Masterclass | Preparing Your Roofing Company to Sell

Pete: All right, everybody, welcome back to the Roofr Masterclass. I'm your host Pete, with my co-host Nic, and we have a special guest today.  

Welcome, Gokul. I'm excited to have you, man.  

Gokul: Yeah, thanks for having me, guys. Appreciate it.  

Pete: So I'll give you a second here, Gokul, just to introduce yourself and then we'll jump into some housekeeping things really quick here.

Give us a quick introduction just for the folks listening that maybe don't know who you are or what you guys do.  

Gokul: Yeah. So I founded HS Exit Advisors. I've been in the M&A game for about 20 years now. I think I had hair when I started you know. We have the same barber.

Pete: And, you know- I had a ponytail when I started in roofing, so.  

Gokul: And, and here's, here's the thing. I mean, I, I've built home service companies and sold it to family offices and private equity.

We founded HS Exit Advisors with a very simple premise that, we got really hardworking folks that know roofing really well, okay? But at some point they're gonna exit their company, and we're the resource for them to do it.

So it's not about, trying to exit today or tomorrow, it's about what are the things that we need to be doing, every year? What do we need to be planning on every year? How can we be a resource so when the time ultimately comes, that they can cash in on years of hard work, and that's, that's the reason we do what we do.

Pete: Yeah, the biggest thing that I find, and I've had numerous conversations with folks, they're getting to this point where they're like, "Okay, now it's time for me to, to look at potentially leaving the business." And it's like, wait a second, we're not where we thought we were, or the business isn't quite ready, or we overlooked this completely and now we have to spend the next year or two, you know, where we thought we were gonna be able to get out now we're another two years down the road of trying to essentially sort things out before we get to that point.

Gokul: Listen, I mean, I'm a small business owner. I haven't had a W-2 paycheck in probably 30 years, you know? And, you know, it's like sometimes people say we're crazy, but that's okay. We are. one of the things I see over and over, over the 20-some years I've been doing it, and it happened to me too when I exited my company, is, you know, we're all entrepreneurs and, and there's a certain invincibility when we start our companies, where some of us are second-generation companies, third generation, and there's incredible family stories of how Grandpa started something or Dad started something or you started something, right, out of maybe in your driveway or, or in a small 800 square foot warehouse, and then it's grown and grown over the years.

So there's a certain invincibility that happens with entrepreneurs when we start our business, right? Like, "I'm gonna do this against all odds." It's fantastic mindset to have, right? But what happens When we're not spring chickens anymore, and we're starting to get, towards the middle or the later half of a career, that invincibility actually hurts us because what it prevents us from doing is looking at exits of a company, whether it's now or five or 10 years from now, and actually planning around it so you can maximize it, right?

So as you become in the middle or latter part of your career, you know, yeah, We're not gonna run it forever. We gotta think about exits, whether it's to family members, whether it's to employees, whether it's to somebody outside. At some point you're gonna hand it over.  

Pete: A great question here, right? Like, when are you guys looking to sell your business? When I came into this, everybody was in business 15, 20 years.

Everyone was a legacy company looking to hand it over to a son or daughter or someone in the family, and now it seems like we've moved a bit away from that. Are we seeing that kind of mentality kind of go by the wayside? Are we not necessarily looking to hand companies down like we used to? Is it more like a, "Hey, let's sell to private equity," or, "Let's, find a buyer,"?

Gokul: So six years ago, we went and interviewed a lot of our clients around the country. Business owners, say 5 to about 100 million in revenue. When we started digging into the numbers, here's what we found, that less than a third of small roofing businesses and home service businesses actually go to the second generation.

Pete: Hmm.  

Gokul: It's less than 5% of companies get to the third generation, and things that go to the fourth generation is so minuscule it's not even worth talking about. Whether you're living in Texas or Florida or Canada, I mean, like anywhere you look, right?

So you've got a 70% chance that you're gonna exit, okay, whenever it is, whether it's now or 50 years from now or 30 years from now, that you're gonna exit to somebody that is outside of your family.

Options are different now, right? Mm-hmm. I mean, like I'm in M&A, and my kids want nothing to do with it, you know? I mean, they got options, right? You know what I mean? Yeah, yeah. Back in the day, 80 years ago, you kind of went with Dad, and you kind of did what he did in the shop, and you just kind of picked it up.

And I think that lifestyle is broken, and I think that's causing a lot of companies to exit out.  

