We’re Growing. Now I Want to Make Money
Introduction:
This week, Sarah Segal tells David C. Barnett and Jay Goltz that she has decided it’s time to pay more attention to something that can occasionally get lost amid the other demands of running a business: making money. Sarah’s agency is having a very good year, with revenue growing 40 to 50 percent. But she’s realized that growth alone isn’t enough. She wants to know exactly what it costs to hire each employee, what it costs to service each client, whether her fees are covering those costs—and what has to change if she’s going to hit a 20 percent profit margin. She’s also confronting something a lot of owners struggle with: how much to pay herself. For years, Sarah says, she’s been inclined to put the money back into the business rather than pay herself a market rate salary. Now she’s trying to do both—raise her own compensation while making the business more profitable.
Along the way, Sarah, Dave, and Jay weigh in on how owners can fool themselves about profitability, why growing businesses eventually require real budgets, and what owners should actually expect from their banks. Is a bank merely a safe place to park your cash, or can you expect it to help you finance and build your business?
Plus: When should a new business start paying its owner a salary? Dave argues that until a business can pay the owner for the work he or she is doing, it’s more of a hobby than a business. He also explains how entrepreneurs can get trapped in money-losing businesses—not necessarily because they still believe in the business, but because loans, leases, and personal guarantees can make shutting down even more expensive than continuing to operate. The episode is brought to you by Grasshopper Bank.
— Loren Feldman
Guests:
Sarah Segal is CEO of Segal Communications.
David C. Barnett helps people buy and sell businesses.
Jay Goltz is CEO of The Goltz Group.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome, Dave, Jay, and Sarah. It’s great to have all of you here. You know, we like to say here that to run a business, you really have to wear 21 hats. But in trying to focus on all of an owner’s responsibilities, I think it’s sometimes easy to, at least briefly, lose sight of the fact that one of the most important responsibilities is to make money.
And I know that sounds obvious, but there are always opportunities to try things that may, at least in the short term, reduce profitability, which means priorities have to be set and decisions have to be made. Sarah, I gather you’ve been thinking about putting a greater emphasis on turning a profit. Can you tell us about that?
Sarah Segal:
We’ve been growing at an exponential rate. Like, knock on wood, we’re in a good place. And as I’ve grown my team, it’s given me more ability to really sit down and look at the numbers and be a little bit more thoughtful about where we’re wasting money and where we’re spending money. And so one of our recent activities has been doing an internal audit of where all of our dollars are going with two main—actually, three main outputs that we’re looking for.
One is really basic. We wanna know how much—when we take on a new employee, outside of the benefits and the salary and all that kind of stuff—what is the actual cost of us bringing on a new team member? Because when we bring on a new team member, we are putting them on a whole litany of different SaaS programs. On top of that, looking at a new client, how much does it cost for us to add a new client to some of the services that we have? And then making sure that those expenses and that overhead is somehow covered.
We’ve always done one of two things. We’ve either charged our clients an ongoing maintenance fee that kind of covers regional travel and some of these subscriptions that we have to use to service them. Or if they are not inclined to do that, we give them the option of just having a markup on every expense. And 95 percent of our clients, maybe even 99, choose the maintenance fee. And it kind of does work out, but we’re just wanting to make sure whether or not our current maintenance fee really does offset those programs that we have to use to service them. So the goal here eventually is to create a formal budget for next year and really have a better idea about where our money is going so that we can hit that standard 20 percent profitability that most agencies go for.
Loren Feldman:
You mentioned that you’ve been growing exponentially. How do you explain that? What happened? Is that a result of a strategy? Is it something that just happened?
Sarah Segal:
I wouldn’t say that it’s something that just happened. I always look at it as kind of a snowball effect, where we started with a very small snowball and then slowly went downhill and gained traction. I think we’ve done a really good job essentially establishing ourselves as the leading lifestyle agency in the San Francisco Bay Area. It’s a big market. Not all of our clients are here, but having brand recognition for us has been very beneficial, and I’ve been working at that for a decade. So nothing in particular. I think also part of it is that the Bay Area is starting to see a bit of a renaissance period after a bit of a fallout. So we’re riding that wave.
Jay Goltz:
Could you just define exponentially? What does that mean? You’re doubling, tripling, five times, a hundred? I mean, what is that? How much did you grow last year? What percentage?
Sarah Segal:
We’re looking at between 40 and 50 percent.
Jay Goltz:
That’s a lot.
Sarah Segal:
Yeah, and honestly, it’s been overwhelming, but it’s also been me having to be like, “All right, I have a team that’s very capable and I need to trust that they’re going to do their jobs. And then I can focus on the other things.” And I think I’ve finally gotten really comfortable with that.
Some of you may remember that I hired a very senior person, a VP, last year, and I looked at it as an investment hire because I couldn’t totally afford her. So I reduced my salary in order to do that because I was like, “It’s gonna help.” And it did help. It let me have somebody else watch the henhouse so I can go out and find new foxes to be friends with. That’s a terrible analogy—and I apologize profusely for it—but I’ve only had one cup of coffee, so that’s my excuse.
