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Greg Crabtree on Understanding the Metrics You Need to Grow

Greg Crabtree on Understanding the Metrics You Need to Grow

Today, I’m talking with Greg Crabtree, the CEO of Crabtree Rowe & Berger, a financial consulting and accounting firm for growth-oriented businesses.  

Greg is also a fantastic speaker, and the author of Simple Numbers, Straight Talk, Big Profits, where he outlines a pretty revolutionary set of metrics for driving business profitability.  

In our chat today, we’re going to cover the most important financial metrics that you can use to understand the direction of your business.  How to measure them, the overall purpose of what a benchmark is and a whole lot more.

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Topics covered:

  • (01:04) – Background Leading up to Today
      • (02:05) – Greg explains his area of expertise and what he does for his clients.
  • (05:59) – The Philosophy and Language of Effective Financial Management
      • (06:21) – Standardization and the employment of capital.
        • (06:30) – Discussing the concept of ‘Return on Invested Capital’.
          • (09:12) – The ‘Buy Scenario’.
          • (09:43) – Why it can be worth it to buy companies with a low rate of return.
            • (10:19) – Understanding the metrics for scaling.
            • (12:58) – Long term investing.
          • (15:01) – Barriers to entry in the property management industry.
      • (17:23) – Greg explains why businesses face challenges of profitability when scaling beyond a certain size.
        • (17:25) – The Black Hole of Business.
          • (18:29) – Discussing ‘real’ revenue figures.
      • (22:14) – Return on Invested Capital (ROIC).
        • (22:22) – Acquisitions and multiples.
        • (23:24) – ROIC as it applies to sales and marketing.
          • (23:24) – Four types of capital.
            • (23:35) – Trade capital.
            • (23:56) – Infrastructure capital.
            • (24:09) – ‘Buffer capital’.
            • (24:28) – ‘Launch capital’.
          • (25:09) – Problems with the idea of customer acquisition cost.
            • (26:27) – ‘Lagging variables’.
            • (27:24) – Commitment to marketing.
            • (28:07) – Three simple rules of business success.
      • (31:54) – Greg discusses important metrics for marketing campaigns.
        • (32:16) – The Baffle Technique.
        • (34:26) – The challenge to marketing.
  • (35:57) – Operational Efficiency Metrics.
      • (36:47) – Labor efficiency.
        • (37:48) – Differentiating between management labor and direct labor.
        • (38:19) – Labor efficiency curve.
  • (41:45) – Tying it Together
    • (41:57) – Greg discusses themes and ideas for his next book.
      • (42:18) – The Business Value Triangle.
      • (44:09) – The Escape Velocity Model.
      • (44:39) – The Harvest Model.

Resources mentioned:

Where to learn more:

If you want to learn more about Greg and his services, or find out about his upcoming online educational material, head over to his flagship website SimpleNumbers.Me.

Transcript:

Jordan: 0:00:00.5 Welcome closers, today we have another episode of The Profitable Property Management Podcast coming at you. This is Season Three on profit.

0:00:08.5 I’m your host Jordan Muela, and every week I interview world-class property management entrepreneurs and industry experts who share actionable insights to help you grow your property management empire.

0:00:17.9 Whether you manage 100 units or 1000, this broadcast is designed to help you see the big picture and to give you the tools and tactics that you need to get to the next level.

0:00:26.9 Today, I’m talking with Greg Crabtree, the CEO of Crabtree Rowe & Berger, a financial consulting and accounting firm for growth-oriented businesses.

0:00:35.8 Greg is also a fantastic speaker, and the author of Simple Numbers, Straight Talk, Big Profits, where he outlines a pretty revolutionary set of metrics for driving business profitability.

0:00:47.0 In our chat today, we’re going to cover the most important financial metrics that you can use to understand the direction of your business. How to measure them, the overall purpose of what a benchmark is and a whole lot more.

0:00:59.7 Welcome to the show, Greg.

Greg: 0:01:02.6 Glad to be here and I appreciate the opportunity to talk to your audience.

Jordan: 0:01:04.7 Yeah, it’s a pleasure to have you back on. So for context, we first met in Puerto Vallarta last year. 0:01:11.4 We did a little mastermind retreat.

We had four of our best clients we brought out, to kind of get serious about the numbers. 0:01:20.7 We sent you a whole bunch of data, and we sat down for about two days to kind of deconstruct things. And there was a lot that came out of that.

0:01:30.6 But the main thing that came out of it, for me, was seeing the opportunity for more standardization, more transparency around data within our industry.

0:01:38.4 I know you work across – with clients in a bunch of different verticals. I work with clients in one.

And so, I have the luxury of caring about going really deep on the metrics and even getting into some operational stuff.

0:01:52.2 Part of what also came out of that was doing the benchmarking study. 0:01:56.0 So the property management financial benchmarking study that we recently completed was really kind of inspired, or at least the seed was germinated, when we first showed up there.

0:02:05.8 So, I want to start here. When you think about all the different flavours of financial services, accounting, CPA, CFO, etc., where do you kind of – where do you fit in the mix and what do you do for your clients?

Greg: 0:02:18.0 Well, you know, for us, where we fit in is a client that wants to create a planned outcome.

0:02:24.0 So that’s a business owner that — we work with 0:02:28.4 [Inaudible] hill businesses that they want to say, “I don’t want to just allow a random occurrence of things, I want to create a plan.”

0:02:37.3 And then, once we help them through that process of analyzing both history of how they got to here, but where they want to go, then it can feed off into some of the more traditional services.

0:02:47.9 So I kind of like to look at ourselves – is we’re really three businesses. 0:02:52.4 We’re a consulting firm, first and foremost. We help those business owners understand their data and our simple numbers format. 0:02:58.9 Because we believe there’s one business structure of seeing data.

0:03:03.6 Every business has different plays that they’re going to run. 0:03:06.5 So the uniqueness of the property management industry is there’s a select group of plays that will work within that industry.

0:03:14.6 And if you try to be something that you’re not, you’re going to fail. 0:03:19.2 Every business industry has those same elements to it.

