What Makes a Painting Company Financially Successful

Jon Bryant: Hey everybody, welcome back to Price. Sell. Paint. I'm Jon Bryant. Today Michael Murray is not joining us. He obviously has something better to do. I don't know why because today we're talking with Daniel Honan from Bookkeeping for Painters. And Daniel, you and I go way back and I'm excited to talk to you about what makes a painting company great from a financial point of view and just how we can incorporate that into our sales process in every job we do in order to make sure we're making money, getting back to the things we like in life and just get into that dream of why we got into this business in the first place. So Daniel, maybe you can just tell everybody a little bit about yourself and Bookkeeping for Painters.

Daniel Honan: Absolutely, thanks. I'm super appreciative of the invite and glad to be here. So my journey started back when I was in high school. I used to work on the job site for my dad's painting business. And in college, I went and studied accounting. During that time period, I did an internship with College Works Painting. And then afterwards, went to the military, came back, ended up starting my accounting firm and reflected back on my experience and I was like, well I've had some experience in the painting industry so I decided to niche and just work with painting businesses. So since 2016 I've been helping painting business owners know their numbers and what they mean and save big in tax.

Jon Bryant: Amazing. Yeah, and being a part of the same community, we've kind of seen that impact you've had on so many businesses and knowing the numbers, getting that stuff organized, so important. Yeah, I mean, your experience, it's funny you say, so it's College Works? It's like all they have to do is put college and then another word. And it's just like another painting franchise for college students. So you took that, how many years were you doing that in college?

Daniel Honan: For the College Works, I just did one season. So it was about a year and we started in the winter, did all the marketing and then the sales, lined up everything for the summer and then finished everything out in that fall.

Jon Bryant: Cool. So what gets you excited about working with painters? You made that choice. Obviously it's really, you said it's niche. Tell me a bit about kind of about that.

Daniel Honan: I really love diving into the numbers and helping folks get clarity on their business so that they can make better decisions. And it's great to see when someone comes to us for the first time, usually they don't quite understand where they stand in their business, how they compare to other painting businesses, can they afford that next hire, can they afford bringing on a production manager or a salesperson? They don't have quite a roadmap and they don't quite understand their financials and how to leverage those to make decisions.

So helping them, giving them that clarity on here's where you stand now, here's how you compare to other painting businesses of a similar size, and here's the numbers that the top 20% of painting businesses hit, and here's how you can get there. And a lot of, you know, the first time I look at the financials going through working with someone, usually it's a gross profit issue. That's usually the number one issue is gross profit is not optimal. And we dig in further, it's usually a pricing issue. Not all the time, but most of the time it's a pricing issue. And then the next question is, how do you price your projects? How do you get to the price? And when it's really off, usually they're not doing production rate estimating. And so we kind of walk through that and go through a way to do it to get that optimal gross profit margin.

Jon Bryant: Yeah. So I want to dig into that because I think that's super interesting. And honestly, as someone who went through that process of not really knowing the numbers, not understanding how to price, getting clarity on that stuff kind of changed my life and spurred on all of these other things to help other people kind of get a handle on that. So let's go back to the point where people come to you. How many people come to you and they know their numbers? What percentage would that be?

Daniel Honan: I would say probably 20%. Most of the time it might be a little bit more, but usually there's some sort of pain in understanding. They might have a basic understanding, but it's not good enough. They feel like it's not good enough. So usually there's some sort of pain involved with knowing the numbers. Sometimes it's just tax, they just want to save more in taxes and their current accountant is not being proactive. But I would say the majority of the time it's usually some sort of issue with not fully understanding the numbers either the way they're tracking it or their acumen and understanding the numbers is not quite where they'd like it to be.

Jon Bryant: So if you're in that 80% and you're listening, don't be embarrassed. I think it's a big thing to take away from this. Most people don't, right? In our industry, it's strange, I think. And you can probably, I mean, I'd love to get your opinion on this, but I just feel like it's really, you know, a lot of people talk about the volume they do. And I think that that saying of volume is vanity, profit is sanity. And we talked about volume, but very few people talk about the actual end result.

And it's always made me wonder, maybe people don't understand the end result. It's easier to understand what you sold, but then at the end of the day, how did you maybe lose money? Which has always been wild to me. But from the 80% that come to you and they don't know, what's the process you walk through, kind of step by step, and how long does that take?

