EntreLeadership - Why Making a Profit Isn’t Enough to Survive in Business

Episode Date: December 18, 2023

Today we’ll hear about: •       A business owner who made $8 million last year but is going broke •       The best way to structure bonuses for your team that doesn’t negatively affect your profits •       Someone wanting to buy a gym, but the current owners aren’t being honest •       What to take into consideration when determining how to pay yourself as the owner of a business Links mentioned in this episode: •       The EntreLeadership Podcast •       Stages of Business Assessment •       Have a question for The EntreLeadership Podcast? Leave a voicemail at 844.944.1070 or submit your question for a chance to be on the show with Dave Ramsey: https://www.entreleadership.com/ask Start growing in business and leadership with the EntreLeadership Newsletter. Sign up to receive tactical tools, advice and resources in your inbox every week: https://bit.ly/3IRWnsL   Support our sponsors: •       NetSuite •       BELAY •       Payority •       Trainual Learn more about EntreLeadership Events: •       EntreLeadership Summit •       EntreLeadership Master Series Learn more about EntreLeadership Coaching: •       Elite •       Advisory Groups •       Executive Coaching •       Workshops Find out what stage of business you’re in and what you can do to level up with our Stages of Business Assessment Listen to all the Ramsey Network podcasts anytime, anywhere in our Ramsey Network app: https://apple.co/3eN8jNq Learn more about your ad choices: https://www.megaphone.fm/adchoices Ramsey Solutions Privacy Policy: https://www.ramseysolutions.com/company/policies/privacy-policy Learn more about your ad choices. Visit megaphone.fm/adchoices

From the headquarters of Ramsey Solutions, this is the Entree Leadership podcast, where I take calls from leaders like you about what it takes to win at any stage of business and leadership. I'm Dave Ramsey, your host with over 30 years in the trenches actually doing this stuff. It's not freaking theory. If you want that, go to business college. This is where we actually do this stuff and did it today before I turned on the microphone. Dealt with it today before I turned on the microphone. been scratching and clawing for 30 years before we turned on the microphone. So we're here to help you.

If you want to call, be part of the program. You've got a question about your business. We love small business people here at Ramsey. The phone number is 844-944-1070. Leave a note, and the team will get back with you and we'll get you on the air. You can also do that at the website, Entreeleadership.com slash ask. Tyler is with us in Knoxville. Hey, Tyler, what's up?

Hi, Gabe. Great to speak with you. So we have a home construction business. I have about 50 employees, did about $8 million in revenue. But last few years has just been especially rough for us. I'm a CFO, and just I can tell the whole executive team has been very kind of just worn out by decreasing revenue. I mean, week to week, struggle to make payroll, pay subs. And we're just kind of having discussion now of do we keep going, hoping things turn around,

or kind of pivot and kind of sell a company, pivot to something else, whatever it is, trying to decide how to make that decision. Okay. So you're doing spec houses? Both spec and contract and just sales has slowed down. You know, obviously this year a little bit with interest rates, obviously not helping us there, but a little bit of both. Primarily it is we're getting contract beforehand.

I have no interest in the spec. I have no interest being in the spec business in this environment. I don't like specs anyway, but super high risk in this environment. So, you know, contract makes a lot of sense, though. And what price range are you doing most of your contract in? Yeah, so most of them are normally somewhere in the $300,000 to $500,000. They're tiny homes. Why?

Why are you doing custom that cheap? I mean, so that's where the price point we've kind of found where we're at is what people are paying. for, I mean, we're talking, you know, 500 square feet homes most of the time. Did you say 500 square feet? Correct. We're doing tiny homes that are kind of mostly used as vacation homes. Oh, okay. So, yeah, I mean, we're talking, you know, $800, $900 a square foot in some cases.

Yeah, well, there's good margin in that, for sure. Yep, yep. Depending on what the dirt cost under it. But you're doing that up in the mountains and the resort areas around Knoxville then. Correct. And you're selling those, you're building those on contract for $800 a foot in Knoxville. Holy crud. Why are you not making bank?