Nic: I had that experience before. When I started roofing in 2002 and growing up in it, it's just like, "Oh, this is just like a natural progression." Yeah. And to your point, Gokul, I'm here. I'm not on the roof with my dad, right? Like- Right ... options do pop up, and it was because of like you find a need, you find a gap, and, and if you're an entrepreneur, you're gonna go towards it.

And the interesting thing that I've noticed over the nine years of us doing, or 10 years now of, doing Roofr is seeing that transition. There's always been a thing that I've seen as a roofing contractor, I know, Pete, being in the trades as long as you have too, you've always seen, is that people overlook the trades, especially- Yeah

service trades like roofing, HVAC, plumbing, and stuff like that,  

Pete: yeah.  

Nic: But recessions hit. It's a cycle that we're always gonna end up hitting, and the one thing that is typically recession-proof is certain trades, like roofing. I've been saying that forever. I went through it in 2008. My dad went through it in the '90s. Once the pandemic hit, roofing was one of the main things that just kept on going because guess what? Yep. Your roof starts leaking, you gotta get it done. And now I go onto Instagram, I go on TikTok, and I see these people that I follow that are like, "Hey, you want passive income or you wanna do that? Then go buy those companies from those golden generations, those baby boomers that are kinda aging out of their businesses 'cause their kids aren't around anymore."

And it brings up to where we are today is like, are you going to be handing it off to your kids, or is there a secondary, option here where you can sell it to someone that is looking to kinda build up, and, and jump into the trade? So there's a lot of different options around there.

Seeing that transition from being like mom and pop to all of a sudden now you got the people with the big bucks looking over at us.  

Gokul: And Nic, I mean, even in your own story, if you went and look at it, I mean, yes, you're in the roofing industry, but you started- Mm-hmm

a completely new business.  

Nic: Yeah.  

Gokul: Correct? I mean, you're not on the roof doing... You're not hammering nails, right? Mm-hmm. So yeah, you went and started something else in the same industry, but completely different. Yeah. My hands are clean,  

Nic: which is weird,  

Gokul: And like I said, 30% of companies are. The data is the data. And, you know, nobody wants to think about exiting their business, especially when you've built it from the ground up, mm-hmm. But I think it's also smart to think about, "Man, if and when the time comes, if it ever comes where I wanna do it," wouldn't it be nice to know that you have something that's valuable and ready to go if you wanna do it?

Correct?

If you constantly keep thinking about your business on the balance sheet and what's the value of it, what are the things that it needs to run healthy, you know, can I get it buyer-ready, when you work on those things, you're going to have a great business.

Okay? Even if you don't sell it, you know? You're 25 years old. You got a, let's say, a 40-year career left in front of you. If you just pretend you're gonna sell your business every three years, it's gonna take out all the noise that you have, and it's gonna get you focused into improving your business.

Pete: It's a super smart approach, right? Because I think traditionally what you do is you don't think about it until you're ready to sell it, right?

And so what are some of the things, Gokul, that you find that folks that aren't necessarily thinking that way are overlooking? Big red flags that are being overlooked on the day-to-day.  

Gokul: I think a lot of people that are running family-owned businesses, I think they really overlook this concept of local competition, right?

I think the risk factor is always there, right? You... So if you look for, like, things like, I'll give you an example, okay?

We did a very big transaction in Ohio, the owner, and the two sons were working in the business. They invited me to go play a round of golf with them. I said, "Great," you know. The owner's fantastic, right?

He's like 78 years old, I mean, 40-some years in the business. Man, who, who would not talk to him? I'm like, "I'm in. Let's go." "Hey," I said, "what was the number one reason, like, you exit? I mean, you had a great company."

And here's what a lot of people miss. They're like, "Hey, this other company that had 900 million in revenue was sniffing around trying to buy one of my competitors, and I didn't want to go against them."  

Nic: Very interesting  

Gokul: So a lot of times you have to look at this with data and strategy and not emotion.

As much as we're tied into this business, you know, strategy gets you on top. Okay? The thing that a lot of owners don't think about is what is changing around them and who they're going up against every single day. If you have a private equity that just bought one of your competitors and has a $2 million Google ad budget, how are you gonna go against them now?

And they can lose money for three years because you're one of 50 companies that they own. And they're two miles down the road from you.

I have seen family businesses decimated because of this. And when you ask about a risk that a lot of people don't look at, it's not material risk or, you know, things are costing a little bit more. I mean, those things happen, and o- owners get over it over the long term. They fix those problems.

They use tech, there's other ways they save money in the business.

But the one thing that everyone forgets to look at is what is happening around them. Who's competing and which big person is starting to enter their markets. Because if one big person enters your market, it's challenging.

