rule, there's no rhyme or— there's a rhyme or reason, but there's no necessarily hard and fast rule. And that is essentially, there's a lot that goes into that. One of the big pieces is that revenue predictability. But Chris, what have we seen? And this actually just came up with one of our largest clients, any one-time anomalies or massive jobs that are just total— they make your financials look phenomenal in a given year, right? You had this huge large loss, you had this huge project that was state-funded, and it went for 3 years, but you know, it's not renewing, and it's never coming back again. And you have no shot of repleting that revenue. That isn't something that somebody ultimately is going to want to buy, because they can't rely on that future revenue post-transaction.
[00:19:52.210] - Brandon Reece
Yep.
[00:19:52.690] - Jim Emerich
And that QoE is going to help not just justify what actual profit is to make sure It is what you said it is, but it's also going to then help the buyer discount or potentially lower a multiple or something because, hey, that one project or that one quarter that you had that was amazing, that's never going to happen again. And here's why. Where a fractional CFO— so we don't do those QoEs. That's going to be a third-party, completely unbiased— for us to do that for a client would be—
[00:20:22.650] - Brandon Reece
Right. Yeah. Right.
[00:20:23.700] - Jim Emerich
Not reasonable, but it is our job to defend our client.
[00:20:27.780] - Brandon Reece
Yeah. So, and the work that you're doing up to, right? You guys are laying the bedrock and ensuring that it's protected when it comes to that point of transaction, whenever that happens.
[00:20:38.540] - Jim Emerich
We want it to be clean. We want to know the stories ahead of time so we can not control the narrative, but so that we can help the client navigate it. Right. Because some, if I'm a buyer, of course, I'm going to want to be discounting as much as I can. I'm going to want to lower that multiple for X, Y, and Z reasons. And we're, We're with the client, of course, we're trying to position the company to say, no, you're in a really good position, Mr. and Mrs. Buyer, and here's why. This is how we have MSAs. We have— I came from the government contracting space. We would have these, what they call IDIQ contracts, indefinite delivery, indefinite quantity, 5, 7-year contracts where they can place blanket orders at any time. So it goes back to, hey, this might seem like on paper highly concentrated, but here's why this helps you. Here's why this elevates the predictability of future revenues for you. That goes back to the enterprise value conversation. So if you're listening and you're a small business wanting to scale, and you're thinking, okay, how can I pivot? Not how do I get out of restoration?
[00:21:36.060] - Jim Emerich
Or how do I get out of being an HVAC company? But how do I pivot my model in such a way where I move from one-off transactions towards something that gives me in today's world, but also in the future, some more predictability into future revenue?
[00:21:51.700] - Brandon Reece
Mm-hmm.
[00:21:52.070] - Jim Emerich
That could be, That could be, to Chris's point earlier, an MSA. That could be setting up a program with your, uh, and I'm even thinking of a landscape contractor I work with, setting up 1-year contracts with residential, I would say middle, middle to upper income level type of clients where they're paying a monthly subscription for all the things, not one-off mulching in the spring and, you know, 28 cuts a year in New Jersey, but it's, I'm going to pay 10 grand or 20 grand and I'm going to have 10 services done. I don't have to think about it.
[00:22:21.790] - Brandon Reece
Yeah.
[00:22:22.400] - Jim Emerich
But if I, if I have, if I have 150 customers that have that contract versus paying it one-off here and there, it could be the same revenue, but the revenue predictability is entirely different. All of a sudden enterprise value goes up.
[00:22:36.860] - Brandon Reece
So, so 2 things I kind of want to piggyback on as we're in this, on this topic. One is on the enterprise value. I just kind of want to unpack really quickly kind of how we think about it in relationship to a business's health. And I think this is important because we, we have friendships with people that are brokers, for instance, not only in this industry and others. And we always want to be very clear that Floodlight specifically, we're not evaluating your company, not— we're not actually telling you this is specifically what your asset is worth. What we focus on is helping that business owner understand and identify that, yes, when you were at the bar on Saturday and JoJo was telling you about the multiple he got on his profit, Yeah. Understand that before that transaction closes, that due diligence period is going to start. And they're gonna start looking at all the systems, the processes, the key players, the roles, who owns what, whose skills are gonna stay in the business. What happens when you leave, when they buy you? Was this a shop that was built on the back of an overly productive owner-operator, or are there legitimate systems in place that will continue to live on after you?
[00:23:50.030] - Brandon Reece
And so, what we like to look at is when we're looking at this enterprise value, our job in partnership with teams like yours, with a JT Crye, is we're gonna help evaluate the health of the systems in the organization, and we're gonna identify that these things right now are either taking away from or adding to the potential value of your business, right?
[00:24:10.470] - Chris Nordyke
Yeah.
[00:24:10.720] - Brandon Reece
And so, I think just kind of coming back to that enterprise value, we're in alignment with you. That's how we think about it.
[00:24:15.920] - Chris Nordyke
Like, what kind of things have to be in, in the Well, and not only that too, but one of the conversations we end up having with clients to help kind of level set their expectations is one of the ways investors and strategic buyers will sort of offset their risk when they see lumpy revenue, they see some big large loss activity, they see some heavy concentration around a single customer is, yeah, they still may pay out that 11 times multiple or that 8 multiple. But a big chunk of that payout is tied to the performance of the company over the next 3 years after you sell. So you might only be getting 60-65% of that big giant number. The rest is predicated on you being able to repeat that performance over the next 3 years, 5 years, whatever.
[00:25:03.830] - Brandon Reece
Good point.
[00:25:04.410] - Chris Nordyke
So that whole earnout thing, that it is like our egos as owners who have sold our company, we often just leave that part off the table. We're like, I got a 9 multiple, but in reality, how much of that They actually have a 4 multiple in their pocket, and the rest of that payout is predicated on them performing for another 3 years, which means they still have a job.
[00:25:26.420] - Brandon Reece
Yeah.