You did $8 million of that. Your margins ought to be incredible. You'd think that. Yeah, I would. Yeah. I think there's just been some very poor decisions from the owner, I'm being honest, of just kind of getting ingredients, pouring all of it into next product, next product, next project and not set aside the profit margin to the profit margin is not the problem, then the business is not the problem.

The reinvestment back into the business unwisely is the problem. Correct. And a lot of these, we are selling the lot prior to doing the infrastructure. And I think I'm the first outside accounting hire and it's been very poor planning on the owner's side of leaving money aside for finished out communities, set inside rainy day fund, that and just been kind of... So he's been developing and he hasn't, he hasn't sinkhole the money, hasn't kept retained earnings to finish each development out?

Yeah, the utility, do... So he got to do the next deal to finish the last deal because he didn't bank it? Correct. Oh, geez. That's classic. Okay. And now that things have slowed down, that game is up because you can't, you don't have the next deal to fix the last deal anymore.

Now I see the stress point. Okay. Yep. So the business model isn't bad. The financial management of the business has been bad. That's what we're saying. Yeah. That's okay.

I've done that too. I mean, everybody has. I'm not picking on him. I'm just saying. So the question is, does he want to start being wiser and start holding, you know, basically run accrual accounting is what you're trying to teach him, right? where he sets the money aside associated with the project and the project and quits acting like it's profit and rolling it to the next deal because it's not real money.

It's like not paying your taxes. You know, it gets you, it comes back, bites you later. Is he willing to make those changes in his flow? And you might have to make them gradually. And hopefully you can keep enough business on the books to actually make the changes and cover the hole that he's in on those other projects. But there's nothing about. what you were describing that that would not be a reason to continue doing unless he's gotten

himself so far out over a barrel that you can't make the swing. You follow what I'm talking about? I am, and I think that's the main struggles we're having as an executive team is we know we've got a great product. We know we've got a great opportunity here, and it's just managing up. Yeah, so is he just unwilling to listen and learn? or that's what it feels like. Just a lot of, you know, despite the company dealing with a lot of financial issues, still kind of operating his personal life as if it's all fine and all that. And that's bleeding into the business where I think he's acting like nothing's wrong.

You know, there's been no change in sales, all that. And so still trying to, you know, he's wanting to hire an acquisitions guy right now to find more land and more opportunities. And we're just telling him there's nothing. There's no money there to do that. We've got to finish what we got first. And he doesn't seem too receptive to that because he believes the only way to do it is to keep this model going of next project pay for the last one. Yeah, you've been sliving over a barrel your whole life, yeah.

It's classic. I mean, I grew up in the real estate business, so it happens all the time. The problem is it's not sustainable because the first time there's a downturn, which is what we're sitting in right now. The volume slows down. the math quits working as you obviously know you're the CFO so I'm not telling you anything what would I do what would I do what would I do well I don't know is this guy going to sell it doesn't sound like a guy that would sell uh he's the eternal optimist he got hit with a very large irf bill on uh October 15th there and so he's looking to uh he may be forced to sell is what

it sounds like um but then then the math has caught up and hit him in the back of the head, you all aren't left with a choice. Because he also hadn't been setting a stinking taxes aside, what you just told me. Yep. Are they unpaid 941s? No, it's... Good.

It's 1040. Okay. All right. Good. Because the 941s will pierce corporate veil and land on his lap anyway. All right. Oh, my God. All right. Yeah. Yeah, I'm selling. I mean, you're not left with a choice.

Because what I was thinking was earlier in the conversation, I didn't have all this last piece of information, is I was thinking that, you know, instead of 100% of the money forward and to cover the back is to start to gradually a little bit at a time, chip away at the hole that you're in and get back up to square. You see what I'm saying? And so if it took a year's worth of projects to get back to square to where you're actually funding the project from the project rather than from the last project or the next project, that kind of a thing, you could do that a little bit of time you don't have to do it a full stop. You see what I'm talking about? Yep, yep. You could like

take a chunk and say, okay, we're going to do 25% a quarter, or we could, we're going to do 12.5% a quarter for two years, and you could make the full turn if you did that. And I've walked with people through that consulting before and shown them how to do it. And you, you obviously understand the math and could do that. But the problem is now you've got the double whammy. You get hit with this, and the market has slowed down, so you get the whole, yeah, you've got perfect storm going now, and you're probably left with no options. So I guess you are selling. That's sad, though, because it's actually doable.