And then competition for employees goes up because they can offer healthcare, they can offer 401k, they can offer retirement plan savings, they can offer 50 branches.

If you wanna move from one city to the next, you're welcome to do it.

So when you ask about what the risk is, to me, the biggest risk is to see what's happening out in the marketplace and who they're going to battle against every single day. I think you gotta be really intentional about that.

Pete: I used to own a landscaping company when I was younger. And we were in an area that was pretty affluent, country club area, and myself and two other companies more or less, like, sealed it up, and then a large company came in, opened an office, instantly, you know, a fleet of probably 15, 20 trucks.

Incredible gear, you know, an army of people, and they decimated, like, all of our businesses in there. They took a piece of everybody, within months, right? Because they were just so much more efficient. They were so much harder to compete with on price because they were such a larger company.

And so yeah, I, I experienced that firsthand.

Gokul: It gets very difficult, yeah. That's why I always talk about, you know, just get your company ready, you know.

Get a valuation done once a year. Even if you're not going to market, that's fine. Know how ready your business is. Just like you get a blood test or you go to the doctor and you get a physical once a year or whatever, you know.

You wanna know how healthy your company is and what the valuation is once a year.  

Nic: Yeah ... that health score is huge.

Even before we went live today, you were talking about times that you have to have that tough conversation with people and be like, "Dude, you're not ready.

You're just not gonna be ready there." So e- explain a little bit more about like what they need to do to kinda get ready, and what are some of the things that you've noticed that is a big, clear sign that, "Hey, you're not going to be able to sell based on this, and you have to do the X, Y, Z things"?

Gokul: Man, that's a loaded question. You got a couple hours? Uh, but, uh- Okay.

Let me break it down. I think number one is the strategy that you're using to operate a business May not always be the healthiest, okay?

If you're operating it from a mindset of, "I gotta make payroll, I gotta pay these bills, I've taken a little bit of money home, you know, I'm growing at 10% a year," so the strategy of operating companies and the strategy of an owner's mindset and growing the balance sheet, growing the value of the business, and getting it ready so if...

It's like a car, you know, getting it nicely polished and ready to go so if someone ever wants it or you ever wanna get rid of it, that you can. Those strategies are very different. One is not harder than the other. Mm-hmm. You don't have to be smarter to run one or smarter to run the other. They're just different, okay?

And when I talk to owners all the time, they're so embedded in the operation strategy as opposed to creating value in the business strategy. I think that's a huge difference.

I think the second thing is when you talk about the role that an owner plays within the company. When we all start a company, what skills you need to make it successful is you have to be like a rainmaker, right? You gotta be in sales. That's where everybody starts, right? If you got one truck or one crew and you're getting going, you gotta be the rainmaker for your company. But as your company grows, now you're gonna become a team builder, so your job description changes.

And then as it grows, you're gonna become a systemizer, right? So you'll notice that everyone that's calling you guys to systemize their business, are in that stage of growth. Mm-hmm. They're running into issues, and they're trying to grow.

They're trying to get efficiency. But what happens after that? You gotta look at your company as an investor. Very few people make the mindset shift from a systemizer to an investor, and it really, really hurts them down the road.  

Nic: That's really interesting.  

Gokul: Yes, yes. So what happens is it's really interesting.

When people call us, they'll call us exactly at 8 million in revenue. They'll call us exactly at 15 million in revenue, at 18 and a half million in revenue.

If they need to become a systemizer and they continue to play the rainmaker and they don't have the awareness to kinda shift their job description, they get burnt out and the business stalls.

Once they've systemized it, if they don't make a change to becoming and looking at their business from an owner's mindset and from an investor mindset, they get burnt out from the operations.  

If they're systemized but the business needs them to be an investor in their business, and they're in a wrong role, and they're stuck in it because they've been doing it for 20 years, right?

And they don't wanna change. So that's what we see a lot, is the owners also have to make a transition, and it's so difficult to do because every time you get your hands around your business, and you're sitting in your seat, and you're starting to feel comfortable to leave on a Friday at 2:00 every once in a blue moon, right?

All of a sudden, your business grows, and you're like, "Oh, man, I gotta go do something else now."  

Nic: Yeah.  

Gokul: So it's this constant shift.  

Nic: Pete, you always, one question I love that you always do on the podcast as well is, like, what's that most important hire that you guys made?

Gokul: I think one of the questions you need to be asking as an owner is, "Am I spending most of my time in the highest and best use of my talent?" If you're not doing that, you're just an expensive admin for your company.