Loren Feldman:
If you grow 50 percent this year, do you have to increase your team by 50 percent?
Sarah Segal:
Oh yeah, we’re definitely hiring. But here’s the thing: I’m not hiring people who are VPs. I hire a lot of people who are one year out of school, two years out of school, zero years out of school, where the work that we do is very in-person, tactile, that has to have people that are running around doing stuff. So when I hire people, it’s not like a huge, stressful investment. I have to be thoughtful about it, though.
Jay Goltz:
I wanna know: What percentage of the people you hire don’t work out?
Sarah Segal:
Well, I’d have to go back and look at the numbers on that, but not very many. Here’s two things I do face: One I face is the kids coming right out of college, not really sure about what they want to do. They come and they join us, and then they discover that they like a particular aspect of what we do and then go either in-house to a company or go to a larger agency. And if they spend their two years with us before they go and do that, I’m more than happy that they do that. They should do that. They should taste test other opportunities, and we have our onboarding system so well fine-tuned that that’s fine, especially for the junior level people.
Last year, I had a—well, my first employee, she came back and started working for us again, and she’s full-time. And then just this week, I got an email from a former employee who had taken a job at a full-time brand, and had some life changes, etc., and wants to have a conversation now about possibly coming back. So I know I have a good environment, and I know I’m very good at balancing that for my team. So if people leave, it’s just for their professional enhancement.
David Barnett:
Sarah, if somebody, like a client, leaves, and you have to reduce your headcount because you don’t need the workers anymore, what does that cost you? Like, what is the cost of having to lay someone off or reduce your headcount?
Sarah Segal:
Specifically?
David Barnett:
Well, I wanted to understand, because you talked about the software costs, and I’m trying to figure out what it costs you when you hire someone on. I’m just wondering what the other end of that looks like. Because if you are growing your team quickly because you’re getting all these new clients, that obviously you need more help in the office, but what is the risk you’re exposing yourself to with these big new clients, I guess is what I’m thinking of?
Sarah Segal:
I’m very cautious about that because in 2023 I had to lay off a handful of people, because we had a bit of a contraction and a reset. So I don’t run out and hire people as soon as we get a new client. We’ll do these things where we get more clients or get larger clients, and it will get to a point where it’s obvious my team is stretched. And that’s when we start adding somebody. But we wait till things are settled.
But I also have to be comfortable that the client is happy with our work and is gonna stay the course. But, you know, I’m always looking at contracts, and when those contracts end and making sure that I’m not gonna have a gap. When I first started this, David, I don’t know, not 100 percent, but a lot of my contracts I had, annual contracts, all ended on December 31st. And I learned from that mistake. So I spend a lot of time also—because I’m not in the weeds on clients—doing a lot of temperature checking and making sure that clients are super happy with us, which I think has been a benefit to us in general and probably helped the exponential growth.
Loren Feldman:
Sarah, did your focus on profitability grow out of a sense that you’re not as profitable as you’d like to be or should be?
Sarah Segal:
Uh, yes. So, we’re kind of in between 10 and 20 percent right now in terms of our profitability for the first half of the year, and I really wanna hit that 20 percent mark by the end of the year. I gotta do more math and make less gut decisions and more financially conscious decisions.
But one of those things is I’ve always paid myself way too little because I’ve always been inclined to be like, “Oh, I’m just gonna put the money back into the business. I’m gonna put the money back into the business.” And while that’s been great, someone flagged to me that’s probably not an accurate reflection of a solid business if I am not earning what I should be earning as the CEO, you know?
Jay Goltz:
There’s really two different things there. One is how much you’re pulling out, which doesn’t really matter, but I was just gonna ask you: When you say you wanna make 10 or 20 percent, is that after you’ve allocated the market rate for you working there? Because I’ve been in business groups where the guy says, “Oh, I’ve got a whatever, some high percentage.” And I go, “And how much—” “Oh, I’m paying myself 40 grand a year.”
So the question is, are you shooting for a 20 percent bottom line after you pay yourself $150,000 a year? Even if you don’t pay yourself, at least allocate that money on the budget for that.
Sarah Segal:
I’m trying to do it in parallel, where I literally gave myself a raise this month. It was the first time I gave myself a raise in way too many years. So I’m probably at, you know, three-quarters of what I should be. And then, you know, keep working on the profitability, and so hopefully, by the end of next year, I will have an appropriate salary and appropriate profitability. This is not an overnight project, for sure.
David C Barnett:
Do you have a specific profit target after you’re paid? Like, do you wanna pay yourself a market wage and have the business show a 20 percent profit, for example?
Sarah Segal:
Yes. Exactly. That’s what I want.
David C Barnett:
Okay.
Loren Feldman:
And do you have a sense of where you’re gonna find the efficiencies that will allow you to increase profitability?
Sarah Segal:
Well, part of it’s that, and that’s just being thoughtful about where our spend is. But part of it, the profitability is also gonna come from everything that these guys know, which is upselling clients and adding more services or finding new clients. More clients, depending on the clients, doesn’t always double your work. It can be where you’re putting them into a system of work that lets you, I don’t know, do more with less. That’s why we use so many SaaS systems. I see it as two kinds of active plays, if that makes sense.