I'm not a huge fan of tiny homes, but I am a huge fan of selling something for $800 a foot that you can bill for $180. Oh, my gosh, that's a pretty sweet margin. In the home building business, it's unheard of. It's a great margin. And, you know, a tiny home, if it works anywhere, it works in a resort, setting. So it's like a weekend cabin, a little tiny cabin, 500 square footer. Huh, very interesting. Yeah, I think I'm, I think he's got a sell, dude. I'm sorry. Wow. Unless you guys can figure

out a way to get the IRS bill and make the turn, and that's going to involve an act of will on the owner's part. But if you've got a stubborn owner, a slow economy, and an IRS bill, that's called the perfect storm. This is the entree leadership podcast. Well, if you've been listening to this podcast for a while, you've probably heard me talk about the stages of business. The treadmill operator, the pathfinder, the trailblazer, the peak performer, all the way into the legacy builder. When we start talking about succession, treadmill operator being obviously you're on a treadmill, you're just getting started and you do everything yourself. Our Entry Leadership team just released our new and improved stage of business assessment. will help you assess easily and accurately and free where you are,

and then that indicates to you exactly what you need to do to move through these stages. Now, you can move through them at whatever pace you want, but I will tell you from experience, I've walked through all five of them in this business. The faster you move up, the easier this thing gets. And, you know, one thing about solving a problem, what you get is a new problem, but you get a new thing to work on, but that's okay.

And so, hey, click the link in the show notes or go to ontary leadership.com and find out which stage of business you are in. Matt is in Dallas. Hey, Matt, welcome to the Entry Leadership podcast. Hey, thanks, Dave. Thanks for what you do. Love the podcast in the show. I really appreciate it. Thank you.

How can I help? So my question today is, how do we dial in a fourth quarter bonus? Just a little bit of context. My wife and I own a small staffing and recruiting franchise. We've got seven employees and did about $1.2 million last year. And we're trying to put a good fourth quarter bonus on the table that would, you know, incentivize people on our sales team just to give, push that little bit more to the end of the year. And it just feels challenging to dial in the right goal. Too high, it's not attainable.

Too low, it feels like a gimmie to the team. Or if something kind of gets off track, the wind gets knocked out of their sales in the next 10 weeks or its blog talking about it. and I just wanted to hear what you've done to dial in like a fourth quarter incentive bonus. Is it better to do small like $25 bite-sized goals along the way or a big $500 bonus? If you hit this big number, what's worked for you? You're talking about not a fourth quarter bonus that you start talking about at the first of the year, but you're talking about today heading into the fourth quarter, a bonus this quarter. Exactly.

Yeah, I wouldn't try to do a four. I have not had good experience doing a fourth quarter bonus talking about it in January. It's too far out to be motivating. So I'm making sure I know what I'm talking with you about. So, yeah, if you're talking about doing that right now between now and the end of the year, yeah, that makes a lot of sense. And it's for staffing, right? Right. So we have contractors on billing.

So, for example, one team member, she averaged 35 contractors on billing in the third quarter. so we set out a goal, hey, let's do five contractors on billing for the fourth quarter, five more, to average 40. But then she got eight of her contractors hired on, which felt a little bit uncontrollable because she did a good job. They got hired on, but now she's in, you know, the average is down to 27. So it feels like a big mountain to climb to get back up to 40 and the wind's out of her sales a little bit. So I'm looking at myself saying, did we set the right goal to set her up to win or what does Dave done on this? That's what the question was coming to my mind. Yeah.

Sometimes what I've done is the mistake I have made a time or two, and I'm trying to ascertain in your story if you did this, is I paid people a bonus for an activity that I thought would lead to profit. And instead, they did the activity so well that it led to no profit. And so you have to be coming. careful because they're going to do what you pay them to do, right? I mean, if you set an activity related to the bonus, they're going to go do the activity. I mean, all of us are going to push the food button and the food's going to come out into the bowl, right? We're all going to do that.