Mm-hmm. I mean, it's literally that, I'll give you a tip. I'm doing it here myself. You w- Can I go there? Will you allow me to go there?

Nic: Of course.  

Gokul: So every Friday I work on this highest and best use, and y'all can... Anyone that's listening, you can do it in literally 10 minutes. Just get a three by five card. I have one right here. I have tons of them here on my desk. And I put down the million dollar actions.

It's just a figurative speech that says, I wanna work on high value things for my company, okay? I don't work on $10 actions. I got teams, teammates that'll do it for me. I don't work on $100 actions. I wanna work on million dollar decisions. And I always write down three every week on Friday before I leave the office.

It's a great way to make sure that you're working on highest and best use all the time. And I know that any week that I finish those three, and a bunch of other things goes unfinished, at least I finished the three most important things that I wanted to do, and it moves the needle. You know, our firm- ... I think we've grown 7X in five years And large part is because I stopped being the expensive admin to the company.

So this idea of highest and best use is a great question to ask, is what I'm trying to say.  

Nic: I love it.  

Pete: Yeah. I did a podcast with, a guy who's sold a couple businesses, for he's now with a company called LiveSwitch. His name is James Hatfield. Every time he goes into a business, right, I think he's the chief revenue officer at this company that he's with now, he says, "The first thing I do is try to figure out how quickly can I make myself irrelevant?"

How quickly can I replace myself in this company? Correct. And so that I can get, go, like you said, to this investor space where I can now look at the big picture and not be working in the business. I essentially wanna work myself out of the business as fast as possible.

Gokul: So those are the technologies, right? Those are the things that owners are doing that are having phenomenal businesses, and when the time comes to exit, they can exit. I, h- here's what I'm trying to say. I'm not trying to tell the folks that are listening, "Sell, sell, sell today."

That's not the point of it. The point of it is most of your exits are gonna be driven by an event. It's not gonna be planned. Okay? It's gonna be some event that is going to drive it. And when that event happens, good or bad or whatever it might be, you just wanna make sure that you got 20, 30 years of your career that is not- Mm-hmm

wasted. That's the, the framework that I come from. Because I've sold myself, and I know it's extremely difficult to do.

There's an article I wrote w- oh gosh, two years ago, m- on the seven emotions of selling a company. I had a pool construction company, and then I bought a gutter company, and a soffit company, and a sprinkler company, and put it all together, and then I exited to a family office in Orlando. And I documented all of that, and it was painstaking when I went and read it.

You know, and I'm in the business, and it's still painstaking, but yeah. Critical, really critical to just have it ready if and when you wanna do it.  

Pete: Yeah. What are some things, Gokul, from a cashflow, financial side that I need to be paying closer attention to, to get my business ready in case that does happen?

Whether that be next week or whether that be 10 years from now.  

Gokul: We're all roofers. I, I'm a finance guy, but most of the people that are looking in here are roofers. They got into the business because they like to do handy things with their hands, and they like to be outside, and they like talking to people, right?

But here's the, I'm just gonna shoot straight with it. Accounting is the language of business. Whether you like it or not, or you hate it, you love it, anything in between, accounting is the language of business. You gotta understand it. At the most minimal, you gotta understand- job costing, minimal gross margins per job, where the margins are eroding. How you're forecasting, you know, your budget versus actuals in your forecast, right?

We've done about 650 transactions or so now in our firm. And we went and started talking to a bunch of them, and we started looking at all these transactions saying, okay, the companies that were valued the most versus the, the phone call where I had to make and say, "You know what?

I know you've owned this company for 30 years, but there's no value there." Those are the two extremes. We went and looked at this top 5% of companies and we just said, "Okay, what is it that they're doing differently that other people are not?" Financial discipline. The owner's mindset that I just spoke about, you know, with the different job description, that was number one, hands down.

Mm-hmm. The best of the best companies in our industry, the owners are changing their job positions as the company grows. Hands down, number one. The second thing that they're doing really well is this financial discipline. Not to say that we all need to be accountants.

I'll tell you what I do, is just get a CFO, part-time CFO. Get a bookkeeper, get an accountant. Fractionals, you know, nowadays, like you can hire them for relatively inexpensive cost. Even in my firm, even though I look at financials every single day.

The best of the best companies always have someone from the outside looking at their financials, and they're having a discussion about it. Whether you have 5 million in revenue or 500 million in revenue, it didn't matter. They had this habit of, "Oh, I talk to my bookkeeper once a month. I talk to my accountant once a month.

