No Fees No Equity Loss: A New Way to Scale Your Business

Summary

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Service Business Mastery for Skilled Trades: HVAC, Plumbing & Electrical Home Service

Episode: No Fees No Equity Loss: A New Way to Scale Your Business
Date: April 22, 2026
Hosts: Tersh Blissett & Josh Crouch
Guests: Mike Michalowicz & Greg (The Prosper Group)

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Episode Overview

This episode dives deep into alternative models for scaling home service businesses—specifically how owners can experience meaningful growth and operational freedom without giving up equity, incurring consultancy fees, or losing control. Mike Michalowicz and Greg from The Prosper Group share their "no equity, no fee" turnaround partnership program for companies stuck in low-profit, high-stress limbo. They detail operational fixes, the power of strict timelines, workforce optimization, and how deadlines and targeted interventions unlock sustainable profitability.

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Key Discussion Points & Insights

1. The Prosper Group Model: No Fees, No Equity Loss (04:02+)

• Genesis & Philosophy: Mike and Greg share the origin story of Prosper Group, targeting “at-risk” businesses (revenues $2M–$15M) that lack sustainable profitability, not by consulting or taking equity, but by partnering for shared profit/win outcomes.
  • “We don’t take any equity and we don’t do consulting. What we do is we partner with you in your business...the only thing we share is long-term success.” — Mike Michalowicz (06:10)
• Execution & Timeline: 3-year partnership where The Prosper Group helps execute, coach, and, when required, takes hands-on roles to drive turnaround.
• Exit Objective: By the end of three years, businesses should be “sellable”—owner-optional, free of bottlenecks and able to run independently (08:53, 10:18).
  • “Our goal is them to be sellable…where the owner can be away for a month and not be needed at all…We want everyone to not be a linchpin or a bottleneck.” — Greg (08:53)

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2. Importance of Deadlines & Time Compression (11:19)

• Parkinson’s Law: The hosts and guests discuss how constraining timelines leads to focus and innovation, referencing both The Science of Scaling (Ben Hardy) and the “12 Week Year” approach.
  • “As we get more time to do something, the longer it’ll take us to complete. But it’s true with all aspects.” — Mike Michalowicz (12:20)
• Accelerated Sprints: Previously, initial turnaround phases took six months; Prosper Group now compresses them into four weeks, which has improved results substantially (13:30).
• Scarcity Breeds Clarity: By limiting time and resources, non-essential tasks drop away, spotlighting high-impact changes (“catalysts”) for the company (15:00).

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3. Identifying the QBR (Queen Bee Role) & Core Activity (15:50)

• Defining QBR: The “Queen Bee Role” is the single, most critical function that drives a business’s reputation and value. The Prosper Group helps companies clarify and protect their QBR.
  • “Of all the activities I do...which one most drives that? For me, it’s books...that becomes the essential activity, which is the QBR.” — Mike Michalowicz (16:11)
• Crisis Triage First: When companies are cash-strapped (can't pay rent or payroll), QBR comes after immediate financial crises are addressed (“shock paddles” on the business).

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4. Due Diligence, Red Flags, and Turnaround Tactics (20:53)

• Dealbreakers: Multiple owners (especially family) and unsustainable debt loads are the primary structural issues that block turnaround (21:20).
  • “Too many owners and debt...We can’t fix either of those very easily.” — Greg (21:20)
• Debt Service Solutions: Prosper Group seeks fast fixes—refinancing, HELOCs, debt consolidation—to make burdensome debt manageable (22:00).
• Return on Payroll (ROP/E or "Rope"): A key metric is Return on Payroll, helping them identify overstaffing and staff misalignment (23:28).
  • “It’s not surprising how many businesses are overstaffed because the owner thinks it’s loyalty...We look at the rope and say, this business should be four people, not seven.” — Mike Michalowicz (24:23)

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5. Talent Management: The A, B, C Player Model (26:54, 27:14)

• Titles vs. Tasks: Prosper Group prefers matching tasks to talent over rigid job titles, creating morphic roles for maximum fit and enjoyment (26:54).
• Case Study—Container Store: Paying top dollar for “A” players yields 3x the output, is less expensive overall, and increases retention.
  • “One A player delivers at the level of three B players...So I said, how could a business ever afford A players?...He goes, how can companies support B players? Because it’s three times 15. So this becomes...You gotta find people who are the right fit for the right role and want to do this and thrive at it.” — Mike Michalowicz (28:22)
• Letting B/C Players Go: It’s better for everyone to fit roles to the right people—or let people move on to companies where they can be “A” players ("set them free") (29:48).
  • “They are an A player somewhere. So let them go find that—you’re holding them back from doing it and you’re hurting your business at the same time.” — Greg (29:48)

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6. Owner Mindset, Financial Blindspots & Operational Realities (37:28, 41:38)

• Facing Financial Reality: Many owners are in denial about severe issues; Prosper Group’s first job is to expose problems and act relentlessly to fix them, rather than letting the problems compound (37:28).
• Profit vs. Cash Flow: A recurring theme is “phantom profit"—owners report high P&L numbers but don’t know where the money is (41:38).
  • “Where did you put that? Like, meaning, did you buy a car, a house? How did you benefit from that money? And they're like, I don't know where it is ... So, like, there's this idea of profit on the P&L, [but the] reality is, I took nothing home.” — Greg (41:38)

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Noteworthy Quotes & Moments

• On Working On, Not In the Business:
  • “Mike’s book talks about this—Clockwork—where the owner can have a month away from the business and not be needed at all...We want everyone to not be a linchpin or a bottleneck to the system.” — Greg (08:53)
• On the Value of Tight, Defined Partnerships:
  • “If we knew this could be over and over and over again, sure, let's do [what] Mike was saying earlier and do a decent job ... but we want to step away and have them not need us.” — Greg (10:18)
• On Owners in Denial:
  • "A lot of these business owners put a blind eye to what's not working. You know, money's coming in ... it's this little game we play. So the first thing we do is shed light on businesses and we can get our hands around debt ... if you're ignoring it, we're going to expose it." — Mike Michalowicz (37:28)
• On The Employee Investment Equation:
  • “How could a business ever afford A players? ... Are you kidding me? How can companies support B players?” — Mike Michalowicz (28:17)