And so you have to be careful that the unintended consequence, like, for instance, I had a manager over our incoming 800 call center years ago. and I started paying him on the gross revenues. Well, what did he want to do? He wanted to hire 16 people to jam the gross revenues up, which of course would have meant that the additional gross revenue produced negative profit. So I figured out I needed to pay this guy on the net profit of the room, not on the gross revenues of the room, because I got the wrong result.

You follow me? right so that's the kind of crap mistake update over the years is they're going to do what he was all excited about increasing gross revenue with no thought at all of the fact that it needed to turn into net profit because that wasn't what I was paying him for so I turned had to change his incentive plan so that may be the case here I mean like you got so many dead gum contractors you couldn't get them all onboarded and they weren't productive they weren't as productive per sale as you thought they were going to be it sounded like was I did I hear that right well it's that it's

They were placed at a company, and then the company hired them on. And so when our goal was to increase your number billing by 5 to 40, and the number went down, it just feels like, okay, I've got to get now 13 more, 13 more because I got eight hired on. And that feels like a lot. Well, does she get paid when they get hired on as well as when she got the contractor? No, because she just gets paid off the commission. It's based off a weekly billing, the gross margin on a weekly billing. So once that weekly billing goes away, you've made your,

profit over the 13 weeks prior. So do you make money? Do you make money when they hire them on, though, right? No, we don't do a buyout fee at the end. If they complete the number of hours billed, then there's no fee at the end. So if you put a, if you staff a contractor on the team and they end up becoming a full-time employee, you lose billable hours then. Right.

Yep. Okay. I'm catching on. Typically, our contract might be, I play three-seven. receptionist with you for 520 hours, you agree to keep them for 520 hours and make the margin for that time. And then after that, you keep them and we've made our money over that time. And that's obviously standard in your world.

Right. Yeah, that's a normal practice for us. Okay. So you're always working yourself out of business. Yeah, in that sense. If we do our job well, and that's our aim. You put quality people on. They stay on it's full time.

You lose the billable. You've got to go find more quality people. Yeah. So we're always in sales. We're always in sales. You're unemployed every morning on that. Well, number one, I mean, that's okay. That's an okay business model.

You just have to say it out loud, and that last 10% of truth scares the credit out of you, but that's good. So number one, I might go back and rethink a different way, be inventive on how to do this business. Is there a way where we can charge them less per hour and then get a bump if they hire them? and so we get we're happy if they hire them because right now we're unhappy if they hire them and so I don't I might rethink the business model but that's that's a sidebar back to your bonus then how do we do a bonus in this current without reinventing your whole stupid business which I don't want to do that you may want to do that but I'm not going to do that right now I love the business it sounds great so there you're getting punished mathematically how do we keep

your salespeople from getting punished mathematically and not put you upside down. So let's say they hired 10 and all 10 stayed permanent. That salesperson is starting over, but so are you. Right? Right. So that's the nature of the beast. So you get paid when there's billable hours, they get paid when there's billable hours. oh well that's how your business works they know that and so if they add 15 and all 15 of them

leave and they start back from zero well that's that's the nature of the business this is the rough and tumble of your world and so uh you know you got you got knocked down on this particular play you get up and you play another play and you don't throw an interception right so it's not interception is not actually a mistake. It's just the nature of the thing. A touchdown. Yeah. A touchdown, you get to cash a check, but

so not here. I think you have to really set your narrative with your salespeople around. You are not failing when you start from zero. It's part of what we do. You're not failing when you have

less people creating billable hours because they became permanence. It's part of what we do. And so what the bonus should be based on is number put into service, not number continuing in service. Ooh, I like that. Yeah, I'm trying to get to pay the, this is what drives your business engine. Number put into service is what drives your business engine.

And anybody that stays in service is like good. That's awesome, but it's gravy on the biscuit because we don't really even expect them to. We expect them to either bail or become permanence. Right. It's a high turnover. Either way. Yeah, so pay them for putting it in service, not for, so I probably would quit paying on billable hours. I would try to figure out if you've got enough data, it would be very cool to back into it and figure out every time you launch one,

you make an average of X before they bail or become permanent, or they may stay on two years. But the average, every time we launch one, they are worth X on average. Across the- It's about 2,500. Okay. I do know that. That's your lifetime value.