So you don't have to be accountants, okay? But get someone on your team, even if it's 1099 or, someone you're paying $500 a month and say, "You know what? Hey, go into my QuickBooks, look at all these numbers, and da, da, da, da, and explain this to me in English."

So when you look at it from a financial discipline, it's not like we need to know all these numbers all the time. It's more the habit of looking at them with somebody that knows it and can shoot straight with you and actually understanding what it is. Otherwise, you're driving a car without knowing what the dials are saying.

So financial discipline is crucial. So that's one habit that we found in the top 5% of companies when we went and interviewed them, is they had a CFO, they had a bookkeeper, they had an accountant outside of the company that they talked to on some regular basis. Once a month, once a quarter.

Okay? Looked at budget, looked at actuals, looked at what the job stuff was doing. Am I hitting the right margins? Why am I not hitting the right margins? They had an idea about it. It's a great behavior, right? And I'll tell you, as far as the KPI on the financials, I think the mother of all KPIs in my opinion is revenue per employee.

I mean, if there's one number you wanna track, it's revenue per employee  

Nic: Everyone talks about EBITDA. Nobody talks about revenue per employee.  

Gokul: It is a magic wand as, as close to a wand as I think we have seen. We've seen the top companies always have much greater revenue per employee-  

Than the companies in the middle and the companies in the bottom of our surveys all the time.  

Pete: So is that saying essentially those are the leanest running companies?  

Gokul: They're the most efficient.  

Not necessarily lean. You know, you don't wanna lean out your company too much, then you got talent drain that's going on.

Right. So this whole idea of lean and mean, I know it makes great soundbites, but it really doesn't work. You want a company with, with talent. You know what I mean? So you can't just lean it out all the time.

That's not the answer. Yeah. The answer is, can I run like a Navy SEAL team? Maybe that's a great analogy, right? I mean, can I run with a tight ship, and can we achieve more, overachieve than underachieve? I think that's really where the game play. That's what revenue per employee will do for you.  

Pete: This is what we do at Roofr, right? Like, we help people streamline and organize- Correct. Correct ... and get more efficient.

You know, and I think people look at that and think, "Okay, having a CRM, and having automations, and having AI built into the product, all these things are gonna just make me so much leaner," right? Yes. "And able to run so much leaner, and that will just make my revenue that much more," right? And that's not-  

Gokul: Yeah.

Revenue per employee is so critical. It gives you margin. As an owner of a company, if your revenue per employee is higher than average, you will sleep at night, 'cause your margin, your daily execution margin is immense at that point. We get so caught up in revenue, and we get so caught up in how many employees work for us, you know?

And I think a better way to look at how healthy your company is, what revenue am I producing for the number of employees I got? And it's a very simple calculation. You just take the total revenue divided by the number of employees you got. Everybody. E- you know, everybody included. The field, the office, everybody, and you just divide.

And that's, that's what you're looking for.  

Pete: Luke said he's taking notes. I like it. Yeah. Kind of in line with what you were just saying about having that fractional CFO, I was literally just talking to Corey the other day, Nic.  

Gokul: Yeah.  

Pete: He has a fractional CFO, I think. He's not- Yeah ... in the company every day, and, was able to catch the fact that their marketing budget was being misused based on seasonality.

There's different things selling for them at different times of the year, and now because he was able to catch that looking from, at the bigger picture from the outside, they're able to now fine-tune and adjust their marketing dollars better. You know, and he said essentially like, by us just marketing the same way month in and month out, some months we're flushing it down the toilet," right?

And so they were able to really, like hone that in, but it took that guy from the outside kind of looking in, doing some homework and saying like, "Hey, here's your marketing budget. Here's how you're spending it, and this is what I found," right?

And so I thought it was a great indicator of why it makes sense to have that kind of third party look at it, you know, because sometimes we're too in the weeds. We're just in the daily operation so much that we don't necessarily catch that big picture stuff.

Gokul: I think a lot of owners, They run their business out of a checkbook. So you think, you know, just because you got all this money in the bank that your business is profitable. It, it, it could be the furthest thing from it.  

Nic: Yeah, coming back to that business health score, right?

It just kind of all plays in, right? The cash flow the revenue per employee and everything else. Once you understand the actual nuances, the actual things that make that business tick, you'll be able to understand, like, "Hey, is this business ready for selling?

Is this worth selling?" So on and so forth.  

Gokul: Or, or you'll be happy going home at night- Yeah ... knowing that you've got something of great value and, and it's gonna continue to build for you, your next generation if you're gonna hand it over, you know? It- so the technologies and the strategies that we're using, Nic, that to say, is your business exit-ready, is literally the best strategies that you can have to run your business.