David C Barnett:
Sarah, the last time you and I were on the show together, we talked a lot about pricing and the prices you charge. Was that part of what led you down this path toward the focus on profitability? Have you done anything different with the prices since then?
Sarah Segal:
We haven’t done a lot differently, but we did go back and reassess them. And so my director of operations went through and figured out—and I think we talked about this—exactly how much we should be charging for my time versus somebody else’s time, and being able to really price things out correctly. We’re very fair in our pricing, and in how we approach it. It’s not willy-nilly.
Loren Feldman:
Sarah, you’ve also talked here about having a tendency to fall in love with certain clients that excite you for some reason, or that you think will be fun, that your team will enjoy working on. And sometimes you give them a price that maybe is more favorable than you’d like to. Do you track which of your clients are profitable for you and which aren’t?
Sarah Segal:
I do. And I think I’ve been doing a good job at kind of sunsetting out the ones that don’t pay us appropriately. We’re big enough, I think at this point, where it’s okay to say no. Because if you reduce your prices, it devalues the work that you do, and we’re still doing the work. So I can’t afford to pay clients to do their work, and I’ve gotten over that.
Jay Goltz:
How much of the health insurance are you paying as a percentage?
Sarah Segal:
It’s not very high because my team is very young.
Jay Goltz:
Right, but I’m just asking what percentage of the premiums? Because I’ve seen some people are—
Sarah Segal:
Oh, of the premiums? I pay 100 percent of the base premiums.
Jay Goltz:
I was guessing that, because—I’m just throwing this out there—I don’t know that anybody has the luxury of doing that anymore. The insurance has gotten so—so when you talk about profitability, I would suggest looking at that. Because paying 100 percent of the base policy is a lot of money, and that’s chewing up profits. 10 years ago, maybe you could do that. I don’t know that there’s many companies still doing that.
Sarah Segal:
Do you know how much you pay per month?
Jay Goltz:
Absolutely, $500.
Sarah Segal:
No, no, but like how much do you—
Jay Goltz:
We pay 50 percent, and it’s $500 an employee, and it’s a lot.
Sarah Segal:
But you have a huge business with a lot of employees.
Jay Goltz:
Well, I’ve got about 60, probably, on the insurance.
Sarah Segal:
The payment that you send to your healthcare coverage, I would expect it to be like 100 or $200,000 a month? Or what are you—
Jay Goltz:
Well, I can do the math here. If I’m paying $500 and it’s half, that means it’s a thousand a month. So yeah, it’s like 80 grand.
Sarah Segal:
Eighty grand, right? So again, my team is on the younger side, and so I pay maybe $5,000 a month total.
Jay Goltz:
For all of them?
Sarah Segal:
All of them.
David C Barnett:
What does that represent as a percentage of their salary, Sarah? Is the health insurance an extra 5 or 10 percent kind of on top of what they’re paid?
Sarah Segal:
Yeah. But there’s also a lot of other benefits that we actually factor into their total compensation because we look at their vacation days as well, and all the other perks that they get. So we do, after a year, we pay for some of your gym membership and these other things that add in that’s part of your total compensation package.
Loren Feldman:
Do you think the benefits you offer, including covering 100 percent of the base premium, are better than or the same as competitive firms?
Sarah Segal:
I think they’re the same as. I’m friendly with a lot of agency owners, so we have a lot of candid conversations about what we pay. Like, how much are you paying for this service—just so we can make better decisions based on what everybody else is paying. There’s a level of transparency among PR agencies in particular that I find refreshing. There’s competition, for sure, but there’s enough—at least where we are—there’s enough business out there that we don’t have to be fighting tooth and nail.
Loren Feldman:
Dave, you meet with owners all the time who wanna sell their businesses. When you do an analysis of those businesses, how often do you conclude that they’re as profitable as they should be?
David C Barnett:
Oh, you know, probably half of them are not meeting the industry benchmarks that I discover, and most of them have no idea what those benchmarks are. You know, I’ve got different sources that I go to look to try to see what peers should be doing, and I’ve also got some data from transaction databases that show a little bit of the financial performance of some of the businesses that have sold. It’s pretty common for people not to be as profitable as they should be.
And, you know, the conversation starter there that Jay brought up about, “What do you pay yourself?” and, “Is this before or after you compensate yourself?,” a lot of business owners out there fool themselves with underpayment or just they’ll set themselves up maybe as an LLC, for example, and they don’t really have a salary line for themselves. They’re just taking money out of the overall earnings of the business, and they don’t really identify the part of that money that’s for their time as a worker in their business, for example, and then the profit beyond that.
And that’s what I go through when I do an analysis. I go through a whole normalization, we call it, where I set the owner’s wage at what is determined to be a fair market value, and then I look at what the profitability is, because that’s your return as an investor for all the time, effort, capital you put into building this business. That profit after your paycheck is really the return for creating the business.
Jay Goltz:
I’ve heard the phrase “recasting your financial statement.”