About 25-10. I'm going to pay them on that. I'm going to pay them on that. Hmm. It might be a much, it probably might be a higher percentage. but every time you launch one, you don't have to worry about the billable hours. You don't have to worry about whether they go permanent. That's me.

I got to worry about that. I'm the owner. That's on me. But your job is to launch them. And if you're now in the insurance business, they add another element to it. If you launch a bunch of crap and it all turns bad, in other words, you're just launching because now I'm paying you to launch, right? I'm paying you put new people on. you start putting crappy ones in there so they turn over even faster or they never become

permanence and they become problems for me because I got to go manage the upset client because we sent crappy people over there because you're just getting paid to launch or you're launching anything that's that breathes air instead of putting quality on. In the insurance business, if you sell a life insurance policy and it doesn't stay on the books three years, they recoup on you. That's called persistence in that world. If the business isn't quality business and the people want to refund, then they'll recoup on the agent and take their commission back. I wouldn't go that far, but I would say, I'm going to pay you on the $2,500. I'm going to pay you to launch as long as your quality stays up.

Is this making sense around just barking up a tree? No, it's so cool to hear an outside my fishbowl perspective because I'm swimming in this fishbowl, and I'm just thinking how many people I'm billing, how many people I'm billing can we raise our average. That's where you get your money. But the way they get their money is by launching because they're going to lose them all. And that puts their focus on how many starts can I get this week? Where can I get someone started? Can I get someone started? How do I get them started?

Where do I get the start? And they have to be quality. I'm not starting mouth breathers. Right. Okay. We're not starting knuckle-dragers. We're starting quality because I don't want my customer pissed off because I'm sending substandard humans over there.

Right. Yeah, this is good. That's fun, Matt. It's a great discussion. You're a stud, man. I love what you're doing. You're great small business guy, thinking and pushing and grappling. And then the last thing is I'm going to go back maybe first to next year,

and I'm going to start to think about, am I going to bill these people less, and I'm going to become a recruiter as well as a staffer, meaning I get paid when they hire on as a permanent, but maybe I don't pay, maybe I don't charge quite as much, so I do get paid. So now I've got a real incentive to get somebody hired. and I'm happy, happy when they get hired. Happy if they don't get hired and I'm happy if they do get hired. I'm happy if they don't get hired because I'm billing them per hour.

I'm happy if they do get hired because they get a little bump then because I built that into the deal. I know that's not the industry standard process, but don't give a crap what the industry standard is. I'm all about breaking that, all about doing something smarter than the industry's doing. Contrarian ideas. It's fun to think about. We do that all the time here.

We try to break stuff before it's broken. We don't wait until it breaks to fix it. We want to break it now. And that's really cool. Very cool, Matt. Man, you're fun. That's great. I love it.

Thank you. Thank you for being in our audience. We appreciate you being an entree leader. This is the Entree Leadership podcast. I'm Dave Ramsey, your host. This is a very tickey, tacky, hands-on, actual business leadership thing where we get into the way down in the dadgum weeds sometime. Need a weed eater on somebody's calls. It's so fun, though.

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Big time helpful. Thank you for doing that. All right. Doug is with us. Doug's in Jacksonville, Florida. Hi, Doug. Welcome to the Entree Leadership podcast. Good afternoon, sir.

Thank you for your time. My pleasure. How can I help? My wife and I are in the process of negotiating to purchase a 24-hour gym. It's one of the two gyms in our area that's expanding. The area is expanding. I haven't been given access to their books yet, the two owners, but we're just going to assume they're not lying and run on that. The question around the negotiations specifically is there's maintenance that has not been done to the facility and some of the equipment.

So when you're valuing a business, you're going on three or four times revenue, maybe different for a gym, but in general, it's what I've heard. No, three or four times profit. Profit. Yes, sir. They're not including maintenance as a line item, so I feel that's something that we're going to need to factor in for the overall value of the business, but then it doesn't seem fair in my mind for them to essentially

be taking what should have been maintenance, putting it into their pockets, and then, yeah, I'm having to pay this essentially inflated value. and then also pay for the main of the amount of the inflated valuation. What I'm going to do is I'm going to take the P&L and let's say they weren't paying rent. Okay. Well, I'm going to take the P&L.