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Timestamps for Key Segments

• The Prosper Group philosophy & structure: 04:02–08:09
• The importance of deadlines and time compression: 11:00–15:32
• Defining the QBR and business triage: 15:32–17:37
• Dealbreakers in due diligence (owners & debt): 20:53–23:14
• Return on Payroll (ROPE) and workforce analysis: 23:28–25:32
• A vs. B vs. C player hiring model: 27:01–28:22
• Owner mindset and facing denial: 37:28–39:07
• Profit on P&L vs. what's actually in your pocket: 41:38–42:09

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Additional Resources & Contact

• Learn more about The Prosper Group: TheProsperGroup.org
  For companies from $2M–$15M annual revenue looking for a real transformation—no fees, no equity loss, but a true growth partner.

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Tone: Energetic, banter-filled, direct, supportive—grounded in practical, real-world business tough love with a focus on accountability and owner freedom.

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This summary captures the major lesson points, stories, philosophies, and operational takeaways from the episode. Whether you’re a challenged home services business owner or a leader looking for transformational ideas, the episode packs both strategic blueprints and tough but fair wisdom.

Transcript

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[Mike Michalowicz]

Sometimes it's the right people with just the wrong seats Titles are one of the worst things, because people aspire for a bigger title, even though it's not their competency. So instead of matching title to talent, we try to match tasks to talent. But I was meeting with Kip Tindall. He's the founder of the Container Store, and he said, One A player delivers at the level of three B players and one B players. Three Cs A players get paid 25, Bs get 15 and Cs get 10. So I said, how could a business ever Afford A players? They're 10, 10 bucks more per hour. And he goes, are you kidding me? How can companies support B players? Because it's three times 15. So this becomes, yeah, 40. They're paying $20 more an hour to get the same output. And These guys, it's three times three. They're paying 90 an hour. So when you look at the real numbers, he says, you gotta find people who are the right fit for the right role and want to do this and thrive at it.

[Podcast Host]

Today's episode is brought to you by one of our show partners, upfrog.

[Josh]

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[Krista from Marketstorm]

Hey, I'm Krista with Marketstorm and we work with home service companies across the country. Quick question. If another H Vac or plumbing company in your area starts influencing homeowners before they ever hit Google, who gets the first call? By the time someone searches plumber near me, they've already been researching the problem. We use AI to detect those early intent signals and put your brand in front of them. So when they do search, your name already feels familiar. Visit Marketstorm AI or text us at 213-575-5448.

[Podcast Host]

Hello everyone out there in the podcast world. Hope you're having a wonderful day. You're listening to or watching the Service Business Mastery Podcast. We are live here. It's actually been a couple of weeks since we've gone live. We used to be live consistently every single week, several times a week. We've been on the road, traveling and doing so many different things. And I was actually recently with the team of the Prosper Group in New Jersey, and I'm excited to have this conversation today. So hopefully I'm not, like, too giddy or anything, but Mike and Greg have been friends of mine for a long time now, and I'm excited to have them on the show. Before we get started, though, I feel like I would mess things up if I introduced y', all, because I. I've known y' all for so long that I. I wouldn't tell everybody. Everything that you need, I need to tell y'. All. Would you share Mike and Greg a little bit about yourselves and your background? What makes you experts?

[Mike Michalowicz]

The more you get to know someone, the more you know, like, the intimate details, but not the overarching backstory anymore. We were hanging. You and I were down in Savannah at the restaurant, remember? And just. I discovered. Because of you, I discovered massaging chairs in a car. I didn't know that existed.

[Podcast Host]

I forgot about that.

[Mike Michalowicz]

The next car I'm buying is gonna happen, and it does. Now it has that. And I always think of you. But that's. It's interesting how our mind kind of morphs. I'm like, oh, Terse is the massage chair guy

[Podcast Host]

and automation guy.

[Josh]

Are you. Are you telling me that Tersh gives massages in cars? Yeah.

[Podcast Host]

Well, in the nud.

[Mike Michalowicz]

Oh, okay. I wasn't. He was.

[Josh]

I'm learning something new about church, too.

[Mike Michalowicz]

Yeah, yeah, yeah, yeah. It was.

[Josh]

This is gonna be great. He always. You know the story that Jesse tells on stage, really, about the air conditioning company that gives massages? I'm starting to think that maybe it was a cover for something else.

[Podcast Host]

All right, we're gonna have to start this show over again.

[Mike Michalowicz]

Yeah. Well, the live broadcast, what we're doing, Greg and I together, is an organization we call the Prosper Group. And it actually came out a conversation, so maybe it's best explained through story. Greg and I were spending time with each other. I was on a vacation down the beach, and he came down with his wife to visit, and he asked a profound question. He says, I. I built and sold a couple businesses and was running some businesses. I have investors in my other businesses because if you could do it all over again. He goes, what's the ideal structure in getting partners in the business? And I said, well, I found that when I hire consultants or coaches, they're paid by the hour. So their motivation is just to spend more time with you. And yeah, they want to have impact, they want to stay engaged. But their motivation is almost like this homeostasis. If they serve you too well, then their time is up. And if they don't serve you well enough, you'll fire them. So it's, it's kind of this goal to be just adequate enough.

[Podcast Host]

It feels like it's like your therapist.

[Mike Michalowicz]

Yeah, just like a therapist.

[Josh]

Yeah.