[00:25:26.600] - Chris Nordyke
Like, I just ran into one of our clients, uh, in San Diego this past week, and he got a very handsome, uh, buyout here recently, but he's got a 3-year earnout attached to it. And I said, yeah, but you're probably still on easy street, right, bro? He's like, no, I've never worked more than I have I never worked this hard. He's like, bro, I got a lot of money on the line to perform and grow over the next 3 years in order to get all the rest of the money. And I think a lot of owners don't realize that, right?
[00:25:55.520] - Jim Emerich
Yeah, it's huge. We just had a concrete restoration company. They just went to closing. This is one of Melissa's clients. And I'll tell you one of the things that I'm most proud of Melissa is that over the— it took a while, multiple buyers came to the table and and left and all this stuff, that she helped that company, it was a husband-wife owner, get a 1-year earnout as opposed to a 2 or 3, which, Chris, to your point, that's dollars, but it's also lifestyle, man. Like, again, everybody's in a different place in a season, but these guys have been at it, I think it was like 39 years.
[00:26:29.370] - Brandon Reece
Oh my God.
[00:26:29.750] - Chris Nordyke
Wow.
[00:26:30.240] - Jim Emerich
You know, kids are grown in the business and there's like, that's a whole story in and of itself, but they don't want to, they don't want to be on a 3-year earnout, right? Like they're ready to live. In retirement, in the blessing of, of what they just worked the last 39 years for. So I think the conversations around exposing what that enterprise value means in terms of a sale is really critical. But Chris, I have to go back to the thing you said like 5 minutes ago, because I think this is the— it's the killer in a good way. Like, it's the thing you should be looking at. If you're listening, you own a business. You said a minute ago that enterprise value gives you options. And to me, that is the thing. So, because I don't know, I don't know, like the actual statistic here, but I'm gonna go gut reaction based on the companies I talked to, less than 50% have a hard, I need to sell in 3 years from now.
[00:27:20.810] - Chris Nordyke
Yeah.
[00:27:21.280] - Jim Emerich
Most of them want to eventually sell, but they're still in the pursuit and they're still growing and they might, they might never sell at all. I was just talking with a GC in Philly Monday or Tuesday this week. And he was on a pathway to sell. And then his son turned 21, graduated college, and all of a sudden said, Dad, I want to get into the business. And his entire trajectory changed. He's like, of course, let's go. Like, let's, let's, let's create a 10-year pathway for you to get into a leadership capacity that you can actually run this thing. So again, like everybody's got a different, but he has built an enterprise that'll do $60 million in sales this year. Has significant leadership, has significant runway, has significant brand. Now he has options. He has enterprise value, but he has options. So I think, I think if you build with that in mind, whether or not you go to sell in 3 to 5 years from now, I think is another topic. But I think the optionality gives you a ton of peace of mind as a business owner. And if you're building with enterprise value in mind, you'll have a healthier business, Brandon, to your point earlier, you'll have a healthier business regardless.
[00:28:30.580] - Jim Emerich
You'll be a better business owner for it.
[00:28:33.130] - Brandon Reece
Yeah, yeah, life will be better. Like, it's, it's kind of like one of these things, we have this conversation a lot where the level of work that it requires to create a company with a ton of enterprise value is the same work that makes that company worth owning indefinitely because you can manage it. It's not chaotic. If you don't show up for a week because you choose to take a vacation, Nobody cares because you weren't part of the production cycle anyways, right? You're an actual owner versus a service provider. So I think it's critical across the board. I don't want to lose a little bit of this conversation because I think that there's probably— when you get outside of restoration space, I'm not sure it's as obvious on the service-based side what we can do to make some of our service offering more consistent. And I think this, again, this relates to Cash flow, it relates to revenue consistency. And I kind of want to get your play on this. So example, obviously, if you're talking about like landscaping and it's commercial, you're already used to having some contracts of some sort where there's a monthly fixed fee.
[00:29:37.870] - Brandon Reece
You have so many commercial clients, you know exactly or roughly what your revenue is based on number of clients. I think though, for a lot of residential-based businesses on, on the service side, We tend to just be like, I don't, you know, we're, we're paying for so many leads. Hopefully we get those leads in, we're going to provide so many bids. But what I'm seeing happening a lot in all the services that we've hired over the last 18 months, just personally in our own household, every single one of them has offered a monthly service of some sort. And so like an example, and I'm sure HVAC companies are like, yeah, we've been doing this for a long time. There is a service price that I would pay fixed every month.
[00:30:19.790] - Jim Emerich
Okay.
[00:30:20.440] - Brandon Reece
And then what that's going to basically do is I'm going to have somebody come out 2 times a year, do a complete diagnostic on my HVAC system, maybe check some additional filters, things like that, maybe do some kind of very minor maintenance. And I couldn't even pretend to know exactly what it is that they would do. It's perception management, if we're honest, though.
[00:30:39.860] - Jim Emerich
But it's keeping relationship.
[00:30:42.520] - Brandon Reece
That's it, right? Is that the fees were small because they know the line they're walking, right? Because otherwise you got to show the value every month for this fee if it gets above a pretty small incremental amount. But if I'm in this service contract of some sort, why on earth would I call a different HVAC company or get multiple bids? Like the likelihood of me getting competing bids at the end of the year when it's time to do XYZ or replace a roof or whatever, you name it. I'm going to have very little motivation to work with a company outside of this minimum contract. And I was thinking about this for like contractors, remodelers, like how much of the baby boomer group is in a position now where taking care of their home is an actual problem? Like logistically, it's an issue.
[00:31:34.710] - Chris Nordyke
Yeah.
[00:31:35.180] - Brandon Reece
How many contracting companies, for instance, I'm throwing this out there, I might get a contractor call me and tell me I'm stupid. But what would like a honey-do list, for lack of a better way to call it, program look like?
[00:31:47.220] - Jim Emerich
Yeah.
