← Service Business Mastery for Skilled Trades: HVAC, Plumbing & Electrical Home Service
Service Business Mastery for Skilled Trades: HVAC, Plumbing & Electrical Home Service
How Service Business Owners Use Phantom Equity to Retain Talent & Avoid Entitlement - Chris Buttenham
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Why can't a traditional trades company just give a stock option? Generally, most of these businesses are LLCs or some other form like an S Corp. It's actually kind of hard to carve out real ownership in those businesses, and even if you do, it creates consequences that owners, quite frankly, don't want and employees don't want. You give membership interest in your llc, it creates a taxable event for the employee.
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B
Are you looking for valuable business advice to reach that seven figure revenue mark? Do you want actionable tips to properly navigate through every business challenge you encounter along the way? Let Tersh Blissett and Josh Crouch be your guide in getting you to the top here at Service Business Mastery. Tune in as they sit down with world renowned authors in business leadership and personal growth who share valuable insights about management, marketing, pricing, human resources and so much more. Let their nuggets of wisdom gold guide you in owning a thriving, profitable and ever growing business. Here are your hosts, Tersh and Josh.
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Today's episode is brought to you by one of our show partners, upfrog.
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C
Learn more@upfrogio. I want to give a huge shout out to Market Storm for sponsoring today's episode.
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D
You've heard of Google Ads, Facebook ads and SEO, but did you know that there's an entire ecosystem like 80% of the Internet that ads can be served on that you barely heard about?
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C
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They leverage data science and AI to build customer profiles for your ideal customers and get your ads ads in front of prospects before they are ready to hire a pro, planting your brand in their minds early and often to chat.
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With a team about how they can help you grow your business. Visit MarketStorm AI if you're a contractor with multiple CSRs, check out this service Business Mastery podcast partner LACE AI. LACE uses cutting edge AI to analyze your phone calls, uncover lost revenue opportunities and empower your CSRs to convert more leads. You can significantly increase revenue without spending extra on marketing or hiring. By using LACE AI to boost your conversion rates for the first time, you can gain deep insights into customer needs at scale with minimal effort. Elevate your call center to achieve industry leading booking rates and revenue. Visit www.lace.AI to book a demo today. Now back to the show. Hello everyone out There in podcast world. Hope you're having a great day. You're listening to or watching the Service Business Mastery podcast. I am one of your hosts, Ter Blissett. We're going to have to have Chris intervene on us for employee retention. Today we're talking employee retention and I think I'm going to und Josh after his terrible introduction there. I guess today we're going to talk about retaining key employees through equity in the business, which is something that like Josh and I, we've talked about it on the show before, we've had theoretical conversations. But it'll be great to pick your brain today on like how this actually looks and like some of the pain points associated with it and, and all of that good stuff. Josh, you look like you want to say something. Yeah.
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D
And it's just, it's a, a lot of theoretical conversations because people want to keep, you know, key drivers of people in the field or some key office employees, but they, they just pay them more or they give them a bonus. They don't really know how to structure. They want to structure for growth. And we've also, we've all heard like some of these companies that do, they do like a rollover equity type play when they sell. So they're, they're retained and then they have their key employees retained. But then they give them equity for the second bite of the apple essentially when you know that that roll up happens. A key driver in helping that business grow and continue to make sure that earnouts are earned and all of those things. So really valuable conversation because there's a, there's just a ton of, there's still so much conversation around these types of plays and the people that initially sold three to five years ago back before COVID during COVID are probably going to get back into the conversation with a new company once their non competes are up.
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C
So we're coming up on it. I mean if they sold in 2020, it's probably going to expire here in this year. So yeah, that's exciting for those individuals. They'd probably be sitting on the sideline watching, just cringing like. Or maybe they've been celebrating the whole time like ha. Yalls problem, not mine. Chris, welcome to the show, man.
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A
Yo, thanks for having me, guys.
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C
Absolutely. So give a little bit of backstory on you and what you have going on right now.
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A
Yeah, So a little bit of background on me. I do not come from this world formally. I'm an entrepreneur.
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C
You're an alien.
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A
Yeah, that's right. Is that where you're Saying, that's right.
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D
You're like, ec.
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A
That's right. You know, the, the. In New Jersey, The. The drones. Like, that's. Yeah, yeah. That's where I came from.
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D
Okay.