David C Barnett:
Yeah, recasting and normalization are exactly the same thing.
Jay Goltz:
Yeah. But the other thing is some people have spouses who make a fortune and, you know, they’re running their business, they look successful—because I’ve been in business rooms with them—and then you find out they’re making very little money. But they have a spouse who makes 300 grand a year, so no one’s starving.
David C Barnett:
There are a tremendous number of business hobbyists, we can call them, who are people who don’t really take any kind of meaningful money out of their business. And what’s also unfortunate is that there are people out there with huge bank loans in their business, and they’re not taking much of a salary out. But they never default on the loans. And so this is one of the reasons I say never look at statistics like SBA loan default rates and then figure that that’s an indicator of business success. Because somebody could be in a business 60 hours a week earning nothing but still making every loan payment.
Jay Goltz:
Absolutely.
Loren Feldman:
Sarah, what is your plan? What are you hoping to accomplish, and by when?
Sarah Segal:
Loren, I’ve never had a budget. That’s my goal. I wanna go into 2027 with a budget. Like, this is our target revenue, this is our target profitability, this is what our overhead is, this is how much we pay our people, this is how many clients we have. In order to get from A to Z, these are the things that we need to do—and then make sure that we do them. Like, I’ve never had the time to really focus on: What is that game plan? So this is really in service of 2027.
Loren Feldman:
I’m sure it has something to do with the amount of time and hours in a day, but what has kept you from doing that kind of budget? I think you’ve had a fractional CFO for some time. What stopped you from budgeting going into previous years?
Sarah Segal:
That’s a good question. I think just a sense of, not fear, but, like, I’m not a business school graduate. I didn’t do any of this stuff, right? I’m figuring this out as I go, and so I’m learning as I can. And there’s always that I-don’t-know-what-I’m-doing kind of imposter syndrome. But now I have the bandwidth to learn it, and I have the time to focus on it, and I know that it’s a priority if I want to keep this. I don’t expect to maintain the same growth that we’ve had this year. But still, I want to always have stability, in terms of our growth. And if I don’t figure out a structure, in terms of a way to reinforce that, then I’m gonna be in trouble. So I just need to know where all my dollars are.
Jay Goltz:
Yeah, I have an answer to that because I’ve lived through it. And the fact is, trust me when I tell you, I went to business school, and they don’t teach you any of this. Now, that was 50 years ago. Maybe it’s better, but here’s the problem: Wouldn’t it be great if there was a book that—and there are books out there—the accountants will tell you about standards of industries, and they’ve got it for all kinds of industries. Not picture framing. And I doubt they have it for PR. So part of the problem is, you didn’t have enough data and experience to know, “Oh, I gotta keep my labor.” Even if you wanted to do it two years ago, I’m not sure you had enough data or experience to be able to have a feel for, “Oh, I think I can keep the labor to this percentage, and I think we can find this amount of business.”
And I wouldn’t call it a budget. I think I’d call it a plan, because it’s the same thing, but it’s more accurate. The plan, three years ago, could you say, “Oh, I think we could do $4 million?” I don’t know that you knew enough to know how much business you could attract. So now’s the time to do it. And I tell everyone this: Stop torturing yourself. You’re going through the typical growth stages of entrepreneurship. You now have enough data that you can sit down and figure out a logical plan that: Okay, here’s what we did last year, here’s what we’re gonna do this year. I don’t know that you could have done it three years ago.
David C Barnett:
It becomes more important the bigger that you get. When your business is very small, you can kind of keep your arms around it just by observing the money coming in and out and the sales activity, etc. And, Sarah, that’s probably how you’ve run for a long time. But as you start to get bigger and bigger, 10 percent of sales suddenly becomes a bigger and bigger and bigger number.
And so, if you start to have these variances or oscillations in revenue by month that start to be meaningful amounts of money, then it’s hard on the seat of your pants to sort of figure out as you go. And you start to need these tools, and you’re probably just arriving at the point where you know that you’re having trouble keeping an eye on everything. And the budget is the tool that is gonna help you with that.
Sarah Segal:
I want the ultimate dashboard where I can look at things and move things around. I mean, I have a spreadsheet that I look at daily and play with. But it’s not giving me the percentages. It’s not giving me what Jay said, where it’s like my percentage of this should be overhead and headcount and all that kind of stuff. I don’t have those specific numbers assessed. But right, yeah, I have history, and I could probably figure those numbers out. But yeah, I’m figuring it out.
Loren Feldman:
All right. It’s time for a new segment we’re calling Beyond Small, and it’s brought to you by our friends at Grasshopper Bank. The idea is to have my esteemed guests, you guys, address a topic—
Jay Goltz:
Thanks for pointing that out, that we’re esteemed guests.
Loren Feldman:
Oh, everybody knows it. [Laughter] The idea is to have my esteemed guests address a topic and a few questions with two goals in mind. One is to provoke a conversation that will help our listeners think about how they manage their businesses. The other goal is to help Grasshopper better understand the needs of small business owners they want to support. I’ve selected the questions with Grasshopper’s help, and their only request is that my guests answer the questions candidly based on their own experiences, which of course is what you guys always do.