They're not independent of each other, if you know what I'm saying. Having your business ready is, it gives you a great peace of mind. Absolutely.

Pete: I love that you brought up the job costing piece, 'cause I think it's one of the biggest opportunities that I've seen is companies not doing good, accurate job costing.

Nic: Yes. Yeah.  

Pete: Yeah ... job costing goes beyond just, you know, "Hey, this is what we spent on materials, this is what we spent on labor." Overhead so often gets overlooked. We don't necessarily understand ultimately what this job made us, right?

Then you get- ... to that point where it's like, yeah, we're making money, but are we really making the money we thought we were making? Like, when we really- Yes ... dial it in, all of a sudden we realize, like, hey, our profit margins aren't where we thought they were. They're not at the percentage that we thought they were.

And I think that's one of the things over my time, being on the CRM side, is probably the biggest gap that I've seen is, like, people just not understanding what their jobs actually cost, and really- Yes ... being detailed enough about it.  

Nic: Being detailed is huge there too. No offense, I'm not throwing shade on anybody in the chat or watching later.

But people who run strictly off of price per square, instead of itemized quoting, You're backing yourself into a corner where you actually don't know your true job cost on there. You can get a good idea, but you're not getting to, like Pete, to your point, a detailed understanding of what your projected are, what your actuals are, where your margin is, and where things are going wrong.

'Cause if you're consistently going down there and you think you're profitable, but once you open up a line item booking, you're going to start to see like, oh crap, I've been making X percent less on each one, and that turns into my entire business being less profitable than I thought it was.  

Pete: Yeah, and I can say that-

we just did a survey internally where I think 80% of the people that were surveyed were per square pricers.  

Nic: At the end of the day, when you're looking at becoming profitable, having that revenue per employee, you're not gonna know that with just per square pricing.

It's going to make it very, very difficult.  

Pete: Yeah,  

Gokul: I had a really good friend who's got a pretty big roofing company out in the west. We were chatting, and he said something that was really interesting.

He goes, "Gokul," he goes, "Margins don't disappear, they erode." So margins, they don't kind of vanish. They're eroding little by little each step of the way from the discovery call to the estimating to scheduling, all the logistics to finishing the job. You know, they're eroding along that line.

I think that's a great statement, isn't it?  

Nic: It makes such a big difference 'cause it, it just, it does. It slowly gets chipped away, and if we're using that past example with price per square quoting-  

Pete: Yep ...  

Nic: you're not losing your shirt on, a job.

It's just you're making instead of what you think you're making, 30 to 40%, you're making, you know, 25 to 28% per job, and then that just slowly compounds compounds. If you don't have your prices connected in your CRM, and there's a price increase from your supplier, that's gonna cut into those margins and erode, erode, erode until the point where you're like, "Holy crap, where the hell did all this money go?"

Gokul: When you look at CRMs and when and how it connects, to databases and, and vendor lists, I've seen owners get more bang for their buck and increase their profitability way more- Mm-hmm

by looking at where are my margins eroding and fixing it than trying to go get an extra 20% of revenue growth The answer is not always revenue, and the answer is not always hiring the next person. A lot of times the answer starts with just squeezing the orange a little bit more.

Pete: Mm-hmm.  

Gokul: I've talked to owners all over the country and, you got people that are running, at dismal, 5, 6% margins to people that are running at 20, 30% margins.

What's the difference? We're all in the same industry. It's the detail. It's how they're estimating. It's making sure that the margins are not eroding.  

Pete: I think one of the things, like, and you kinda touched on it, is looking at your business every year and reevaluating. You talked early on about, like, reevaluating your local competition.  

Nic: Yeah.  

Pete: I think sometimes we get in this kind of l- like set it and forget it mindset of like, "Well, this is how we kind of set our process up.

It's running fairly smoothly. We're making money, so we're good to go." And I can, and Nic can probably vouch for this too, I mean, in my time I've seen companies that were making money, all of a sudden out of business.  

They look like they were profitable, right? They look like they were killing it, and next thing you know it's, you know, completely coming apart at the seams.  

Nic: Yeah.  

Pete: And I think a lot of that- Yeah ... is just "Oh yeah, like, we're making money hand over fist, so just-" Let's

Nic: open up a new location.

Pete: Let's just keep expanding, keep growing, keep pushing, right? And, next thing you know the whole thing comes crashing down.

Every quarter, every year, kind of reevaluating things and looking at the whole, the business as a whole, right?