But the thing is, the beauty that we’ve created with our simple numbers process is I can actually compare a business that does property management to a business that does, you know, in-home care services for seniors. 0:03:37.2 I can compare it to, “Hey, maybe I want to run a pest control company.”

0:03:42.6 Well, you know, we’re all doing stuff. I mean, if you really think about it, there’s only three business models that exist. I either sell stuff, I do stuff, or I make stuff. 0:03:53.9 And every business is either those three or a blend of those three.

0:03:58.8 You know, sometimes I will make and do stuff that I sell. But that’s it. And so, when you really simplify it down, and says, “Ok, how do I structure my data so it becomes much more effective, much more useful, I’m not in the weeds.”

0:04:11.6 And so, that was really what led me through just researching hundreds and hundreds of business data sets that we have access to.

0:04:19.0 You know, we kind of came up with this methodology, and the more we apply it, the more we refine it.

I’m even really surprised at how reliable and sustainable and – we almost never vary from that original structure, you know, that I put – you can see it on page 22 of the original book.

0:04:36.7 And then we’ve continued to develop some next level thinking off of that that we’ll talk about some today.

0:04:43.6 But essentially, that’s what I did with those four companies at the mastermind retreat. 0:04:48.4 And what was amazing was – and I’ll give you guys credit for the benchmarking survey, you did the one thing that nobody else does, well actually you did two things. 0:04:59.2 You cleared the distortions of owner compensation to produce real profitability.

Jordan: 0:05:06.5 I’ll let you guess where we got that idea, Greg.

Greg: 0:05:09.6 I have some vague idea.

0:05:10.1 But secondly, the other idea was you isolated labor by function. So, what’s directly or what’s management labor.

0:05:18.9 And I can’t tell you, it’s just the simplicity of those two things that really is 90% of the distortion that people have about how their business works.

0:05:30.4 And by doing that, yours is probably one of the most reliable pieces of survey data that I’ve seen out of any industry group. 0:05:39.1 [Inaudible] because of that.

Jordan: 0:05:41.3 Aw man. I appreciate that. High praise. And we really knuckled down on the word ‘study’ rather than ‘survey’.

Because survey implies that people are kind of volunteering their own data in whatever way suits them. 0:05:52.6 We had to go right in and like, get the actual data. Which puts a bunch of work on us to do the formatting, etc. Really painful.

0:05:59.2 But the key here, the point of what we’re talking about, is standardization. 0:06:03.5 I like this for two reasons.

The first reason is this: standardization is the mindset we should always have, because when you talk about comparing a property management business to a pest control business, what I’m thinking about it is, as an entrepreneur how should I think about investing more in my business, as opposed to buying stocks and bonds or any other asset class.

0:06:21.9 The standardization is the fundamental way to answer the question, “Where’s the best way to put – where’s the best place to put my next dollar? To employ capital?”

Greg: 0:06:30.3 Yeah. Well, and what’s interesting to that – and this is in the data that I’ve spoken on – I’ve yet to – it’ll be in the next book, and certainly in some of our work that we’re doing, but the next level of thinking to that, I’ve come to believe, is this concept of return on invested capital.

0:06:48.8 And so, whereas in my original book I gave an opinion that somewhere between 10% and 15% profitability, you know, was the profitability target for most businesses.

0:06:59.4 And I would say that actually is true for about 70% plus of the businesses out there.

0:07:06.2 But there’s always some outliers. And it still bugs me. You know, when you see an outlier, you gotta know why is that an outlier. 0:07:12.3 Well, now I know why.

And I couldn’t tell you why it was 10-15%, it was more just an observation of the hundreds of businesses we had access to data and said, “What is that common data point?”

0:07:23.1 And so, I now know why – is because from an operating business standpoint it’s about the return on invested capital.

0:07:31.6 Of the money that I put into the business, what is the profit that I must get as an entrepreneur back out of it?

And every business model has a different level of capital input required to either start it, grow it, scale it, exit from it.

0:07:47.6 And so, from that standpoint, what we found was, absent of buying – so this is not the example of a business being bought by somebody, this is called, “Start a business from the ground up, what is it going to take?”

0:07:59.4 That the minimum return on invested capital standard is 50%. The average is 75% and the best ones are 100%.

0:08:07.9 And so, essentially I can say that if it takes a million dollars for me to start my business, I better be finding a way to produce $500,000 dollars of profit, you know, within the first one to two years as a run rate of profitability to make that a viable opportunity.

0:08:25.6 Or else, I got to go back to the drawing board and say, “There’s just not enough profit in this, I need to either take less capital or find another way to be more profitable in that process.”

Jordan: 0:08:38.2 I just want to stop you right there because I feel like folks are going to get hung up on this. And, Greg, honestly, I’ve got hung up in the past.

0:08:43.7 When you say that, you’re not – you’re putting an expectation out there that’s almost like this is how every business should behave.

0:08:49.6 But fair to say, most businesses do not behave like that. In terms of starting new businesses. 0:08:54.5 In fact, most businesses flounder, and they fail – the point that you’re making here is that you have a choice.

And you fundamentally have a choice about investing a million dollars to start a new business or buying an existing business, or investing your money elsewhere. 0:09:10.6 That’s, I think, the key to what you’re framing here.

Greg: 0:09:12.6 Well, and so here’s the buy scenario.

So, we’ve had clients that I would say – probably the average that I’ve seen of late is somewhere between 7.5 to 10 times earnings multiplier.

0:09:24.9 I mean, it is a very, very aggressive purchase marketplace right now for many, many businesses.

There’s only a handful that are kind of out of favor because they’re too hard to run. Not that they’re not profitable.

0:09:36.8 So, if you like to roll up your sleeves and get to work, there’s still some really good opportunities out there. 0:09:42.1 But, you’ve got to be willing to work at it.

0:09:43.9 But for the most part, the businesses that are kind of en vogue, they’re getting those high multipliers because – we had a client that sold for ten times their earnings.

And so, if they were making a million in profit, they sold for ten million dollars. 0:10:01.4 Well, that’s a 10% return on invested capital by the buyer.

Now, why would somebody do that? 0:10:06.7 One, it’s still a decent return, but it’s a very risky return at that level.

