EntreLeadership - Rare Exceptions to Dave Ramsey’s “No-Debt” Policy

Episode Date: March 4, 2024

Today we’ll hear about: A new business owner who owes $200,000 to the IRS A group of businesses that provide a scholarship fund for the trades The best way to protect your assets when transferring ownership of a company Why businesses should or shouldn’t provide financing on their products Next Steps 🗳️ Submit your question for a chance to be on the show with Dave Ramsey: https://bit.ly/3HUgAgi 👣 Find out what Stage of Business You’re In:  https://ter.li/axd39b ✉️ Sign up to receive tactical tools, advice and resources in your inbox every week: https://ter.li/y8qdo7   🏢 Attend EntreLeadership Summit: https://ter.li/fcazl2   🎤 Attend EntreLeadership Master Series: https://ter.li/wcjhpu ☎️ Learn more about EntreLeadership Coaching: https://ter.li/ycznhl 💵 Learn more about Ramsey SmartDollar: https://ter.li/4imot0   🗳️ Help us make the show better! Please fill out the quick survey form. https://bit.ly/3O8fRvh   Offers from Today's Sponsors NetSuite: https://ter.li/x1t20q BELAY:  https://ter.li/yohiu6 Payority:  https://ter.li/fh2oau Trainual:  https://ter.li/a8zexl Listen to more from Ramsey Network 🎙️ The Ramsey Show   🍸 Smart Money Happy Hour 💡 The Rachel Cruze Show 💰 George Kamel 💸 The Ramsey Show Highlights 🧠 The Dr. John Delony Show 💼 The Ken Coleman Show Ramsey Solutions Privacy Policy https://www.ramseysolutions.com/compa… Learn more about your ad choices. Visit megaphone.fm/adchoices

From the headquarters of Ramsey Solutions, this is the Entry Leadership Podcast, where I take calls from leaders like you about what it takes to win at any stage of business. I'm Dave Ramsey, your host with over 30 years of experience in the trenches, doing what you do every day, still do, and we're here helping you. We love small business people. We love leadership. and we're glad that you are in our tribe and you're out here getting things done in America today. If you've got a question you want to talk about business, particularly small business, well, just give us a call. You can fill out the form at entreleadership.com slash ask,

or you can call us at 844-944-1070. We'd love to hear from you. Ross is with us in Louisville, Kentucky. Hey, Ross, how are you? I'm doing good day. How are you? Better than I deserve. What's up in your world?

Well, we're contracting business, and we do about $5.5 million to $6 million a year. We're on track to hit $10 million this year. And we had a good year this past year, and our accountant suggested that we go borrow money to cover our tax bill or because we just spent most of it to pay debt. You did not set your tax money aside? Well, I just started my business. And so I didn't quite expect to do this well,

nor necessarily knew to go set that kind of money. But I mean, you knew you were making money and over fist, and your accountant knows you're making money hand over fist, I assume. Yes, she called December 27th. No, I mean, what happened in June when you guys were making $5 million on the way to $10 million? Nobody talked about taxes? No. I didn't speak to our accountant until she called in December when she asked for our QuickBooks upload.

Okay. You're running this like it's a wild. one million dollar business. Yeah, because you need to be doing tax planning every single month at your level. And you need to be talking to whoever's doing your books every month and figuring out what your tax liability is going to be and be sure you're setting that aside so you don't get to the end of the year and have a freaking $200,000 bill, right? Okay.

I don't like surprises like that. I don't either. Okay. Not at all. I took all our extra money for the year and paid off, was actually going debt-free the week before December 27th, and then got hit with this. You were debt-free not counting on the fact that you had $200,000

you over the IRS, so you're not debt-free. Yes, correct. Wow. So where are you going to borrow $200,000? Her recommendation was that we pull off the line of credit, and borrow that and then and then just paid off as fast as we possibly can next year. But I'm trying to figure out what do we do to not get in this situation ever again. Yeah, I mean like now, I want to know right now this month, the first three months of this year,

I want to get in balance. And you need to be, you know, it's almost like you need to be setting aside withholding on yourself is the that's the basic concept right you're supposed to be doing quarterly estimates to start with where the flip you probably need a new accountant i think you've got a new i think you've got somebody that's used to doing tiny little businesses i'm not sure quick books will survive a 10 million dollar business you probably got yeah i don't think i don't think you're i don't think you know me software i would i would say we we grew quickly this year with uh just starting and yeah uh now trying to figure

it out. Yeah, what was, how many years you've been open? This would be my second. So you did $5 million one year, $10 million the next? No, we did $5.5. This year, this, in 2023, and under contract for 2024, we currently have $9.8 million under contract. Okay.