Mm-hmm. Financially, the systems, the processes, all of it, and reevaluate it. Can we squeeze a little bit more out of the orange, like you just said? Like, is there a way to streamline things a little bit more? Maybe we don't need a new employee where we thought we did.

Kyle had a really good question here. I- I wanna kinda jump into it really quick. He said, "What's a good ratio or number for revenue to employee?"  

Gokul: So when we look at it across the country, if you're early stage companies, right? Early, early stage, you're starting out, you got a small crew, let's say 5 million and under in revenue. You're about 50 to $100,000 of revenue per employee. Growth stage, you know, say five to about 15, 20 million in revenue, you're, somewhere between 100 to 200,000.

And then if you're doing about 20 million in revenue to about 80 million in revenue, you gotta be about 200 to 500,000.

Okay, so you say, "Okay, Gokul, what's the difference between 100,000 to 200,000 per employee?" It's tech. It's stuff like you guys do, CRM. It's, it's, it's connecting databases.

It's customer feedback automatically to make you a customer-centric organization, not a profit-centric organization, you know what I mean? So the top 5% of the companies, those are the revenue per employees that they're generating.

Nic: It's fascinating to look at that, 'cause I just never thought about it, right? Yeah.

Pete: It's funny because I often talk about, like, I do a new, employee orientation, and in there I talk about how eight years ago I worked for another CRM, and we would see companies that were making $5 million that had 15, 20 employees.

Gokul: Yeah.  

Pete: Right? Because there wasn't a lot of tech being used. There wasn't great systems. It was kinda just like a, "This is how we've always done it," you know? And guys still on pen and paper a lot of times. And now you're seeing $5 million companies that have, what, Nic? Three employees sometimes?

Nic: Some, yeah, like- Five,  

Pete: employees, like ...  

Nic: there was a roofer of the month that you did- It's crazy ... not too long ago that just had, like, I think it was three employees, and they were just crushing it.  

Pete: Yeah ...  

Nic: multi-million dollars, and they just started out, and it just, took off.  

Gokul: When we've transacted a company in a market, okay? Let's say they're doing 10 million in revenue.  

Nic: Mm-hmm.  

Gokul: Right? And we'll sit down with the owners. "Oh, you know, this market is so difficult. It's not what it used to be."

That's like a bat. Yeah. Everyone says that, right?  

Nic: Yeah. "

Gokul: Okay. Then we'll exit it, we'll sell it to someone, stay in touch with them five years later and they've, like, tripled and quadrupled the business. Same market, same employees, different mindset. I hear a lot of roofing owners, you know, they'll talk about, "Man, Gokul, I'm just old school. I don't wanna do it." Yeah. I'm old school. I'm this."

But let me challenge you guys respectfully on that, those who are thinking about that. It's no longer whether you're old school or new school or any school in between. That's not the idea. The idea is really if you own the company, you have to be the best shepherd of that company, and for the company, for the employees, for the vendors, and the customers.

That's the mindset, and you do what it takes so you're the best shepherd of everything that surrounds your company. Let me respectfully challenge everybody that's thinking I'm old school and I don't wanna change. Think about more like the lens of am I the best shepherd?

Am I doing everything that I can do to take care of my employees and my customers and my family? That's a better lens to look at.  

Nic: And Pete and I always, always talked about it that way, too. It's like we talk to contractors all the time, the ain't broke, don't fix it mindset."

Yeah. You're doing good, you're making good money, and the phrase that I always bring into for us on the Roofr side is, is, "Look, man, You got a wheel that's spinning well. I'm not trying to change what's working." Right. "I'm just trying to update that wheel from wood spokes to steel spokes, and you're gonna have a lot more time back.

You have to really take to look at like, okay, it's been working this way for a long time, but why is it working differently for others? How can I get to that aspect there? And especially if this is what you're looking for, is to optimize that cash flow and get into a s- position where you can sell.

Gokul: We get caught up in our routines, right? Because we're comfortable there, you know? Mm-hmm. And, and a lot of us have successful routines. We have great businesses out there that we're comfortable doing, but things change, It's not just whether you're running the company well today. I think you also have to look into the future two, three, four, five years down the road. What am I doing today to make that company healthy, you know, five years from today? That's a valid question to ask yourself.

Pete: I mean, one of the questions that I always ask on the Roofer of the Month is I always ask, "Where do you guys see the company in three to five years?" And the answers are always very interesting because some people obviously have thought about it and have it very- Yeah ... kind of mapped out, and others give you some very random answers that you can tell it's like you kind of caught them off guard if they don't really know. I think that's something that I think a lot of people just don't think of that far ahead.