[Mike Michalowicz]

And they weren't invested in the outcome. Like, if it didn't work, it's like, well, it's, it's your problem. Like, you're not trying hard enough, you're not doing enough, you're not following the instructions. And I go commercially, I've had investors and I just one investor in my business, his name's Howard Hirsch, great guy. And he took a risk on a business of mine and wrote a six figure check out of his personal bank account. Said, I'm betting on this business. And he made a good bet because for years, and then a decade plus later, I'm writing him installments that at toward the end, where our business was growing so much, each installment was approaching his initial check.

[Podcast Host]

Dang.

[Mike Michalowicz]

And I remember how painful it was. I called him, I said, howard, I don't, I can't sustain this. Like, I'm, I'm, I'm fulfilling my obligation. I can't do this anymore. And he said, well, I kind of want you to keep doing it, but, but he was a great guy. He said, let's get together and let's discuss a buyout. So we had a final exit. And then the company came under my control again. The risk with private equity people investing your business is they take control of your business, but regardless of their involvement, they're a beneficiary financially for life. So I told Greg, I said, I want the best of coaching. Someone comes in with a knowledge set, but I want somebody as dynamic and works with me. And I want people that are actually invested, meaning they're putting money in. So when Howard put money in in the very beginning, he's making all these introductions and stuff because he made an investment. Once the return was there, he was out. So I said, I wish someone was invested, like actually putting money into it in some capacity and was bringing in expertise. And then Greg, in his prophetic way, said, well, why don't we just do that? And that became the inception of this. The Prosper Group is an organization we work with, we call at risk businesses. They're companies that are doing a couple million in revenue or more but they're not sustainably profitable. They're living check by check. The owner's exhausted, struggling and frustrated. There's almost a sense of throwing your hands up and giving up. But they know the business is good. There's just some things missing. So we go into those businesses. We don't take any equity. I think that's the worst thing. People are as, as Greg says, stealing equity from you. We don't take any equity and we don't do consulting. What we do is we partner with you in your business. We bring in our team. We definitely have advice and experience that we bring to the table. But we will execute parts of it with you. We'll execute parts of it on our own completely. In other cases the owner is going to take the direction and if we agree to the execution, the owner's executing on it in exchange. Since we don't have equity, the only thing we share is the long term success. So as the profitability starts building, we get a portion of it, the owner gets a portion of it. We do this over a three year period. Our goal is after that third year is we're hitting a home run. It's not always the case but we are turning around these businesses and the, the best moment is on year three, the last day we give them the proverbial keys back and say congratulations on having a healthier business. We benefited too in this process. But now take the company, you own it outright 100 as a healthy state business.

[Podcast Host]

Now, now with that being said, is the goal at the end of year three to sell the business or to keep the business and just keep growing it. And then I told you beforehand I was going to ask this question. I know that it's a, it's an like you don't want to like in the perfect world you don't want to keep continuing on this relationship. But what happens if year four we're like hey, I don't have to do anything anymore and it starts to like, like decline. And then you're like hey Greg, I fail, I fail at life. I need yalls help again. And then you know, year five you agreed to. Or would you agree to coming back in and doing it again?

[Greg]

Yeah. So I think at the end of year three our goal is them to be sellable, you know, and however they're defining that we're not trying to be involved in a sale. We are trying to get them to be completely extracted. You know, Mike's book talks about this clockwork, where the owner can be. Have a month away from the business and not be needed at all. And that's really everybody in the business. We want everyone to not be a linchpin or a bottleneck to the system. So sellable is our general term for that. We want them to be able to actually sell it to get checks or to some hybrid in the middle where they're fulfilled by that thing they like doing, but they're doing it 10 hours a week or they're doing it as they want, not 40 or 60 or 80. You know, in a sense. And I think there's. There's a dynamic that we're aware of in this. In the middle of this process where I was talking to someone earlier, actually, it's like. It's like in the workout world, like, if this was actually possible, like, I'm not. I don't want to come in and do your workout for you, and then somehow you feel better, and then you don't know how to work out, you

[Josh]

know, like, I would like that.

[Podcast Host]

Yeah, that would be great.

[Josh]

Love if I did the workout. But then when we got benefit of that workout.

[Greg]

Yeah, nice. When we step away, you don't know how to do it, and you get fat again, you know, like, so it's

[Podcast Host]

like, yeah, we don't.

[Greg]

We got to watch that we're not doing too much, that we're a great guide. We're a great resource. We're a great, assertive, accountable partner. But they can, you know, essentially go off to college on their own or go, you know, whatever the metaphor is.

[Podcast Host]

Yeah.

[Greg]

Where they can go there. And, you know, we. I like the idea that there is no beyond three years. Like, I like having a deadline. If we knew this could be over and over and over again, like, sure, let's do what Mike was saying earlier and do a decent job.

[Podcast Host]

Yeah.

[Greg]

Job enough where they need us. But if we get them to, you know, if they double their business or whatever the. Whatever success is, and we're. We're done and we're thinking it out again, and it makes sense. And we do have, you know, reasonable criteria around, like, we don't want to work with someone who doesn't need us. Yeah, they might. They might not meet that challenge by the time we're done.

[Josh]

I love that you talk about deadlines.

[Podcast Host]

Yeah, that's it. Yeah, that's What I was doing.

[Josh]

Are you guys familiar with the science of scaling? Ben Hardy.

[Greg]

I. Yeah, Hardy.

[Josh]

Because you guys. I know Mike, you've written several books, but Science of Scaling was all about. I think his next book is actually about literally time as a, As a. I think time is a tool or something like that.

[Greg]

It is. Yeah. It's already. It's out. It's an audio book. It's great.

[Josh]

Oh, it is.

[Mike Michalowicz]

Okay.

[Josh]

So it is out. I. I knew it was coming. I didn't know it was out yet.

[Greg]

We're check.

[Josh]

That was one of the biggest takeaways I had from reading that book was. And I tried to implement that in our own business because, you know, get someone to tell you what. Or like, hey, this is going to take me two weeks. I'm like, how about I give you 10 days or I give you 70? You put that time crunch on why

[Podcast Host]

you started doing that. To me,

[Josh]

it's amazing what gets done when you can compress a timeline because I'll. We use EOS for our business. As an example. 90 day rocks. Well, guess what gets done like day 89?

