Episode 138

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Making a profit is the goal of any agency owner. But too often, the way we think about profit actually hurts our agency. The standard equation (sales – expenses = profit) can lead to bad decision-making. We are willing to accept the leftovers (profit) rather than running our business to deliver profit as a key outcome. I’d much rather have you determine the amount of profit that is acceptable to you and then you manage your business to that goal.

This is a more effective way to look at the profit equation – one that helps agencies thrive and gives you the ROI you deserve for taking the risk of owning an agency.

Michael Michalowicz founded and sold two multi-million dollar companies. Then in his mid-30’s, he went broke. Starting over again, he was driven to find better ways to grow healthy, strong companies. Among other innovative strategies, Mike created the “Profit First Formula,” a way for small to mid-sized businesses like our agencies to ensure profitability from their very next deposit forward.

Michael is now running his third million dollar venture, is a former small business columnist for The Wall Street Journal, the former MSNBC business make-over expert, a popular keynote speaker on innovative entrepreneurial topics, and is the author of Profit First, Surge, The Pumpkin Plan and The Toilet Paper Entrepreneur.

 

 

What you’ll learn about in this episode:

  • The two questions Michael asked himself that allowed him to find his calling to become an author
  • Why leaving too much money in your agency leads to bad decisions
  • What it means to run the Profit First system within your agency
  • Basic principles to help your agency get ready to use the Profit First system
  • Why you aren’t limited by a lack of resources
  • The parallel between Pumpkin farmers and business regarding organic growth
  • Key takeaways agency owners can apply to their biz dev strategy using the principle of “growing the strong sprout”
  • Why it’s important to serve the verticals your agency knows well, and that will allow three or four of those legs to support your stool
  • Consequences you may face when you put too much focus on your weakest clients
  • Why entrepreneurs struggle with being profitable
  • A better way to calculate profit for your agency so you can stop using the “Frankenstein Formula”
  • Principles taken from health and fitness industry you can apply to manage your money better and simplify your agency

The Golden Nuggets:

“I have a pretty specific process in my writing. I ask, ‘what did I do wrong in business, and then what did I do right?’ Then I interview as many entrepreneurs as possible who did it right.” – @MikeMichalowicz Click To Tweet “It’s not good enough just to study best practices. I test them out in my own business before I write about them.” – @MikeMichalowicz Click To Tweet “In my mind, the fact that you've built successful businesses and you've made mistakes along the way – which you've been pretty transparent about and learned from – that’s actually what makes your books so pragmatic.” – @DrewMcLellan Click To Tweet “A successful business is actually facilitated through the lack of resources because a lack of resources requires innovation.” – @MikeMichalowicz Click To Tweet “When you borrow from profits, it doesn’t allow you to correct systematic mistakes. You’re just masking mistakes.” – @MikeMichalowicz Click To Tweet “We've all been told this in our personal finances: Set a percentage of income aside – hide it from yourself as money for your future. Live on whatever remains. This principle should apply to your business as well.” - @MikeMichalowicz Click To Tweet “If you have an idea and you want to start something, don’t wait. Time is the only non-renewable resource. And your lack of other resources is actually an advantage.” - @MikeMichalowicz Click To Tweet “Don’t exert yourself on your weakest client. Weed out the weak clients and focus on assisting the strong client. I call this the pumpkin principle.” – @MikeMichalowicz Click To Tweet

 

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Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast, presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25 plus years of experience, as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody Drew McLellan here with another episode of build a better agency. I love doing these podcasts and I love talking to my guests, but I got to tell you, I have had this one scheduled for a while and I’ve been looking forward to it for a long time. This is a guy who I have followed for quite a while. I have read every book that he’s written, and many of you have had me tell you to read his books and talk about his philosophies. I am really selfishly looking forward to this conversation.

I hope you enjoy it too, but I’m all for it. If you want to come along for the ride, you’re more than welcome to. Let me tell you a little bit about my guest. So, my guess is Mike Michalowicz. Mike, by his third 35th birthday, he had founded and sold two multi-million dollar companies. Confident that he had the formula to success, he became an angel investor and proceeded to lose his entire fortune. He started over again, really driven to find better ways to grow healthy, strong companies.

Many of you are familiar with his innovative strategy called profit first, which I talk about on a regular basis, a way for businesses to ensure profitability from their very next deposit forward. Mike is now running his third million dollar venture as a former small business columnist for the wall street journal. He’s a former MSNBC business makeover expert, keynote speaker on innovative entrepreneurial topics, and he has written many books, including Profit First, Surge, The Pumpkin Plan, and The Toilet Paper Entrepreneur, which business week, by the way, deemed the entrepreneur’s cult classics. With all of that, Mike, welcome to the podcast.

Mike Michalowicz:

Drew, it’s awesome. Thanks for having me, brother. I appreciate this.

Drew McLellan:

You bet. Let’s talk a little bit. Let’s dig right into, had a bunch of money and the next day have no money. What was that all about?

Mike Michalowicz:

That sucked.

Drew McLellan:

Yeah, right. That’s a bad day.