0:10:11.3 Well, they’re only doing it because they know they can scale that business where the current owner had scaled it as far at they wanted to go.

0:10:19.2 Now, so here’s the magic to that equation: for me to double that and go to two million of profit and just keep the same rate of performance, I just double it in size because I can drive customers and volume to it.

0:10:34.4 The capital required to double it in size is not another ten million. It’s probably, maybe a half million.

0:10:42.2 So now, my return on invested capital has gone up from two million as my numerator and ten million five is my denominator. 0:10:49.8 So now, I’m almost at 20% return.

0:10:53.5 If I double it again and get to four million, my capital input is maybe 12 million, so now I’m at four million to 12 million, I’m almost to a 40% return on invested capital.

0:11:05.7 And what’s fascinating is, we’ve got a couple of private equity firms that we’ve started working with their portfolio companies – and it’s really kind of fascinating because you’re seeing a blend of: how does money and effort play nicely together in those companies.

0:11:17.2 Because, if I start a business, you know, I start with my initial capital, but remember, every dollar that I retain in after tax profit, is also a capital addition.

0:11:31.1 See, I’m putting capital in but I’m not thinking that way. But you are.

0:11:35.2 And so, over time – you know, we had a client that grew – they started from nothing. 0:11:40.7 They got two dollar bills together and rubbed it and said, “Hey I’m going to make a profit.”

0:11:45.3 Well, 15 years later he’s got five million dollars of equity in the business because he’s left earnings in the business.

0:11:53.0 And he’s making five million two hundred and fifty thousand a year in profit. 0:11:58.4 So, that’s over 100% return on invested capital.

0:12:01.9 Now, it didn’t get there overnight, but year after year after year, this guy probably was over 100% return on invested capital every single year of operation past the first year.

0:12:12.8 Now, let me ask you a question Jordan. If I offer you 100% CD – I hear you’ve got $100,000 dollars and you say, “Yeah, that’s a good deal.”

So you’d put $100,000 with me, year later I’m going to give you your hundred back plus a hundred in interest. Oh, by the way, that hundred in interest is taxable.

0:12:35.3 So, I’ve got to pay, let’s say roughly 40% is the average tax rate, so I’ve got to pay 40,000 of that in tax, so I’ve got $160,000 left over after tax. Would you like to do it again?

Jordan: 0:12:47.5 I’d ask you for a CD with longer terms.

Greg: 0:12:49.3 That’s right, but see, the market is a very fickle place. See, it doesn’t like to give long terms. And the longer terms it gives, the less yield it gives.

Jordan: Right, right, right.

Greg: 0:12:58.2 It works the same way. And so, you say, “Yeah, let’s do it again.”

0:13:03.1 And so, as you continue, you’re creating the hyper-growth from the ground up. Businesses that work really well are the ones that continually reinvest the capital. 0:13:13.9 As long as the market is giving that opportunity for growth. 0:13:16.1 Sometimes it’s there, sometimes it’s not.

0:13:19.3 You know, from your property management companies, sometimes it’s at a where not share too. ‘

Sometimes they are penetrated as far as they likely can get in the area where they’re in, and guess what they have to do? They’ve got to change their where. They’ve got open up an office in another place.

0:13:38.0 That’s a separate business model of investment but you’ve got to think through it the same way.

0:13:41.5 If I go spend $100,000 dollars to open a new office, when can I generate $50,000 a year profit to justify that investment? Minimum. Minimum requirement.

0:13:53.6 And really, I want 100. I really want 100. Most service businesses should produce 100% return on invested capital. For the most part.

0:14:01.9 The only businesses that struggle to do that are the ones that have to carry – they have to wait to get paid by the customer, so they carry AR and they’re an inventory – I’ve got to carry inventory and I don’t get good turns from my supplier.

0:14:14.4 So, I’ve got a Latin America food distributor and the best return on invested capital I can get for them is 40% because their vendors make them pay when they order, not even when they deliver.

0:14:24.5 And so, they got the worst of all possibilities of waiting to get paid 60 to 90 days by their customers, carry inventory, and they’ve got to pay in advance to get supplies.

0:14:35.3 But even that, they still make 40% return. You know, on. So, not within my standard but you’ve got to – you’re dealing with a dysfunctional marketplace, you know, from a trade perspective.

0:14:46.5 So, every business model has these underlying characteristics. The beauty about the property management business is this: I don’t have to wait to get paid. I get paid every month in advance, for what I’m doing.

Jordan: Recurring revenue.

Greg: 0:15:01.5 That’s right. So, that’s a good thing. Now, the only barrier to entry is – because the payment is relatively small per incremental door of that process, I either have to get doors in chunks to scale, or I’ve just got to be very, very consistent and get passed to that point of initial viability.

0:15:22.1 You know, if I’m launching a property management business, that’s going to be the part that that person has to stay in it long enough to get to that point.

Jordan: 0:15:30.6 Get your first 100 doors.

Greg: 0:15:31.1 Exactly. And then, but once you’re there, what was really amazing in the mastermind group, was the consistency of the adjusted profitability for truth of financial data of the group.

0:15:43.8 And that was eye-opening even to me, and I see hundreds of data sets. But if you’re doing it the right way, you’ll be very, very profitable.

0:15:52.7 Now, the question is, how deep is the market willing to give you that credit extension to get to two million, three million, five million and beyond.

0:16:05.8 And that’s just a question of how hard you want to go after it. Because you can see in the marketplace – I mean, this affects business owners as well. Are you willing to do the same thing to get to the next million of revenue that you did to get to the first million?

Jordan: 0:16:18.7 Right. And that’s a personal decision. So, some people tap out at two million and go the lifestyle route. No problem. No judgement with that.

0:16:26.0 And you kind of talk about the challenge of certain – we know in general that there’s a cycle of infrastructure and staffing investment and getting some of the gain of that. And that lifecycle happens over and over again.

0:16:38.8 But you make the observation that between three and five million dollars in revenue is a really challenging hump to get over.

0:16:42.3 What we found is interesting was, we see a lot of clients that are really growth focused, and their belief is if they get to a certain size of scale, obviously they get the economies of scale.

