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Scott Fritz believes that if you are a property management business owner and you stay in that business, your company will be worth less than it would be if you train your company to work without you.
He joins Alex on The Property Management Show this week to discuss the different between an entrepreneur and a business owner, and what you can do to work less but produce more.
Scott Fritz: Angel Investor | CEO | Business Coach
Scott has been an active angel investor since 2001, and before that he founded Human Capital, a PEO company that handled outsourcing for all human resources work like insurance, legal, and payroll. Once that company grew to a revenue of $170 million, he sold it. Then, he wrote a book called The 40 Hour Work Year. He’s also the founder of GrowthConnect.com. So, there are plenty of ways to reach Scott.
At PM Grow, he’s teaching a workshop and delivering a keynote.
We wanted to know what he means by his belief that “if the owner stays in the business, the company is actually worth less.”
The Ownership Paradox
The dangers of working in the business instead of working on the business are well known, especially if you’ve read Michael Gerber’s e-Myth. The danger for owners is that when you are ready to sell your company, you’ll get an offer. If you’re working in the business, all of the compensation you’ve been taking to run the business will not be added back into the bottom line with the sale.
Someone will have to replace you and the work you do. That’s going to be a cost for your buyer, so you’ll lose money. Even with property management acquisitions done on the topline, there’s still a line item for owner’s wages.
If you own a property management company, you may have the mindset that you’re selling a book of clients.
That’s a mindset you need to change.
A property management company has more than a book of clients or a collection of doors. It also has intellectual property, brand value, etc. If you’re just selling book of clients, you’re getting a low multiple.
If a buyer wants to acquire your company, but they know that you as the owner have to stay in place to run it, you’re going to get an offer that’s lower than the offer you would get if the company was running itself.
In his book Simple Numbers, Straight Talk, Big Profits, Greg Crabtree says that you have to eliminate gamesmanship. True up your salary based on what you do in the business. He says not to pay yourself $30,000 and then take $200,000 in distributions. The IRS will notice. And, don’t pay yourself $200,000 if your job is only worth $100,000.
Pay yourself whatever it would cost you to hire someone else to do what you do.
Don’t chase pennies instead of dollars.
Human Capital: When Outsourcing Makes Sense
Managing human resources gets expensive and complicated for growing businesses really quickly. Scott’s clients were diverse in size and scope when he ran Human Capital, and he says that there isn’t a magic revenue number at which a company should consider outsourcing HR functions. It’s more about headcount and complexity of the business.
Scott had clients with only one employee and they outsourced HR for insurance reasons. Other clients had more than 500 employees before they began to outsource. It’s not necessarily where you are that drives your need for this resource; it’s where you want to be.
If you have 10 employees doing work in-house, but you want to expand into four other states, you’ll need a PEO. Maybe your headquarters are in Michigan but you have offices elsewhere. Every state is different, so outsourcing this function can make a big difference and protect you from liability and lawsuits. One of Scott’s Human Capital clients had come to his company because he was sued for providing financial advice at a Christmas party.
Consider shopping for a PEO when you’re ready to outsource your HR functions. It’s a good investment, and this advice comes from a guest who no longer has a stake in it and a host who is grateful to be using a PEO at his own company.
The 40-Hour Work Year: Growth, Structure, Sales
Scott’s book is about growing a business, structuring that growth, and moving the owner into a passive role so that the business can be profitably sold.
There’s a lot to gain from the book even if you’re not ready to exit your company. It’s about setting up your business so you can exit at any time with the maximum multiple you want to receive.
Here’s an analogy. When you want to sell a house, you don’t wait until it’s run down and the weeds have grown high enough to cover the windows to sell. You fix it up first and then you sell.
We want you to fix up your business – not necessarily to sell it right now, but to be ready to sell.
What if you’re an entrepreneur who enjoys running the company?
If you’re doing what you love and creating a legacy business, don’t feel bad about staying there. Create the business you want and create the life you want. You don’t want to own a job – you want to own a business. Make sure your company is structured so you can do that. Find your unique ability so you aren’t slaving away and trying to make things work while your people are miserable and overworked.