So here’s today’s question: Do you feel like your bank is helping you build your business? Or is it really just a place to park your cash?
Jay Goltz:
I believe that most businesses that need to borrow money, probably the two big things are inventory and receivables. If you don’t have inventory or receivables, I’m not sure that you need to be borrowing money or should be.
But my biggest lesson, and I’ve dealt with, oh my God, I’ve probably been at 15 banks over the years—some of which I left simply because they merged—and it’s a totally different landscape than it was 30 years ago. And I have found that the most important thing you can do before you decide what you’re gonna do with the bank is find a bank that’s interested in supporting small business, because many of them are not. You know, there’s three markets. There’s retail business—just consumers—there’s huge businesses, and there’s small business. And I don’t know that any bank does all three of them.
So the bank that does local mortgages and car loans for consumers might have no interest whatsoever in small business. And I can remember, like yesterday, specifically, I called the bank. I gave them my financials. The guy came into my office. It’s like he was on fire. Like he dropped, “Yeah, sorry, we can’t help you. You’ve got inventory.”
And he ran out the door—like my head was on fire. Like, “Oh my God, I have inventory!” They don’t want anything to do with that. They want to lend money against hard assets: a machine or a car or a truck or whatever. And in Chicago, at the moment, I don’t know that there’s more than a few banks that actually service small businesses, and it used to be there were 10 of them. But they’ve all been consolidated now. Most of them have been consolidated.
Loren Feldman:
What does that mean, “ to service small businesses?” What are you looking for?
Jay Goltz:
That they want to lend money to small business, which means—
Loren Feldman:
Lending money is the key.
Jay Goltz:
Absolutely. Lending money and taking some risk and not looking at you like you’ve got inventory and—One of them actually told me one time, he said, “They hate inventory, because inventory disappears.” They’ve got no problem lending you money for a piece of machinery that costs $50,000, because they know it’s gonna be there. But inventory? Poof, it’s gone.
Loren Feldman:
Presumably you got some money for it.
Jay Goltz:
Maybe you did, maybe you lost it. But the bank didn’t get it. I mean, that’s the point. And so, some banks are in that market, and that’s where they make money, and many banks really are not in that market. And I think if you go to one of those banks—this is what I’ve also learned—the guys writing, the women writing the ads for the banks are not the ones giving the loans. Even if they’ve got billboards on the highway that say, “So and so bank, the bank for small business,” that doesn’t mean they’re the bank for small business.
And some of these gigantic banks have absolutely no—but they won’t tell you. They won’t just come right out and go, “Yeah, get lost. We’re not interested in your business.” They’ll lead you along, and then finally when it comes down to it, they’ll eventually tell you when the sales guy or woman turns it over to the underwriters, then they tell you they can’t give you the loan. So I’ve been down the road with all this stuff, and it’s tricky. Am I wrong? David, am I wrong?
David C Barnett:
Yeah, it’s hard to borrow money a lot of the time for the things that you’re talking about—you know, inventory, receivables—just because it’s tough for the bank to keep an eye on it. I mean, sometimes they will require you to submit some kind of reports, but you’re talking about markings on paper or I guess digital files now. I mean, it’s very much open to someone who might choose to defraud them, just to send in erroneous reports. So it’s tough.
I mean, outside of somebody using a public warehouse with a third-party warehouse manager who’s tracking inventory, that could give the bank a good deal of confidence. But that’s not gonna help a retail showroom like yours, where your stuff’s coming in and out all the time. I think one of the most important things about a bank is just the ability to conduct your transactions and move money around and have things work on a reliable basis and not have websites down or that kind of thing.
Loren Feldman:
That seems like table stakes. Is that something that you’d actually have to look for?
David C Barnett:
Well, I’ll give you an example. I deal with two different banks, and I have a credit card from each of them, and before I moved to my current accounting system, it was really important for me to be able to download my credit card statements in a CSV or Excel file, because of how I was managing stuff. And one of the banks only allows you to download your statements as PDFs. The other one allows you to download your statements in a multitude of different formats, including CSV.
And so, guess which card I used? I still deal with both banks, but there was a feature missing there at one of the banks, and as a result, I didn’t use that card because it was really inconvenient. I kept the card because there’s certain things that I need that card specifically for, but every other transaction I’m doing is on the other one.
Sarah Segal:
Loren, can you ask the question again? I just want to make sure I was clear on it.
Loren Feldman:
My question is, do you feel your bank is helping you build your business, or is it really just a place where you have a checking account where you park your cash?
Sarah Segal:
So do you think that the question is more about traditional banks or credit cards? Because I’ve never applied for a loan. I have looked into it. I did that whole little online SBA thing, and then I got spammed with a lot of people reaching out, and so I kind of just stopped it. I started ignoring it. But my bank is—I park cash there. It does what it needs to do.
But for my personal stuff, the banks that I tend to like working with the most are the ones that have a human being who answers the phone—and literally, that’s how I make my decisions. If I can get in touch with somebody who can help me with my problem or navigate something—that is a live human being and I don’t have to go through 300 different prompts to get there—then that’s like half the battle for me.