Daniel Honan: First off, we want to get their books in order so that going back, usually folks have some months that haven't been done or maybe even going back to the end of the year, wherever the case is, getting the books done in a way that makes sense so that we can analyze them. So that's step one, and that's done in a couple of weeks usually. And then from there, within the three or four weeks of them signing up, we're usually doing a look back, saying, okay, here's how you're doing and comparing their numbers to benchmarks based off of how big of a business they are.

And then from there, we're usually doing a tax analysis on their situation for US based folks. We do an analysis on where can they save big in taxes and trying to implement those tax strategies as quickly as possible to give them a return on investment. Our whole approach is to give you a return on investment working with us, either through giving advice on how to improve your financials, like knowing the numbers and what they mean to make decisions to improve your net profit, or looking at their tax situation and saying, here, you can do X, Y, and Z tax strategies to lower your tax liability and save tens of thousands of dollars in tax. And so within the first 30 to 45 days, we're usually hitting those three things, cleaning up the books, getting things integrated, oftentimes integrating Paint Scout with QuickBooks Online or something like that, then getting them that initial understanding of their financial picture, and then doing some sort of tax strategy session within the first 30 to 45 days.

Jon Bryant: Gotcha. And what are people's reactions? Like, 80% when you don't really know your numbers, you just kind of feel like this is the right price. What does that look like for most people?

Daniel Honan: Yeah, so just to talk through an anecdote, I was working with a painting business owner. Their gross profit was, and just to define gross profit, because one of the problems when we talk about these things is people have different definitions. So gross profit as when I say that, what I'm saying is what you charge your customer, your revenue or sales, the total amount you charge your customer minus the cost of the painters and the burden associated with that, the payroll burden and the workers' compensation minus the materials to do the job. So the paint, the sundries subtract that out of the total top line revenue and that gets the gross profit. So that's how I would define gross profit.

So I was looking at a painting business owner's profit and loss over the year to date and their gross profit was around 35%. It's kind of low. You know, the average is 40% gross profit for painting businesses from what we see in our internal benchmarking. And also if you look at national data, it's about 40% gross profit. And so we like to recommend to try to at least hit 45% to be above average. And so I was walking this through with them and I was like, okay, your gross profit's a little low. So let's walk through your pricing. Cause that's usually the issue. How are you pricing?

And so they basically said, okay, well I have an average painter, I pay them about $25 an hour. And with about a 30% markup, you know, I'm paying about $30, $32 an hour. And then I basically double that for my charge rate. So I charge them $65 an hour. I was like, okay, that sounds, and so they said they're shooting for a 50% gross profit. And I was like, okay, that sounds great. So far your actual cost is $32.50 and you're charging $65 as your charge rate, which is basically double what it costs you, which would be shooting for a 50% gross profit margin. So that makes sense so far.

Okay. What about your materials? And they said, well, I usually just mark up about 10%. You know, I get a discount and I just charge 10% additional. And so that was the issue. If you're only doing a 10% markup on your materials and you're doing a 100% markup on your labor, you're not going to hit a 50% gross profit margin or 45% gross profit margin. Because in order to hit a 50% gross profit margin, you'd have to do 100% markup on your labor and your materials, not just your labor. And so that simple change got their gross profit up. So that's just walking you through things like that and giving people, that's the change we need to make. And it oftentimes is not hard to implement these things. It's just once you know the numbers and why they work, you can get results quickly.

Jon Bryant: Totally. So I'm curious about something you said there, which is about the materials. And I see this all the time in the industry, people talking about materials. Do I mark them up? I get a discount. I'm sure you've seen these kinds of arguments too online. And it sounds like based on what you're saying, a hundred percent markup on materials is what you should be doing. Is that correct?

Daniel Honan: I mean, if you want, it's just math. If you want to get a 50% gross profit margin, you have to mark up your labor 100% and your materials 100%. Otherwise, when you look at your profit and loss, it's not going to be, assuming you're hitting your budgets, it's not going to be 50%. So it's just a math thing. I mean, some folks, what they do to kind of get around this would be they would mark up their labor more than 100%, like mark it up 150% and then they do less markup on the materials. That can work out okay. It's just the risk is if you have a, if you're doing a stucco home or a brick home where it just takes a lot of product, you might get burned on those jobs potentially if there's just a lot of, you might have a lower gross profit on those projects. If you're good with that, then that's fine. It's just knowing that that's the thing, that's the risk that you're assuming there.