[Mike Michalowicz]

The 90 day rock. Yeah, yeah, the 90 day rock.

[Josh]

If we had 30 day rocks or, you know, whatever that. I mean, obviously sometimes you need more time for stuff, but we all fit stuff into a certain window. So if you guys give a five year timeline, guess what? It would take five years?

[Podcast Host]

Very.

[Mike Michalowicz]

That's right.

[Greg]

Three years.

[Josh]

And. But having a deadline I think is so important. I don't think it's a. A tool that's used enough and just. I'm not talking about.

[Podcast Host]

Isn't that Parkins Parkinson's law?

[Mike Michalowicz]

Dude, you. You nailed it. So quick, history lesson.

[Josh]

Remember something?

[Mike Michalowicz]

This guy's name was North CO. That's his first name. North Coat. North Coat Parkinson. 1950s research that he conducted and identified that as a resource increases in availability, our consumption increases at the same or similar rate. So to what Josh was saying, as we get more time to do something, the longer it'll take us to complete it. But it's tr. It's true with all aspects. I. I do a little presentation around toothpaste and when you have a brand new toothpaste tube, watch how much toothpaste you use compared to when that tube is like shriveled up like a prune. It's a subconscious response, but less resource. Be more frugal in its utilization but also be more innovative. So to Josh's point, when we have one day to get a 90 day rock done, which is one day if you're doing 89, you have one day to get done. You find a way to get it done. And so we do put in this intentional time frame. And so we go in sprinting. It's funny, we had this foundation period that Greg was referring to. We do start off with a certain script. It's almost like coming into an ER some of these businesses and make sure that we put a tourniquet on the spots that are bleeding out right away. It used to be six months, literally six months of this setup. And I don't know, I think Greg inspired it. Greg, our portfolio manager. So he oversees all of our investments. And I think Greg, it was you who said, let's move this to four weeks. And it's getting done. Actually it's getting done better now. Even though it's a full six month script, we do it in four weeks. It's faster, it's iterating and we're seeing faster, better results by. By a long shot.

[Podcast Host]

Parkinson's loss feels similar to what. What was it? There was a different book called Like 12 Mike. I feel like it's something you recommended,

[Mike Michalowicz]

not the four hour work week.

[Josh]

This is why I congratulate you. When you actually remember something.

[Podcast Host]

Hush.

[Josh]

Cuz then you go and you.

[Podcast Host]

Where's that button? I don't remember where that mutant button I got find.

[Mike Michalowicz]

I can see Ter is just loosening up his hands because whenever he gets in a stuck, he just starts massaging. He just starts massaging and everyone's like, oh, this is so good. I love you, Ter. That's how he recovers.

[Podcast Host]

Yeah, Old magic fingers over here. No, no. Talking about reducing. Basically it might have been Ari Mazel. Talking about reducing. Basically a full year's worth of work in 12 weeks.

[Mike Michalowicz]

Oh, that's interesting.

[Greg]

Yeah, I know what you're talking about. Like the 12 week quarter or something. Like it's like a. Yeah, no, it's like the 12 week year or something like that.

[Podcast Host]

Yeah, yeah, something like that. And it's basically the same concept of like every week is every week is a month. And so you. Every day is basically a week's worth of work. And you know what's interesting about that

[Mike Michalowicz]

is I think people interpret that saying, oh my God, I have to work. I get an animal. That means each week is a 15 hour day and work works. And that's not the reality. What you do is you compress the time and you say what was irrelevant, what was the filler stuff? And I would argue 80% or more of the work that the entrepreneurs are doing that we invest in is superfluous, unnecessary, busy work. But when we do this compression, we get down to the essentials. We call them catalysts. And we say, okay, we're going to insert this one thing that's going to cascade into a lot of opportunity in your business, and we're going to stop doing all this unnecessary work.

[Podcast Host]

Whenever you're doing that, how do you come up with your. The. Like, your qb, qbr, the queen bee role, whenever. Because that's what you ultimately have to do in order to be able to be proficient like that. And can you explain that process?

[Mike Michalowicz]

Yeah. So the QBR is a term I coined in my book Clockwork. And what it is, is the essential activity in the business that builds this reputation. So every customer is buying from us for a specific reason. Um, I'm primarily an author. That's my main job. I also, with Greg, invest in businesses. But I'm an author. And my promise to my market, my readers, is to simplify the entrepreneurial journey. I call it entrepreneurship simplified. But to simplify the entrepreneurial journey. And then I have to ask myself, of all the activities I do, public speaking, podcast with you, Tersh and Josh, all these different things, which one most drives that? And for me, it's books. I got to write gosh darn good books, and that's to be judged by the consumer. But I put every effort into it that becomes the essential activity, which is the qbr. So for every business is different. Now, what's interesting is when a business is in a kind of cardiac arrest, we have to shock them back to life first. Yeah, you got to put on those paddles. So we don't often start off with, like, what's the core activity? When. When they're concerned about how they're going to pay the rent and payroll at the end of the month. So sometimes it's leading with profit first, sometimes it's extracting the owner. That's stuff I also wrote about in Clockwork. Sometimes it's leadership. Sometimes. And I will never mention this client's name, but we have an investment we made into a company where the asylum was run by the inmates. It was horrible. And so we had to take drastic action to remove the insanity that this owner was allowing to happen. So you don't always start at the same spot, but often there's some form of electric shock paddle applied in the beginning. I think this is what I hear.

[Podcast Host]

Whenever I first was talking to Greg about this, Mike, Mike sent me a message, and he was like, hey, you need to talk to Greg about this program. We're doing it. I'm like, okay, whatever you say, Mike. And blindly, like, Julie, my wife, she was like, so what are you meeting with this Greg guy about? And I was like, I don't know. Mike told me to meet with him, so I'm meeting with him, and turns out it was great.