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A
Yeah. I'm an entrepreneur by trade and have found myself in the world of software, predominantly. I started a company back in 2015. It was an AI company. We sold software to software companies, essentially. We made it easier to find answers to common questions at work, and we ended up selling that company in 2021. And my co founder and I were looking for something to sink our teeth into again and wanted to find a problem we could really be passionate about. And really, we're jaded by this idea of selling software to software companies. If I'm being honest, you know, I say I'm not from this world, but I come by it honestly a little bit. My dad has a home service company. I used to work for him coming out of school. And so, you know, in part it was. It was inspired by him. He's 65 years old. He's had the business for over 35 years. And at the time when I was transitioning out of my last company, I watched him struggle to try and take a step back. He wasn't ready to sell, but really trying to align the goals of the business with some of the key folks in it. Right? We talk about employee retention, but it's also about alignment of growth and what are the goals, where do we want to be in the next three to five years? Right. And what I learned kind of through that exercise watching him, was there's not a lot of great tools for businesses like this to do that. You know, coming from the software world or even private equity or public companies, there's so many options, right? Like, you join a software company, you get a stock options package, you're in a public company, you know, you get stocked.
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C
My thought on this, and I've learned this more recently as we started developing a software, we started talking to other software companies in our space. And what I've learned is that whenever you get those stock options, they're usually in trade or in lieu of not a livable wage, but, like, you can pay a little less and do that. Whereas, like, I feel if I. If I went to a plumber and said, hey, I'm going to give you stock options, but I'm going to pay you $20 an hour instead of $35 an hour. And we know you can live on $20 an hour. And when we sell the company, you could make a million dollars or Something stupid high, we're going to pay you less. I think they'd be like, I'll take 35 an hour.
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A
Yeah, well, the market dictates it in a way. Right? In the trades, we have this interesting supply and demand imbalance where they really are in control because they are far, you know, more in demand. More in demand. Right. So, and that's one of like, the key tricks with any type of incentive like this is to not make it an entitlement. So I think, Josh, you mentioned this, right? Like, what happens is you ended up just trying to throw money at people like, oh, I'll pay you more, I'll give you another. But what happens is if it's not actually aligned with the goals of the business and something that that individual can help produce, then it just becomes an entitlement that folks expect. And then it actually doesn't, you know, create the outcome that people are looking to achieve when they first implement these types of incentives.
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C
This sounds a lot like Christmas bonuses, like.
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A
Exactly, exactly.
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C
You're entitled to a Christmas bonus when in fact, like you, what you should be doing is tying that bonus, or whatever you want to call it, to their performance. And so, you know, they do a great job, then they get a great bonus. That's why I like giving mine out during the middle of the summer versus, like, I like doing Christmas in July and period, because it's not normal. And so then during the, the winter time, like, we'll give them money, you know, as a gift, not as a bonus type thing, because then. Because I don't want people to tie it to profits of the company like the gift that they get, I guess is best way.
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A
Yeah, you know, gifts are fine, right? As long as we, we sort of divide those two things. A gift is a gift, an entitlement is an entitlement. And an incentive should be meritocratic. It should be earned. Right.
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D
You said you wanted to have something that you were passionate about, solving a problem. So when you started getting into this, you started realizing some of the things that were going on with your dad, maybe trying to figure out some sort of solution for the trades. What kind of roadblocks did you stumble on? Trying to have conversations with contractors what equity and revenue share, when maybe they. Something they never considered previously.
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A
Every roadblock you could imagine. So, first of all, I'm not an attorney by trade. That's a big, big, big hill that we had to climb, you know, but we tackled this really from, from first principles. So if you zoom out, what is really the problem we're trying to solve. You know, when I started talking to business owners, um, outside of my, my old man, it was like, employees, employees, employees. That was their biggest challenge. And so you keep talking to them, you keep sort of pulling that thread and it's like, they don't want to work or, you know, I can't keep them around or. But you have.
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C
We've all heard that. We've all said that to you.
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A
Exactly.
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D
We've had a lot of podcast episodes about keeping people and trying to find good people and all that kind of stuff. A lot of podcast episodes about that.
- [11:02]
A
Exactly. And I was like, I'm not going to build an HR company. That's just not my speed. So I had to really think, you know, what is, you know, what do people really want? What do people really motivated by? What's really going to solve this problem? And again, what is the bigger picture? Well, it's, these businesses are looking to sell. Most of them are owned by baby boomers or Gen X who are looking, at least looking at retirement or looking at succession in one way or another. How do they get there? Right. They need key employees. Those key employees are going to be the operators in the business. We were you mentioned like when you roll up or when you sell, having the earn out, you know, be tied to the employees as well. We actually have no tools to be proactive about that. I learned. And, and so, you know, to answer your question, the, the first roadblock was really like, how do you actually solve this practically? And we had to interview a bunch of attorneys kind of just from first principles like, you know, how is this possible? And we stumbled upon some instruments that had been used in other industries and had been used in home services, things like phantom equity, profit sharing programs.