Jon Bryant: And I think the argument is somehow this argument exists and I want to be respectful to people that have this argument, which is that it's unfair to mark up materials. What do you say to those people?

Daniel Honan: I mean, it's unfair to mark up labor too. You could say the same thing about labor. It doesn't make sense. To me, when I hear it's unfair to mark up materials, you're having to get the materials and it's not just, I don't know, to me it just sounds like you could just say that sentence with any other item. It's unfair to mark up labor, it's unfair to mark up XYZ. To me, it sounds weird. Like why is it unfair? You're running a business, you have to be able to stay in business and you have to charge a markup to cover your overhead and profit. So if you're not doing that, you're going to have issues.

Jon Bryant: I mean, that's a very valid response. And I think one that's always been a little bit, you know, it seems to make sense to me. We're in business for a reason. We're in business to ultimately fulfill some type of a vision for the future that we're hoping for, whether that's independence financially or time, or, you know, an ability to build an asset of some type. And it's, so it's just always seemed kind of a little bit counter, the whole thing when you say, well, we give the materials for free. But hey, I mean, I always love comments on these types of videos. So if you feel otherwise, I'd love to hear from you and kind of how you feel about those materials.

But so let's move on kind of back to the pricing thing, which is that you find that once you bring someone in, the first thing to look at is the pricing. Like how are you constructing your price, that's going to reflect the rest of your business. Is that true or is there other things too?

Daniel Honan: Well, so I look at their profit and loss. Profitability is the number one, the first thing I look at. And so usually it's gross profit is the issue. It's not always the issue. You know, last week I was working with someone, they had a 50% gross profit margin. Awesome. And then we looked at their overhead costs and they were overcompensating their salesperson.

So usually we want to see a three to one ratio of gross profit to customer acquisition costs. So let me define that. Customer acquisition costs would be all the costs associated with closing the deal. So this would be your marketing and your salesperson compensation. If you're doing Facebook ads, that would be the cost of the ads, maybe paying the marketing agency if you have one, maybe your setter, compensating your setter to set the appointments, compensating the salesperson to close the job. All those costs would be your customer acquisition costs.

So that customer acquisition cost should be one-third ideally or smaller, one-third or smaller of your gross profit. So if you just use easy numbers, if your gross profit's at 45%, then your customer acquisition costs, your marketing and sales costs should be 15% of revenue. So we're looking at his financials. He had like a two to one ratio where his gross profit was 50% but his customer acquisition costs were like 25%. And it was because he was just paying his salesperson way too much for what they were providing in terms of closed deals. So we just worked on a new compensation plan that would get a three to one ratio instead of a two to one ratio. And so he's implementing that with his salesperson.

And so yeah, it doesn't necessarily have to, oftentimes it will be pricing because that's usually the number one thing, gross profit's just low. And it's usually a pricing issue. That's the number one issue, but sometimes it's a compensation issue, like we're overcompensating your team or your salesperson or something of that nature.

Jon Bryant: So I love this. The ratios have always helped make the business make sense to me. What are some other ratios that you see as important? You've got sales rep compensation, you've got your cost of goods, or I guess gross profit, 50-50. I love that one third of gross profit for sales and marketing. What else stands out?

Daniel Honan: So we have to break down the customer acquisition costs further. Usually it's like a half goes to marketing, half goes to sales, approximately. I mean, I'm not as concerned of that breakdown as long as you're hitting your overall three to one ratio of gross profit to customer acquisition costs. But that's another one. You know, we said one third is customer acquisition costs. The other third is all your other overhead costs. So this would be your production manager, your insurance, your accounting and bookkeeping costs, all other overhead costs are another third of your gross profit. 15% if you're using an example, because it's easy to communicate it. So if you have a 45% gross profit, 15% customer acquisition costs, another 15% to all your other overhead costs, production manager, insurance, accounting, and then another third would be your profit.

So a 15% net profit is, this would be after all costs are paid, what's left over in the business, net profit of 15%, that's usually a strong net profit. Now that shouldn't be all the compensation to the owner. Because sometimes the owner is compensated through officer salary. If you're in the US, S corp tax status, so you're taking a salary. Your discretionary earnings is what accountants call it. Basically all the earnings, all the cashflow to owner is usually higher than 15% because they're usually working in the business and they're taking a salary in addition to that.

So the way that a very important formula that we use to understand how much should somebody be making in their business is looking at the roles that they play. So first off, the painting business owner. If they're completely passive in the business, meaning they're out on the beach sipping Coronas and the painting business is working without their involvement...