[Greg]

Y' all do what we're told when Mike talks, right?

[Podcast Host]

Yeah, we did, but it's. It's integrity, honestly. So, like, all the times I would not give up the coaching organizations that I've been a part of because I've learned a ton. And one of the biggest things for me was networking. That's how Josh and I, like, seen each other in person and. And actually met each other. So maybe it's a bad thing. I don't know. Josh isn't paying me attention.

[Mike Michalowicz]

He's zoned out now.

[Greg]

I just see.

[Mike Michalowicz]

I saw his hand come. Like, me and Julie.

[Podcast Host]

Yeah, pretty much. But the thing about this is, like, it's the integrity of, like, we're staying behind what we're coaching, basically. Like, we're putting our profit where we're putting our money where our mouth's at, and we're getting paid if you win. And like, I've. Josh and I have talked about this for years. Like, all these organizations that you basically have to change what you're doing to fit their motive, the mo and you're doing the exact opposite. Like, you're like, hey, if we're not profitable, then, you know, I'm not taking money out. But it. I don't know. That's just the way that I perceive it. I think it's a fresh. A breath of fresh air, in my opinion, when it comes to that.

[Mike Michalowicz]

Can. Can I give a little shout out to Drew Larson? I just noticed the comments. I wasn't paying attention. The comments are filling up. So, Drew Larson. I was at cleancon last year. Last year, last week, saw Drew out there. Daniel Foss pointed out the 12 week year. That is the book.

[Podcast Host]

12 year. I knew. See, I'm not crazy.

[Josh]

I knew the listeners chiming in and helping us out because we're just couple dumb contractors and don't really know his stuff. Actually, Ter is the one that brings it up and he never remembers. So anything that I bring up, I always remember what it is before I open my mouth.

[Podcast Host]

Whenever you look at Josh and he's like, he's concentrating, trying to think of what it is that he's saying while I'm talking, and I can See his, his eyebrows. And so I'm like, all right, I gotta feel the time right now because Josh is thinking over here.

[Josh]

Imagine if we just recorded the audio and not the video. You wouldn't be able to see.

[Podcast Host]

Oh gosh, that'd be terrible. It'd be horrible.

[Josh]

Mike, Greg. So we talk about we'll get back on track here a little bit first. And I can go off track really easily. So three year plan, like so I'm guessing that through this process, when you guys get into a business, you're plugging in, you start figuring out what's going on. There's probably some things that you are very consistently that you guys find that are things that people should look at now as they're listening to this episode and just start doing some investigative work themselves. What would you say to those things that you guys are kind of typically finding early on when you start working with a new partner?

[Mike Michalowicz]

Well, I'll let Greg answer this because I just want to set the stage. We go through a due diligence process, which is before we make an investment, what is the real state of this business? And there are a couple things that are such red flags that it's a Titanic, you cannot save that ship and it's really getting people off the ship. But there's some businesses that are in situation, you can see the iceberg coming, but you can divert it. So I thought, Craig, maybe you can share some of those metrics.

[Greg]

Yeah. So in our due diligence, we're looking for companies in general that are going to get there on their own. We can get them there faster. If we're talking to someone who's never going to get there on their own, it's not going to be fruitful for us to work with them. And you know, like, so we're looking for the, the biggest deal breakers we have are too many owners and debt because we can't fix either of those very easily. So too many owner. We had one example years ago, it was like a couple and their in laws and some cousins, brother and sister, like six. There's like six plus owners and we're like run Forest run. Like just, you know, like we're not like you can't make movement where there's that many people involved, you know, so ownership is kind of a thing that couples that are still married work with us. But usually outside of that, it's usually single ownership and then debt. That's the thing. That's the one thing that we can't solve. We can pretty much solve or Help them solve almost anything else in their business. But debt is just a structural thing. And we've had several wins where we've saved companies 20 plus thousand a month in their debt service by in the box solutions, by just asking the right question. You know, one was where we had to get a HELOC on their house. So we connected the personal in the business, which I think had a personal guarantee anyway. So it was connected whether they thought so or not. But we got a HELOC, dropped the interest rate from like 25 to like 7 and saved them 20 grand a month. And now they can put the same amount of money toward the debt and just pay it off a lot faster, you know, so there's a ratio we look at on how much their minimum payments are compared to revenue and looking at, you know, what's salvageable or what's not. And then in that mix, like what are the levers we could pull that will get us out of that kind of deal breaker scenario?

[Mike Michalowicz]

We get businesses that come to us and they're upside down on debt. It's inserviceable, unserviceable. They will never be able to do it. And those businesses, unfortunately there's nothing you can do.

[Podcast Host]

You just told them to file bankruptcy and start over or you just like.

[Greg]

We don't jump in because there's not a lot of product. We can't be productive every week. It's like, are you still alive? Are you still alive? Like, it's just, we can't do anything beyond that.

[Mike Michalowicz]

There's another thing we call the rope and it's a really interesting analysis. It's return on payroll. R O P. We call it rope. And it's one thing we look at more like it's.

[Podcast Host]

Isn't that more like rop?

[Mike Michalowicz]

It is rop, but we add a little e at the end. A small little E. Okay, okay, okay. Just to make it sound good because it's like, oh, how's this rop? It's like, oh God, how does that business is rope? It sounds a little better. Rob sounds like a disease of some sort. He's suffering from rop. He's had rop since he's been in high school, you know, you know. And you know who he got it from? Mrs. Stro, the eighth grade teacher. So yeah, I think Ter suffers from ROP probably. Yeah. It's horrible. How man, what does it stand for again? Rotten, oversized. You can figure out what the P is.

[Podcast Host]

I thought I was recovering.

