Last week, I shared with you an idea from Greg Crabtree on why it’s really important to get clear on what your salary is, versus profit. And separate the two, so that you have a firm understanding of how your company is really performing.
I’ve got another piece of wisdom from Greg, and I’m a big fan of Greg and the way he thinks. He thinks in a conservative way about extracting money from the company. But what’s really exciting about what I’m about to share with you, as I hope you’ll find it encouraging, because it speaks to just how successful your company can become if you’re patient.
Meaning if you try to minimize debt through line of credit. If you minimize your salary, you take a fair salary versus a huge salary early in the business, and if you really stay focused on getting the financials of the business to a very healthy place, how it can become really, really exciting in regards to how much your business can produce.
One of the things that I have noticed through a lot of conversations with different individuals in the industry is the dream is generally to sell the company. And my question is, “Would you want to sell the company if your company were making 15 to 20% profit a year? And you’re getting paid a very healthy salary? And would you want to sell your company if you felt that it was fully capitalized, to the point that you felt safe, that it could weather financial storms? And you could take care of your entire team, without concern through those financial storms. And, would you want to sell your company if you have an awesome leadership team helping you run the company, where everything wasn’t on your shoulders and you weren’t wearing all the hats?”
And so the point is, what Greg is about to share, is an example of what could be, if your company’s capitalized, if you have minimized your debt, and if you’re making profit. And I believe when you reach a point of having a company like what Greg’s about to talk about, you suddenly lose interest in selling it. Enjoy.
What we want to see, and if you properly capitalized your business, that this pre-tax profits number, if it’s at 10% profit or better, is a minimum 50% return on investment of what you’ve put in the business. Without, I’m allowing you to borrow money for your fixed assets, but you’ve got zero on a line of credit and you’ve got two months of operating expenses in cash now to run the business.
If you can get your business to that level, you’ve got an investment asset that is producing at a rate of 50%. So let me ask a story. So if I went to Jonathan, I said, “Hey, Jonathan, I hear you got $100,000 you’d like to invest and what if I gave you a 50% rate on a one-year CD? Would you be interested?”
In a heartbeat.
There you go. And so he knows me, and he says, “Well, I know Greg’s good for that,” so we do a deal and I say, “Great.” A year from now, I come back and I say, “Hey, Jonathan, here’s your $150,000. Oh, by the way, the IRS knows that that $50,000’s taxable, so I’m going to go ahead and send them the $20,000 in tax, so that you got $130,000. Would you like to do it again?”
That’s the correct answer. So, think about the compounding rate of value on a 50% interest rate, guys. Because that’s what’s possible with a privately held business. That’s why it doesn’t take anywhere near as long, if you’re committed to profitability, to build a business that’s great.
It’s when you don’t commit to profitability, that it takes forever. And many times never happens. And I’m telling you, you’re in an industry where it is possible to be profitable. There is no mystery. There, I mean, that is not rocket science. You’re not trying to build the next super duper one to a gazillion website. You’re not trying to, you know, crazy one the mini business model. I mean, this is called just basic blocking and tackling and what I love is I consider it one of the necessaries.
There’s always going to be a need, and so therefore, I mean, at some point they’ll probably get some artificial intelligence that’ll figure out how to do the mowing, but that’s the lowest profitability part of it anyway. And so, beyond that, I don’t see you guys running out of something to do anytime in the near future.
And so think about that. I mean, I’ve got the potential to get a 50% or more return. And in most cases, I mean, one of our clients, a lot of our clients are easily in the 100% return on a year over year basis, without selling the business.
See, most people think you only get those kind of returns because I built a business and some crazy person with more money than brains came along and paid me for it. No, no, no, no, no. That’s extra. You know, let’s run a business that’s giving me 50% return now. That’s a good deal. And that’s the case that I’m building in this discussion today, and I’ll touch more on it in the fall at the conference.
So that’s really kind of the mindset. So that’s why I want to focus on pre-tax profits, because it’s the CD that we’re talking about, that you have.
If you enjoy Greg’s wisdom, I’d invite you to join us at SA4, our conference in November. Greg will be doing a three-hour workshop, and at that workshop, he’s going to talk about how can you get your company from operating successfully to operating extremely successfully? Meaning, it’s fully capitalized, you have minimal debt, you have a lot of cash in the bank, you’re generating a lot of profit, and it’s getting bigger every year.
He’s going to talk about how you get there, and how you get there quick. And what to be thinking about. And what numbers to be watching. What things to be working on in the company so that you don’t have to struggle for five years, 10 years, unnecessarily. How can you get there quick? And he’s going to tell you exactly what you need to think about, exactly what you need to work on.
So join us at SA4 in November. Greg will be one of many really exciting and very interesting people that you’ll have an opportunity to talk to, network with, and learn from. Hope to see you in November.