How To Build a Scalable and Sustainable Business With Josh Patrick

“Small Business Stacey” interviews Josh Patrick to share how you can create a business you love where your work is valued, you’re having tons of fun, and creating extreme profits. Now that’s what every small business owner wants!

Episode Summary:

Welcome, everybody, to another episode of the Small Business Success interview. I am your host, Small Business Stacey, and I am so honored for today’s guest, Josh Patrick, founder of the Sustainable Business.

When I went to his website to learn more about Josh, I loved his mission statement, which was his main focus in life is helping private business owners create extraordinary value with their businesses and their lives. That’s what we all want, right? As we’re recording this in the month of July, it’s the month where we talk about freedom and independence, and that’s what every small business owner wants. I know that you are going to leave today’s session with some great takeaways. Josh, welcome to the show.

Thanks, Stacey. Glad to be here today. I appreciate the opportunity.

Absolutely. Normally I would have this long boring bio, and on your website, you had a lot of information about yourself, including a whole page of certifications and designations that would take just 30 minutes to go through, so we’re going to throw that bio out the door. You tell us about yourself. Go ahead.

First of all, good idea to throw the bio out the door because nobody really cares about all that stuff. That’s been my experience. I’ve been involved in private businesses since 19 … Well, officially since 1976 but a lot longer than that. I first did my first business thing when I was seven years old. I used to sell candy I bought from my father’s wholesale tobacco operation to the kids in the neighborhood. I went from there to managing our band and got a lot of gigs first when I was in high school with our band, and then I went to college and did a bunch of business-related stuff, graduated, looked around, said, well, gee, I think I’ll join the family business. I ended up buying a branch from my father within a couple of months and went from there. I was in the food service and vending business. I did that for 20 years. Built that from one and a half people to 90 employees, and then I sold that, looked around and said, what’s next?

I went to the wealth management world, and my natural market was working with owners of privately held businesses. I’ve been obsessed for over 40 years now with what it takes to have a privately held business go from being successful to economically and personally sustainable. That means somebody else would want to own the business after you’re done with it.

Okay. Leaving a legacy. Right?

Well, not necessarily. It’s just that if you build a business that somebody else would want to own, you’ve built yourself a better vehicle for a business and you’re going to have more fun. You’re going to make more money and have less stress.

God, that’s something we all want. Right?

Yeah.

We know about the professional you, but what the listeners really want to know is the real you. I have some questions you need to answer.

Okay.

Chocolate or vanilla?

Chocolate.

Absolutely. Television or books.

Books.

Any favorites?

Well, I read a couple of novels. I read a book a week.

Good.

I’m right now in the middle of a thousand-page novel, which I actually count as four books. I’m giving myself three weeks to read it. It was a book by a guy named Neal Stephenson, who’s my favorite fiction writer. For business books, probably I’ve read way over a thousand business books. You have to say what’s the topic and I’ll give you a book about the topic.

It sounds like you’re a library of information.

Yeah. I’m a fountain of useless information.

Oh, I doubt that. I doubt that. Well, final question. Would you rather live in the past or live in the future?

How about living in the present?

What’s so great about today?

Well, it’s a day, and if you’re living in the past, everything is a historical event. If you’re living the future, you’re anticipating what’s going to happen but you forget to enjoy today. One of the problems with goals is people are focused on the end result and forget the journey. I don’t know about you, but when you plan for a vacation, a lot of times, the journey is actually more interesting than the destination.

Yes.

If we don’t pay attention to the journey, we miss some really, really important things along the way. I want to live in the present, not the past or the future.

I love it. I’m so glad you said that because I’m curious about your journey. You’ve been around, like you said, for over 40 years doing this, and everybody has a backstory. We’ve all been through the ups and downs. Tell us about your journey. What are the most prominent lessons learned that you’ve learned from your back story?

The most important lesson I’ve learned is to stop screaming. When I first went into business, I was a “my way or the highway” guy. I was a terrible listener. I would blame people all the time for making mistakes. I never took responsibility when things went wrong. It was always someone else’s fault. That’s a really bad way to run a business because if you do that, your employees really don’t care about you or your business. They’re just waiting for a chance to get back at you. I went to one of those new-age seminars that was around in the ’80s, and I had this epiphany that it really was me that was causing the problems. It wasn’t everybody else. Once I learned to take personal responsibility for things that were happening in my life, my life got significantly better. It’s my business for that matter.