[00:31:47.690] - Brandon Reece
And maybe we do quarterly things where we hit light bulbs, we replace filters, we do some checking of certain systems, we do some diagnostic on appliances. But we have this consistent check-in and we're staying in front of that client that now it's time to sell the property. Well, we got to remodel that thing and maximize market value. That's my contract, right? Like, Like, are you seeing and hearing more of this like service type agreement with the effort to just maintain that sphere of influence?
[00:32:16.650] - Jim Emerich
3 that pop, like just from a client perspective that I can rattle off the top of my head. You already named one of them. HVAC is like, they're probably the staple, right? They, that, that's not new for them, but that's one of them. Pest control. I mean, this one is huge.
[00:32:29.860] - Brandon Reece
Yeah.
[00:32:30.020] - Jim Emerich
Pest control is gigantic. Uh, and then the other one that I've seen, and I don't know, I guess it depends geography-wise. So outside of landscaping, landscaping is another one. And then ductwork and up in the Northeast, we have chimneys.
[00:32:42.380] - Brandon Reece
Oh yeah.
[00:32:42.620] - Jim Emerich
So like chimneys and ductwork service, right? So I actually have a contract for my home on that as well. So like, those are 3 service-based contractors that could sell those exact services one-off, and they do. Or you can contract with their company, pest control, duct cleaning, chimney service, landscaping, HVAC, my gosh, I'm a buyer of all these things personally. All right. And it's a no-brainer, right? For me, I don't want to— if I have this just happened, if I have hornets in my barn, like, I don't want to have to— who do I call? Like, my kids are outside, right? Like, I just got to be able to pick up the phone and be like, hey, we got a hornet's nest. Somebody get over here ASAP, right? Or once a year, you know, after— I guess actually ours comes out in the spring. We got to clean the chimney. It's going to get cold in 2 months, right? It's got to happen. And then the ductwork's got to get cleaned. So these are all things where if you're listening and you're running a trade service of some sort, of any sort, the likelihood of there being a component that's either repeatable or has a maintenance servicing check-in component or could have, that's where I would be thinking.
[00:33:49.930] - Jim Emerich
And the good news is, in most cases, we're not, we're not talking about anything that's rocket science or Brent, like, yeah, I don't think we're coming up with any brand new ideas on this show.
[00:33:57.590] - Chris Nordyke
No.
[00:33:58.040] - Jim Emerich
But go like, this is like, if you have eyes, plagiarize, man, right? Like, this is the exact moment. to just rip off and duplicate somebody that's doing it well. Because if you're starting from nothing, and it's all one-off, that again, go back to the 4 levels. This is where I'm learning, you can create an asset in your business that has nothing to do with a single customer transaction. If you have a program with 1,300 members in it, and they pay $50 a month to just be a part of the membership, because now you come out and check on this thing once every 4 months, you now have a program and that program is an asset. That asset probably has an email list. The downstream value of that stuff is, it's wild, man. When you talk about marketing and sales, and this is why I, I think contractors have such an amazing advantage, especially when you're talking about trades like, or services like landscaping, where you could have hundreds and hundreds of clients over the years. Get 10% of them to sign up for a membership of sorts. Chris, to your point, like it doesn't have, that doesn't have to be the thing that makes the money, right?
[00:35:02.190] - Jim Emerich
Although there could certainly be some of that, but it's, it's the repeatability. Now they're my, they're in my membership corner. They're not going to another landscaper when they have to have a patio built.
[00:35:13.090] - Brandon Reece
They're going to come to you. That's interesting. I wonder where, I wonder how many teams, for instance, are beginning to do this in a way where they're creating these little mini ecosystems together. Like I can see a world where let's say a GC partners with their subs to create an environment where there's this very low fee kind of group or whatever, like maintenance, whatever agreement. But then basically what happens is that individual now is getting access to an electrician, a plumber, the GC to do kind of the broader trades, maybe a landscaping company that they've kind of united with where Maybe the fee is enough to cover the administrative work required by the GC to kind of house and corral the list. But then ultimately, it's very low effort on the part of your business partners. You just need to be able to kind of— the people, it's like one call, and one call will solve a lot of problems. And I think that we see that being mirrored across, like, the commercial space likes to have one neck to wring as much as possible. They'd rather have less vendors on the list and And have trusted people where one call handles all of the above.
[00:36:21.660] - Brandon Reece
And I just think that there's a way for us to mirror that in the residential space and keep, you know, create some of that consistency that you're talking about. It's almost more like community versus marketing.
[00:36:32.330] - Chris Nordyke
Yeah, this reminds me too of a conversation we had with Rocky Hensley at One Tom Plumber. He's the founder of One Tom Plumber, co-founder, I suppose. But he was talking about his, in his engagement with Eversmith, which is a big private equity you know, fund in the home services space. In his conversations with them, one of the things he's hearing at kind of a macro level is their intention to own as much of the homeowner's pocketbook as possible by sort of consolidating these different home service verticals to where Eversmith can have a disproportionate amount of that money, whether it be weatherization, waterproofing of basements, Mm-hmm. floor covering, carpet cleaning, plumbing, electrical, et cetera, et cetera, in these residential spaces. It seems to be a trend that's starting to happen at the investor level. And I wonder just how long it takes before we start to see— here locally, we have a big painting brand called Fitzpatrick Painting, and he has started to expand into Fitzpatrick Custom Homes and Fitzpatrick Handyman Service.
[00:37:34.960] - Brandon Reece
Exciting.