[Mike Michalowicz]

So rope stands for return on payroll. And what we do. It's not surprising how many businesses are overstaffed because the owner thinks it's loyalty and acknowledgement to the team. Hey, he's been with me for seven years. I got to keep them. This person, they just joined us, but they're. They're really trying to put their best foot forward. I have seven people, and everyone's busy. And then we look at the rope and say, this business really should be four people, not seven. And so what the seven people are doing, which is human nature. We talked about Parkinson's law. You have the time. We find busy work. So it looks like there's lots of plates spinning, but there's no activity.

[Josh]

Typically is a good starting point of projects that get done during that time period.

[Podcast Host]

What was that, Josh?

[Josh]

I said that. Well, typically, like I've heard, I've had clients when their guys aren't busy, they're at the owner's house doing projects.

[Podcast Host]

Oh, yeah, yeah, yeah, yeah.

[Mike Michalowicz]

Change.

[Josh]

Changing all kinds of things. You know, adding on, doing remodels, like, you know, things that obviously aren't going to produce any revenue. Revenue for the business.

[Mike Michalowicz]

It's classic, right? It's a way to retain.

[Josh]

They don't want to lose the people, so they find things for them to do. They're sweeping the side. What do you say?

[Podcast Host]

You know, what do you say to people in that situation, though? Because, like, for several years, we've been dealing with a labor shortage where we couldn't find good help.

[Mike Michalowicz]

Well, this is not every industry, and your industry may be the case where we don't have the right number of people with the right quality. But in other industries, we go through. And we go through a rating process and say, really, what are these people bringing now? It sounds ruthless, but really what it is is if. If we can't sustain this business, everyone's out of a job. So let's first realize that if we keep doing this, we're firing everybody because. Including the owner. Secondly, if we do have to let people go, if they're not fit for this business, they're likely fit somewhere else. It's a disservice to them to retain someone who can't perform well or doesn't like it and we'll get fired at some point anyway. Let's free them up now while we still have some Runway to have a smoother exit as opposed to this abrupt ending. With that being said, sometimes it's the wrong people in the wrong. The right people with just the wrong seats. So we've shifted people around. It's like, oh my gosh, this is working out so well. Now, one thing too is we, we obliterate titles. Titles are one of the worst things because people aspire for a bigger title, even though it's not their competency. So instead of matching title to talent, we try to match tasks to talent. So it's more of a morphic business and people can do what they're really good at and enjoy doing.

[Podcast Host]

Yes, that's a good point. Now, you've mentioned in, I want to say was Clockwork. I could be wrong.

[Josh]

Actually.

[Podcast Host]

I don't think it was Clockwork, the, the challenge or the, the curse of hiring B B, B players versus, like A versus Cs.

[Mike Michalowicz]

Oh, yeah, I got.

[Podcast Host]

Can you share.

[Greg]

Share a little bit with a Container Store? I think you talked about that. Yeah.

[Mike Michalowicz]

Greg. Good, Good memory. You.

[Greg]

You.

[Mike Michalowicz]

I quiz Greg every evening. Did you? Yeah, you referred to something. So I'll just draw it out real quick and I'll show on the screen. So. But I was meeting with Kip Tindall. He's the founder of the Container Store, which had stratospheric growth back in the day. It still exists, but not like it used to. So he wrote this formula and he said, 1A player delivers at the level of 3B players and 1B players, 3C's and the container Store. He said, this is back in the day. They're paying those people 25 bucks. B players that were working now computer competitor to the Container Stores, like a Walmart or making maybe 15 bucks. And then C players were maybe making 10 bucks, whatever the minimum wage was back in the day. So now it looks like this. A players get paid 25, Bs get 15 and Cs get 10. So I said, how could a business ever afford a players? They're 10 bucks more per hour. And he goes, are you kidding me? How can companies support B players? Because it's three times 15. So this becomes. What is that, 45 an hour?

[Josh]

$20 more an hour?

[Mike Michalowicz]

Yeah, 40. They're paying $20 more an hour to get the same output. And these guys, it's not three times one. It's three times three. Because one B goes. So it's nine times. They're paying $90 an hour. So when you look at the real numbers, he says, you got to find people who are the right fit for the right role and want to do this and thrive at it. And he goes, and pay them well. So they have nowhere else that would pay them that well and they'll stick around. Forever. But they're going to out perform these people. So that's one of our roles when we go into a company is who do we already have in the right place doing the right thing? Who can we move from a B position to an A position? And do we have people that just are not a fit for the organization? In that case we need to transition

[Josh]

them somewhere else and maybe analysis on that to, to make it. Because I think you know, we always hear that. I mean Tommy Mello, who I think most of us know, like he speaks and he talks about all the time A players but like putting a number to it. It's just similar to like what we're doing with, with Phone Tap. We talk about call booking rates and it's an AI call analysis tool.

[Greg]

Okay.

[Josh]

Not going to get into it right now.

[Mike Michalowicz]

But it's.

[Josh]

We like everyone sees a call booking, cool. All of a sudden we put revenue.

[Mike Michalowicz]

Yeah.

[Josh]

What's missed? And I was like, oh, I didn't realize I was missing that much money.

[Podcast Host]

It goes from 67% booking percentages to you just lost $574,000 last week. Like, oh crap. Like that's a real number to put there.

[Josh]

I really like that.

[Greg]

Analog we see sometimes is like it's not some justification to make you feel better to let people go. It really is like set them free. Because unless they have like a personality problem or something that maybe some self awareness would benefit from, like they are an A player somewhere. So let them go find that you're holding them back from doing it and you're hurting your business at the same time. So it's a win win. Although it doesn't seem that way when

[Josh]

you don't believe like you don't believe

[Podcast Host]

that they're always a B player. Like, like, like they figured out the niche to get under the radar.

[Greg]

Well then like then they have some reality checks and this is the first of maybe many that says like all right, like I'm a B player, I got to go be surrounded, be surrounded by B players. And maybe they're an A player at the B player company. You know, like something like that.