Jay Goltz:
I hear people say a lot of times, “Oh, I’ve been at such and such bank for 20 years. I’ve got my—” Like, they don’t care. If you’ve got your house mortgage with them and three cars, they don’t care if you have a small business. It’s a false sense of security to think, “Oh, I have a relationship with them. All of a sudden, they’re gonna lend me $100,000 on a credit line for my business.” Yeah, that’s not how it works.
David C Barnett:
The bank that issues the credit card that you can’t download the CSV for, the reason I still do business with them is because I have an assigned account manager, and I have a phone number that literally goes to their cell number, their cell phone. So I have got access to an individual person, and I can call them. And if there’s something difficult or out of limit or something from the website, I can call them to get things done. And I can also call them up to ask about doing certain things and if something’s feasible or not.
So, if I was running a retail type business like Jay and I had inventory, I could call that person and just say, “Hey, would you guys even look at doing a loan for this kind of stuff?” And he would tell me right away. He or she, it changes over time, of course. But that’s one of the reasons why I stick with those people, because of this dedicated account manager setup that they have.
Sarah Segal:
The human element.
David Barnett:
Yeah.
Sarah Segal:
The human element is important, and you’re finding less and less of it across the board, in terms of service.
Loren Feldman:
Sarah, have you tried to build that kind of relationship with a human at your business bank?
Sarah Segal:
My business bank is just a big Goliath of a bank. It’s not anything special. I have no loyalty to them. They haven’t done anything wrong. They’re just kind of like one of those things that hasn’t been a problem, so I don’t pay attention. I don’t need to fix what’s not broken.
But that said, your question was just interesting to me because I don’t know what my bank should be doing for me. That’s why I asked you to ask the question again. Like, what should my bank be doing for me as a small business? I don’t get any of that. I get a lot of email ads on new credit cards and stuff for my business, but—
Loren Feldman:
Well, have you thought about getting a line of credit?
Sarah Segal:
I have a line of credit. I just don’t use it.
Loren Feldman:
At the big bank?
Sarah:
At the big bank. I mean, it’s not even a big line of credit. It’s a crappy line of credit.
Jay Goltz:
But it’s for your business? You have a business line of credit?
Sarah Segal:
Yeah, I don’t use it. I like to have it as a safety net. It’s like zero, but I like to have it as a safety net. Because a while ago, when I had to do a readjustment, there was a period of time where I was a little bit hand-to-mouth and waiting for a check to come in from a client. And making payroll was a very stressful time. So I had a line of credit, and I still have it. I just don’t actually—
Jay Goltz:
Is it secured or is it unsecured, meaning do they have your receivables or is it just a credit line based upon your credit score and it’s unsecured?
Sarah Segal:
Probably the latter.
Jay Goltz:
That’s what I’m thinking. It’s basically like a credit card.
Sarah Segal:
Yeah, it’s basically like a credit card, but with a much lower rate. So, like, if I were to have a balance on my credit card that I needed to put over to somewhere else, that I couldn’t pay off, I’d probably throw it on there. But no, I mean, I don’t know what I don’t know. I don’t know what a bank should be offering me and what a bank should be doing for me. It’s never a conversation that I’ve had bandwidth or time to have, but honestly, this conversation makes me go, “Oh, well, what should my bank actually be doing for me?” Like, am I missing out on something that other small business owners are getting, because I don’t have a relationship and I don’t have a human at my big bank? It gets me asking questions. Good question, Loren. Good question.
Jay Goltz:
You just brought up the big word. Here’s the word. This is when you know to run—when the banker says, “We’re not just a regular bank. We’re looking for relationships.” And you find out that when you have any problems, they don’t really care about the relationship. They want their money back.
So I always say, “Stop, stop. Don’t start with the relationship routine. I’ve already heard that 20 times.” That’s what they get their foot in the door with, but at the end of the day, your relationship isn’t gonna matter a whole lot if they wanna get their money back for some reason. And I never really heard of a business credit line that’s unsecured. So what is the interest rate on it? Is it prime or something? Do you know, Sarah?
Sarah Segal:
I’d have to look. I haven’t touched it in ages, so I’d have to look.
David C Barnett:
Well, it’s secured by Sarah’s personal credit score because there’s almost certainly a personal guarantee on it.
Jay Goltz:
Right, but what was interesting is that stuff is usually, like credit cards, 20-some percent. She said it’s a much lower interest.
Sarah Segal:
No, it’s like eight percent.
Jay Goltz:
Oh, that’s good. Okay. That’s not bad. That’s a good thing.
Loren Feldman
So, Sarah, you asked what you should be expecting from your bank. I think without realizing it, you have one of the most important things you can get. I mean, Ami Kassar, who has a business brokering loans and is kind of our resident small business banking expert, says every business should have a line of credit. And I think he recommends—don’t quote me on this—but I think he recommends it be 10 percent of revenue. And the hope is you don’t need it, but when you do, it’s there.