[00:37:35.620] - Chris Nordyke
and siding and all of this kind of stuff. I wonder just how quickly we're going to start to see that be a mainstream trend. And then I was in the gym the other day, and I heard, you know, every once in a while you hear these like really charismatic conversations, you overhear these conversations of like a sales chat that's happening around you. And of course, my ears tune in. And there's this gal, she has a home service business that she sells, and she said it in her pitch to this guy. She's like, I work with affluent homeowners. And we have a suite of services where she gets her referrals from realtors, and she comes in and she basically provides and/or subcontracts out landscape maintenance. And that's where they started. And then they have vacation sort of home observation and home care. So when people leave for like a sabbatical, some doctor or something leaves for 3 months, This company will take over and collect all their mail and do drive-bys to maintain the security of the home, all this kind of stuff. Like, if their security alarm system goes off, they have their home manager that responds to it, checks it out, works with the police, whatever, whatever, and then just sends the homeowner a report.
[00:38:46.560] - Chris Nordyke
Hey, this thing happened. No big deal. We took care of it kind of thing. Now they pivoted. They have laundry services where they pick up laundry, they launder, fold based on the customer specifications, and they deliver that laundry in 48 hours, blah, blah, blah. And so she has this whole suite of services that now then to that homeowner, oftentimes an affluent homeowner, has rental properties, family vacation homes that they want to Airbnb, but they also want it to be ready for them when they do family vacations. And so they have all this whole suite of services where this gal is building a company Where she owns a majority of that household spend on owning a home and enjoying a home. They also— oh, here, another thing. They set up the family home for holidays.
[00:39:33.990] - Brandon Reece
Oh, wow.
[00:39:34.410] - Chris Nordyke
So they have a service now where it's like, hey, you pay us $2,500, we're going to come hang Christmas lights, put up decorations. We'll come with a little flipbook, let you decide what style you like, and then we'll just do it for you. You show up one night, it's done. And I just thought, wow, is this the future of this sort of contract-based, super low beta from an investor's perspective, like, like revenue business, where it's like month in, month out, this business is, is doing, you know, $40,000 a month, $50,000, like X number of profit every month, month in, month out, because they have these static relationships with homeowners or businesses, you know?
[00:40:11.240] - Brandon Reece
Yeah.
[00:40:12.380] - Chris Nordyke
It's pretty cool.
[00:40:13.100] - Jim Emerich
The genius of that business, of the woman you're speaking of that created that, is that she, going back to the 4 levels, she's creating the ecosystem for herself.
[00:40:21.020] - Brandon Reece
Yeah. Yeah.
[00:40:22.320] - Jim Emerich
She's just creating it. She's creating the platform, right? She owns all the relationships, all the subcontract relationships, all the trade partners, all the, right? And then of course on the client side. So I think as contractors, if you can think more on the basis of that, it's really just taking your marketing dollars that used to be, hey, let me go Google Ads and Facebook and PPC. And on all the traditional methodology of creating new generation of leads, the origination cost, taking that same level of effort and maybe the same resources, but diverting it and applying it a little bit more strategically and say, how can I create the platform? How can I create the ecosystem? How can I either get into one or create one myself? And I think if contractors spent going back to ROI, and this, this comes right back to profitability too. How do we keep our overhead and cost of acquisition down? Well, it's to have access and deep relationships with recurring revenue to some extent. And that recurring revenue might not be a subscription model if you're— and again, making it up— you're a, you're a duct cleaning service or you clean gutters or something like that.
[00:41:29.500] - Jim Emerich
Might look different. But if you can stay in front somehow where you own the relationship, that is a recurring service to an extent.
[00:41:37.550] - Brandon Reece
Yeah.
[00:41:37.890] - Jim Emerich
And if you can be the provider of choice where there is no other options, It's almost structural, but not really, you know, but it's almost presented that way, then you're kind of creating the path forward for yourself to have enterprise value.
[00:41:51.130] - Brandon Reece
Yeah. You know, one kind of last thing maybe to add here for some, some context is I'm thinking about when we made a big push early on in restoration to do fixed contract cleaning, basically floor maintenance. And Chris really headed up that charge. And one of the things that He ended up approaching that was pretty different at the time was this idea of, of more of a fixed monthly rate that reduced, like your overall spend on the year ended up being about the same if you did like 2 emergency cleanings when it was do or die last minute, but it also afforded you to have kind of a more consistent environment. And you weren't necessarily paying much more at the end of the year to have this monthly service, right? And what Chris did is he centered it around, in this particular example, around high traffic areas. So we were going in on a regular basis, hitting the high traffic areas.
[00:42:45.540] - Chris Nordyke
Red zone.
[00:42:46.260] - Brandon Reece
Yeah, the red zone. That's right. And then by the end of the year, you would hit some of these bigger areas that are a more extensive cleaning. Maybe we did a hot water extraction 2 times a year. The rest of the time was encapsulation. The point was, is that Chris found a way To take something that people would do, let's say, 2 times a year and spend X dollars. And he basically found a way to get that client to take that same spend and break it up so that it was coming in month in and month out. But then it set the stage for them to do Ă la carte selling every service call.
[00:43:19.710] - Jim Emerich
Yeah.
[00:43:19.730] - Brandon Reece
So one of the things that they would do basically is that the team would call the client prior to their Tuesday service and be like, hey, You have your menu of additional services in front of you. Did you want us to hit a couple hallways? Did we need to hit another high-traffic area? You know, whatever. And so actually, their spend, if you looked at it by the end of the year, they probably spent more with you. Most of it you got on a fixed, consistent basis. And in addition to that, we would be the first call for disaster restoration because our face was in their building. Every month.
[00:43:54.880] - Chris Nordyke
Yeah. Our hypothesis was, what if, what if we could get a 1-to-1 revenue bump with these carpet cleaning clients and tile cleaning clients? What if, what if they also, like, how much could we reasonably expect across, say, the 100 or so hotels and senior living communities that we were servicing? What if some percentage of them end up needing us for restoration? Like, could we expect a 1-to-1? Like, if we do $1 million worth of floor maintenance, Could we reasonably expect $1 million worth of restoration work across the year as well? And sure enough, yeah, sure enough, within a matter of 24 months or so, we started to see that 1-to-1 relationship. We had a couple of years too that kind of popped and were even greater than that. Because of course, as restorers know, it doesn't take a whole lot to generate $1 million worth of restoration when you're working with commercial entities. You got a group of 100 you're selling to. I mean, that number could be 3x in a really awesome year, but— Sure.