But, what if you’re ready to elevate?
Scott has three easy steps that you can take right now.
- Take your total annual compensation and divide that by 2,000. That will give you your hourly rate. If you earn $100,000 per year, divide it by 2,000, and you earn $50 an hour.
- List all the things that you’re doing for your business. There might be 30 things when you list every task and every responsibility.
- In the next 30 to 60 days, pick the three things that you absolutely need to stop doing. As long as those things are under your hourly rate, you can eliminate them from your to-do list. So, perhaps one of the items is that you go and change locks on all the doors you manage. Surely you can pay someone less than $50 an hour to change those locks.
Over nine to 12 months, you can move the 30 things you’re doing down to five or 10. Those are the high-dollar, high-value things that require your specific talents. You’ll be more productive.
Which brings us to this question – are you busy or are you productive? If you’re doing things that you can hire someone else to do at a lower wage, you’re not productive. You’re merely busy.
Income and Implementation and Having the Right Mindset
You may be thinking that you’ll have to give up some of your income today to make the company work better in the future.
It’s the only way to make money. When Scott was ready to transition out of his business, he knew that he and his partner would have to take a temporary pay cut. So, they did. They cut their salary by 60 percent, but they used that money to buy a building, invest in software, and hire executives. Within nine months, they were back to earning what they had before taking the pay cut.
Your mindset can be your biggest weakness as an entrepreneur. Have you ever said these things?
- I can’t hire someone right now.
- I can’t train someone to do this.
- I can’t grow my business right now.
If you’ve said any of those things – well, you’re right. It’s all about your mindset.
If, instead, you say:
- I can hire someone.
- I can train someone.
- I can grow.
Then, guess what? You can.
Make sure you align with your partners if you have them. You need a structured way of doing things, and you need a Buy/Sell Agreement in place. It’s hard to think about these things when you’re just starting a company, but a structured Buy/Sell Agreement can avoid messes and attorney fees.
Mistakes in Property Management Acquisitions: Back to Mindset
The main reason that people don’t sell their property management companies to people who are ready to buy them is mindset. There’s a fear of not having something to do, especially if it’s a mom and pop business that’s been around for decades.
One of Scott’s potential sellers pulled the plug on the deal because her CPA warned her against the taxes she’d have to pay when she sold her business.
That’s a huge mindset issue, especially when the money and the terms of the sale would have more than eclipsed the pain of a tax bill.
In Scott’s experience, the people selling property management businesses are usually selling the only business they’ll ever own. But, the people buying a property management business buy new companies as frequently as they eat lunch. That can sometimes put sellers at a disadvantage.
There’s a difference between entrepreneurs and business owners. Entrepreneurs have the experience of jumping off a cliff to start a business. They will usually be willing to sell. A business owner will be less likely to sell because running a property management company is all he or she knows.
Be intentional. Decide what your intention is, and put the plans in place to support it.
Know your end game.
If you’re an owner who ultimately wants to train the company to run on its own so you can transition out and eventually sell for as much money as possible, you need to work on the T-word.
You cannot build your organization if you cannot trust your team. Let them fail and let them learn. When you get to a level of trust with your executive team, you can successfully transition out of the way. Read Speed of Trust by Steven Covey Jr. Its exercises will help.
Tips on Life and Business and Health
Scott, writing about a 40-Hour Work Year, subscribes heavily to work/life balance. Alex asked him what his morning routine looks like and how he stays centered. Here’s what Scott does:
- Wakes up and listen to a recorded program called Bible in One Year to get his head straight and focus on God.
- Does some journaling to reflect on what has to be done and what’s at top of mind.
- Goes to the gym for 30-45 minutes most days.
- Drinks a lot of water.
- Spends an hour a week somewhere quiet with everything turned off. Think freely about ideas, what was great about the week, what fell short, etc. This opens up your mind to creativity, which entrepreneurs need. Record all your ideas.
Thanks to Scott for sharing what he knows and what he’s learning.
Hopefully all our listeners are coming to the PM Grow Summit April 17-19 in Austin, Texas.
You’ll walk out a different person.
Visit pmgrowsummit.com to learn more.