[Mike Michalowicz]

Yeah. One of the kindest things is, is letting people see their true selves and not deny it. I think that's one of the kindest things.

[Podcast Host]

And in the long run, yeah, in

[Mike Michalowicz]

the long run, in the moment is, is brutal and but I've been called out too. And I gotta be clear. I'm a B or C player. It all depends on this. The circumstances. When I sold my second, my Second company I was running the business perhaps an A player. It was in computer crime investigation. I moved to this new company, a Fortune 500. It was the exact same industry, computer crime. And I dropped from potentially an A to, to F. Like I just, I hated the organization. I didn't fit in the culture. I like to make jokes about all these different things and doesn't work in corporate America. It was constant discipline and you're like, you're like one of the worst employees we've ever had. And they're. And they were right. And they were right and they fired me. And I'm so grateful for that moment because then it let me pursue what I wanted to pursue.

[Podcast Host]

That's a, that's a really good point. I mean that's interesting. Yeah, it is very interesting. Can you share just a, like five seconds on the E word? The, the organization that was not very

[Mike Michalowicz]

great where I, where I was.

[Podcast Host]

Yeah. The crime, the crime, the financial crime.

[Mike Michalowicz]

Oh, Enron. Enron. Yeah. So I didn't work for Enron, so I know.

[Podcast Host]

Yeah, yeah.

[Mike Michalowicz]

So qu. I I, I managed the Enron trial defense analysis. My company did, not me personally. And we were representing the indicted for folks. Kenneth Lay, Andrew Pasto. That company that I owned, that forensic business was acquired by Robert Half International. So I went from this small scrappy business. We had I think 30 employees at the time. I had a business partner in there. We sell it, we go to Robert Half International and overnight the cultural shift and the soul sucking. The funny thing is in that experience I hated it there. I loathing. I was just talking with my wife recently about this and it was just grueling because everyone was just with just an cog in the wheel, just do it, do it, do and try to climb the corporate ladders by, by kissing butt. I fell back. I fell more in love with small business than any time in my life because I had a perspective of what other business is like and that ain't for me. And like I'm going to do everything in my life to be a small business owner and to support small businesses. The funny thing is like with Prosper Group, when we're making these investments, most businesses have a handful of employees. 5, 10, maybe 15 employees. You know, every hire you make, if you have 10 employees, that's 10% of your workforce. If, if Google hires 10% of their workforce, they have to hire like 50,000 people. If they do that today, that's 10% of their workforce. But if my small business hires one person, that's 10%. My workforce. So these small shifts of just hiring one person are extraordinary changes in the business and great opportunities for that one person to play all these different roles in the business. So you gotta have healthy businesses out there. And my experience with Robert half inspired me to. To go all in on small business.

[Podcast Host]

That's a great point. Josh, you got anything?

[Josh]

Yeah, yeah. Is a. I mean, it's a big point because, you know, as we. I know it's like for my marketing company, like 87 people now, like hiring one person is a lot different than hiring one person when we have five people. Because I still remember it was only like five or five years ago. We had like. I was having team meetings with like four people. It's like, wow, everyone's really important on this call. And now it's like, sometimes I don't even know the names. Like, I don't. I know what they do and I kind of know who they are. I don't know a lot about them though. And it changes pretty drastically when you get to that point. So it is a big thing when you say just hire one person. You got five people or 10 people, it's like, that's a big change for us. Plus a lot of times small companies don't know who to. They don't know how to hire properly. Sometimes, like, they're. Case in point, like the first hvac. I'm sure Tersh is very familiar with this first H vac company that I ever worked at. We were hiring warm bodies Y. And I mean that literally. Like these people were not in the basement of my grandmother's home, I can promise you that. But like, I. I had one guy,

[Mike Michalowicz]

he would.

[Josh]

We had paper tickets at this point or service tight and everything else.

[Podcast Host]

And every.

[Josh]

I collect their paper tickets like once or twice a week. And he smoked so much in the van, his paper, put it on my desk. It could stink up the entire office. And this guy was going. I mean, he stunk. Like, it was just like. Like a trail of smoke. And he would go into people's houses and talk to them and try to sell air conditioning equipment, stuff like, just not the. The right type of. You know. But we didn't have some of the things in place. We. When you mentioned the debt service and how challenging that is. That same company. I've told ter this story. I came in. I didn't. I was the accountant. That's what I got hired as. Cause I was in accounting. I like numbers and data and stuff like that. And I started getting the mail because I quickly became I quickly realized I like running the business and they needed someone to run the business. Owner was, the owner had bad credit and some bankruptcy stuff in the past. He couldn't get. Just a lot of issues there and he was really burnt out. So I just kind of took over running the business even though I had no idea what I was doing. And I started getting the mail and I started seeing these, these things from the IRS that we owed over $100,000 in withholding taxes because I was writing payroll and he told me, yeah, just write the check. But I didn't know we had to be paying the taxes on those checks. Like I didn't know. Like I'm telling you how naive I was at this point in my career. But to your point, like our line of credit, I, I played the game literally. It was the time I wrote a check to go to the supplier and they cashed it. And I knew exactly how long that took. It was two days, 48 hours until the check got cashed. Unless it was on a Friday and then it was on Tuesday the following week. And like we, so we had to, not only to your point, like it was very difficult. We started getting stuff garnished from our account and all this stuff it, it. We ended up making it. It put a very high onus on revenue producing jobs and activities. We had to completely rethink what we were like. We couldn't mess around with 99 maintenances. We had to go installs insta like big jobs and go after it hard. Which I appreciate that I learned that lesson. But it is extraordinarily challenging when that happens. And then you have guys quitting all the time because their payroll checks bounce. And I'm picking up vans every other Friday because they're like, yep, come pick up my. They cash their check and as soon as the cash like hey, come pick up the van. It's sitting at the American TV store. Like great, thank you. So just to your point, like if anyone's listening to this and you have that going on and it's hard to service that debt, you're going to have to really, really get aggressive on. Like you're really going to have to be aggressive before you hire folks like these guys because you got to get yourself out of that if you're ever going to have a self sustaining.