[00:44:49.370] - Brandon Reece
Yeah.
[00:44:50.110] - Chris Nordyke
It became kind of the tip of the spear for us sales-wise was that recurring revenue to then capture the one-off large loss. We just call them angel losses. That was just, it was just piles of gravy on top of that nice static monthly revenue, you know?
[00:45:07.130] - Jim Emerich
And Chris, like, just to like seal the deal here, because I think this is so critical, and I can almost guarantee I've never heard you tell me that story, but I can almost guarantee this is part of the outcome beyond the revenue. is you're able to then staff and have an operational excellence built around that delivery that now you can count on.
[00:45:26.590] - Brandon Reece
Yep.
[00:45:26.930] - Jim Emerich
So there's the revenue piece, but when we talk about profit and we talk about the operational component that can deliver on the thing, that's the icing on the cake. It's— and I talk to restorers all the time, and this I think is probably true in all trades, not just restoration, but we're leveling up on temporary labor. We're having a hard time staffing a particular department. But if you can have more of this recurring revenue, or you can have this piece of your business that is recurring, not only is it a recurring revenue, it's also a recurring business model that you can fully staff and fund.
[00:46:00.430] - Chris Nordyke
Yeah.
[00:46:00.750] - Jim Emerich
That enables your business to have an entirely different level of predictability all the way through, kind of cradle to grave. And I think that for most business owners is another headache, right? We have to, as we scale revenue, we also have to have a way to staff it. I was talking with a roofing contractor recently going to multiple locations. Sounds awesome. Even had a— I think it has a very good pathway for creating the revenue, but the subtrades on delivery is now an entirely different challenge, right? Because we have to now fulfill on that revenue promise. So I think, again, the recurring nature of this, of what we're talking about and building these platforms or this ecosystem, it actually provides a consistency across the board that elevates enterprise value. And again, think of enterprise value as optionality, provides you a better lifestyle as a business owner, certainly helps cash flow, helps revenue consistency. And then if and when at some point in the future you decide to sell, or you're entertaining those conversations, inevitably the multiple on, on your EBITDA or your profit is gonna, at least from that component, gonna be stronger. You're gonna have a great—
[00:47:07.240] - Brandon Reece
Oh yeah.
[00:47:07.580] - Jim Emerich
Great narrative to tell, a great story to tell. If you can really lay out that you have an ecosystem creating recurring revenue in your business.
[00:47:14.540] - Chris Nordyke
Maximum leverage.
[00:47:15.660] - Brandon Reece
Yeah, big time. It's funny because I think that, you know, the guys like the Gary Vaynerchuk and stuff have kind of been saying this ultimately, but audience is key. So I think there's an opportunity for service companies. And if I'm honest about like just kind of making some broad strokes assessment, I think our younger entrepreneurs coming into the spaces right now are living this out and you see it, you can see these, small, newly started service brands that are literally hitting a couple million, $3 million a year in revenue within 18 months, because the approach is so audience-driven versus the service offering itself. Now, again, I'm not saying that having a tradecraft and skill and doing a great job is, is not important. Those are the minimum standards if you're going to charge somebody for a professional service. So that goes without saying.
[00:48:06.480] - Jim Emerich
Table stakes.
[00:48:06.910] - Brandon Reece
But you're seeing these young— yeah, the table stakes. You're seeing these young entrepreneurs starting out of the gate, just recording cleaning the freaking driveway and showing that video in 10x speed. And all us weirdos that get chuckles out of watching a green driveway turn awesome is like watching for a minute and a half. And when I go to get my driveway cleaned, who am I calling? I'm going to call the guy whose video I watched on the toilet last Saturday, you know, versus starting from scratch.
[00:48:36.330] - Jim Emerich
There's this guy, real quick story on LinkedIn. This is how crazy social media is. I don't even know his name or his business's name, but he builds decks and the dude is incredible. But he like shows all like the little hacks and tricks of like building decks. That's his, that's the entire like content mix of his reels. And literally bathroom, like quick break. I'm like, oh man, he's back in my feed. Let me watch this real quick. He got this trick. How do you get that beam up there with like just himself? And I like, it took 45 seconds, but if I ever build a deck and that guy's close to me, 100%, 100%. I'm going to that guy first. There's no other— I'm not Googling deck builder near me. There's no way.
[00:49:15.450] - Brandon Reece
Yeah. I think what you're tapping into a little bit is this idea that when we talk about people working on their business, right, I think we all have a different interpretation or definition of what that means. But I think what we're saying here is there's an opportunity for all of us to grow very wise to the fact that having the skill to do the service I'm not downplaying it. Obviously, we're in a deficit of blue-collar skill and tradecraft right now. Like, you got to have professionals that understand how to provide the service. But as business owners, we often hang our hat that we've got X years experience doing the trade, doing the craft. And the reality of it is, is that doesn't scale a business. You can hire other people that know how to frame, that know how to apply, you know, install a roof. But what are you doing to think about gathering an audience or a captivated ecosystem? And it could be the most valuable time spend that you have as it relates, like you said, Jim, to the enterprise value, to the consistency in your income, your ability to recruit and have good staff because payroll's kind of taken care of, you know, nobody's, nobody's hitting home runs unless we get the big work, but payroll's taken care of.
[00:50:28.030] - Brandon Reece
I've got people here ready to say yes to the next opportunity of substance. It's got a ton of value.
[00:50:33.760] - Jim Emerich
So we haven't even touched on the term like, or a concept like cash flow and things like that today. And I love it because all this stuff is, it is like, this is the why behind the what, right?
[00:50:45.010] - Chris Nordyke
Yeah.