Sarah Segal:
Ten percent of revenue. So meaning monthly revenue or annual revenue?
Loren Feldman:
Annual.
Sarah Segal:
So I should have a line that is equal to 10 percent of my annual?
Jay Goltz:
If you can get it.
Sarah Segal:
Oh, I don’t have that at all.
David C Barnett:
I do have that. So that’s one of the things that this bank has done for me. But, you know, this conversation has just brought up a memory of, back in my business broker days, I had a real rollercoaster cash flow. You know, lots of money would come in very quickly, and then money would go out over time. And I remember one time I had basically maxed out my line of credit, and I had a deal closing. I was going to have money—you know, a little bit—and I needed to write a check, and I did not have the resources. And I called my banker and I said, “What do I do?” And she said, “Hey, if you write a check that is bad, it actually comes to me, and I get to decide if it clears or not.”
And she said, “So if you need to write that check, go ahead and do it. But here’s the thing: I can only keep your account here for 14 days once you cross that line, and you go to special collections.” And so it was a very interesting conversation. Basically, they let me write a bad check with a very strict time limit. And so that was a real helping hand that they were able to give me, and it was because I was able to talk to a person that I was able to get that.
Jay Goltz:
That is shocking.
David C Barnett:
Now, that would’ve been in 2009, and so I don’t know if the same infrastructure is there today or not.
Sarah Segal:
Oh, I couldn’t get that from my bank. No way.
Jay Goltz:
Can you send me her name? [Laughter]
David C Barnett:
She has retired, the lady specifically.
Jay Goltz:
Yeah, retired or fired. [Laughter]
Sarah Segal:
So when I grew up, I used to—and I still do—we go to this tiny town in northern Wisconsin called Bloomer, Wisconsin, and my grandparents had their main bank, where they normally lived. But during the summer, they had a small bank account at the Bloomer Bank. And you’d walk in, and the people would know who you were. It was the kind of place where you’d get a toaster when you opened up an account. To me, that’s the kind of banking I would like. But you don’t get that kind of attention anymore. I want somebody who can help me figure it out, and David, it sounds like you had somebody like that.
David C Barnett:
Well, and I’m in Canada, so it’s a little bit different here, but amongst my American clients, I’ve some raving fans for some of the small community banks. And they talk about the access to people and the ability to pitch things and be closer to decision makers. When it comes to loans, I think a lot of these big banks, it’s a very automated process, with a lot of AI, probably, to decide whether or not someone gets approved for a loa or not. And I think the smaller the institution, the easier it is to get your story presented in front of somebody who could maybe cross a line with respect to a policy or cover a bit of gray area or something for you.
Jay Goltz:
Part of it is simply—and I’ve lived through this—they wanna know what assets you have. And when you’re 28 years old and your business is growing, I had no assets. I had no property. I had no anything. And as I’ve gotten older, I’ve got some real estate. They cut you some more slack if you can give them a personal financial statement and they show you’ve got a net worth—because they know that you’re not gonna go personally bankrupt. You’re gonna pay them back. So there is some judgment there, other than box checking. It might go beyond the loan. It might simply go to: What is your net worth and are you signing personally?
Loren Feldman:
I wanna hit one more topic in the limited time we have left. As I often do, I’ve pulled a question from the small business subreddit to throw at you guys. It actually relates to our initial discussion. The question comes from a business owner who started a food business in the past year, and his or her question is about compensation. Here’s what the owner wrote about the business: “It’s been steady growing and is now turning a profit consistently. At what point do I take a paycheck? Any advice on this and the next phase of growth?”
Jay Goltz:
First of all—
David Barnett:
It’s not profitable.
Sarah Segal:
You’re not profitable.
Jay Goltz:
Right, that’s just what I was gonna say. They’re not profitable.
David C Barnett:
When I address people and talk about starting businesses, which I do rarely, I talk about the multiple breakeven points. And the first breakeven point is where you’re just covering your direct expenses and your overheads, and that’s the point this person’s at. The next breakeven will be when they can afford to write themselves a paycheck. So right now, they’re subsidizing this thing with their labor. So again, it’s a hobby right now. It’s not really a business yet.
Loren Feldman:
Some people say, “Oh, you’ve gotta start paying yourself from day one. You should always be paying yourself.” Does that make sense?
Sarah Segal:
There’s no way.
Jay Goltz:
That’s just ridiculous. Really? Where’s the money coming from? Like, oh, why didn’t I think of that? Like, where do they think this money’s coming from that you’re gonna go pay yourself? It’s just a ridiculous, misleading phrase to go tell people: Pay yourself first. You should pay yourself when there’s enough profit. What David just said: once you get past you’re covering your overheads and now there’s some money to pay you.
Sarah Segal:
Should you give yourself a timeline? Like, somebody who wants to be an actor. They go to Hollywood, and I’ve heard all these stories about, like, “I gave myself a two-year time limit, blah, blah, blah.” Should small business owners give themselves a limit, in terms of when they reach that ability where they can pay themselves? Or like, should there be that point that they make the decision where, “Okay, well this is not gonna work.”