I'm going to put rent in it. And that reduces the net profit. Yeah, I agree with that. So then do we all. I mean, let's make up a different scenario. that's not sleazy, okay? Let's just say, all right, their dad owns, their dad owns the building,

and he let them operate it rent-free. But you're going to have to pay rent. That's the same thing as they hadn't been doing maintenance, but you're going to have to do maintenance. You follow me? Yeah. So just treat it like that, like dad's going to charge you rent, but he wasn't charging them rent.

You're going to do maintenance, they weren't doing maintenance. So I'm just going to say, all right, we've got the gross revenues, We've got the expenses down through here. And I'm not negotiating with them on whether it's a 4x of revenue or 3x of revenue. I'm doing that multiplication, or not revenue of net profit. I'm doing that multiplication after I determine what I think real net profit is. I agree with that.

That's fair. And so now they're not benefiting from an inflated price because we've deflated the price to reality. 100%. So then when we're talking about, like one of the big issues is, the mat area for the freeway section of the gym, a lot of those, the flooring is actually like bubbled up, peeled up in some places, cracked big enough that you could stick your foot and trip in that area.

Do we then get an estimate for what it's going to take to repair that, including labor? Absolutely. Or just get a, you know, a wet finger in the air and go, all right, I've got to buy,

you know, let's say they didn't have three pieces of equipment that you needed to operate. then I'm going to take the cost of those three pieces of equipment out of the annualized profit because the thing's not functioning. The business is not functioning properly. Let's say the air conditioner wasn't working. Well, I've got to take the repair of the air conditioner, and I can amortize it across 12 months. I don't have to take it out of a month, a single month, but I mean, I'm looking at an annualized profit anyway to do a multiple on it.

and so I'm going to fix the air conditioner as a part of the cost, and that's going to reduce the profit and reduce the things. So I'm going to fix the mats at a part of the cost. So the deal is this, they're not going to be able, as long as you know these things are there, they're not going to get paid a multiple of the fix on those because you're going to reduce the net profit of that.

so you're not getting slimed. But I hear the aggravation in your voice that they've not operated the business well. They've kind of milked it. Yeah. It's kind of aggravated you personally because you thought they were going to benefit from that. And with this formula that you and I are doing, they're not going to benefit from it. As a matter of fact, I'm kind of glad they've screwed it up because it's going to give you a better deal. Well, absolutely.

There's an opportunity there because they've put the business in the same. situation it is. I think the, you're, you're 100% correct on the frustration and it's, it bugs me when I see something that's such a simple fix. Yeah. And, uh, it's a lack of caring. It's late. It is. And it's nasty in a gym to have rolled up mass. That's just gross, you know. It just, it's, you know, anybody that cares. And, and, but that's who you want to buy from is somebody that's dumb, but that doesn't care. That's where the deal is. Yeah, 100%. So this makes me a smile.

It doesn't make me frustrated. That's a fair point. If I'm buying a house, I like the gutter hanging off. Not up there nailed properly, you know, because that means I'm getting a deal. I want that sucker waving at me because that's giving me a signal that that guy's wanting to sell that house. Absolutely. All right. You're on board, man.

So, yeah. But the thing is, you're going to take the gross revenues annualized and you're going to put proper maintenance. in, proper mats in, proper rent in, and proper air conditioning in, and then the resulting net profit, I'm going to pay these bozos no more than four times, if not less. I would probably like to talk it down a little bit closer to three, because this is the stuff that I can see what else is wrong. Yeah. Well, and not only that, you have to put in your brain power to fix their messes.

So I'm up for three. Yeah. What do you think the net's going to be when we adjust that? Let me give it. I don't know what that'll make. What's a margin on this puppy? According to what they have told me, again, we'll take them at face value, that each of the owners, the two owners are taken $8,700 a month. And they have one employee on site that is taken home $2,000 a month.