And the year before you did five, you did what? One. Okay. You need to hire a C.O. or at minimum a controller in-house that manages your books, builds out some good software that is sophisticated as the size of your business, and as a part of that, tax plans, and set your, you get your quarterly estimates going, because you're going to get your butt kicked in penalties for not doing your quarterly estimates in your third year.

In other words, you have to pay your taxes for the first quarterly estimates. quarter of 24 in March. Okay. And in addition to this other problem we've got, but this other problem just reveals how weak your, how weak and primitive your systems are for how quickly your business is grown. Congratulations on killing it. That's awesome. But now what's going to happen is your lack of systems and your lack of sophistication is going

to cause you to lose it if you don't. You can't out-earn stupidity. I've tried it. and so you've got you've got to put some good software yeah you need to hire an accountant I mean a CPA a controller at a minimum in-house that works for you full-time does nothing but manage your payroll your books and your taxes and keeps you up to date and working with an outside accounting firm is fine I use an outside accounting firm for my taxes and they work with our financial team inside Ramsey today but make sure by God my taxes are current

is the last thing we need to be behind with a stupid IRS. So her solution to this disastrous mess is the correct solution. Take it out on the line of credit, pay it back as soon as possible. You would rather owe the bank on the line of credit than you would the KGB. The IRS's penalties and interest are much higher than the line of credit. Yeah, because I think the lines are like 8.5% or something. I don't even care. You do not want the IRS in your life.

It's the last thing. It'll screw up everything. You're going to have them breathing down your throat, man. You don't even want any. No, no, no, no, no, no. So do what she said. Take that line out. But much more important than that is get this fix so it doesn't happen again.

And that is hire a controller, get somebody on top of your books, upgrade your software. QuickBooks won't handle a company this size. You need to look at something like NetSuite or something along those lines, put a more sophisticated thing in, it'll help you with the job costing too. And then if you work with an outside firm, that's fine. I don't think she's sophisticated enough because at some point during the year, if you're running that kind of volume, she should have been raising her hand going, we need to get, you're going to get yourself, you're going to get your butt in a crack here

with these taxes, man. I mean, I don't like being surprised by my lack of systems and the people in my life just supposed to be telling me what to do and help me and aren't. So I think you probably need to upgrade your software, your accountant, and you need to bring some accounting help inside the building, a controller level at a minimum, a CFO at a maximum. And that's what I would do if I were in your shoes. So very, very good stuff.

Wow. Congratulations on your success. Be careful. Success is one of the leading causes of failure. This is the Entree Leadership podcast. In person, C.D. for Entree Leadership Summit are completely sold out. The live stream passes are still available and they're going fast.

So, preserve your spot today at Entreeleadership.com slash summit. You'll tune in with over 3,000 other leaders from across the globe and hear world-class speakers like New York Times best-selling author of Atomic Habits. James Clear. Naismith Memorial Basketball Hall of Fame coach Mike Kay, Coach Kay, The first female F-14 Tomcat fighter pilot, Carrie Lorenz, me, Dave Ramsey, and many, many others. With one live stream pass, you and your whole team can stream the whole conference without worrying about travel expense or time away from the office. Plus, you'll get access to the replay with all your favorite talks for 60 days.

So get your team together and have a summit live stream watch party. I promise your business will never be the same. get out your phone go to entreeleadership.com slash summit lock in your live stream pass today Jacob is with us in georgia hi jacob welcome to the entree leadership podcast hey dave how are you doing today better than i deserve what's up hey uh just calling in uh had a little bit of a brag to share with uh with you guys today cool tell us about it yeah so um i currently own and operate a uh just a small window cleaning company here in blue We have the top-line revenue right around just over $500,000 for the last year.

