Profit Leaps

“When everyone in my firm gets a bonus between $3 and $5 million this year, how am I going to keep them motivated?”

This was the question asked, 20+ years ago in the YPO group I used to belong to, by a member who founded a hedge fund/finance business. I have never forgotten it. Not just because of the sheer out-of-touchness (Not a term. Should be.) of this being his answer to us all sharing our biggest worries (He was a bit of an ass), but because I was jealous that this arrogant ass was making such a massive profit at the end of the year and I was not.

Here I was toiling away in my business and, despite the usual bump in growth every year, bonuses were in the tens of thousands of dollars.

For almost every business owner, I have met and worked with, this is a similar experience for them as well.

The business grows its revenue at 10, 20, or even 40% each year. But their annual change in personal income is not life or lifestyle altering.

I remembered this story as I was considering the question: What does a business owner really want?

A friend of mine had urged me to dig deep and make a detailed client avatar of my ideal client. You may know the drill, give it a name, a lifestyle, 2.2 kids, etc.. and detail out what their true wants and desires are for their lives and careers.

As I sat there thinking through every client I have had over the years, I kept coming back to a simple answer… They all wanted a lot more money in their personal bank account. The type of real wealth that was created every year from their business. The type of wealth that would allow them to create a real cushion for retirement. The type of annual income that would make it easy for their kids to go to the school of their choice. The type of annual bonus that would allow them to easily buy a larger home or go on amazing vacations. The type of wealth that would allow them to give back in whatever way they desired.

While this level of comfort, security and lifestyle meant different things to all of them, the lack of large jumps in their income was a festering frustration that had built up over many (many) years.

Amidst all the talk about being passionate about our work, having a vision and our businesses having a mission/purpose, this is what I kept coming back to. When a client hires me, ultimately, they want their business to grow significantly enough so they can personally make a lot more money (This requires a significant growth in profit that helps serves the business growth plans as well).

Sure, they wanted less stress, more fun and to not worry about how they were going to pay their mortgage. But, I asked myself, what ultimately is a cure for a lot of the stress and worry? In the immortal words of ABBA (Yes, that ABBA. Don’t judge me)… Money, money, money.

We all know that owning a business is fraught with risk. Somewhere we seem to have given a pass to demanding a fat reward that makes the risk realllllllly worth it.

The business romantic in me (I know, awwww… So cute!) would prefer my answer had been to make the world a better place. To make a dent in the universe, etc.. But when my clients are the most honest with me, they want to make a lot of money so they can enjoy their lives. Then they can use that wealth to make their dent.

So what is causing this cycle of growth without commensurate increases in wealth?

For most businesses, revenue growth is matched closely by expense growth. You get a bunch of clients, you hire a bunch of people. You grow enough to have to invest in IT or a larger office. Each year there is some extraordinary expense that sucks up potential profit growth.

In some cases, the entrepreneur’s salary has grown enough so they get a larger house or maybe a vacation home. So now their personal expenses also have grown along with their income. At the end of the day, their business is not allowing them to create the leaps in wealth and security that they truly desire.

Why?

The business has not drawn a line in the sand about the profit levels it is committed to creating from every client and as a business.

Maybe this is the New Yorker in me but I grew up watching all the Wall Street financial guys drive by in their fancy cars and $3,000 suits. They lived in enormous apartments and had giant vacation homes.

This level of wealth is not created from a $50,000 or $150,000 annual bonus. Their wealth (Not including the trust fund kids) was created from operating a business where a $2, 5 or $20 million annual bonus was the norm.

Go ask an investment banker if they will help you sell your business for $3 million and you will get some version of this answer…. “We only focus on deal sizes of $50m or higher because it takes, roughly, the same amount of work to close a $50 million deal as it takes to close a $5 million deal.” M&A lawyers will tell you the same story about the amount of paperwork it takes to close a $1 billion deal as a $1 million deal.

It also requires, roughly, the same amount of staff, office expenses, etc…

Somewhere along the way, they decided that they were going to draw the line in the sand and leverage their time on deals and clients that would maximize their wealth.

Now, I hear you, an agency, service or product business is not the same as a Hedge Fund or Investment Banking business.

Or is it?

I am willing to bet that there is a competitor in your market that is making an extraordinary amount of profit and that the owner of that business is making 10X your personal income. I do not care if it a laundromat chain, a digital agency, a real estate business or a fitness franchise.

Maybe you chalk their success up to their connections or just dumb luck. Maybe you think they are more talented or smarter than you. Speaking for myself, I have had plenty of competitors that were far from the sharpest knives in the drawer. However, they were smart enough to hire great talent that they could leverage into leaps in profit.

If you can stop rationalizing long enough to take a closer look, you will see they made a choice that “getting by” each year was not going to be enough.

Around this time of year, we all start thinking about projections for next year. I am not suggesting that you change your 20% projected growth in 2021 to 2,000%. However, I am suggesting that you start thinking about what it would take for your profit to not just grow, in small steps, but to LEAP.*

What would have to happen in your business for your net profit to quadruple while your expenses stayed roughly the same?

Yes, quadruple (Sit with the idea for a while before you reject it).

A 4X leap in NET PROFIT
AND
A (near) zero increase in expenses

What would have to happen?

If you increase your pricing 4X then what would you have to deliver to make that happen? What would you need to offer clients? Who would you need to hire (or acquire)?

How could you deliver results to your clients that were 4X what they are today? How could you handle 4X the number of clients you do today with, roughly, the same staff/overhead?

Profit leaps only occur in an environment that demands them. 

That means a shift in how you think about how much profit you MUST earn.  (Remember, revenue is just a metric for your ego) AND the constraining the expenses required to create that growth.

You see, it is not just my clients that want to make these leaps, I feel the same about my business. For me, I answered that question by figuring out how I can take 20X as many clients through my process in a year. It allowed me to lower my cost to clients by delivering results in 20% of the time.

But I got there from an itch in my brain (and gut) that desired a leap in my income (And doing it by massively increasing my impact – I did not say purpose and vision are still not important). First, I needed to decide that incremental growth was no longer acceptable to me.

These Wall Street bankers do not have a secret that you do not. Either their industries, competitors or markets have long ago baked in what type of wealth creation is expected. More importantly, they have a non-negotiable floor for the amount of money they expect to earn from every transaction, deal and/or client.

So I ask you the same question I ask my clients… “Why not you?”

Your business could and should be the top hedge fund equivalent in your market. No, not tomorrow. However, you can decide, tomorrow, that you are sick of incremental growth and will put in the time and effort required to start to design a version of your business that will finally create real leverage. A business that delivers such a high level of expertise and value that your profits can leap instead of small steps that are not impacting your life.

Somewhere business owners have decided their path should be a struggle and a slog until one day they will sell their business and finally have that windfall they want.  Those lawyers and bankers just happen to be in the right business.

I have two works for that thinking. Bull and shit.

Too many businesses exist that way for decades only to find that their industry changes or other economic tsunamis occur (Hello global pandemic?) and then they cannot sell the business for the amount they hoped and dreamed they could.

That does not have to be you anymore. It is a choice.

Make it.

How will you make your profit leap in 2021? Better yet, what will you put in place in 2021 so your profit can leap in 2022 and forevermore?

Draw your line in the sand and then….. LEAP!

*Note: Yes, I am aware I am writing about creating leaps in profit and wealth during a global pandemic. For some of you reading this, the pandemic has crippled your business. I hope it has not crippled your desire for success, wealth and impact. While the pandemic has choked off specific types of businesses it has also created opportunities for others to earn more than they ever had before.

So, I ask again, why not you?