So 19,000 a month have tracked out. But you got all kinds of expenses out of that. They're taking out $8,700 after they're paying their bills, but not counting the ones we're talking about they should have done. But the rest of the bills are paid. I mean, they're having to pay rent, right? It's a rental. Yeah, rent utilities all the idea. It's leased.

So they're still pulling $17,000 a month out. Yeah. You were probably going to have to add, I would say at least in the short term, we're talking at least $1,500 a month for maintenance because we've got to get caught up. Yeah, we may be able to adjust it down in the future with proper care and attention. But, yeah, I'd shave at least, you know, so I mean, you know, so you're looking at what, 150 grand or something. Probably some of that ballpark. I don't think it's going to be worth more than 200 all of sudden done.

I was talking about the net profit, wasn't I? 17,000 times 12 minus stuff we're talking about. Yeah, that is probably about right. Yeah. Yeah, that's more like 150,000 profit. So your max is, if you bought it at a 3x of that, that'd be 450. 450. Yeah.

I mean, I'm doing this rough and dirty napkin math right now. I ain't got a calculator, but that's what, I mean, you're in the 300 to 400 range if you get a deal on this. It sounds like if that 8700's real. But when I see these other things, I start to question other pieces of integrity. Here's the deal. you do not buy this from them based on their books. I want to see their tax returns, their personal tax returns,

because tax returns tell the truth, because you go to jail if you do those wrong. Yeah. You do books or you lie to you, that's not going to jail stuff. So, yeah, I want to two years of tax returns. I want to see your personal tax returns on the business. If it's an LLC, you're filing on the LLC.

I want to see what the flow through is on it, and that'll tell me my number. And then I'll take that and plug that against your actual P&Ls from your bookkeeper, compare and see how much you're lying about other things, too. And because, yeah, these guys have been milking this thing, and it scares me on integrity like you. I agree with you. I want to be careful.

I'm not saying they're crooks, but if you're going to find a crook, this would be the place to look. You know, I mean, that's a possibility. So something to think about. Cool, man. I like your plan. I like your frustration. It's the right.

kinds of frustration, but you may want to flip it and smile about it and use it as leverage. Because these guys can't continue to milk this thing and it's stay open. They're going to take it to the bottom pretty quick if they're not careful. This is the Entree Leadership podcast. Thanks for hanging out with us, America. We're so glad you're here. 54% of the gross domestic product of the entire economy in America today is produced by businesses that have 500 or fewer team members. By definition, there's small businesses. If that's you,

you are why this podcast exists. We're here for you. I love you. You are the backbone of America, even though Congress taxes your butt off and does all kinds of stupid things to make it difficult to operate. And your local municipalities don't understand you, and they make it difficult for you to operate often. But small business is what makes the world go around. Most people in America work for small business. Small business employs more people than big business does. Yeah, you're heroes. Thank you. We appreciate you. John is up next. John is in Salt Lake City. Hey, John, how are you? I'm doing well, Dave. Thanks for taking my call. Sure. How can I help? Well, my wife and I run a clinical research site. We have two full-time employees.

five contract employees. We've done about 500,000 in the past year, which is about the same amount of time that we've been open as a clinic. And my question is, our accountant is suggesting doing owner payouts instead of paying ourselves through W2. And I'm just wondering, because I listen to your show and I hear a lot of callers talk about how they pay themselves as a W2. So I'm wondering, what is your suggestion when it comes to owners paying them? themselves. It doesn't matter because your taxes are the same. Income tax is income tax. There's just a process difference more than anything else. So if you just pay yourself out, you get self-employment tax, which is 765 times two. It's 15.3. Okay. If you're W2,

the guys sitting in the booth looking at me, when I pay them on W2, they pay $765 out of their check, payroll tax, and the employer, me, pays $765. Okay? Okay. So when I pay me here, Dave, the employee, pays $765,

and Dave the owner pays the other $765. The same thing as self-employment tax. If you just take a draw, you're going to pay self-employment tax on your business, of 15, 3. So it all comes out the same. There's not a big difference. It's just a process of whether you want to build it into the payroll. And if you've got volatile cash flows, owner pay can be a problem. In the early days in this business, I set my salary. It's not that way now, at 100,000 in years that I was making three or 400,000. But I had a monthly income.

based on 100,000 at W2, and then I just took owner draws on the rest of it. Because I didn't know above, I didn't know, I knew, I knew that I knew that I knew we were going to have 100. That was, that was easy. That was a slam dunk, right? But I didn't know if I was going to have 200. And turned out I always did, but it just, I didn't know that.