Good for you. Netting about 175. Excellent. And so in this window cleaning company, I have had the pleasure of meeting some real great, people, real great community leaders. And about two years ago, I got involved within. a scholarship foundation. I'm on the board for a local

parade of homes organization. This organization was started back in 2019. Year to date, we gave out just over $370,000 in scholarships to two students

within our current geographic region, about four different counties here. Wow, that's awesome. Yeah, so it's a pretty special group of guys to be involved with. So scholarships to do what? Where are they going to school? So we are, with this organization, we felt like the trade in particular was a very underserved

group of kids going into the trade, shop kids, if you will. So we wanted to focus on that particular demographic of kids. So we've, so far, we gave out 36 scholarships. These scholarships are $10,000 apiece. We separate that out between each semester, $5,000 apiece per semester. And it's just, man, it's just absolutely special to be involved in this day. Wow. Way to go, man.

Congratulations. Our buddy Micro will be thrilled to hear this. This is great. Yeah. You know, he's got the Microworks that they get. giveaway scholarships for this exact same thing and pushes folks and helps people get into the trades and do all kinds of different things. But well done, sir, congratulations. That's a great use of your time and your energy, isn't it?

Yeah, it is, absolutely. And it's so humbly to see these groups of kids come through every year. We plan on giving out right at $200,000 this year. So what do you think the best couple of trades, two or three, that somebody can go into if they're going into trades these days. Gosh, man. There's not a bad pick, I don't think. We're seeing a lot of welding students come through, HVAC technicians, plumbers, you name it.

It's needed. I mean, it's just all the way around. And they all can all make really good money coming out, can't they? Absolutely. Absolutely. That's phenomenal, Jacob. That is a good realization and a good use of money. Well done, sir.

Well done. really, really want to appreciate the, or we appreciate you calling in and bragging. By the way, if you don't know what Jacob was referring to, on the Entree Leadership podcast, we invite you to call and tell your brag stories. Small business people don't have anybody they can brag to in America. Well, we love you.

We think you ought to brag. We had a crow from the mountaintop, baby, when we win. You ought to just howl at the moon. Let's do it. This is the Entree Leadership podcast. Thank you for joining us, America. I'm Dave Ramsey, your host. This is the Entree Leadership Podcast.

Give us a call with your questions, your comments about business and leadership. The phone number is 844-944-1070, or you can leave a little message at the website. We'll get back to you and make you a caller here on the air. That's Entraryleadership.com slash ask. If you're looking for theory, you're in the wrong place. We talk about the five stages of business here because we've lived them. and because we've walked them with people like you that are running businesses for the last several decades.

We work with tens of thousands of small businesses all across America. Most of us start out at the treadmill stage where you feel like you're on a treadmill. The whole thing counts on you. And if you're smart and you're lucky and you learn to do some delegation and some time management, you can move up to the Pathfinder stage. And that's where you need to get a very clear direction. You kind of get in chaos mode at the Pathfinder stage, and your clear direction with some role clarity and mission statement, core values, got lots of communication. You can move to the trailblazer stage.

And this is where you need people to scale your business. You need leaders in their seats. You need more than just you helping to make decisions and think like an owner. And so planning and repeatable processes and leadership development for sure will lead you into the peak performer stage, where you probably make the most money you've ever made in your life. and your business can become too comfortable because winning is everywhere. And if you're not careful, you can get caught in that and you have to shock everything and create a relentless culture of getting better, which will lead you to the last stage of the five stages, the legacy builder stage, where we start talking about succession, where we start talking about making this thing last beyond you, next generation development, estate planning,

all of those kinds of things come into play at the legacy builder stage. So give us a call if you want to join in a conversation with the practical people. If you want leadership theory, you need to go somewhere else because I do this every day. There's nothing here about theory. Almost nothing. Up next is going to be Steve in St. Louis. Hi, Steve. Welcome to the Entry Leadership podcast.

Hi, how you doing, Dave? Better than I deserve. What's up? Hey, so just a little background. And then I'll give you my question. So we have a family-owned business that I've been away from. I'm getting ready to go back into it. It's like plumbing and excavating.

Plumbing and excavating. Yes. Those are two very different things. So a lot of the plumbing we do is like installing like septic tanks and stuff. So we have the bulldozer, that kind of stuff. Okay. So we do some residential. Or you might do some infrastructure, a little bit of light infrastructure stuff, too.