Jon Bryant: That sounds amazing. How many businesses get there daily?

Daniel Honan: We have a couple that are nearly there that they are not even in the same state and they're just collecting checks. So yeah, 15% for a painting business owner that is completely passive. So that's what you should be making if you're not even involved in business. Now, most folks are involved in the business, so they're usually doing sales. We kind of touched on this, but usually compensation to a salesperson is somewhere around 8% of revenue.

So we would add that in if they're the salesperson. So that gets you up to 23%. Another common role that the business owner plays, depending on how big the business is, is maybe the production manager as well. If you're a million dollar painting business, maybe you're doing sales and production management. So that would be another five to 7% additional. So that could get you up to 20 to 30% discretionary earnings should be going to you. And so typically knowing how much you should be making in the business is helpful because if you're not making that, if you are the salesperson and the production manager and the business owner and you're not hitting 28 to 30% discretionary earnings going to you, you're going to have a difficult time hiring people to grow to the next level because you don't have the margin built in to do it.

Jon Bryant: Do you think that's where a lot of people go wrong?

Daniel Honan: Yeah, it all goes back to pricing. Yeah. I mean, yes, I do think that's the number one issue, not pricing usually because they're not using production rates. I just talked to somebody this week. It was a gross profit issue. Okay, how are you arriving at the price? And they said they're using square footage of the home, which is always weird because they're not painting the floors. I'm not sure how that became a thing. I think I know, it's just, it would make sense if you're like new construction and everything is the same that you're painting. You could probably use square footage, but not in a context where you're having different types of projects all the time and then you're still using, right.

Jon Bryant: You're speaking my language, Daniel. This is exactly what I feel.

Daniel Honan: Right, so using square footage or some other method, it might be able to work for you. Maybe you can get good margins doing it, but oftentimes it's hard to grow beyond you just doing the estimates because you don't have a reproducible way to get the price for the project. So it's hard to hire a salesperson to tell them that you just kind of go into each room and kind of ballpark it in your head kind of thing.

So yeah, basically we end up kind of walking through that pricing, how they're doing it, and then providing a recommendation. Hey, production rate estimating is a thing. Really a great tool for that would be Paint Scout. And so we usually point them your way if they feel like they need help with that. But yeah, pricing for sure and the way they're doing it is usually, if you can solve that issue, that will help the gross profit.

Jon Bryant: For sure. So just to recap what I was hearing and for those listening, maybe we can write this down somewhere. We'll put it below in the description. Maybe not, I don't know. I get in trouble when I say this stuff. But anyways, the labor, we're talking about what, 35% overall of your price should be labor. Is that right?

Daniel Honan: Yeah, yeah, yeah, that's...

Jon Bryant: 15% materials-ish, somewhere in there.

Daniel Honan: Yeah, if you're shooting for 50% gross profit, 35% for labor, 15% for materials, and that should get you about a 50% gross profit margin.

Jon Bryant: Now we're in the 50% gross profit and we got 15% of that going to our marketing and sales. 15% going to all of our kind of operational overhead and 15% to profit. Does that sound right once we kind of simplify like that? Yeah.

Daniel Honan: Right, which leaves, yeah, which leaves 5% left over if you have a 50% gross profit margin, which, you know, that's maybe your officer salary if you're taking an officer salary out of the business or something. But yeah, if you wanted to break it down into thirds for 50% divided by three, whatever that would be, 16 and a half percent. Yeah, yeah.

Jon Bryant: Yeah. That's where I mixed that up. I mixed that part of it up, but you're correct. Yeah. So the one third, one third, one third. And so for those that are listening, if they, obviously I think this is a great exercise to go through and try to evaluate where your problem is. But the next step is, and you mentioned this is production rate estimating and incorporating this day in day out on how you price a job. Can you give kind of a high level overview of how you see that as an accountant? Obviously you've got the painting experience, which is great, but production rate estimating for those listening, what do you mean by that?

Daniel Honan: Sure, it's just how long it takes a painter to paint a given surface. So if it takes an hour for a painter to paint 200 square feet of siding, you know, that would be a production rate. Or 10 linear feet of trim is a half an hour for this type of trim. Or it's an hour for a door or hour for a window. Those are all different production rates. So as the estimator or whoever's doing the estimating should be able to go into the project, measure all the different surfaces and multiply it by or divide it into all your different production rates that you have. And from there, you should come up with an amount of hours, budgeted hours for the project. And then you multiply that by your fully loaded rate or your charge rate.