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C
You keep going because it sounds like you're going to say that you're doing something different than these.
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A
We had to create our own framework to deliver these types of instruments because essentially they are super archaic. They had never been innovated upon. And really the solution today is, as you alluded to earlier, you go to an attorney, you spend, I've heard, upwards of $30,000 for as small as $5,000 to get a piece of paper that they've pulled off the shelf and changed your name on. And what happens is, again, it's not really then a benefit to the employee. They don't really understand it, the owner doesn't understand it. And so what we did is we work with some of the best compensation attorneys in the country to create a framework, one that we could create, create in as plain English as humanly possible. And one that we could use technology to customize to the needs of businesses, specifically in the trades and home services.
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C
So how does that work?
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A
So it's essentially created based upon what's called deferred compensation, which is basically phantom stock.
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C
Can you explain those two like the phantom stock and the equity that you were talking about earlier?
- [13:45]
A
Yeah. So first let's back up. Why can't traditional trades company just give a stock option generally? Right. Most of these businesses are LLCs or some other form like an S corp. It's actually kind of hard to carve out real ownership in those businesses. And even if you do, it creates consequences that owners quite frankly don't want and employees don't want. Right. So you, you give membership interest in your llc, it creates a taxable event for the employee. Right. It creates a liability for the employee. They're on the hook for your loans, things like that.
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C
Yeah, well it puts some skin in the game for them though too. So like they, they don't, they're more likely to make a better decision in the field. Be like ah, instead of reacting to their something to the effect of like oh well, it's not my money, so I'm not worried about it at that point. It is their money and they are.
- [14:45]
A
Liable 100% and there's merit to that in certain circumstances. But it's not a tool that you can use more broadly across your organization.
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C
Manage people by using that process. I mean especially some people would understand it and be like there is potential risk here in the future for me. Whereas other people are.
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A
Yeah. And some of the larger companies more sophisticated, they'll do that with, you know, they'll bring a general manager into the fold, you know, and they become a partner. But that's a much, much bigger undertaking and like both parties really need to understand that. It doesn't really solve the problem we're talking about which is, you know, aligning more of the employees incentives with the goals of the business. So for all those reasons like traditional equity type incentives aren't really a fit, generally speaking. So we created this framework and what it does is it gives you two different types of incentives. Long term incentive, sort of akin to phantom stock, which is essentially a fancy cash bonus that gives all of the benefits of stock ownership without any of the drawbacks. So what you do is, you know, for a super simple example, you give 10% of your company to an employee and they have to vest into it maybe over the course of two to four years. And they get paid in cash when the business sells equal to the value of the underlying stock that they were given. Simple as that. There's no upfront cost to them. They don't have to buy into it, but they have to earn it with their tenure and often with, with performance goals.
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C
They meet the time frame, but they don't meet the performance goal. Do they get a percentage of the 10% or they get totally customizable?
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A
Totally customizable, right.
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D
So with some of that stuff, is that what you're saying that you guys tried to put together in like a, like a software? Is that kind of. So you can track like the employee can track the performance and see what that might look like and then the employer or the person that gave the, the stock options can also understand if they're hitting it and keep. Keep tabs on it, Is that what you're saying?
- [17:05]
A
Exactly. So, so let me just first say like, you know, I love to be value first. So all of this you can do without reins, obviously. Right. But we've made it really easy. So for the employer, we have our framework and we have software that helps them customize it for their business. So they get to choose these selections. Right. Should it vest, generally what, what goals do I want to hit and should it forfeit if the employees leave? Like things like that, for example, for the employee, to your point, Josh, they all get a login and now they can see, oh wow, I've got, you know, 5% of this company. That's equal to a fair market value of X dollars. If I do X, Y and Z, I will earn this bonus. Right. And that's just the. We just talked about the long term incentive. The second incentive within our framework is a short term incentive. So akin to a profit sharing type of plan, which is typically shared a little bit more broadly, it gives a more of a short term cash distribution and you'll see you kind of maybe picking up the pieces. The combination of these two incentives is really what retains and aligns employees. Right. Because what do we care about? We care about, you know, a bonus four times a year. What keeps me like, I really shouldn't leave.
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C
I've got this, you know, you had that golden handcuffs. If you can do that, if you can do the vested part of things.
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A
That's right, yeah.
- [18:26]
D
So that way they're not, I mean Church and I've all managed people, especially when my time in the trades and he's dealt with this probably even more recently where they leave like for a dollar more an hour and it's the most or they'll come back. Well, if you give me $2 and more an hour, I'll stay. And it's just this conversation is effing frustrating because you're like, are you serious? You're literally for $2,000 a year, you're going to leave to something that might not be as good as you had it here. And you're going to take that risk and you may burn that bridge forever both ways. And the employee was happy and they seemed like they were doing a great job and all of a sudden they want a dollar more an hour.