Okay. Yes. All right. And so the net profit last year was $215,000. Mm-hmm. So, and I'm wanting to get, I'm getting back into the family business with the expectation that my brother's going to sell it to me because my half-brothers who owns it. I was wanting to see. So, like, I'm going back in, kind of knock the rust off my plumbing and excavating knowledge.

and then I'm going to start doing almost like a succession or grooming, kind of like learning how to make bids and like pay taxes, all the backdoor stuff. And I was willing to see during that succession period, is there anything you can put in place, I guess kind of protect me if something were to happen to him? Because he doesn't have any like errors that are interested in running it, which is why he's wanting to sell it to me.

but if something happens to him before that purchase takes place, is there anything that we can put in place or how, so that way it just doesn't get sold and money divided amongst his heirs, I guess. What have you been doing? I've been driving a truck. I worked for him initially, and then 2008 there was a slowdown, and he was like breaking even, so I ended up driving a truck. I'm driving a truck locally now.

and I've been talking to him interested. None of his kids are interested in it. And it's something my dad started originally. So, and it's something I enjoyed, and that's why I'm wanting to get back into it. And how old are you? 37. Yeah, you can simply have a contract with him that outlines the pricing and the method of purchase and locks it in. and that that gives him an out if you walk away or you're incompetent and have to be fired or do drugs or whatever, right?

So, I mean, we don't want him trapped with you if you go bad, but on the other hand, you don't want to be at the, you know, you don't want to, somebody else to end up with this if something happens to him. So his estate where he to die would be liable to fulfill that contract. Okay. And so you would get with an attorney in draft a simple purchase or an option to purchase contract, but the contract would become invalid in the event that you don't work out for some reason or another, and that would all be outlined in there. Okay. Yeah, I wasn't sure since I wouldn't have actually taken ownership of what could be put in place.

Yeah, you're just, you're contracting. It's a purchase contract that says you have the right to purchase it under the following terms. And it might not, it might be that it takes three years to close this deal, right? Okay. So, yeah. It doesn't have to be that just because you have a contract that it's 30 days. It could be, you know, that you have the business under contract. And part of that contract is this apprenticeship period where you, you learn the skills necessary to run the business.

And if during that time you guys decide to separate ways, he's not bound to sell it to you then. Okay. And then if something happens, that protects me so I can still... Something happens to him like he dies. That protects you, yeah. Okay. Okay, that's what. One thing you can add to that if you want to, it's a touch more sophisticated.

And I really wouldn't do this until you've been in the saddle for at least six months. But if someone's in a partnership, they normally set up, and you're not, but they normally set up what's called a buy-sell agreement, which it sounds like this. He buys life insurance that makes you the beneficiary. And so part of the deal is he would go buy a term policy for, I don't know, whatever you're going to pay for the business, call it a million dollars, okay? You're going to pay a million dollars for this business. Then he buys a term policy for a million dollars.

In the event of his death before you execute on the contract, that money is left to you. and then you are obligated to use that money to buy the business from his widow or his heirs. Okay. So, yeah, it would basically give them the money that comes from that. Right. And that would be, that's called a buy-sell agreement. And that's not, that's a fairly standard thing. And term insurance, if he's in good physical condition, is not very expensive. So it doesn't cost a lot to put that in place.

And, you know, where I in your shoes, I might even be willing to pay for that policy. okay because it gives you the money it gives you the money to buy out any errors instantly and execute on this contract if something should happen to him but again you guys need lots of exit uh provisions in the contract that if uh somebody's misbehaving we can get up we can get apart okay i mean if he starts doing drugs and selling and running running bulldozers off into ditches and stuff you need to get get out of there, right? Yeah, because, yeah, that wouldn't.

Yeah, you're going to get stuck with a bill you don't need. And a headache you can't afford it. So, I mean, people get into crap like that. You know that. So I'm not saying your brother's going to do that, but I'm just saying you need provisions. I call them the go crazy provisions. If somebody goes crazy, what's going to, what are we going to do? Okay.

And then you just work all that with an attorney. Yeah, it's standard exit clauses in a contract of this sort. Okay. Yeah, a good general practice attorney. This is probably going to cost you $1,000, $2,000 to put this contract together. Okay. And it'll be worth every penny because it's going to spell out every little thing that when this happens, then the next thing we do is this. And this happens, we do this.