Mike Michalowicz:

Yeah, it’s a bad day. It’s a bad day. Yeah, if anyone tells you, oh, it’s a great awakening or something, it’s pretty painful, [crosstalk 00:02:32]. What happened to me is I had … Has been in the entrepreneurial space all my life. I’d sold my second company. It was two companies in a row I’d sold. My second one was acquired by a Fortune 500, and I thought I had the formula figured out that simply when you … If you want to achieve wealth, it’s an eventuality. You got to build, build, build. It doesn’t matter how much your business struggles, as long as you stick with the struggle and then exit out.

By the second I did this, I was like, oh, I figured it out. This is what you do. And so I did two things. I bought all the trophies in the world, the cars, moved into the expensive town, joined the club, because I thought, to should show off my wealth, it was really arrogance and ego. I’m embarrassed about it now, but that’s how I behaved. The other part was, I said, I’m going to become an angel investor and start all these different businesses and just pump them and dump them because this is where wealth comes from.

I had no right to be in the angel space. I had no clue what I was doing. I lost my money through ego, arrogance and ignorance. It took me only two years. I had become a millionaire when I was in my early 30s, I lost everything. My wife and three children, I had to come home to them to tell them, the guy who was meant to provide for the family was the guy who actually stole it all away. That moment was, oh, it was brutal.

Drew McLellan:

Yeah, I can’t even imagine. How do you go from that to the writing the books that you’ve written, to put in together the strategies that you now teach? What was the transition from sort of that confession that you had to make at home and looking at yourself in the mirror and saying, okay, maybe I wasn’t quite as smart as I thought I was, to what you’re now teaching today?

Mike Michalowicz:

Yeah. It took me. When that day happened, it was literally a day. It was Valentine’s Day of 2000.

Drew McLellan:

Oh lovely.

Mike Michalowicz:

Yeah. Perfect.

Drew McLellan:

Lovely.

Mike Michalowicz:

That’s the day I found out that … My accountant called me and said, Mike, you should declare bankruptcy. You’re done. I didn’t declare bankruptcy. I felt so ashamed of what I did. I knew I had to dig my own way out of this as I told my family. My daughter, literally, as I was telling the story, she was nine years old, ran to her room and got her piggy bank and said, “Daddy, daddy I’ll help us.” It was that desperate.

What that triggered is this turning moment, which was a two year turn. I went through actually depression. So, it didn’t get better.

Drew McLellan:

I’m sure.

Mike Michalowicz:

I went through functional depression. I’m not proud of it, I’m not ashamed of it. Meaning, I think a lot of people watching the show actually have experienced, maybe even yourself have experienced depression in some form. It is more prevalent in the entrepreneurial community than anywhere else in the world. I went through depression, which for me, was a of drinking when I should’ve been drinking, a lot of insomnia and no social situations where I put myself in. I was hibernating in my house, a rental.

How it turned was interesting. There was a moment, and I can’t remember the day, but there was a moment when I asked a question that I had never asked before. There’s one question that circulates all the time. They say, if you had all the money in the world, what would you do? It’s a good question, but there’s one assumption that is bad. The good question is, if you had freedom, what would be your passion, your calling, your purpose? What would you [crosstalk 00:06:01]? The fallacy or the flaw, I should say, in that question is, there’s an assumption that there is no financial constraints.

Meaning I could say my calling is to be a beach bum and drink margaritas on the beach in the Caribbean for the rest of my life. Yeah. Okay, that works. But the reality is we need to have a sustainable way of living our calling, or purpose, or desire, and it’s got to bring financial … Well, the question that came to me was, now that I have no money, because I’d blew all of the money, if I had no money, and I didn’t, what would I do with my life?

I think it’s the confluence of those two questions, if you had all the money in the world, you had total freedom, what would you do? But if you have to make a living doing it, what would you do? And once those answers are the exact same thing, that’s when you found, that’s when you truly found. I remember one time ago saying, if I had all the money in the world, I’d be an author. I want to just be an educator. I want to learn because I can teach. And the more I teach, the more I learn, and that just appeals to me.

But now I had no money. I said, what do I want to do? I said, I want to be an author and I can make a living doing this. I can really serve people and survive. Those two answers align, and that was kind of the aha, and I’ve set out and endeavored to do it. I’ve been doing it for almost 10 years now, nine years into it. Listen, it hasn’t been an easy journey. More and more people hear about me today because of the popularity of Profit First in particular. And they’re like, oh my God, you came out of nowhere. You’re an overnight success. You decided to write a book and look what you did.

And I’m like, that’s actually book number five, and each one’s been a fight, but I love it so much that it doesn’t feel like a fight. I’m in it because I love it.

Drew McLellan:

All of your books that are about running your business in a better, smarter, more profitable way. There’s incongruity in I lost everything I own, and now let me teach you how to run a business. So, how do you reconcile those two? How do those work together to be the wisdom that is in your books?

Mike Michalowicz:

Yeah. So, I found, well, I had success with my other businesses. I mean, they grew … Both of them were multi-million dollar businesses. If you wanted to find a successful, both of them were acquired. But there were certain elements I got wrong, but good timing played in my favor, or I could just survive long enough before someone else acquired it and fixed those bad elements. What was interesting was there were some things I was doing right, and I’ve now extracted with as worth. There’s many things I was doing wrong and I’ve investigated those.