- [19:02]
A
It's shortsighted. Right. And this is one of the only ways I know that you can create sort of a disproportionate incentive that actually is meaningful to them.
- [19:14]
C
How do you avoid something like that? Or do you ever run into that situation where they become vested and then leave and then they have ownership in the company? They don't even work there anymore.
- [19:23]
A
Yeah, great question. So first of all, that's one of the reasons using this type of instrument is more advantageous than actual ownership. Because then you know, let's say worst case that happens, you don't have to give them financial rights. There's, there's no information rights, there's no voting rights, things like that.
- [19:44]
C
But they still technically would own.
- [19:46]
A
They have a chunk. Right? Certainly. So, so that can happen. So the way to, to avoid that is a. Is a few ways you, you can really design it such that this isn't the case. So one is you just simple, most common way is you forfeit the right if you leave.
- [20:02]
C
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- [21:21]
D
Yeah tersh those industry leading analytics tells you everything that you're going to want to know about your lead. Where they came from, what they did before scheduling and what page they converted on other things. On average about 75% of people who start a booking with our app completed. But we'll give you a more granular reporting that shows conversion rates based on marketing source and medium to help improve your marketing efforts.
- [21:42]
C
So honestly with no contracts, affordable monthly rates and you really don't have anything to lose. And so it's, it's a great program to try out and if you use SBM when you go to sign up for it, you'll actually save fifteen hundred dollars on the setup fees. Honestly, give it a shot. Tell us what you think.
- [21:59]
D
Today's episode is powered by Ciro Systems.
- [22:02]
C
Sara is all about removing the clutter and unnecessary touch points to run your home service business profitably.
- [22:07]
D
They use AI dispatching to get the right tech to the right call automatically and job time efficiency to ensure your entire team runs like a profit generating machine.
- [22:16]
C
Get a tech upgrade for your business at Get Sarah Tech Service Business Mastery. What's up friends? Never miss a call again. So our partners with free to grow their world class AI voice CSR platform is designed specifically for trades businesses with industry leading integrations, dedicated onboarding team. You'll never have to worry about missing calls or losing leads again. Whether it's booking, rescheduling, answering customer questions or escalating to your internal staff. Their AI handles it all 24 7. And not only that, it can book directly into your fsm. So stop wasting time and money on leads that get fumbled. Let free to grow. Turn every call into a book job and they just, they have to be very well educated. Like to know that like it's oh it's clear right?
- [23:12]
A
It's like you have to be employed at the time of the sale to get the the benefit. You still may vest into it. You still may have to have those performance conditions but you must be employed at the time of sale to get the benefit. It doesn't have to be that way to your point, but a lot of owners will do that and that's one of the reasons, they'll couple it with the short term incentive, the profit share, because it gives, you know, it gives that, you know, short term bonus and reason to stick around. Now the other, the other way to do this and something that technology does enable is the old way of doing this. When you go to an attorney or you do it analog, it's really cumbersome to add people, to give new incentives to make, you know what I mean? With software, within a click of a button, I can grant a new award. So what a technology like Reins does is it enables me as an owner to say, hey, maybe instead of just doing, you know, I really love Tersh, I'm going to give him 5% of the company. He's going to invest into that over four years and that's all I'm giving him. What if I gave Tersh 1% a year every other year for the entirety of his tenure until we sell? So it allows you to actually grant multiple awards over time and you can see, do I still like Tersh after three years?
- [24:36]
C
Well, what happens? So how do you avoid someone coming into the conversation and becoming vested and then becoming a complete deadbeat? They know that, that you have a five year goal or you have a seven year goal to sell. And because they've been privy to the conversation as they were getting vested or after they got vested, and so then they're like, all right, I own 10% of the company. I'll probably get a half a million dollars on the sale. All I have to do is just be here whenever at the time of sale. I don't have to be in good working condition. I don't have to be like, I can be here by the skin of my teeth at that point, as long as I'm at the time of sale, I'm gonna get half a million dollars. How do you avoid just becoming a complete slack ass? Be like. So I, I've seen it happen. That's the reason why I wonder.
- [25:33]
A
Well, two things. One, we can't fix bad people, right? These incentives don't. Yeah, yeah, These incentives aren't gonna fix that. And you'd find that out pretty quickly. I think you wouldn't be, you probably wouldn't be giving these incentives or you wouldn't be as flexible with them, right? So you'd choose maybe a forfeit, you know, if not employed. And if they do become a slack ass, as you said, there are things, and this is what, you know, having a really good framework does for you. Like if you, you're fired for just Cause forfeit. Even if it were that you left with it, for example. So you have a lot of discretion as the owner by design. Right. To make sure that this isn't getting abused.