0:16:52.2 But they’re also believing that there’s going to be a real meaningful change in the EPD to multiplier, or the per door multiplier that they’re going to see, because rather than just selling the doors of the contracts, they could be selling truly a whole brand, a whole business package to be valued as such, rather than individual doors.

0:17:11.8 But, we didn’t see any businesses that have actually successfully crossed that chasm and remained profitable in the process.

0:17:23.1 Talk to me a little bit about why there is this kind of challenge at that certain size scale.

Greg: 0:17:25.8 Yeah. And so, in the book, I call it The Black Hole of Business. Between one and five million. And I will tell you, that even more refined than that is – I’ll tell you, the one number that you don’t want to be at, is three million.

0:17:41.5 That is the deepest, darkest moment of your journey as a business, because you’re too big to get away with doing things with not enough management, without pulling your hair out. 0:17:54.5 As we say, flying into the sun. Yeah. You’re killing yourself.

0:17:58.7 And so, when you’re at three million, you have one or two choices. “I’ve got to keep pushing forward and get into four plus”, or “I’ve got to go back to about two and a half to two.” You know, somewhere around in there.

0:18:11.1 But that is that mid point that you just got to say, this – I can’t stay here. 0:18:15.2 This is not good.

0:18:17.9 And I don’t care what industry you’re in. 0:18:20.5 Now, when we do say revenue – fortunately, in the property management business, your revenue is a real number. It’s not a fake number.

0:18:29.6 You’ve got some product businesses that will say three million dollars of revenue at a 20% gross margin.

0:18:33.9 Well, that’s not three million revenue. I mean, you know, we’ve got clients that do distribution and we’ve got one client that does 100 million dollars in revenue at a 13% gross margin.

0:18:45.6 And, you know, he’s under no delusion that he’s a 100 million dollar business. 0:18:51.1 He’s a 13 million dollar inventory management business.

0:18:54.0 Because that’s the gross margin that he lives off of. 0:18:57.4 But, the beauty is, he brings four million of that to the bottom line.

0:19:02.1 That’s not a bad business. And he’s found a way to fund it to where he doesn’t have to – he gets paid by his customers at roughly the same time that he has to pay his vendors.

Jordan: 0:19:12.8 You could conflate in this industry and you could think of your rents. I have heard of some people thinking of their rents as being the actual top line revenue, which is just coo coo.

Greg: 0:19:22.1 Yeah. Travelocity actually once tried to claim that the full price of the airfare was revenue instead of the four dollars and 95 cents that they got as the fee. 0:19:32.2 And the accounting industry quickly poo pooed that one.

0:19:35.8 But there’s still plenty of people that do it, in terms of – it’s that ego thing. 0:19:42.5 So really, the idea is – you’re absolutely right in a sense of – as I push to do different things, people start reaching for, “Well I could charge for this and I could charge for that.” Or, “I could do this.”

0:19:54.4 And we’ve seen people in your industry set up separate management companies – or separate maintenance companies. In essence. 0:19:59.9 Well, that is a different business.

And guess what? That business has to operate under the same operational parameters of your property management business in the sense that it’s going to need capital. It’s going to need somebody to run it, it’s going to have to be profitable on a stand alone basis.

0:20:16.8 And I think what tends to happen is, you’ve got to ask yourself, “What am I really good at?”

0:20:21.8 And I want to outsource the things that I’m not good at and let that be somebody else’s risk so I’ve got freedom of change of vendor.

0:20:30.1 Because there’s some people that will try that just to say it’s more revenue and I’ll make a profit on all of it. 0:20:35.1 And you start to realize, “No, you really won’t.”

0:20:38.0 You know, I’m smart enough to do a lot of things, but there’s only a handful of things that I’m really world-class at.

0:20:46.0 And I think the recurring theme in most businesses that are super profitable is, you’re fine in that niche that you’re really good at.

And then, like you say, it’s your personal choice of how big do you want to get and where do I want to serve.

0:21:00.7 So, in our business model, ours is relatively unique that I could not have experienced what I wanted to accomplish as a professional if I just focused on Huntsville, Alabama where our office is.

0:21:11.7 And so, we got so good at dealing with people outside of the area that actually now 85% of what we do is not in Huntsville, Alabama.

0:21:19.0 And I don’t even market to people in Huntsville, Alabama. 0:21:23.8 Because it’s kind of nice. They don’t come into my office. And I can play golf with them and beat them and not worry about playing customer golf.

0:21:32.5 So the idea is that where not share mindset of going, “If I can find a way to do something and break the geographic barriers, that’s certainly a great way to change the model.”

0:21:47.0 But I’ve got to be market savvy of what is the potential of the market. I’ve got to price to the market. And as I always like to say in terms of – it was kind of interesting some of the data in your study about the prices that people charge per unit on average.

0:22:02.2 And it’s pretty much the same as the price elasticity curve that, you know, for Neiman Marcus, there’s a smaller amount of customers than there are for Walmart. 0:22:10.2 Well, I’ve got to figure out which one I want to be, but I can’t be both.

Jordan: 0:22:14.3 Right. Well, a lot of it does end up kind of evening out. I want to go back to the ROIC, return on invested capital concept.

0:22:22.2 You introduced this to me after the mastermind and the reason I was so hung up on it was because two things. First, the question about acquisitions and multiples.

It comes up and it goes round and round. And they’re non-sensical. 0:22:33.9 The average multiplier is 12 to 18 months monthly revenue per door, which means nothing on top line revenue. 0:22:39.9 It doesn’t account for profit.

0:22:43.1 But additionally, the more pressing thing was customer acquisition cost. How much should I pay to acquire a new door organically.

Which, in and of itself, is a fundamentally nonsensical question. 0:22:55.9 How much should you pay? How could we possibly answer that?

We could at least frame it by starting on the conversation of how much could you pay? 0:23:01.3 And the way that we choose to highlight that issue was customer lifetime profit before sales and marketing.

0:23:07.8 If that is $1000 bucks for you, then with certainty, I can tell you that you cannot afford to spend more than $1000 dollars to acquire a new customer. 0:23:18.3 But that’s just one dimension.