[00:50:45.390] - Jim Emerich
But I'll say like from a CFO's perspective, and this I think will put so many people at ease, but also challenge them at the same time. And I'm distinctly going to an HVAC client that we work with. And if you're in the trades, you'll relate to this. Immediately, especially if you're in a business where you have a lot of either new construction or a lot of one-off projects. We do what we call a 13-week cash flow forecast, very simple tool. But at the end of the day, we're just looking at future revenue, right? And all the expenses and stuff. But this one client, very large HVAC client, they have mastered this, this entire concept we're talking about. So they have effectively maintenance contracts. And dude, for, cause you think of like a construction company, you're like, this must be really hard to manage cash flow. And 9 times out of 10, it is. Right? And this is like a $30 million plus company, but that one line on their 13-week cash flow forecast almost never changes. And it is the most beautiful thing to look at because for a $30 million trade company, right? And they do new construction and like, that's definitely part of the bigness of their numbers.
[00:51:51.560] - Jim Emerich
But the fact that they can have 30% of it never go away, ever, ever.
[00:51:56.910] - Brandon Reece
Yeah.
[00:51:57.340] - Jim Emerich
And by the way, it's huge margin business, like, because it's service. And then, oh, by the way, when there's the emergency, who's getting the call, right? It's like, these guys are crushing it. So I will just say, like, love that. If you're listening and you're, you're thinking like, how can this really benefit me? Why should I go through the effort? Why should I put the resources against this? And I can just tell you that if you can create even 20 to 30% of your business's revenue that is stabilized, And I don't want to say you don't have to think about it, but it's just there. Yeah. Just what would that do for you? What would that— if you're a $10 million business and you have $2 million a year coming in that you never have to question, what would that do for you?
[00:52:37.020] - Brandon Reece
So question on that, because this is actually super interesting. So from your perspective, because you work with so many different companies, a lot of the nuts and bolts for Chris and I personally has been inside the P&Ls of a restoration company. You know, when we look at restoration companies as an example, like we're looking for the cost in your G&A, so your overhead, let's ballpark, very big, broad number around 30%, maybe 31%.
[00:53:03.490] - Chris Nordyke
Okay.
[00:53:04.020] - Brandon Reece
Yeah. So when I'm hearing what you're saying, like, how realistic is it in the broad teams that you work with for us to get the majority of our overhead to potentially be addressed By some of this fixed, more maintenance-looking revenue so that really kind of the foundation, right? You're paying the bill for this, whether you go out and get a new job or not. How much of that do you think realistically service companies could get covered with this kind of endeavor?
[00:53:32.570] - Jim Emerich
I would think of it in this way, that even the example I just gave you, look at doubling your gross profit from normal, right? So that in that, let's simplify this. Let's say it's a $10 million HVAC company, and you can get 20% of your revenue to be annualized on some recurring maintenance package. If you are typically in service businesses, an HVAC will already be a nice GP. It's baseline plus 50%. But if you can get that recurring revenue, now you're looking at 80% gross profit. So that $2 million is now producing $1.6 million of gross profit. Think about that math. So to me, that's the— that is the goldmine. It's not the revenue number. It's the gross profit that it produces. Because that gross profit falls right to the bottom line. And it enables you to have the supers and the project managers that you need to go carry out the new construction, which is still variable, and it's still going to swing, right?
[00:54:31.130] - Chris Nordyke
Yeah.
[00:54:31.470] - Jim Emerich
But now you can rely on that gross profit to manage your cash flow that from this this piece that's recurring. And again, I think we keep using HVAC as an example. I believe there's a component of that reality in every trade or most trades, not every trade, but most trades. Like I said, I think of some examples I can personally vouch for: pest, duct cleaning, HVAC, roof repair. Like these are things that like these, these can be a component of this can be annuitized. Is that the right word?
[00:55:01.490] - Brandon Reece
Yeah.
[00:55:01.810] - Jim Emerich
Right? To create an annuity with your— and I like the word member, right? Creating a community with your customer base, not just a, not just a one-off transaction, right? Getting away from that, but creating a community around it. And now you have loyal members. Those loyal members get special benefits. Those benefits then create future revenue opportunities when the one-off new HVAC system has to be installed. And that's great. And those are awesome, but I want to be first in line for that, or maybe exclusive when it comes to my clients' needs for that new, that new install.
[00:55:37.640] - Brandon Reece
Well, and I think that's maybe where you just look at your service offering and saying, look, okay, the bulk of what we do is still fairly one-off. Okay, fine. But how difficult is it with your existing systems, process, toolkits, assets? How difficult is it for you to identify a more mundane quarterly couple times a year, a few times a year thing that the average homeowner, or maybe it's a target, a more affluent homeowner needs, and then just decide like, we're going to provide that service. That is our, our foundation offering. Like, you know, maybe a contractor decides they're going to wash windows, right? And they set up a 4 times a year program with the, with homeowners to do windows 4 times a year. You're not getting rich. Like maybe it's actually a decent little window washing company, but it's not the point. The point is you're in front of these people. 4 times a year building relationship, they're getting the newsletter, they're getting the annual, are you prepared for fall? Are you prepared for winter? What do you have, you know, planned for spring renovations? And the next thing you know, it, you know, it's this consistent captivated audience that you're doing business with on a regular basis.
[00:56:46.710] - Brandon Reece
I mean, you can spin something up.
[00:56:48.700] - Jim Emerich
Yeah, I think the highest and best use of a CEO or founder's time is to scale to a point where they can be spending 80% of their brainpower on solving that problem, that is where the work's at. That is where the value's at. Like that is, you get going back to like the classic conversation of working within the trades, talking to a business owner who's, he or she can swing a hammer, right? And that's how they got into the space. But the thing that will accelerate growth the most, and going back to enterprise value and cash flow, and we can connect the dots and all these different pieces, it's spending your time, effort, and energy On these types of activities that will ultimately get you to where you want to go. And it, and it is not, it's not the one-off transaction. It's not the one-off estimate, man. I, I, this was like breaking my heart. I might've shared the story last time, not breaking my heart, probably overexaggerating, but I just see it so often. I'm like, no, where I'm on a sales call with a landscaping contractor doing about 5, I should say hardscaping, landscaping, both doing about $5 million a year in sales.