- [26:15]
C
I'm sure you had to figure this out for every state in the US because there's some states that are far more difficult when it comes to employment versus ownership, CA being one of them. What the other is like, I'm thinking of like, there's certain states like New Jersey, where in order it like, so if you bring on a new trade that that person has to have ownership in the company. There's workarounds for that as well. But I'm sure you. You had to probably get a lawyer in every state or at least figure out all the rules in every state. Does this play into the employment role at all or is this a way to kind of avoid those issues?
- [26:56]
A
Yeah. So good, good time in the show to say, I'm not an attorney, we aren't a law firm, and we don't provide legal advice. No, you're not wrong. There's certainly nuances and going, you know, good callback to the hills we had to climb to get here. Just an incredible amount of nuance to make these types of instruments happen. But what I will say sort of at the state level is generally it's seen as contract law. So there aren't a lot of nuances at the state level, but we basically just encourage our customers to have their local attorney just give it a blessing across the finish line for any nuances that we just don't foresee. We kind of operate like a really, really robust legal zoom. But for this type of thing, at least for the creation of your plan. And then, you know, we have a whole suite of tools that helps you administrate it.
- [27:48]
C
So what is the difference in doing something like this versus a legal Zoom for those who don't know what LegalZoom is? It's basically like a doc in the box, but for lawyers.
- [27:57]
A
Yeah, exactly. So they don't really touch this because of its complexity and its level of customization. So but even if you had a document that's not really reins benefit. Right. Our benefit is helping you customize. It's also we created guardrails. Knowing a lot about this industry now in hindsight and what owners really want to do to, you know, what are the goals of what they're trying to accomplish when they implement these incentives. And then really it's around aligning, you know, those goals, making sure there's visibility into them. Do all the employees know what we're after. You know, is it gross margin, is it installs, you know, and, and just making sure those financials align with it.
- [28:43]
D
There's a lot of people, at least I feel in the trades that probably don't even really think about this as an option for team members or even having discussions with maybe someone like you'll say they want to bring on a trade like a, maybe they're H Vac, they want to bring on an electrician, they need a licensed electrician. So somebody like comes in the business opens like tersh was kind of mentioning where you open up a new trade. But this person's like a master electrician and you want them to run the department. So in order to you, you kind of give, you obviously give them a decent, a good salary for that. But then layer this on there are there things that you're seeing like some commonalities of like common places where people start as far as what they try to offer in these incentive programs or is there any consistency you see across that where it's like, hey, like if you're starting out, this is kind of where a lot of people are like thinking they want to start before they maybe make this a more complex program.
- [29:38]
A
Yeah, a hundred percent. So one thing is we've really made it so simple to do this. Historically it's been very complicated and so people don't do it because of the perceived complexity of the incentives. So, so that's, that's number one. But where folks usually start is they will give the long term incentive to managers or folks that can, basically all folks that they think that can influence profit or gross margin or what have you. Then I see more broadly they will share a short term incentive, some, some folks with every single employee and the commonalities there. So on the long term side, anywhere from 10 to 25% of the company usually carved out in a pool, maybe 50% of it is given away on the onset and then they save room to bring on new people or incentivize the existing people over time. On the short term incentive side, usually what will happen is they'll create a threshold. So it's like anything over 10% gross margin. I want to share 50% of or a hundred percent of and I'm going to distribute it among employees either based on their salary or based on a percentage that I allot. So there is some commonalities of how folks are setting it up and we make really, really easy to again not make it an entitlement. There has to be some component of I'm driving as an employee, I'm driving this metric, this goal for the business, and that's how I earn the incentive.
- [31:20]
C
Yeah, I like that. So it's not the entitlement. It takes that entitlement out of the equation. Now, how, how do you, how do you avoid the emotional outburst of like, hey, I should have gotten this and I should have gotten that, and you wouldn't be anywhere without me and my networking skills and their. My non KPI ability. You know, you can't meas the amount of times that I've, you know, gotten new conversations started or blah, blah, blah, whatever.
- [31:52]
A
There's so much emotion in this, and there's a lot of emotion and expectations from the owners as well. One thing that we really harp on that isn't as obvious when folks start is that complexity kills this. So an owner will come in and they will have an idea of an expectation of how this should work. And we really working with hundreds of companies now, it's like, we have to tell them, no, no, no. This is how you actually create the emotion. Like you were saying, tersh with the employees is if they don't understand it, if it's not visible, if it's not clearly and often communicated. That's how at the end of the road, at the end of the quarter, at the end of the year, at the end of the vesting schedule, we're like, whoa, you know, misaligned expectations. And again, that's part of the issue with doing this analog is there's no visibility. People forget what the heck they got the minute.