0:23:19.2 Can you talk to me about the return on invested capital as it would also apply to sales and marketing?

Greg: 0:23:24.6 Yeah, absolutely. So, not to go down to big of a rabbit hole, but think of it in terms of capital. So my invested capital comes in four flavors.

0:23:35.9 So I have trade capital in a business, which is, “How much do I need to fund accounts receivable, inventory and then what trade support do I get from accounts payable?”

0:23:44.8 Guess what? In your industry that number is zero. Because I don’t have to carry AR. I don’t have to carry inventory. I don’t really have any meaningful accounts payable. 0:23:54.4 So it’s like, ok so that one’s solved.

0:23:56.6 So I have infrastructure capital. I need some equipment, I might need a vehicle, but essentially I don’t have a significant amount of infrastructure cost. Ok. So that one’s pretty doable.

0:24:09.4 So then the third one is what we call Buffer Capital. 0:24:12.1 So, in my original book I refer to the core capital target.

So I’ve got to have two months of operating expenses in cash. So that’s my buffer for the variability of business that goes on. 0:24:24.3 So I can plug that number in based on the run rate that I’m targeting to get to near term.

0:24:28.6 And then the fourth piece that I think is the one that’s least understood, and I’m calling that Launch Capital.

Launch capital is the amount of losses that I’m willing to spend money on before an activity breaks even.

0:24:47.9 So the idea is this is where your customer acquisition cost would come into.

0:24:55.8 I believe your marketing spend is really more akin to launch capital. 0:24:58.3 And from a standpoint that it is an experiment to spend money to try to win customers that I can – once I can win the customers, I can model out what is my incremental gain in profitability.

0:25:09.4 And so, the way I would actually look at it, and I understand the industry likes to come back to a customer acquisition cost per customer.

0:25:20.3 I think the problem with that is that sometimes that ebbs and flows so much that it’s a meaningful calculation to go through but I think it’s a reflective calculation.

It would not be my primary calculation. 0:25:33.4 My primary calculation is, “Here’s what I spent in exploratory marketing spend and then here’s the actual annual incremental profit I got from these new customers.”

0:25:45.8 Because I can go through my PNL and say, “Well, for every dollar of rent collected, I’ve got to have so much direct labor.”

0:25:54.0 So that relationship of direct LER that we talk about and you guys have in your study, I believe I can easily predict my increase in labor from an increase in rents that I’m collecting. 0:26:04.2 Or management fees collected.

And so than, for the most part, my operating expenses, as much as they may stay static over a short term, guess what, they’re going to stay at roughly the same percentage. To be quite honest.

0:26:18.8 As a basket of all operating expenses, you know, I’ll get some economies of scale, but you know, I think economies of scale are a little bit overblown.

0:26:27.6 Unless I dramatically change how I’m doing business or where I’m doing business, that’s about the only time.

Otherwise, those costs have proven themselves over time to be what I call a lagging variable. 0:26:41.3 I feel the benefit momentarily and then a year from now, those costs have crept up to where they’re actually roughly –

you know, if my operating expenses as a percent of all management fees is 40%, you know, if I get an influx of business and it drops to 35% temporarily, I’ll bet you within 12 months they’re back to 40%.

0:27:03.4 Because, it’s just a little bit here a little bit there and by the time you look around, you’re back to that same run rate. 0:27:09.9

Jordan: 0:27:10.2 It evens out.

Greg: 0:27:10.7 Yeah, it evens out. And so, the idea is I can – but what’s really critical, that I think you guys are very innovative in terms of how you help people get more leads and not just be passive about who comes to their door.

0:27:24.6 I thought what was really surprising in the study was you had a couple of outliers of people on the high end of the profitability range that it’s significantly committed to a marketing spend.

0:27:36.7 And so, what struck me about that, that we see quite often is, I really think most people look at marketing as a black art. 0:27:44.5 And you know, there’s probably some aspects to that. You’ve got to figure out what works for you, what message you’re talking about.

0:27:52.3 But once you figure it out, the people that really have confidence in it, they go all in. 0:27:57.9 And once they go all in, most of those people do rise to the top end. Because I cannot scale unless I’m effective at marketing.

0:28:07.9 Pick whatever technique of marketing you want to use, I can be agnostic about that, but at the end of the day, I go back to – I don’t know if I shared this with the group at the time, I call it my three simple rules of business success.

Figure out what the market needs, find a way to do it profitably and then I tell everybody about it.

0:28:28.0 Well, I think there’s not enough work done on figuring out what the market needs. Well the market needs property managers, but market need is not just the thing you do, it’s how you do it, and how you interact with people, and what you stand for, and what’s your principles and how perceptive you are of the needs of your customer.

0:28:47.7 And innovative ways of responding to those needs is the figuring out what the market needs piece.

0:28:51.8 And then once you know that you’ve actually scratched that itch for that segment of customers, to me the easiest thing is figure out how to do it profitably. I mean, that’s just backing into the math of it.

0:29:01.8 And then once I get those two pieces figured out, those are the people on your study that have gone all in to the marketing piece because they have figured out that they know what they know.

0:29:10.5 You know, we did some follow up work with one of the folks in the mastermind, and one of the things she’s really good at is she knows who she is and she knows what she’s really good at.

0:29:21.7 And so, she’s all in. And so, I mean, you talk about the incremental step of improvement, and her data is just phenomenal from that standpoint.

0:29:32.8 But how many people really go through the setting up of the process to really know that I’ve solved the customer’s problem first, and do it in an exceptional way.

0:29:42.6 And can I operate in a way to still be profitable and do that. 0:29:46.7 Because the world would be great if everything was free but that’s not how it works.

Jordan: 0:29:52.8 Yeah, the gal that you’re referring to has a high-functioning business and her strategy has largely been to market her expertise for the market. And it’s worked well.

0:30:02.5 What I would say – what I’m about to say would apply to her and the vast majority of the market.

0:30:06.1 Making the leap from that, from a local market knowledge, referral basis, to then jumping into things like Facebook marketing, pay per click, SEO, etc. There’s a real chasm between those two growth tactics, and so that’s where the accountability comes in, particularly when you’re dropping a lot of cash.