This is the business where you went from one to 90-plus employees?

Yes. Along the way, we almost went bankrupt a whole bunch of times and had some major theft along the way because the vending and food service business was a cash business. We will play a game, and the game was my employees would figure out a way to steal. I would figure out a way to stop them, and then they would come up with a new way to steal. This went on for 20 years. Sometimes I was really successful, sometimes not so successful, but it’s the game you play when you’re in a cash business.

Yeah, I can relate because in my coffee and smoothie business, although I’m not in the cash-based model, we used to go out and do the events, the fairs, the festivals that were cash-based. As the company grew and I then had employees doing that, yeah, that was always like a struggle, but I’m sure you’re going to talk more about this. If you have systems in place, you know that if somebody is bringing in X amount of dollars, well then you should know how much product is being used or have those protocols in place.

If you’re in that business and you don’t have cash controls, you’re going to lose a lot of money instead of just a little bit of money. Any cash business, there’s a certain amount of theft. The dirty little secret about cash businesses is the owners tolerate a certain amount before they get really crazy. You could steal $20, $25 a week from me if you’re a vending route driver forever. I may know about it, but it wasn’t enough for me to get involved and fire you. If you got above that level, it was going to start showing up as being a problem, and your job security just got a lot worse. You can spend … I could cut it down … the cost would have been higher than what the theft was.

If you have 90 employees each stealing $20 a week, that can add up.

Yes, but I didn’t have-

Is that what made you go bankrupt?

No. We didn’t go bankrupt. We almost did.

Fair enough.

First of all, 90 people didn’t have access to cash. That’s the first thing. The second thing is not everybody stole $25 a week. Some people did, and most people would steal less than that. Some of them might say, okay, I’m going to put $5 in my pocket for refunds. We give away $4 of refunds, and they keep the dollar in their pocket. That’s the type of stuff that would happen. When someone became committed to stealing, they would often get past that $25 range. If they got past that $25 range, you had a thief. You didn’t have somebody who was just … the truth is we’re now especially honest as a race. We all will cut corners or many people will cut corners. It’s rare that you ever run across somebody who absolutely doesn’t cut any corners at all.

Yeah, that is true. Small business owners can be especially hard hit when somebody embezzles and there’s a lot of things that happen, all the fires that happen in the small business owner’s life. There’s this stat that everybody knows, nine out of 10 businesses fail. Nine out of 10 small businesses fail. I always find that so ironic because the day that small business owner decided to open up shop, they had absolutely no doubt in their mind that they were going to be hugely successful and profitable. Otherwise, they wouldn’t have done it. The stats are the facts. Nine out of 10 small businesses fail. That’s because they’re not building and creating what you call a sustainable business. Talk a little bit about what does sustainable mean? Because we all, when we start our business, we want to be successful. We want to be profitable. What does sustainable mean?

Sustainable means you have enough cash. At the end of the day, the reason these businesses cease to exist is they run out of cash. They don’t necessarily go bankrupt. They just close the doors and they wander off and do something else.

The other thing, which is something, the vast majority of people who go into business have no idea what they’re doing. They start a business. It’s like I’m not a big fan of e-myth for a bunch of reasons, but I do like one quote from Michael Gerber, and that is “small businessmen are technicians who have had entrepreneurial cramp”. When you think about that, most small businesses start because the owner of the business, the person who starts the business, knows how to do something as technically based and as a result, they started business because they think that their technical knowledge is what the world wants. That may or may not be true. Maybe it’s true and there’s probably some use for it, but the challenge comes in, it’s almost all small businesses, and I do a program on this a lot, is where we go and look at pricing.

Most small business owners under-price their business by a dramatic amount, and it’s often so much that the business can’t be viable. There’s a simple reason for this, especially on the service small business side. A person opens up a business. They have a consulting idea or they have a technical problem they want to solve. They’re out there and they say, “I can sell 2,000 hours a year of my time.” No, you can’t sell 2,000 hours a year of your time because the reality is you have administrative stuff, you have marketing stuff, you have sales stuff, you have writing stuff maybe, you have thinking things, you have to learn things. These are all things you can’t bill for, and that’s at least half of your time. I actually think it’s close to 60% of your time.