- [32:45]
D
It's out of sight, out of mind. It's like, hey, yeah, that sounded great. But now I'm two years into my tenure and I'm like, I don't really like working here anymore. I don't really understand what I'm potentially losing. Or maybe there's a way to get reinvigorated by like, oh, wait, we've grown this much. And so my little 10% nest egg is now worth from 250,000 to 500,000. Maybe it's not so bad working here anymore.
- [33:06]
A
You know, that's right.
- [33:07]
D
Because there's that financial windfall of a couple years worth of salary down the line.
- [33:11]
C
Does it show in there what their potential earnings would be like?
- [33:16]
A
Yes.
- [33:16]
C
Okay, it does.
- [33:17]
D
How do you, how do you base that, though? Because, like, you know, so let's go back to 2019. Multiples in the trades were 3, 4%.
- [33:26]
C
Or 4 times ideal.
- [33:28]
D
And now they're now they're really great. Thank you to companycam for supporting today's episode.
- [33:33]
C
These guys are changing the game for contractors with their smartphoto app.
- [33:37]
D
Keep your projects documented and streamline your team's communication with even your most complicated jobs.
- [33:42]
C
Try that for free for 14 days and get 25% off of your first two months at companycam.com forward/svm.
- [33:50]
D
And they've stayed really great for a while. Not as good as they were maybe like a year or two ago, but they're, they're still really good. How, how do you guys, is there a way to layer that in or is there some market information that you guys are able to gather to like kind of put like a range around that? So it's like, it's a. This range to this range type of thing.
- [34:07]
A
We again act as a platform here. So the owner puts in the valuation in our $0.02 is that it should be a conservative one. So some folks, some.
- [34:18]
C
Yeah, I have a.
- [34:19]
D
Don't try to oversell that. Oh, don't worry. That 10% is going to get you 10 million bucks. Keep working hard, buddy.
- [34:25]
A
Yeah, I can see that going over. It depends on the type of incentive, but we definitely encourage a certified valuation.
- [34:32]
C
Okay.
- [34:32]
D
Yeah, that makes sense.
- [34:34]
A
Yeah.
- [34:35]
C
What size is the smallest company that you've seen this work with?
- [34:38]
A
The way this works best is you're sort of north of 10 employees. We've done, we've done smaller, but it, it is a bit of a nice to have at that point, at least for the level of fidelity that we offer. Right. Like if you just want to do this for one person and you're, you're, you're a three man operation, you know, just get a, get a piece of paper, clearly communicate it, you know, but as soon as you, you want to go beyond that, that sort of right hand man application, that's when creating visibility, creating continuity and creating a way for you to scale. Right. A lot of these businesses, as you guys mentioned, like this industry's exploding. It's, it's incredibly exciting and these guys have growth goals. So imagine having a tool where when I want to bring on the H Vac trade or I want to bring on a new key employee, I can just instantly stand up an award to include in their offer.
- [35:37]
D
It's a, yeah, it's definitely a market differentiator when you look at like, because they all put up their, I mean if we joke about this now, when I was putting up job ads in 2013, when I was in the trades and I didn't know any better. I was like, overtime was a huge deal and like we would promote you get as much overtime as you want. It's like work 100 hours a week, I don't care, we'll pay you. But it's not like that anymore because. No, because the way that the market shifted with millennials being a primary driver of the workforce, and even now Gen Z, they value more time and some of their hobbies and things away from work and just rest time. So the offers have to be different and the incentives have to be different. The performance metrics have to be different because obviously we have less time really if we're only working 40 hours a week versus maybe a 60 hour work week. So we have to get more done kind of in that eight hour window every single day. This is super interesting as far as thinking of these things because, you know, Tertia and I both own multiple companies and you know, the way we were brought into the workforce is like, well, you just get an hourly wage or a salary and you maybe get a bonus if you do well. Like it's, that was the way like these things, didn't they? I'm sure they have existed for a long time, but bring them down to like the small companies that we've always worked for locally. This is not something that's talked about on a regular basis.
- [36:55]
A
Yeah. And the key takeaway, I want folks to know is that this is accessible to you. Right. With or without reins. Like think about these types of incentives because it's one of the only ways you can sort of disproportionately incentivize your folks and separate yourself from the other businesses that are around you.
- [37:15]
C
What's an appealing amount to an employee?