0:30:23.8 The person that you mentioned is not doing highly cost intensive marketing. Many firms we’re now seeing are really trying to throw around dollars. And a lot of times, that is a substitute for expertise.

0:30:36.9 Because the belief is, the core thing we do is our widgets and somehow sales and marketing is like this kind of novelty side thing.

0:30:44.5 In my experience, sales and marketing creates disproportionate value in any organization regardless of industry. It’s a competency that’s worth developing and worth operationalizing in the same way that you operationalize collection, eviction, etc.

0:31:00.4 So, for the folks that are spending money to outsource it, they’ve got to have some accountability. 0:31:08.8 Customer acquisition cost, it’s unit economic driven.

But you’re right, Greg. People spend money in increments on a campaign. And the campaign costs ten or 20 thousand dollars and therefore it should have an expectation associated with it.

0:31:20.9 The customer lifetime profit numbers that we saw – so I was quoting some average stats here.

0:31:26.8 Average customer lifetime profit before sales and marketing: $1200 dollars. $1230 to be exact.

The average customer acquisition cost here: $314. And that customer acquisition does not include any form of labor.

So it’s probably a little bit higher than that. 0:31:52.1 But there was some level of margin to the hat there.

0:31:54.8 When you’re advising a company on having that accountability for growth, what kind of metrics would you hold them to if I spend $10,000 on a marketing campaign?

Greg: 0:32:02.8 Well, so part of it is – and I think we’re getting at the same thing, just a different way. In the sense that the way I would do it, is I would actually model it out in the complete financial model, and say, if we attain this growth with this spend –

0:32:16.1 So think of it from the standpoint – I did a chapter in Verne Harnish’s book, Scaling Up. And so in that chapter, I added some content that wasn’t in the original book that displayed what I call, The Baffle Technique.

0:32:29.2 In that – and it doesn’t matter if it’s labor or marketing. In your case, it’s going to be marketing spend.

0:32:35.9 So the idea is, I take a business that’s not performing profitably, and I say, “Hey, we’ve got to get you to the 10% profit level first.”

0:32:43.9 And so, we just say we’re going to hold all labor and costs constant until we get to that 10% level.

0:32:51.4 And we’re going to do it old fashioned way of getting profitable and see what breaks. 0:32:54.1 Usually, you can get to that number actually pretty easily. Because it’s just about setting a target and expectation.

0:33:00.1 I mean, that’s what we’ve kind of found with the 10% number. 0:33:04.3 But once you get to 10%, you say, well if we can get to there, let’s see if we can get to 15% under the same scenario.

0:33:08.3 So, I can’t spend any more but I can spend differently. 0:33:14.9 So, if it’s labor that I need to change, I can change people. I just can’t spend more dollars.

0:33:21.7 If it’s marketing, same thing. I can change what I’m spending it on, but the idea is I’m trying to find efficiency with where I’m at. Because I’ve got to prove that the model is viable.

0:33:32.3 Once I prove it’s viable, then I start testing and say, “Ok, I’m going to choose to intentionally diminish profitability from 15% back to 10%.”

And whether it’s marketing spend or labor spend, I can just increase those discretionary spending buckets, but not more so than it pushes me back below 10% because that’s the safe zone of where we want to be you know, in that process.

0:33:59.2 And so, if we push back to there, then we close – it’s like a salary cap, you close the cap and you then earn your way back up to 15%.

0:34:08.5 And as I work through that baffle, I think that is the safe way of taking incremental, accountable steps of, you know, this is what I did, let’s hold it accountable to being producing results and then once we verify, let’s do it again.

0:34:26.0 Now, the one challenge to marketing – I’ve used this example, you might appreciate this – is I said my wife used to work in the lab at the hospital and I said, you know, marketing to me a lot of times is like this bacteria that she would culture in a petri dish. And you try to figure out which antibiotic would work against it.

0:34:42.7 But over time, bacteria develops resistance, and it adapts. And that antibiotic no longer works against it.

0:34:52.4 And so, to a certain degree, marketing has a lot of that bacteria concept to it in a sense that what worked today won’t work as well a year from now and so forth. 0:35:02.4 And so, it is a constant changing, which is why you’ve got to be connected to people.

0:35:07.6 And like yourself, that has a broader reach of the marketplace. Because if I try to hire that internally, or try to do it internally, I’ve got a very narrow picture of the world.

0:35:17.4 And, I mean, there’s stuff happening that I have no concept of unless I’m just widely read or really been digging around.

0:35:24.7 And I’ve always usually believed that it’s a balance of – you know, there’s some executable things that you might do internally if it’s relatively easy to do, but I’m a huge fan of getting that external expertise or otherwise, I’m missing out on what’s actually working. You know, in that process.

Jordan: 0:35:39.3 I love it. And the common theme of what I’m hearing you, is creativity as a byproduct of restraints.

0:35:46.3 Tracking your numbers and using that accountability to say, “Hey, it’s not working, but you know what, that’s actually not a bad thing because we can try something new. And then something new after that.” 0:35:54.3 It’s a quicker path to success.

0:35:57.7 I do want to talk about some of the operational efficiency metrics in the study. Adjusted profitability, to back out all of the distortion around owner comp. At 6%. That was a little shocking to me. 0:36:12.6 Are you surprised by that at all? Do you think 0:36:12.8 [Inaudible] size company?

Greg: 0:36:15.0 No. No. And that’s really where my original book – I talked about it. 5% on life support, 10% you’re good, 15% you’re great. We actually know that the top performers in your industry can be 20-30%.

Jordan: Absolutely.

Greg: 0:36:28.3 But it is not common because that is a person who just does not have the right mental framework of the value that they’re providing and they’ve just got to stop and think about, “Here’s my cost structure, is it – my costs are ok, I’ve just got to do more for the costs that I’ve committed to.” Or is it, “I’m wasting money.”

0:36:47.9 We’ve done projects with other people in the property management industry that when we started looking at their labor efficiency of the costs that they committed to, we started questioning, “Well, I understand what you’re kind of thinking, but these are positions that aren’t producing.”