Jon Bryant: That's a dollar per hour, right? Charge rate being dollar per hour. Yeah. Okay. Great. Good.

Daniel Honan: A dollar per hour, yeah. So charge rate, we talked about earlier, which would be basically depending on what you're shooting for your margin, but just to use the easy 50% gross profit margin, you would do 100% markup. So we said $25 an hour, if you mark it up 30% for payroll burden and workers comp, that gives you the $32.50. And then 100% markup would be a $65 charge rate, so $65 times whatever budget hours that you calculated based off of measuring all the surfaces. And so that gets your labor portion.

And then going back to the surfaces, you'll figure out how much paint that you need to cover all those surfaces. And then multiply how much it costs you to buy all that paint and then 100% markup on that and then add the labor and materials together. And that's your price. So that would be, which is a little difficult to do by hand, but I know Paint Scout makes it a lot easier to do all those calculations.

And then from there, having a, that's what you're providing to your customer, that's the price. But having a work order attached to that is really amazing, because then you can give that to your team and say, here's all the budgeted hours for all the different surfaces. And then you can task organize your team and say, hey, you have the ceilings and you have the walls, you have the trim and the doors, and here's the budget hours for each of those surfaces. So you task organize your team with that work order and then knowing how much time they have for each of those surface types. And then they have clarity on what is expected of them. And then from there, you do a weekly check in with the team to see how they're doing on that budgeted hours based off the work order.

Jon Bryant: Yeah. And I think the key there is that if you price your hour correctly, like that fully loaded charge rate and you get the materials correct and your team produces it on time, you should make the correct amount of profit every single time if you manage your overhead. Is that about right? Is that correct? Yeah. So I mean, for me, this was, when I learned about this production rate estimating, and for some reason it's kind of hidden. So it took me a while to learn this. But once you learn it, the whole business makes sense. Because you have a reason for what you're doing. You understand why you price the things you do. And I think it gives clarity to the whole why of the situation, because your point about square footage pricing is that it really falls through on understanding why. And you can work those numbers back, but it's three more extra steps you don't really need.

And then pricing by licking your finger and saying this is 17 man days, you can get lucky with experience, but it's not standardizing your business to make sense every day. So yeah, I mean, I'm such a huge advocate for this just because of the way it impacted my life. And I think you're 100% correct. This is the way to go. So a couple of questions about production rates and these different percentages you're talking about. Does this change at all when you go into a subcontracting model? Do you change up the way you do this or what you think?

Daniel Honan: Not really, usually subcontractors are a little bit more expensive, that's because they have their own tools, their own transportation, their own business, so oftentimes you're going to pay more for them, so your labor might be a little bit more, but other things should be less, like for example, your auto, your fuel costs, or you spend less on maybe tools, because they have their own tools and equipment. So usually we'll see labor for subs are a little bit more like 40% instead of 35%, but fundamentally, it doesn't change what you should be hitting in terms of your margins, because again, your other costs should be lower because of that.

Jon Bryant: Right. So you're passing along some of that cost that the subcontractor has and covering that, but you make up for it in other ways. Gotcha. Yeah.

Daniel Honan: Yeah, I would say so. Usually the auto costs are usually lower because you're not having to provide vans or whatever, because usually they have their own transportation and way to get around.

Jon Bryant: So the model that you see, if you're working with somebody that does subs, they're pricing the job the same way. Like everyone should be pricing it using production rates, figuring out how long it takes, getting their charge rate. That holds similar throughout both, right?

Daniel Honan: Right. Yeah. Yeah, it's helpful in negotiations because usually if you're doing production rate estimating and you have a work order that has the amount of hours and your sub comes back to you and says, Hey, you're not paying us enough for this job, because that happens all the time, they have this feeling. Usually it's just a feeling. Sometimes it is, but oftentimes it's not. So if you do have a detailed work order that does have the surfaces broke down by budgeted hours and they say, Hey, you're not paying us enough for this job. Okay. Yeah, let's definitely talk about this. Okay. Let's look at the work order. Where specifically did I not allocate enough budget hours?

And so then it goes back on them to tell you where did you not budget enough hours for. Was it siding, trim? Maybe you did make a mistake. Maybe you left something off, but that can be corrected and moving forward. And so it's less about just a gut feeling of somebody not feeling that getting compensated enough. And it goes back to the work order of what you've actually budgeted out.