- [37:17]
A
Of course it's a subjective question, but I hate just giving that answer. I want to give like a tactful answer from what I've seen, you know, in this industry. And it's what, that's, what's. One of the cool things about focusing on an industry is you get to see actual trends. You know, for an employee, like a, a quarterly profit sharing amount is, you know, as good as anywhere from 500 bucks to $5,000, you know, is really meaningful for them for managers maybe in the, the five figures. And then on the equity side, it's, it's really subjective. It really depends on the size of company. And we work with, you know, anywhere from 11 to 200 employee type companies, which means, you know, you're, you might be 40 million in revenue or giving.
- [38:07]
C
Out 5, giving out 10% at 40 million, that's a lot different than at 4 million.
- [38:14]
A
Exactly, exactly. But I think so I don't, unfortunately I don't have a great number there. I will say owners on average will carve out 20% of the company at any of those stages generally, which I think is great. And I think maybe another way of answering the question is this actually creates a meaningful impact on these employees lives that wasn't there before.
- [38:39]
D
And honestly I don't even know why it didn't dawn on me you were talking about this and it just popped into my head. So before I started rental stage I worked at professional services and part of my agreement I had a salary. It was, it was kind of. It was just more like your analog on paper. But I was. Because I was in charge of operations and marketing and, and essentially growth of the company and to make sure that we were profitable. So my bonus was based off of. It was quarterly and I think there was an annual one as well. But based on hitting a certain gross profit percentage and then I got bonused off the gross profit dollars. So if we were, if we hit that percentage, that was great, that was a start. But if we were a percent, 2%, 3%, 4% higher, I got more dollars because there was more dollars available to me. Just for those listening, like if you have employees that you feel like are hungry and they always show up to work and they're excited to work with you and they like working with you, these programs, I'm telling you, I looked at that stuff. I learned a lot about P Ls in those two years because I was looking at it all the time because I was like, well I want to make sure, like hey, what are we doing about this? How come we didn't return this equipment that we're not using? Like just making sure the profit was there so the owner didn't have to do it. And we grew very well over that two year period without having to spend a lot of money because I was constantly trying to find ways of like making sure that we hit those numbers because it, it positively impacted my life and my family's life.
- [39:59]
C
How do you avoid the, as an employee, the owner pencil whipping things to avoid those reaching those target numbers. So I was a GM and I had a manager under me that figured out how the pencil whip things so that it looked like they were more profitable in that department because they were done it, they did it by departments and that department was the service department and they were making money off of the install department and they had just Inflated numbers. Crazy.
- [40:37]
A
Yeah. I mean generally for that reason and others, I would never recommend having like a profit sharing program like that sort of pit different departments against one another. It's almost always like people have good intentions. I get why you would do it, but it almost always backfires. So that, that's one thing just structurally don't do that. Make it, make it company wide. And you'll find that rising tides lifts all boats. I think it's very self serving answer. I think having. It's one of the reasons why there needs to be technology reigns or not around these things is it creates. We don't work for the owner, we don't work for the employee. We try our best to stay and be sort of an unbiased middleman because if we're not then it dilutes the benefit for one of the parties. And so that actually creates the necessary confidence in a program like this. And again it's just about clarity, reducing the complexity and increasing the visibility up front to say. And Josh, your example was a really good one that folks should think about. Simple. We have a 10% gross margin goal. Anything north of that we're going to share X percent of. That's it. Super simple profit sharing.
- [41:48]
D
And it was really easy for me to figure out my bonus. Like I, I got that P and L and I'm like all right, let's go, let's figure out what it is. Here it is.
- [41:55]
A
Y. Exactly.
- [41:56]
D
Looking forward to it. Zero.
- [41:58]
C
Every month.
- [41:59]
A
Zero.
- [42:00]
D
Dude, you know, you know I'm not, I'm not going to not hit my bonus. I'm just very motivated that way.
- [42:05]
C
So we just set the bonus really high.
- [42:08]
D
But yeah, but obviously you have to have, you have to have. This is how you also know if you have the right people too because if they're not motivated by those things, you have like a C player and a C player just kind of wants to show up, punch in, punch out, go home and, and do what they want. That's where Tom, Tommy Mello talks about it a lot. Getting A players. And I know he offers these types of programs because he's talked about them multiple times at his events about profit sharing or equity sharing type programs to incentivize his employees to perform better. And he's, he's got, he's. It's a, it's. The whole culture is of all about performance. And he's. They're. I don't even know how many. 300, $400 million now as a garage door company, they haven't even Added any trades in their 4, 3, $400 million, which is insane to me. I was waiting for you to stop.
- [42:53]
C
Talking so I could make fun of you.
- [42:54]
D
I don't want to stop talking because then you're going to talk and then the show, everyone leaves when you start talking.
- [42:59]
C
How long does it usually take to start up a program like this?