I run a business today too, a new business, for many years now. What I’ve done is ever … As I write my books, I do two things. I say, what did I do wrong in my life? What did I do right in regarding this concept? Then I interview dozens, if not 50 or 60, entrepreneurs that have done it right, compile the common thing. Then the one thing I do that I don’t think was typical of most authors, but maybe, then I test on myself. Because I have an existing business, I’m writing a new book now. It’s not here. It’s called Clockwork. It’s not going to be out for another year.

I just finished the manuscript. I’ve been working on it for six years. I’ve been testing it for the last three years, in my business. Now I know for me what works, for these other entrepreneurs’ works. I got the proof for myself and now it becomes a book. I’ve done that, like Profit First, I started 10 years ago, right? In 2008, I started writing Profit First. This newest release just came out six months ago. I’m testing on myself, and only once I prove it to myself and can see the common thread, in all these other entrepreneurial businesses, do I think is valid enough to print the thesis.

Drew McLellan:

Yeah. It’s interesting because my business model is a little bit the same. So, I own an ad agency, but I also work with 250 agencies, and people say, well, why do you do both? And I’m like, my agency is like the lab, where I get to test things. Or people will tell me about a new tool or a new technique or a project management style. I get to test it in my lab before I tell other people that it works. Or I can say, well, here’s what had happened for us, so your mileage may vary, but blah to blah.

I actually think there’s credibility in the experimentation, but be that sometimes it doesn’t work. So, in my mind, the fact that you’ve built successful businesses and you’ve made mistakes along the way, which you’ve been pretty transparent about, and that you’ve learned from those mistakes, that’s actually what makes your books so pragmatic.

Mike Michalowicz:

Thank you. Thank you. I think you’re right. I remember the first iteration of Profit First, first I did it for myself. Then I wrote an article, I used to write for The Wall Street Journal, so I wrote an article about it and it got a lot popularity. Then started getting emails saying, hey, this isn’t working. It wasn’t working for me, but I didn’t even realize it, when I was putting profit into my business and allocating profit first, that sometimes my business would be under duress and I’d actually borrow, I’m air quoting borrow from my profit. I was actually stealing from myself and unwinding the system.

Drew McLellan:

Which doesn’t allow you to correct the mistake, right?

Mike Michalowicz:

You’re right.

Drew McLellan:

It allows you to mask the mistake.

Mike Michalowicz:

I was masking the mistake. Then I was like, oh my God, other people like, holy crap, I didn’t actually make the system, so I went through another iteration. I like that term, it’s a lab. It’s a living lab.

Drew McLellan:

Yeah. One of the things I love about Profit First is the idea that, and for those of you that haven’t read it, the idea is that in most businesses, and Mike feel free to correct me when I’m telling people what you wrote differently than what you wrote. The idea is, in most businesses, we pay all our bills and do all this other stuff. And if there’s profit leftover, we, as the owner, keep it. But, and as you have heard me preach a million times, when you leave too much money in your business, it gives you permission to make bad decisions, like keep more employees than you should or buy something that really you can’t afford.

The methodology that profit first teaches is that you set a percentage, and you really need to read the book, I’m clearly making it more simple than it is, but that you pull a percentage of your business out immediately and you put it in a separate bank account so that you, the business owner, are properly compensated for running a profitable business first, and then you in essence, have to run your business on the smaller plate, right?

It’s like an all you can eat buffet. If they give you a smaller plate, you eat less because you can only put so much on your plate, right?

Mike Michalowicz:

Right.

Drew McLellan:

If you are running your business with this smaller plate mentality, you will make smarter decisions for your business because you don’t have this big fat bank account that you’re in essence, you’ve already paid tax on that money in many cases, because you’ve left it in retained earnings, and now you’re just piddling it away because you’re making bad business decisions.

Mike Michalowicz:

Yeah. That’s the essence of the book. There’s subsequent steps to it, but it is the pay yourself first principle. We’ve all been told this in our personal lives. When you take home income, immediately reserve money for your future, hide it from yourself, live off the remainder, and sure enough, your lifestyle will adjust. I say, oh my gosh, this may apply to my business, and it does [crosstalk 00:13:34] business.

Drew McLellan:

Absolutely.

Mike Michalowicz:

Money flows in, you reserve stuff for your profitability, and you force your business’s lifestyle to live off the remainder. It does live off the remainder.

Drew McLellan:

Yeah, right. If your business has no profit, clearly, what that is saying to you is that you are choosing to make decisions about how you run your business that don’t serve the profitability part of your business. In many cases, especially in agencies, what that means is you have one or two too many staff people. And because you love them or you know that their kids in college, or whatever it is, and I get it, I’ve made the exact same mistake, you keep them on the payroll even though the business doesn’t justify them being there. The minute you take some of that money out of the pot and you don’t have it to pay them, now, all of a sudden, you have to learn how to run your business with the right number of staff, right?

Mike Michalowicz:

Yeah. It’s save the one or two people and kill everyone else off as a result. If the sh