Jon Bryant: Yeah. Yeah, exactly. And that's where I think a lot of subs probably end up at the end of the day. The reason they're having the discussion is because it just, they never, it's always feeling like the business is trying to screw them in a way. Whereas that opens up a nice conversation to be had about what we're doing here together. Like here's how we're bidding, here's how this works and let's come to an agreement on this stuff. And ultimately, these are conversations you should be having with your crew who are employees too. Is this fair? Does this make sense? Because that's when business works best, I think, when everyone understands and is working together.

Let me flip the question even one more time. The model for commercial. Do you work with commercial contractors as well? Does that model of pricing or structure of percentages hold to be the same in commercial or has that changed at all?

Daniel Honan: They can be different. I mean, commercial covers a lot of different types of scenarios. When we say commercial, it could be, are we talking about you're working under a GC? Are you just going B2B? Like you're going business to business? So those scenarios could be different. I would say if you're working with a GC, you probably don't have any or very, very minimal marketing costs, I would say.

So your gross profit to customer acquisition ratio, it can be three to one with a lower gross profit. Because if you're working for GCs, if you just have GCs that you work for, you have to have that relationship with them, but you're probably not doing a bunch of marketing. So you have your salesperson compensation that you still need to, that you could probably get away with having a lower gross profit because you don't have marketing costs and then you'll still hit your 15% net profit that way. So you might be doing 30, 35% gross profit and still have a profitable company in that scenario just because you don't have to worry about marketing costs. Now, if you're doing B2B, that's a different story. You probably still have substantial marketing costs.

Jon Bryant: Right. So percentage wise, what are we talking here? Is it 40% GP still a good benchmark? Or you think 30 is good? Where does that fall for commercial?

Daniel Honan: Yeah, so if you're working with a GC, like if you just have exclusively GC work, that's it. And you don't have any residential repaint, retail or B2B, you could probably do like a 35% gross profit margin or maybe even 30 because your overhead is just going to be a lot smaller. Cause you don't have to worry about marketing costs. And then you could probably still get away with having a 15% net profit, even though your gross profit is pretty low. Obviously, the higher the gross profit, the better, but I've seen businesses make it work with a lower gross profit just because they don't have that marketing cost there. But most of the time, folks are not just doing GC work. I mean, it does happen, but...

Jon Bryant: It's a world to live in because you're so dependent on those people.

Daniel Honan: Yes. Yeah, it's probably not a sellable business. Like if you want to sell that business, probably not really that sellable just because there's a lot of risk. If one of those relationships goes sour, half your business goes away or whatever. So...

Jon Bryant: Yeah. Yeah, exactly. No, very interesting. So yeah, I really liked the way you framed it there that there's reasons why these percentages change. And it's important for us to understand our business, understand what we're shooting for, understand how to get there. It really starts with the pricing, but then there's a few different levers to start pulling once you're not getting the profit. Profit's really the indicator that you look at probably at a high level, the net profit. Is that true? And then you would kind of work out issues from there.

Daniel Honan: Yeah, yeah, I mean, right, yeah. Gross profit and net profit, if those are off, then we'll figure out, what's going on from there? What's the issue? And it's usually pricing, sometimes it's compensation of the team. Usually between those two things, it's either you're not charging enough or you're paying your folks too much.

Jon Bryant: Right. So what I want to know is you have this amazing amount of information at this point working with so many painting contractors and specifically painting contractors. This is what's unique about Paint Scout as well as Bookkeeping for Painters is that we just work with painters. And so the data is really interesting. And so can you tell me a bit about what the best painting companies are doing? So maybe break it down residential, commercial, what do their numbers look like? So we talked about benchmarks, but where can we actually get here if we do a really amazing job?

Daniel Honan: Right. I would say the top 20%, because I just looked at this data recently, the top 20% of the folks that we work with have a gross profit of 50% or higher. So, you know, it's definitely possible to get 60% gross profit, which might sound crazy to some people not having seen it, but there's some people out there that are hitting 60% gross profit or very close to it.

Obviously those companies, they have a very strong sales process. They're also usually very established. They have everything dialed in, like their pricing and their sales process, very strong production process. Like everything's just dialed in and they're just killing it. But the top 20% are doing 50% gross profit or higher. The top 20% of painting businesses that we work with are doing between 20 and 30% discretionary earnings. And the reason why there's kind of a range there, again, it's because it could be based on their roles.