- [43:02]
A
Yeah, so it really depends on the owner's expectations. But we've done it as quick as literally an hour onboarding call. And people are often really surprised by that because we take out all of the grunt work.
- [43:15]
C
This here, look at that over there. Search for this document or a few weeks.
- [43:20]
A
It really depends on the owner's expectations of how this should work and or their time to carve out to do it. These are busy people and I'm empathetic to that. But it's as fast as you want to move.
- [43:33]
C
Do you pick the KPIs that should be tracked or do you have like a list of recommendations that you've seen successful? How does that work?
- [43:41]
A
Yeah, like we're starting again, starting to see trends of what's important in this industry. Installs, you know, callbacks, five star reviews, simple.
- [43:54]
D
You were on one yesterday.
- [43:56]
C
I was on one yesterday that ended up costing us a lot of money.
- [44:01]
A
So these are all milestones that are important to the trades. But generally, you know, some of the high level financial metrics are pretty, pretty standard. You know, gross profit, gross revenue, things like that.
- [44:12]
C
Josh, do you have any other questions? I love this. The thought of this program and the assumption that I have is the ease of use in the program. For those who are listening, I've never used the program. I've never even actually seen it before. It's so I don't want y' all to take it as like, Josh and I aren't recommending this program to people, but we, you know, we trust Chris and the theory behind it makes complete sense to me. And for me, there's been times where like we've talked profit share in the company or ownership in the company, but then the sense of entitlement followed right behind it. Like, hey, look, now I'm, I'm an owner. I'm a partial owner now. You have to listen to me. I'm the boss.
- [44:55]
D
That's where having someone that's like flesh out a program or maybe it's real, it's, it's more black and white. And then obviously learning how to use those in one on ones or quarterly performance reviews to like remind, hey, you hit your goal. This is where you're, you're trending. You got another year and six months until you're invested. But I think that's the thing too is sometimes we've set stuff like this and then it's like, never talk about it again. And it doesn't get brought up on the, on the management or leadership side. And because it's like we just don't want to talk about, hey, you signed it, cool. They must know about it, right? Because they signed the paperwork or whatever.
- [45:30]
C
But sometimes we feel like we're just repeating things over and over again. But it's like you mentioned a couple days ago or a couple weeks ago, Josh, where he is talking about our branding. And once we're sick of seeing our own brand, that's when the audience is just now seeing it for the first time or, you know, they're just getting used to it.
- [45:50]
D
It. He was referencing content. So like, yeah, by the time you're sick of saying the same thing over and over in your content, your audience is probably just hearing it for the first or second time.
- [46:00]
C
And I, I feel like it's the same way with employees. And you're talking about this, a program like this, I feel like I'm beating a dead horse. And they're like, I haven't heard you talk about that before.
- [46:11]
D
Like, yeah, I talk about it every week. When we implemented EOS at our company, they're the, the implementer that helped us mentioned something about. You have to say it seven times for them to hear it the first time. No, not everything. Because our brains only retain so much. That's a whole different like, topic and podcast episode of like, how many times we gotta repeat ourselves. It's like, it's, it's like with children, right? You gotta tell them how many times until they actually get something done that you want them to get done most of the time. But you gotta tell them a lot. The fear of God will make you listen the first time. I will say that I can't do that with employees. For those that want to learn more, do a demo of Reigns and everything that offers. Where should they go?
- [46:55]
A
My reigns.com so m y r e I n s.com a lot of great resources there on the website too. Free to access. Like I said, I encourage people. Just think about doing a profit sharing program. Don't sleep on the phantom equity side. Like that has incredibly high impact in organizations. You don't need this to do it. It certainly makes it much, much easier and much more effective. But just please do it because it's, it's great. And to your point, it is hard to do the cultural aspect and that's really what you need to do to make these things effective is integrate the incentives into Quarterly Review 1 on ones, et cetera, et cetera. But myrains.com to learn more about Reigns Cool Chris.
- [47:39]
C
We appreciate you hanging out with us. If anybody has any questions at all, don't hesitate to reach out to Chris and his team. If you have any questions for Josh and I don't send it to Josh's email. He doesn't check it. No, I'm just kidding. Until we talk again next time. I hope you have a wonderful and safe week. And thank you for hanging out with us.
- [47:56]
A
Yeah, my pleasure. Thanks for having me.
- [48:09]
B
Thank you for listening to this episode of Service Business Mastery. Now that you are equipped with essential business advice from this impactful conversation, you are one step closer to becoming the successful owner of your dreams. If this episode has been helpful to your business journey, don't forget to subscribe to the show, leave a rating, and share it with other owners as well. Servicebusinessmastery.com to learn more.