And that's all the bad stuff. But it also outlines under what conditions you're going to become the owner. And you're going to go through a one-year apprenticeship to relearn or learn the skills for estimating and operating. running the business and so on. So, you know, and then after that one year, then you're going to pay is going to be X and Y. And after another year of that pay in X and Y, then you're able to purchase the business under this formula for this price, this multiple of net profits or whatever, however you calculate this in this situation.

So all of that will work. All of that will work perfectly. So well done, Steve. Good thinking. And a really, really good question. When family does this stuff on a handshake and does it on an assumption, well, we all know about assuming what that makes you. Don't do that.

Get it all in writing with an attorney. This is the Entree Leadership Podcast. I'm Dave Ramsey, your host. This is the Entree Leadership Podcast. Our question of the day is from Nathan in Texas. We own a landscaping equipment company and primarily sell new and used zero-turn lawnmowers. Is it wrong to let our customers finance their own? equipment purchases because as a business owner that does not believe in taking on debt,

am I violating my ethics to offer financing on our more expensive equipment? I don't think you are, but you've got to decide that. I can't decide that. So let me kind of break this down for you. I teach people, as Dave Ramsey, the money guy, millions and millions and millions and tens of millions of people have followed our advice on getting out of debt, staying out of debt. That is our product. Our product is not zero-turn lawnmowers.

Our product is on trade leadership, helping small businesses run their businesses. It is not zero-turn lawnmowers. Your product is equipment that you're selling. So my product is to get people out of debt on the money side of our equation, right? for me to put people in debt while I'm getting people out of debt would be so hypocritical and oxymoronic that it would be a violation of ethics. So we don't take credit cards at Ramsey. We will take your debit card only, your ACH transfer, your wire, your cash, but we will not take

your credit card, and we do not offer financing on any thing that we do because that would, in my case, because of who I am and what I teach. would be highly. I'm known for that. They'll be highly hypocritical. You, however, are known for zero-turned lawnmowers. You are not known for this. If you own a pizza hut, you sell pizza. And not taking a credit card is an option or taking a credit card is an option for your pizza hut or for your zero-ton lawnmowers to, you know, have a financing arrangement with whoever, John Deere or Cabota or whoever it is, right? A lot of those have their own financing outlets now.

It's much like we're dealing with it. If you're a Ford dealership, you'd have Ford Motor Credit available and probably local bank financing available as well. If you own a car dealership and you believe in Dave Ramsey and you believe in being debt free and you run the car dealership debt free, I don't think you're breaching ethics to offer financing. Now, I think always that you're breaching ethics. if you're letting someone do something or worse than that, encouraging someone to do something,

that you know is out of bounds and going to be harmful to them. We all know that you can borrow more money than you should. And if you know someone's in financial trouble and you suspect even that they're lying on the loan application to get this thing approved because they're so desperate for that piece of equipment, well, obviously we don't want to participate in that. because we don't want to participate in being the cause of someone to lose everything. I'll give you an example. In the old days, the local banker was all there was.

There was no stupid chase or Bank of America. God help us, right? Where some moron in another city was making a decision about your life. It was Joe or Henry or whoever, whatever name you want to plug into this, the local banker. And you knew him from church and your daddy played golf with him. You know, you knew it. And so in the 1950s, if a guy came home from the war and wanted to open a hardware store and didn't have, you know, enough sense to do that,

but didn't have enough sense to know he didn't need to do that. And he goes into Joe the banker and says, I want to borrow $100,000 or $50,000 or whatever you would have borrowed in 1950 to open a hardware store. You can, and I want to put up my daddy's farm as collateral. Well, the banker looks at this kid and goes, Look, kid, you don't know how to run a hardware store. I don't want to have to foreclose on your daddy's farm.

It would be unethical for me to make this loan. And the banker would refuse to do what the banker does, which is make loans, because he knows the kid's going to lose the family farm doing this, or a high probability. Now, of course, fast forward to today, Bank of America will make that loan for triple that and charge them a lot of interest, and they'll end up with a family farm because they don't have sold. But the local bank, back in those days, the community bank did.