Jay Goltz:
I would argue you should see whether you’ve got a path to profitability that you say, “Okay, we’re growing at this rate. My gross margin is this. I should be able to pay myself when we hit this number.” And at least there’s a pathway to profitability.
David C Barnett:
Instead of paying yourself immediately from the beginning and wrestling with the question that you just asked, Sarah, I think if somebody at least is honest about quantifying the value of the labor they’re putting in, so that a person who works full-time at a new business for six months, even if they can’t take a paycheck, they should be saying to themselves, “I have just contributed $30,000 of labor into this enterprise.” Then they can ask themselves, “Am I getting any kind of return on that investment of labor?”
And then they can extend that to what Jay was just saying. You know, at what point will this investment start to pay off? Are sales growing? Can I see that the margin is there, etc.? But that’s what people don’t do. They do a bunch of labor in their business. They don’t keep track of their time. They don’t value their time. And then when they think about what they put into the business, they’re just thinking about the cash or the things they bought or put into the actual business. They don’t ever value themselves. That’s the big problem.
Jay Goltz:
And the problem is, if you do that, you’re not pricing properly. That if you at least allocate it, and let’s—at 30, you’re a little low—let’s go with 50. If you put yourself in for 50 grand, and then you did the budget, the plan, whatever you call it, then you could see, “Oh, there’s nothing left. We need to charge more.” That’s truly the problem, a lot of times, that they’re not charging enough. And the reason they’re growing so fast is they’re giving it away.
David C Barnett:
Yeah, I had said 30 grand because I said six months.
Jay Goltz:
Oh, all right. Good. We’re on the same page.
David C Barnett:
You’re dead on, yeah.
Loren Feldman:
Dave, we often have that conversation here about businesses that aren’t charging enough, the owners aren’t paying themselves enough. We rarely talk about the converse. I’m curious, when somebody brings a business to you that they want to sell, how often do you do an analysis and come away thinking, “You know what? They’ve been paying themselves too much.”
Sarah Segal:
Well, that’s a good thing, right? If you’re trying to buy a business and you see that the ownership has been paying themselves too much, and the ownership will no longer be the ownership, then that’s more money in the bank, right?
David C Barnett:
Well, when we do the normalization, we adjust it to fair market value. So a business owner can pay themselves whatever they want. It’s their business. But if they’ve been taking out 200 grand, and the fair market value of their labor, let’s say, is 100, all that will happen by the end of the process is 100 will move from their wage line down to the profitability. It just more clearly shows that difference between the money the owner gets for doing the work every day versus the money they get for having invested in owning, building, starting the business.
Sarah Segal:
When I started, I was an accidental entrepreneur. I had a client that wanted to pay me, and I did the work. And there wasn’t any overhead, there weren’t any employees. And then I got too much work and had to hire an employee. There’s no plan on day one—at least for my industry. Like, if you’re opening a retail store, maybe it’s a little bit different, but mine is like, “Okay, well, now I have a person, and how do you do that?” And sometimes it’s like you have more clients than you can deal with, but you don’t have enough money to pay a person, so you have to take a little bit of a pay cut. So I don’t know that most entrepreneurs have that foresight to be able to plan that out and be profitable or pay themselves appropriately on day one.
David C Barnett:
Well, and some people get trapped. So somebody could have a great deal of enthusiasm or inspiration for a certain idea, and they invest a lot or borrow a lot of money to maybe open some kind of retail location. They sign a lease that they personally guarantee, and if the business isn’t working out, what do they do? Because now they can’t recoup that. And so there are real incentives in place to try to stick it out and fight and try to make it grow, hope that things change. You know, if they just pull the plug and go get a job, they might be better off, unless their landlord sues them for the balance of the lease that they signed. Those are all the things that people have to consider.
When I wrote the book Franchise Warnings, one of the questions I put in that book is I said, “You need to find out how many franchisees are still open after six years, not five.” Because after six years, most people have renewed a commercial lease, if it’s a retail-type franchise. People will get into a business, open it up, and lose money, but stay operating it. They’ll still operate it because of the liability associated with the guarantees they’ve given on the loans and leases and stuff. And then as soon as they get outside of that lease, for example, that’s the time they’re gonna pull the plug, if they’re gonna quit.
Jay Goltz:
It’s funny you say that, because someone once called me and said, “Jay, let me ask you a question. I’m thinking of getting in the frame business, buying this franchise, and I’m confused. I’ve talked to six of them, and they all told me the same thing: ‘Well, I’m not making any money, but I’m not sorry I did it.'”
I go, “Oh, I have an easy explanation of that. They’re in denial.” Or what you just said, they’ve got a lease. I go, “They’re not making any money.” And the fact is, this particular franchise I’m talking about had 300 stores. I think they’re down to 30. I mean, if you go into the ones that are still open, they’re rationalizing. The ones that went out of business, you don’t even know where they are. Those are the people who you want to talk to.
Loren Feldman:
My thanks to David C. Barnett, Jay Goltz, and Sarah Segal, and a special thanks to our sponsor. This episode was brought to you by Grasshopper Bank. And thanks for listening, everyone.