[Mike Michalowicz]

Yeah. You know, a lot of these business owners put a blind eye to what's not working. You know that money's coming in. There's that famous saying, denial ain't just a river of tears. That you'll cry when terse is massaging you. Like, like that's a.

[Podcast Host]

Never heard that one.

[Josh]

Or maybe that'll be in the next book.

[Mike Michalowicz]

It's a very popular phrase, but a lot of these business owners play, put a blind eye to it, and if I don't see it, not to worry about it. And it's this little game we play. So the first thing we do is we shed light on businesses and we can get our hands around debt. It's. The question is, can it be manageable? There's a certain point where you're over the cliff and it's done and we tell people. But it can be pretty ugly. I mean, we've had businesses with hundreds of thousands approaching million or more in debt, and it was still serviceable. But we had to do some strategies. Like, like Greg said, when you have a personal guarantee and you're. You're doing it through an unsecured fashion transfer to a secured fashion like a heloc, and it's still a personal guarantee, but now you've dropped your rates. Other ones are simple negotiations. Some debt is. Is negotiable, and we can, we can do that. Some can be consolidated. There's lenders out there, and Greg does a lot of this for our organization. He identified a lender that came in and said, oh, this client, this business is paying on average 17%. I'll drop them to 8% because I want to earn that money, and I'll take over all that debt and consolidate it. So there, there's definitely ways to. To consolidate that debt. But the thing is, whatever is not working in your business, if you're ignoring it, we're going to expose it. We have hard conversations about it, and then we're going to move relentlessly to resolve that.

[Josh]

Oh, I love the word choice.

[Podcast Host]

That's the name of his eight. His.

[Mike Michalowicz]

Really? Oh, it's awesome.

[Josh]

Relentless Digital. I'm glad you teed that up for me. Thank you. I owe you. Next week at Jen McKee's event.

[Mike Michalowicz]

Yeah, it's hard pair text or putting a chat in there. Yeah, I know, I know. These guys will be here. Yeah, Just make sure there's no massage chair, Jen.

[Podcast Host]

She probably missed that part. I can watch it.

[Josh]

Yeah, I know we were talking about that stuff. Chelsea Jones came out, if you guys saw that, and she said, well, I logged in at an interesting time. I think we're talking about that. Or rope or romper Rope.

[Mike Michalowicz]

My God. Who says that?

[Podcast Host]

Who says that kind of stuff, man? We appreciate y' all hanging out where's. Where can people get more information?

[Greg]

Yeah, so on our website has more information as a bunch of videos that Mike's recorded about kind of how the model works and things like that. And it's. So it's the Prosper Group.org make sure that org. There's other prosper groups out there and ours is the. Ours the.org and there's an application on there that goes through. We're looking for companies, you know, 2 to 2 to 15 million is kind of our sweet spot on. They've achieved something but, you know, can't keep going the way they're going. And yeah, well I read all those and we'll, we'll dig in and set up appointments to start talking and we, we make sure that we're a good fit. And it was interesting. I had a call yesterday with a, with a potential client and I felt like I was coming on like we're never salesy. We're actually trying to figure out why someone doesn't need us. And I found myself being a little on the like maybe convincing side. And I realized and I told her this, I said I can see helping you and I'm only trying to sell you a little like because I want to help you like, you know, so. But yeah, we want to make a difference and we get up in the morning to make a difference and put these puzzles together and get them, you know, on the right track where they don't need us after the three years that we're done. So it's exciting, exciting to get these companies we're working with and to make a difference and, and see them give us feedback on that. It's been, it's been awesome.

[Mike Michalowicz]

We, yeah, we invest in. Partner with about 15%, 15% of the applications we get. So it's. We, we did make a couple investments this week. We're looking to make a couple more. But we're going to, we're going to go through these businesses and it's not on the, you know, people are like, we, we have calls where people want to say my business is great. No, we don't want to hear that. We just want to hear that the attitude is right from the owner that they're ready to work in a new way, a better way as partners. The state of the business is what we fix, but we need their heart in this the right way.

[Greg]

And one of the really enlightening questions we asked during this process is like, they'll give us the basic, you know, my revenue, my profit, my debt, whatever and we'll see someone that comes in that says, like, they make half a million dollars. And one of my initial questions is, like, where did you put that? Like, meaning, like, did you buy a car, a house? Like, how did you benefit from that money? And we're like, I don't know where it is. So, like, there's this idea of like profit on the pnl.

[Podcast Host]

Yeah.

[Greg]

Reality of I took nothing home. Like, I'm okay, so you're not profitable.

[Podcast Host]

Right.

[Greg]

Let's make that happen.

[Podcast Host]

Absolutely.

[Josh]

I know, I know Jim has been watching this. He's a, he's a fractional cfo. Jim Cross. And he, we've talked about that in the past about. Because everyone you know, pnl, you know, tells you some good information. It's part of the story. But the balance sheet obviously helps out tremendously as well because there's some things that can be hidden on there and a lot of people don't know they. We understand how to read P. L's first and balance sheets kind of get like they're there. But we're like, yeah, it's not as exciting to look at. So it's, it's interesting to see when that stuff all comes together, when you actually start understanding, like, what's actually on the balance sheet and how that ties into the fact that you don't have any money to take home, even though it says you're profitable.

[Podcast Host]

Thanks, guys. We appreciate you hanging out with us.

[Mike Michalowicz]

Yeah, thanks for having us. This has been fun.

[Podcast Host]

It has been fun.

[Josh]

We'll get to, we'll get to hang out and catch up next week.

[Greg]

Totally.

[Mike Michalowicz]

At Jen's event. Jen, thanks for being here too.

[Podcast Host]

Yep, we'll see you later.

[Podcast Outro Host]

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. Visit servicebusinessmastery.com to learn more.

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