You talked about forecasting, so many times I hear contractors just kind of like pick a number.

"Oh, we did this much this year in revenue, so this is how much we should do next year." And it's like they just- Yeah ... picked a number out of a hat, right?

Gokul: So we do our consulting for our clients for free, like we don't even charge them for it, right? The people that come to us and like, they're like, we value the company for them, and they're like, "Man, this is not enough money for my family.

I need more." Mm-hmm. I'm simplifying it, but let's, sometimes we get there, right? And we're like, "Okay, these are the things that you need to work on, just like we're talking about here. Let's you and I talk once a quarter. Happy to get on the phone for a few minutes and talk to you." We coach them. In 18 months, they get almost a 25% increase in their valuation.

In 18 months, and that's a stat that we have kept over 600 transactions that we've done in our space. So that data set is pretty extensive. There's about a 22 to 25% more. That's two and a half million dollars more for every 10 million.  

Nic: It's really big to, like be able to help someone and show them where those outliers are. And if they're looking to get to that, it's not the carrot and the stick, so to speak, but they're like, "I want this."

And I was like, "Okay, we got some work to do. Let's get you there. I would love for you to get there, but we need to do these, and we have to make these changes." Correct. So it's really, really interesting.  

Gokul: And, and we have an entire framework that we've developed when we learned and looked at these industries, and we looked at- the top 5% of our exits. You know, what is it that they're doing well that nobody else is? It gives you ideas to start thinking about things, right? It gives you a great starting point. I'm happy to make it available to anybody who wants it.  

Pete: Kyle threw out some numbers here, and I just wanna, address it 'cause I think it, it's a good question. He said, "If my gross revenue is 2.2 mil, and I have eight employees including four sales reps, my ca- and my cash flow is low, then my overhead is probably too high?"

Gokul: Like Nic said, it's either expenses are too high, or you're leaving money on the estimates. What I find in most cities and most companies, your expenses are your expenses, unless you're, like, really crazy. Like, a rent is rent, right? It may be a little bit more in Baltimore, it may be a little bit less in Orlando, a little bit more in Toronto, but within reason, it's not gonna move the needle you know, a lot.

And I think the place that'll move the needle quite a lot is look at your revenue per employee, and see whether you're leaving money on estimating. So that's the first place I would look. And then the second place I would do is a really cool exercise, and I'll make it very quick.

You got your P&L, right? You print it out, and here's what you do. Take a red pen. Let's say your revenue is a million dollars, hypothetically, right? Just scratch it out and put 800. Take 20 cents out of every dollar and put it in your pocket on the P&L and play that game.

Now, go and do your budget. Go line by line by line and see if you can get the last number to be zero. That is a great exercise to lean out your company. One of the exercises we do with all of our clients, it takes 15 minutes, and they're like, "Oh my gosh, it's, it's, like, transformative."

And I said, "Yes, because I took all your profits out first."  

Nic: Mm-hmm.  

Gokul: Now, it's gonna tell you where all the leaks are. So that's a really cool way to do it.

So I'll tell you in closing, I'll get the Elite Exit Framework out to you guys.

If anybody that wants it, happy to give it to them, no problem about it. And yeah, if anybody's got any follow on questions, happy to shoot it over to y'all.  

I'm a small business owner, and man, I get it. We're here to educate.  

Pete: Yeah, and I think Joel shared the link to you guys a couple times, and so, hopefully you guys grab that if you wanted it.

You can get in touch with Gokul. There it is again popping up there.

If Gokul shares that document with us, uh, I think Joel can get it out to you guys if you're in attendance.

Nic: If not, just consistently email him- Yeah

over and over and over again- Yes ... until he gives up that document. He really,  

Pete: he really enjoys late night phone calls.

So... Well, Gokul, thanks so much for jumping on. This has been fantastic. I know we're over a tiny bit here, but, we probably could talk for another couple hours here, so  

Gokul: Yeah.

It's easy. And, and I know that the revenue per employee and margins are really important let me think through that, and maybe we can do another session on just that. We'll dive into-  

Nic: That could be cool.  

Pete: Definitely a round two here, for sure, so.  

Gokul: Sequel. I told you, a sequel.  

Pete: Sequel in the works already.  

Nic: Return of the Gokul.

Pete: Well, thank you. I appreciate it, Gokul. Awesome advice. We'll see you guys all at the next one. And, thank you for joining us on the Masterclass today.

Thanks everybody. See you everyone.  

Gokul: Thanks for having me, guys. Take care.