When I work with people, who are starting a business or I’m talking to somebody starting a business, I say let’s look at how much time you have available. It’s 800 to 1,000 hours. I want you to price your time as if you had 800 hours a year to sell. If your break-even is 60 bucks an hour, it’s not really 60 bucks an hour if you’re thinking it’s 2,000 hours you have to sell. It’s really about $130 to $140 an hour. If you can’t utilize $130 to $140 an hour, your business is not going to exist two years from now because you’re going to burn through your credit cards and your savings and all the things that you used to start the business, which we call stage one in our cracking the cash flow code, which is you have no money, you have no sales, and you have nothing coming in so you have to use other resources. If you can’t replace those other resources with cash, pretty darn fast, your business fails.

Yeah, I agree with you, Josh, that so many small business owners, they start their business because they feel they have something so amazing, whether it’s a product or a service the world has to know about it. Whatever, their next-door neighbor, their sister, their brother thinks they make the most amazing chocolate cookies, I’m going to start a business doing that. Then, what they realize is they’re giving away their time, their product, everything for free. Do you think that’s because they don’t really understand what goes into running a business and all of the costs that they truly need to consider, or what do you think it is that prohibits small business owners from really launching successfully?

Running a successful business is very different from having a successful business idea. Meaning that … let’s go back. Let’s say I’m selling ice cream. I have an ice cream stand. I’m pricing my ice cream the same price you can buy it in the grocery store. You don’t have the manufacturing scale that a Ben and Jerry’s or a Häagen-Dazs does. You’re going to make a lot less ice cream. If you’re not charging a premium for making that lot less ice cream, you’re not going to stick around for a long time because you can’t use somebody else’s pricing model for what you should charge. You need to build a value proposition that’s for you.

When you really think about this, you would say, okay, well, a normal restaurant would mark up their stuff three times. They have about 35% of food cost, and they need to be above that. Well, that’s fine if you’re getting $20, $30, $50, $100 per person for a meal, but it’s not okay if you open up an ice cream shop or a coffee shop. There’s a reason Starbucks charges $3.50 to $6 for their items, because it’s $3.50 to $6 per item. It’s not $40 per item. They need to charge a higher number to stay in business.

One of the good businesses to go into, which has been reasonable, is the coffee business because people price what Starbucks charges. Starbucks already is pricing at the appropriate level to have a sustainable business. When you think about that, that’s a reasonable place, but if you’re a consultant, you don’t have a thing really to compare that’s about how you should price.

It’s a trading time for dollars debacle. How do you scale if it’s just you and people are buying you, do you then have a sustainable/scalable business?

Well, at the end of the day, not everybody needs to have a sustainable business. What you want to have is you want to be able to build a business where you get financial freedom. Even businesses that are salable, only about 50% of it that go to market ever actually sell. It’s a really small percentage of businesses that sell. For an awful lot of people, you don’t want to build a business that’s salable. You want to build a business that gets you to financial freedom. You can do that without building a business that’s salable.

My specialty in my little corner of the world is not doing that, although I’ve thought about that a bit. I call it the wind-down strategy. When someone leaves their business, instead of trying to sell their business, they wind it down and they use the 80/20 principle to do that. The 80/20 principle very simply is 80% of your results come from 20% of your inputs. 80% of your profits come from 20% of your customers. If you know who that 20% is and you just fire the other 80%, you’ve now gotten yourself into semi-retirement probably making more money than you did before. It’s a really nice way to leave your business, and you’re only working one day a week so your exit out of your industry is more gentle. It’s slower. You’re not going to go off a cliff and lose all your relationships overnight, which is a whole different plane by itself.

You bring up a good point. Do you think that every business owner who’s starting out should really have the end game in mind, what their exit plan is?