So I set the salary, you know, at about a quarter of what I thought it was going to be and ran that on W2. Now, I have a different calculation. I get paid, and my operating board members get paid off of the profits from the month before, and it comes out as bonusable in our paychecks on a W-2 flow. But that's a more complicated thing. I wouldn't suggest you screw with that, at your stage, it's more trouble and it's worth for you. But at your stage, I would just set up, like, what was your net profit last year on 500K?

What did you pay taxes on? Well, we were at our one-year mark right now. So actually, when we started a year ago in about October, we had zero. We didn't even have a trial yet until January. So it was actually in January. Since January, we've generated that $500,000. Okay. What is your net profit on the $500K in, what, nine months?

Nine months. We're probably at about net profit. We're probably at about $75,000 right now. Okay. Sounds like you're making $100 a year. Yeah. Yeah, I think so. Okay.

And so if you set your W2 up on 75, as long as you do that next year what you did last year, you're going to be just fine. Or if you want to set it up on draws and just quarterly take it out, that's fine. But is the cash flow steady or is it irregular? It's becoming steady and it's steadily increasing. Okay. So which makes it even safer. Okay. If it's steady that you know you're going to have the 75 and it doesn't pinch the checkbook,

just on a cash flow basis. On profit annually, you're okay at 75, it sounds like. Because it sounds like you're going to make over 100, right? But if that cash flow, like if you have a slow summer or something like that, and that 75 suddenly is draining the cash out of the place, well, you don't have to do that, as long as you don't have to have it at home to eat. So, you know.

But I think the larger your, team gets and the more sophisticated you get the, and the more years you have under your belt to have a more predictable forecastable cash flow, the more you're going to lean towards just setting the majority of it up on a W-2 and then taking a bonus at your end and cleaning the cash out. Because if you're on LLC or sub-S, you've got to pay taxes on the whole net profit anyway annually, regardless of how you take it. Okay. You don't get away from that.

I see. And as far as this excess that you were paying yourself out, the example you gave a second ago about, you know, you paid yourself 100 and then, but you knew you were going to do 300. You say that you pay yourself that out at the end of the year? Yeah, I would just, maybe a couple times a year. I'd take a hit out of it. Because the money's laying there in the checking account. Right. It's just laying there. It's just profit. It's slush. And I'm not even got an earmarked retained earnings. It's my money. I've got retained earnings. I've got retained earnings. I've got retained. earnings, I'm pulling aside already out of the budget before I count that. But even retained earnings, you get to pay taxes on. And again, kind of my rent before I picked up with you is, you know, Washington loves to screw small business and parade around like they're helping them. But we get to pay tax. If we save money to reinvest in the business next year and it goes over the, it goes over December 31,

we get to pay taxes on it in a sub-S or LLC, which is 98% of small business. businesses out there. It's the best way to structure it, but Washington just screws you. You know, and just because that's what they do. It's their thing. So, yeah, anyway, all that to say, I'm going to pull retained earnings aside, whatever's left that money slushing around in the account. I'm going to tap it a couple times a year, pull it out of there, pull, bring it on home. As long as I know I'm not going to need it at the business, I don't need it laying there in the checking account. Right. Okay. It's that primitive. It doesn't have to be super sophisticated. later on you can set up a system where percentages come out and it automatically drops into your payroll system you'll be using a payroll company by then all that kind of stuff and you know a strong accounting system and all that you can automate a bunch of this and you don't have to look over look over there and go oh there's 200,000 dollars laying there I'm going to pull 100 out but that's how I did it in the other days old days is it was I just looked over and saw a balance because I'm watching the numbers monthly and then I just made the decision to pull it out.

Congratulations, John. 500K with 100 profit year one. Ding, ding. I love it. So proud of you, man. That is exactly the way you do it, folks. You got to love it, guys. Remember, better a weary warrior than a quivering critic.

The 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.