[00:57:50.050] - Jim Emerich
And literally this is an hour conversation. Like, I think it was the first time we ever spoke you know, to each other, had to take at least 3 calls in the middle of our call, triaging problems on a project, customers coming in for estimates, whatever the case may be. And the whole time, this guy, I could just see it in his face, right? He can't even think about what we're actually supposed to be talking about.
[00:58:12.110] - Chris Nordyke
Yeah.
[00:58:12.270] - Jim Emerich
And for him, and we never even worked together, like it never went anywhere. And who knows, right? But I'm not entirely surprised because He's in it, right? He's in it. And, and that's a real trap because you feel productive. You feel like you're doing the thing that has to be done. And the truth is that thing does have to be done. Yes, it does have to be done.
[00:58:31.780] - Chris Nordyke
Well, what's so deceptive too, or I guess distracting for most owners, is that guy with that $5 million business. If he's running even halfway efficiently, the dude's probably making a lot of money.
[00:58:41.940] - Brandon Reece
Yeah.
[00:58:42.520] - Chris Nordyke
And that can be, that can be a real detriment to shifting gears and moving into this more elevated mode. It's like, gosh, you know, I'm already making $500,000, $600,000 a year. This is the good life. I got the nice truck. I got a vacation home. My wife stays home. Like all these things that can be the impediment to taking it to the next level is, yeah, but boy, we got a good thing here. I don't wanna take my foot off the gas or I don't wanna take my eye off the ball and potentially have this thing erode. I think that's the fear that—
[00:59:10.090] - Jim Emerich
Yeah.
[00:59:10.720] - Chris Nordyke
A lot of owners.
[00:59:11.680] - Brandon Reece
How do you, Jim, how would you though, like put that, like answer that in context with the enterprise value? Because in my mind, I'm like, okay, I think this is part of the importance of understanding how to create a conversation based on that.
[00:59:24.350] - Jim Emerich
Right.
[00:59:24.600] - Brandon Reece
But what's your 2 cents on that?
[00:59:26.450] - Jim Emerich
Dude, I, there is a distinction and it really comes down to a mindset and a decision around lifestyle businesses versus enterprise value business. And one of my best friends growing up has a, an artificial turf installation business. He sort of went to college, but he never really went to college. Right out of high school, his dad started this, this franchise. And what we're approaching 20 years graduation. So he's been running it for like 22 years. He's crushing it, man. Like incredible lifestyle. And I'm so glad for him. He's blessed. But also like, if he steps away, man, like it's, it's, it's only a matter of time before things would break down and He knows that. And I know that. And then like, that's just one example that we could probably all rattle off like 10 to 20 people we know that are in that spot. It's not bad, but he specifically wants a lifestyle business. And that's awesome. It's just not going to create enterprise value. And that's such a— we should probably come up with a better term because it sounds so like accountant-like. But really what I, when I say that, meaning like, he's not going to ever be in a position where he can step away for 6 months.
[01:00:30.760] - Jim Emerich
And let this business keep growing. You know, it's going to be compromised at some level, probably multiple levels.
[01:00:36.870] - Brandon Reece
I think one of the things I think about on that enterprise value, Jim, is this idea, and I think we can get lost in this, of how much money, monetary value, is actually tied to this. So for an example, I think $20 million, if they've got any reasonable profit, they're probably throwing off some dough. But I mean, for the average Home service trade contractor. If you just think about, let's say, I don't know, they're sub $10 million, probably on average, most of them are maybe $5, $6 million. I don't know the stats exactly, but if they're doing even 20% profit, yeah, it's thrown off some money. It would be a substantial number, no doubt about it. Right. But, and if they were to look at the value, potential value of the business, let's say Overace. A specific time period, let's go 5 years. The number of commas or zeros that you're potentially adding in overall monetary value, like this will be recognized at a liquidity event as real money in your hand, could be substantially greater than eking out a little bit more profit for the next 5 years based on you doing everything, not hiring leadership, not developing a leadership team, meaning you're not spending into your overhead.
[01:01:52.690] - Brandon Reece
But it could be costing you a lot of money long-term because you're not looking at the multiple effect on your business's value in 5 years when it comes time to exit. And so, like, sometimes I'll even get in those conversations like, hey man, I understand you made an extra $500 grand this year, but if you did that every year for the next 10 years, that's what it's gonna require in order for you to outpace what you could be worth in 5 years. If you gave your attention to the right thing, you know what I mean? It starts to change that conversation pretty substantially.
[01:02:24.150] - Jim Emerich
I mean, I would, I would just love to change the entire narrative around this dichotomy because it is like, we're not making this conversation up. It's lifestyle business versus an enterprise value type of business. But one thing that I've seen to be true in, by the way, I think the example you gave of $20 million company that's shelling off some pretty, like, I don't know any business owners who are running a lifestyle business at $20 million or plus, plus. That point, I would argue you've created enterprise value. Yeah. You know, most times, again, I'm, I'm like actually trying to think of an example that's not that case.
[01:02:58.360] - Brandon Reece
Yeah.
[01:02:58.820] - Jim Emerich
Most of what we're talking about. Can you really? Yeah.
[01:03:02.380] - Chris Nordyke
Good for them. But it's, but, but you're right though. It's an edge case for somebody to be able to build to that scale and not have a leadership team, a framework in place that's actually running day to day.
[01:03:12.340] - Jim Emerich
Right.
[01:03:12.620] - Brandon Reece
Yeah.