There's a few of those still around. A few of those type of bankers still around. Fewer and fewer every year as I get older. But that's the situation. You know, you look at this and you go, now, would I tell you to go borrow money at the bank? No, I don't tell you to go do that. But if you were going to and you're going to work with a community bank, you're going to get a much different arrangement, a bunch different set of eyes looking at the deal.

than you would with one of these mega banks that has no soul, you know, like fifth third. Oh, God, help us, please, no. You know, that kind of stuff, right? So, you know, that's who you want to be. You want to be the Joe, the banker. You want to be the guy who's a member of the community and doesn't screw his neighbors, right? And so if you've got a kid that doesn't need to be taking on this kind of debt, you know, I'm not going to participate in this deal. But if you've got to get a kid that doesn't need, you guy who's, you know, perfectly capable, gal who's perfectly capable of handling this situation and they're going to finance it, but you don't personally believe in borrowing, I don't think that's unethical. I think you've got to present those ideas. And if it comes up, you could always

tell people, hey, I pay cash for everything. I just tell you ahead of time. And we always encourage cash here. And we encourage you to pay cash for everything. But we have the financing available if that's what you want to do. Instead of the first thing out of your mouth is, you know, we got zero percent on these zero turns. It's like, God, no, I mean, maybe the first thing out of your mouth isn't financing, right? Maybe it's like a last resort, and it's kind of quiet, and it's only for the people that you think are going to do okay with it, and, you know, you make some value judgments about not screwing your neighbor, and so forth. Now, again, I don't have that option. It would be very hypocritical for me to do that, and I'm not tempted to do it at all. I wouldn't do it anyway. But I wouldn't

say that you, Nathan, that you in Texas are unethical because you offer financing at your equipment business any more than I would say Pizza Hut or the local pizza parlor that's owned there by a guy or gal in your community is unethical for taking a credit card at the pizza place. They probably don't think twice about it and so on. So that's how you look at it. Just, again, just ethics are the best. business ethics you can do, Jesus already taught us. Treat other people like you want to be treated.

So any of you that have any business ethics questions, how to deal with an employee, how to deal with a vendor, how to deal with a customer, how to deal with a refund situation, ask yourself if the roles were reversed, treat other people like you'd want to be treated. If I was sitting there, how would I want to be treated? well in your case um the person who wants to finance wants the dignity of being an adult and wants to decide themselves if they want to finance they don't want you dictating it to them and some some of those people get mad at me when i dictate it to them but i again do not have an option being me so uh that's that's what you're facing it's a really really good question though um so always

treat people how you'd want to be treated. If I was incompetent and inept, I would like for someone I'm trying to do business with to if they thought that and they thought they were screwing me and I was getting ready to lose everything because I did a deal with them, I would want them to, you know, to turn me down. And I will turn someone down in that situation. I'm not going to ask someone. I'll give you another example. There's throw one out, another one out there. just keep throwing them out there. But this is good discussion because business ethics is sometimes it's really corporate America doesn't have much of a soul left.

All they do is virtue signal. And so those of us that are running small businesses with a soul, we have to think about these kinds of things. So we have people that want to advertise on the Entry Leadership podcast or on the Ramsey show. And those ad slots are, they're national and they're, you know, super, super expensive. and if the ad, if I take on an ad that the only way the guy can pay the bill for the ad is if the ad itself causes so much revenue for him that, you know, otherwise I bankrupt him, trying to collect from him, then I'm unethical for taking that customer on.

And we have turned away many potential advertisers over the years because we thought, that if this doesn't work, when they pay our bill, they're going to be broke, or they're going to just be unable to pay the bill, either one. It's going to completely bankrupt them. So we don't take that customer because it's not good for the customer. I mean, it's good for us to get the money if we can get the money, but it's not good for the customer. So we don't do business in a way that causes our customer to go broke

because then we want our customer to be around forever and be our customer forever. They're too hard to come by. And it's just wrong. It's unethical. So that is what we're facing. Really good question of the day, Nathan. Thank you so much for sending that in. Hey, folks, that about wraps up this session.

Remember, better a weary warrior than a quivering critic. This world needs more high-quality leaders. So take courage and lead. I'm Dave Ramsey, your host. Thanks for listening to the Entree Leadership Podcast.