So a million dollar business doing 30% discretionary earnings would be in the top 20%. Like that's really great. So if they're doing a million revenue, they're taking $300,000 home cashflow to them in some way through employee payroll and distributions. And then maybe a $2 million company, they'll have a lower, maybe they're just the CEO or making sure things are running. So they're getting 20% discretionary earnings there on 2 million, but they're making $400,000 discretionary earnings. So that would be another example of a top 20% painting business.

Jon Bryant: Commercial? Same type of thing? Or how does it change?

Daniel Honan: Yeah, it's the same. To be honest, I haven't parsed it that way because a lot of folks do a mixture of both. We only have a handful of folks who are doing just commercial. Usually folks are doing a mixture of both, but I haven't looked at it just along that, but that would be interesting to look.

Jon Bryant: Yeah, in my world, I've been so interested in residential repaint, commercial repaint, but commercial has been a bit of a world that I'm not, like, I was never exposed to on the business side. We're exposed to it heavily through Paint Scout, but I'm always curious to know what best practices are. So we should have a dialogue going forward on how to figure that out, because I think it'd be fun to give that information back, kind of figure out where that stands because I think some commercial businesses are kind of hidden and very, very lucrative. And so it'd be fun, but that's something for another time.

Well, I've got you here. Is there anything else that you think is, you know, anything that we've missed in terms of the pricing process that people need to be considering that we just haven't covered yet?

Daniel Honan: I would say the pricing is super important, number one thing. Usually the next thing, very close second or potential issue is the cash flow. And that can often simply be resolved by just making sure you're taking a down payment on the projects once you close them, at least for residential repaint. A lot of folks will, for residential repaint, cashflow should not be an issue for you. But sometimes it is, and it's because they're just, they're not taking deposit down and they're trying to pay their employees, pay for everything else before they receive payment from their customers.

Because the whole game with cashflow is getting paid faster and then slowing down payments to others. So speeding up the cash to yourself and then slowing down the payments to others. Which is, for example, Jeff Bezos, why he was able to run millions of dollars in losses for many years with Amazon. At one point he was on Jay Leno and Jay Leno was making fun of him. This was back in like 1999 before Jeff Bezos was a super buff dude. He was skinny, he looked more like me. He was skinny and frail. And Jay Leno was giving him a hard time about losing millions every year and how are you still in business?

Well, the reason why is because he would get paid immediately. When you go on Amazon, you pay Jeff first to buy your thing, pay now. And then Jeff Bezos would go to his vendors, and then he would have the 30 day timeline to pay them back. So he would get paid fast and then slow down payments to others. And so he had a cashflow business where he had really good cashflow. So use that same idea in your painting business, try to get as high of a deposit, 50%. And there's a few states out there that don't allow that in the US, like California and Massachusetts, but take as much as you can legally. And that's going to just help you keep payroll going and keep your business operational. Or maybe do progress payments. If you're in California, take a progress payment as soon as you start the job and then when you finish. Something to get paid faster.

And that's also super important for commercial. If you're doing commercial, usually the payment schedules can be very difficult. So trying to negotiate those and doing whatever you can to get paid faster. And then delaying costs, outgoing cash to others would be like putting materials on your credit line with Sherwin-Williams. Some folks have an aversion to debt, which I understand, especially on the personal side of things, but on the business side of things, I don't think that really makes business sense, especially with cashflow. If you're having cashflow issues, it might just be a timing thing where maybe you just set up that Sherwin-Williams account, assuming it's not a pricing issue, because sometimes it is a pricing issue. You're just not profitable. That's why you have cashflow issues. But if it's not a pricing issue, set up a Sherwin-Williams account and get 30 days interest free on those materials. And then that gives you more time to collect the money from your customers.

Jon Bryant: Yeah. Daniel, this has been a great chat. There's so much information here. Even I feel overwhelmed, which is awesome. I love that. It's great to chat with you and I hope people check out Bookkeeping for Painters if you guys need help with getting your numbers dialed in, getting your pricing dialed in. I think you guys are a tremendous resource in the industry and I thank you for all that. Thank you for your time. Thanks for being here. Pleasure to learn from you. And yeah, we'll catch up with you soon.

Daniel Honan: Thanks, Jon Bryant.

Jon Bryant: Yeah, awesome. Thanks Daniel.

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