0:37:03.8 And so, “If you want to keep that person, here’s what they’ve got to produce to, or otherwise that’s the wrong person or you don’t even need that person.”

Jordan: 0:37:13.2 Ok. So talking about LER, of course we did the trend to see the relationship between labor and profitability, but not surprising, as percentage of labor goes up, profitability goes down.

0:37:26.3 But, we saw the exact same correlation with labor efficiency. 0:37:28.0 The companies that had a better labor efficiency had better profitability. 0:37:34.1 None of this should be surprising.

0:37:35.0 But the nuance between those two numbers is that the labor efficiency allows you to actually have an accountability component. What you just described, 0:37:43.4 Were you talking about slicing labor efficiency on a per role basis?

Greg: 0:37:48.8 Yeah, so – especially we definitely want to look at it between management labor and direct labor.

0:37:54.8 Now, there’s always a little bit of art between who’s direct and who’s management. 0:37:57.9 But at the end of the day, most of the time I just put – for simplicity, for – let’s say if your business is three million of less, I would just put the owner in as management labor and put everybody else in direct. Is kind of a simplified version.

0:38:12.5 The idea is, as long as I track everybody consistently across time, I’m still getting relative performance metrics of that process.

0:38:19.2 And what you’re trying to say is – probably one of the slides that I get asked for quite frequently, is I did a slide called the career labor efficiency curve. In the sense that a human that goes to work wants consistently increasing pay.

0:38:36.9 Well, the reality is, there’s only two things that cause that pay to go up. The market change or am I doing a higher value function.

0:38:46.4 Now we come up with all kinds of excuses as to why we pay people what we pay them. But if you really look at the underlying economic structure of the why, that’s it too.

0:38:56.0 And that’s actually how we counsel our clients to communicate pay changes. That, I’ll give people a raise even though they’re doing the same job that they did the previous year because the market says they’re worth more.

0:39:06.2 Because if I had to go pay somebody to replace them, I’d have to pay them more. 0:39:10.7 Well, I believe fundamentally I owe that person a raise because I don’t want to change them out.

0:39:15.0 But I can’t give them a raise because you’ve gone from a level two accountant to a level three accountant. Hey, that’s a different raise component.

0:39:23.0 I’ve now changed levels of skill and complexity of work as well as quantity of work. 0:39:31.8 And so, from a work standpoint, there’s quality and there’s total output as well.

0:39:36.1 I’ve had people that work for me that were great in terms of quality. They just couldn’t get enough done. 0:39:42.2 Well, there’s only so much I can pay you then.

0:39:43.7 And so, when you can get labor efficiency down to even smaller metrics of, by type of business or by person, you know, some of those things, that on a smaller business, that’s tough. Because everybody – you’re hiring a bunch of generalists that are doing a lot of different things.

0:39:59.9 But, as you get bigger, there’s some opportunities. Because I can actually measure labor efficiency by person. 0:40:08.3 But that’s the nature of how our business works. 0:40:11.2 But in your industry…

Jordan: I love that.

Greg: 0:40:12.8 Yeah. Yeah. But there again, you know, you can actually – you know, we’ve done this exercise with some of the folks in your industry to where you get people to start to think about – you know, in some of our bigger management companies that deal with portfolios.

0:40:28.1 So, I have a dedicated group of people that manage a certain portfolio. Well, I can actually draw a labor efficiency ratio against that portfolio.

0:40:36.3 And did we price this portfolio business effectively for our management fee structure. Otherwise they’re sucking up other people’s time and attention versus this other one which is no problem at all.

0:40:48.6 And so, it gives you a framework of starting to understand there’s a reason why you might want to identify that as a customer that you may want to let be somebody else’s problem.

Jordan: 0:41:00.2 Yeah, I totally get it. And so, for those of you listening at home, I hope you get interested in labor efficiency as a metric, as a number, as a much more useful way to slice and dice the efficiency of labor within your business. Which is going to be the biggest component of any service based business. It certainly is the case for us.

The flexibility of LER is understanding – holding every labor dollar accountable and saying how much revenue should it be responsible for creating.

0:41:26.7 Because, if your overall LER, labor efficiency ratio, is off, that could be the management it could be the owner has a really heavy salary.

Or it could be that there’s one person on the direct labor side of things that’s really driving the team down. 0:41:40.0 The ability to slice that in that additional nuance is total gold.

0:41:45.1 Greg, I was hoping you could give us a little insight from the new book. Read the original book, and it was really eye-opening. I know a lot of folks have. 0:41:51.8 What are you planning on bringing forward in the next one?

Greg: 0:41:57.4 Yeah, so. A couple different ways it can go. So, but it is on my list to work on.

But really, what I’ve intended to write about are things that I’ve been doing in my speaking engagements.

0:42:09.9 So, I’ve actually talked about these next level things of really looking on return on invested capital. A way of thinking about your business.

0:42:18.0 A secondary one is kind of this business value triangle of looking at when do I keep a business, when should I sell it, when should I grow it.

You know, from an understanding stand point of kind of some – you know, three data points of what’s the value of the business in my hand versus what’s the value of the market’s willing to pay versus what is the replacement return that I would have to take the net after tax proceeds to reinvest that to just keep what I have.

0:42:43.9 And so, to me that’s a very good decision matrix in terms of when to buy, when to sell, when to keep, when to grow.

0:42:50.1 You know, and it really gives people some clarity. Sometimes it tells them an answer they don’t want to know, you know, but it kind of is what it is.

0:42:58.0 And then, really diving into the next book will really get deep into some of the segment analysis that we’ve been able to do with some larger companies.

0:43:07.7 That, as you get to that five million and beyond size, you really can start to run separate business units, separate business models. Anything that some advanced techniques of tagging data as it happens.

0:43:23.3 And really get into some of the understanding of how each business model has some different characteristics and understanding, you know, depending on what industry or model you try to employ within an industry, you know, what does that mean.

0:43:37.3 So, there’s some industries that require facilities, but I might can get somebody else to cover the facility and I’m just doing the service component.