[01:03:13.180] - Jim Emerich
Correct. So I would say more, but here's what I'll say. I know plenty of people that have done that. And they are living a great lifestyle that never sold the business because they built a leadership team and now they're not. And I hate this even in my own company. It's one of the most frustrating parts about running a business is when you become the bottleneck or the dependency, right? It's terrible. It's a terrible feeling. So I, I think there's a whole slew of entrepreneurs out there right now that understand that. And I'll, I'll kind of call it the younger generation of entrepreneurs that don't want to work. There's no pride badge around 80 hours a week.
[01:03:46.710] - Brandon Reece
Yeah.
[01:03:46.960] - Jim Emerich
Like, I got a family, I got kids. I want to be a good husband to my wife or a good wife to my husband. You know, like these are things that conversations that I'm actually hearing more, more and more often, which I'm very encouraged by. And those are the types of people I want to work with. And that's just me biased fully. Like there's no right or wrong there. That's just, that's who I am, but it's also the types of people I want to work with. So, okay. So in order to do that, we might have to in the short term, reduce or omit a little bit of profit that we could otherwise take home and keep in the kitty. But the reality is we're building a more sustainable, enjoyable, in my opinion, lifestyle business that will actually enable me to live the life I want. I think a lot of what I saw in the past, and I still have some of these clients right now, I have this one landscaping client, man, in the sales call, it was so hard to get him to admit that working 80 hours a week wasn't good.
[01:04:39.500] - Jim Emerich
It was just like, it was up here and it was not coming out. Like it was locked and I had to— it was locked, man. I'm like, but you have 2 kids and a wife and you sure about that? You know, like, no, man, my dad did it. I'm doing it, you know? You know, whatever. So to me, that's not, that's not an aspirational place to be. So if that means lifestyle business, but I'm— because I do that, I can bring home a million bucks a year, but I forfeit so much in, in lieu of that. Like, I'm, I'm out on that personally. And the, the type— the types of businesses we want to grow and we want our clients to grow don't involve the owner having to bear the burden of 2 or 3 positions and working 60 to 80 hours a week on a consistent basis to make up the difference that ultimately is the profit that should be going towards building a leadership team.
[01:05:28.370] - Brandon Reece
Yeah, I think that's huge.
[01:05:29.190] - Jim Emerich
That's a rant. No, I love it.
[01:05:31.430] - Chris Nordyke
That's an important rant. We don't talk enough about that. You're right. It's like that whole, like, pull yourself up by your bootstraps, that bravado that is just— yeah, it's a big part of what, what made all these trades work, you know, up until now. But we have so much technology, we have so much knowledge, right, that we can, we can live out of to create more sustainable lives than our grandparents did, than maybe even our parents did. Like, we should learn from those things, right?
[01:05:57.690] - Brandon Reece
So, okay, brother, listen, I got one more Q for you and then we'll let you go. Internally right now.
[01:06:03.150] - Jim Emerich
Okay.
[01:06:03.520] - Brandon Reece
We're quickly racing into September. We're at the finish stretch of the year for certain. What's the single biggest, let's just call it friction point or area of concern, if you're willing to share it inside your business, you don't have to be super detailed, but just principally. And what are you anticipating that you guys are going to attempt to do to, to, to solve that problem before the end of the year?
[01:06:26.390] - Jim Emerich
Well, it's an easy answer for us. It's, it's hiring pipeline. And the way that we're going to solve that is we need a full-time dedicated person to own that outcome. And we got to stop having it be a part-time side hustle for 4 different people when they have time. Yeah, that's huge. It is the most frustrating thing that I see in my business or our business today. And the results align with that on every level. And we have a great team and they just need to— everyone needs, like, we need to have twice as many people.
[01:06:58.940] - Brandon Reece
Wow. That's awesome. It's awesome and super relevant. I don't, I don't think there's a single home service or resto company that isn't currently having that, that battle. So I think the only thing I heard you say there that I just want to highlight is turning that into an actual proactive investment of time and energy on a consistent basis versus trying to solve it when your back's against the wall, last minute, do or die.
[01:07:23.020] - Jim Emerich
It's got to stop. Like if nothing else happens in my life before the end of the year, that one has to stop.
[01:07:27.660] - Brandon Reece
That's the thing.
[01:07:29.210] - Chris Nordyke
Hey, hey, hey, Jim, can I— I just got to say something in closing. I'm just going to be really transparent here. When we first decided to do this monthly sort of financial corner, this financial thing, there was a little part of me whispering in the back of my head. I'm like, man, I don't know if we're going to be able to make this fun month after month after month, like this financial stuff, CFO stuff. I don't know how the audience is going to take to this. And yet here we are with a second call in, and we just— I feel like this has been a really fun chat, and I think there's been a huge amount of gold. That we've ventured into beyond just the profit and losses and balance sheets and cash flow statements and stuff like this. There's a lot of really relevant meat here on the bone. And, uh, I just appreciate you joining, man. I'm not sure there's another fractional CFO that could have pulled that off. Yeah.
[01:08:15.340] - Brandon Reece
Yeah. There is some element there. Yeah.
[01:08:17.840] - Chris Nordyke
It gives the audience an idea of what it's like to work with Backbone, that it may not be mind-numbing, you know, mundane conversations. This stuff's applicable to the overall strategy of your business, right? This isn't just the numbers. And that's what I'm looking forward to, the next combo.
[01:08:31.620] - Jim Emerich
Well said, for sure. Cool. Likewise, guys. Appreciate it, brother.
[01:08:35.270] - Brandon Reece
All right, man, thanks for hanging out with us. Have a good rest of your week, amigo.
[01:08:38.500] - Jim Emerich
All right, man.
[01:08:41.980] - Brandon Reece
All right, everybody. Hey, thanks for joining us for another episode of Head, Heart, and Boots.
[01:08:46.560] - Chris Nordyke
And if you're enjoying the show or you love this episode, please hit follow, formerly known as subscribe, write us a review, or share this episode with A friend. Share it on LinkedIn, share it via text, whatever. It all helps. Thanks for listening.