So there’s a lot of different aspects of how that works but if you understand the return of invested capital build up concept, you can quickly identify where’s the opportunities in the marketplace and you can also look at this idea of what I talk about – you know, kind of the three overarching plays that you run in business.

0:44:09.0 So, I have a what I call, The Escape Velocity Model. 0:44:16.6 So I’m a build to sell, I must get to escape velocity, I’ve got one fuse to light and if it doesn’t work, I crash and burn.

0:44:25.4 Well, those are the guys, the Facebooks of the world and you know, the big guys. And there’s some people that do those.

0:44:31.9 And it’s like, just understand the dynamics of what that means, of continual capital raising and one round after another.

0:44:39.9 You’ve got another one that I call, The Harvest Model. Which I want to run a profitable business, I’m going to harvest the profitability off of it once I get to the market penetration size that I want to be at.

0:44:52.3 Typically, that’s in the third to the fifth year of the business launch that I start harvesting that profit as a return on my investment.

0:44:58.3 But, it’s a point to where putting it back into the business is going to do me no good because it doesn’t accelerate where that business goes.

0:45:06.6 The bank has started to say, “I don’t have anymore 100% Cd’s to offer. You’ll have to go someplace else.”

0:45:12.3 So, that’s a critical point that the person has to decide, “Do I open another location? Do I open a different business? Or do I just stick it in the stock market?”

0:45:22.1 And many entrepreneurs will go real estate. So hey, pick your choice. 0:45:26.9 But that’s just the dynamics of it.

0:45:27.5 The middle one is what I call, A Harvest to Sell. And that’s where I’m harvesting the profits off of the business as I go because our data says the average privately held business pays 40% of their profits in taxes, 30% is distributed as after-tax profit where the tax is already paid, and then 30% is retained for growth.

And you can grow at 15-20% a year only retaining 30% for growth. And still increase cash every year. 0:46:00.1 And so that was a surprising number from the data we looked at, because most people would think you would have to retain more of your profits to grow at 15-20%. But the data just didn’t indicate that. 0:46:13.4

Jordan: 0:46:13.4 So this is the best of both worlds.

Greg: 0:46:14.6 Exactly. Because, if somebody comes along and gives me probably – if I take my after tax profits after the sale – if my profit per after tax profit number is 10% or less for a replacement return, I’ve got to say yes to the sale.

0:46:36.2 I mean, we actually had a client that was doing about a million of revenue and got offered two times revenue for his business and he was losing money.

0:46:45.2 And so, yes, that’s a yes. 0:46:48.2 That’s pretty easy. 0:46:50.8 But there’s certain types of businesses that are always constantly being consumed in an active business acquisition marketplace like we’re in.

0:46:59.3 But, I would think that there’s probably a reasonable amount of – if there’s not already there probably will be a reasonable amount of people probably overpay a bit to get to scale in the property management industry.

0:47:15.7 And I think you always have to look at that. But I think if you look at this idea of, “If I sold, what would I have to reinvest the proceeds at to just be back to the same place?”

0:47:27.0 That’s going to give you some clarity. That may sound good, but it’s like, “Nah, I think I can keep going.”

0:47:33.5 Because, a well-run business in your industry has very consistent profitability. I mean, that’s the one thing that you’ve got going for you as an industry, is you don’t have – unless your customers come in chunks and there are variable or a volatile customer source. But if you’re managing quite a few different property owners, you’ve got some diversity to kind of, you know, hedge against somebody coming and going.

Jordan: 0:48:01.4 If you’re traditional single family, that’s absolutely the case. It’s a great business to be in. I love the way that you closed talking about understand that there are different playbooks, know what yours is and be true to it.

0:48:12.9 Greg, if folks want to find out more about what you’re up to, if they want to learn a little bit more about you or practice, what’s the best place for them to go?

Greg: 0:48:19.3 Yeah, best place to go is just go to our website for the book, SimpleNumbers.Me. So there’s some free educational resources, there’s some spreadsheet tools that are free to download.

0:48:31.1 That’s where we’ll also announce the upcoming – we’re building an education platform called simple numbers institute that will be up and coming along with the book coming along.

0:48:42.8 Because, a lot of times a business owner comes to us and says, “Hey, I want my team to understand how to operate this way.”

0:48:48.8 And so, what we’re trying to do is develop content that we’re shooting a lot of video this summer over here’s the CEO track of here’s what I want a CEO to know. Here’s what I want a management team to know, here’s what I want a finance team to know.

0:49:00.8 And we’re going to try to do it in a way that you can just view the videos or you can kind of do an unverified set of exercises and tests to test your skill sets.

0:49:13.5 But then we’re also going to offer a certification level to verify – the CEO wants to know, “Hey, did my team complete the requisite exercises to demonstrate that they actually know how to apply these concepts?”

0:49:25.8 And so, what we’re finding is in this role of online education you’ve got to kind of offer all three because some people want certification, some people don’t care.

0:49:33.1 And I think ours is one where – the concepts fully in my heart of hearts believe are very simple and people just – it’s almost like they’re so simple they can’t believe it’s that easy to do the math.

0:49:48.6 And there’s a few things in terms of we are changing – we’re kind of creating our own vocabulary too. We’re redefining – there’s not a lot of standardization in the accounting world of what certain terms mean and so we’re trying to create a standard protocol of communication amongst businesses.

0:50:07.5 And I think what you’ve guys have done with the study is a great thing to kind of move that along and get people to start talking the same language. Because, I believe in the sharing of data.

It’s kind of like Jack Stack said in, The Great Game of Business. People ask him and he says – you know, because they were open book, and they say, “Aren’t you afraid somebody’s going to use your data?” And he goes, “I don’t care if they have my data, they don’t have my people.” 0:50:30.8 And that’s it.

Jordan: 0:50:32.3 I love it. Man, great way to close. Guys, check out the website, check out the course when it comes out.

Greg has personally radically improved my financial literacy and IQ. He’s doing a great service to the overall community and his work was definitely impactful with the work we did with the benchmarking study.

0:50:48.6 Greg, I appreciate you coming on today, let’s stay in touch.

Greg: Alright, thanks Jordan. Appreciate it.

 

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