It would be very nice, but the truth is it’s not going to happen. You don’t start a business thinking about how I’m going to get out. You start a business thinking about how am I going to serve people and get customers? If you’re thinking about your exit strategy before you start your business, you’re either in Silicon Valley and trying to become a unicorn, and even those guys aren’t really doing that. They’re really trying to figure out how they can get a business to scale and be big enough so somebody might want to take it public or buy it. The big thing in Silicon Valley, which is a dirty little secret out there, is most acquisitions at Silicon Valley are to acquire talent, not to require cash flow.

That is true.

It’s a whole different strategy than the main street businesses in Burlington, Vermont. You’re not going to be acquired to get the barista that knows how to make coffee.

It’s interesting. I started my business, actually my coffee and smoothie business, and I did have the end game in mind. I knew that I wanted to run it until my kids graduated from school because we were going to be staying in the area. As you alluded to, I wanted to sell it, and the goal is then to, as I’m saying, move down to Florida and live with the old people. I came in with that mindset, knowing what I wanted to do, and so I built my business around that. What it did was forced me to put systems in place so that I could sell the business and/or leave the business, continue running, knowing it would, as you say, continue to be sustainable.

Systematizing your business is one of the five things you need to do to build a sustainable business. Another thing-

What are those five things?

The first thing is you have to have … this is just my opinion, by the way. You have to have clear values because values-led organization is always more successful than a non-values-led organization and you get the right people on your team. There’s a whole methodology of building values and then building statements around those values and using those values to run your company.

Number two is something you had to do if you were going to build your smoothie and coffee business to sell it where you had to make yourself operationally irrelevant, which means that you are not involved at all in the day to day operations. Because the truth is when someone comes in to buy a business, they might say they want you, but they don’t. They want your cash flow. They want your employees. They want your systems, maybe. They want your managers, but they don’t want you, and that’s the dirty little secret that nobody ever really talks about.

The third area is you have to have a recurring revenue stream. On the coffee and smoothie business, you may have your regular customers come in every day and buying stuff from you. You’re a retail business, so it’s not traditional recurring revenue, but you had to be able to point out and say you buy this business, you continue doing what we’re doing with the systems we have. There’s no reason in the world because I’m not here every day that your cash flow won’t be the same.

The fourth is that you have to have systems, which you have to systematize your business. You have to let people know what they need to do for success. The less choice you give your employees, the happier they’re going to be, which is a myth that most business owners think is the opposite. Not true. Your employees want to know what they have to do. They don’t want to have to figure it out. They want to know they go one, two, three, four, five, six, and they’ll get a result that will make you happy, and you’ll say nice things to them.

Finally is having a business that creates enough profit in the four crucial areas of profit that you are going to become economically sustainable and financially free from your business. Those four areas are enough money to have a really good lifestyle, enough money for an emergency fund that’s going to last for at least six months because all businesses have downturns at some point where something bad is going to happen. If you don’t have cash available, you’re likely not going to exist. The third area is to have enough money for a fully-funded growth program. That’s not just marketing. It’s not just sales, but it’s marketing and sales and what you need to do to grow your business because businesses are either growing or shrinking and will always stay the same for a long time.

Finally, you have to have enough money to fully fund a retirement plan so you can afford to leave your business because the truth is even if you can sell your business, there’s a tiny fraction of businesses that sell for enough money for someone to ride off in the future. Good thing that a $2 million business will create lots and lots of cash flow for somebody in retirement. The truth is if I sell my business for $2 million, I’m only going to be left with $1.2 million after that because I have taxes to pay and I have costs to sign my business. In the financial planning world, we believe that you can use about 4% of your capital to spend every year. You go pass that, you are at risk of running out of money. Well, 4% of $1.2 million is about $52,000. Most people live on more than $52,000 a year. Your business will get you part of the way. It’s not going to get you all the way.

If I fully fund a retirement plan and I do it right, I might have $2 million, $3 million, $4 million in that retirement plan, which is a whole lot more than I got from selling my business. Now I’ve got $52,000 plus I’ve got $80,000 so now I’m at $132,000. That’s a little bit better for an outcome than $52,000.

Well, you’ve given a lot of food for thought. The small business owner who is soaking all this in and figuring out, like you alluded to pricing. It seems to be the biggest mistake you see them make, and you covered the five pillars. What do you think is … where should the small business owner start? Because it can be completely overwhelming. If somebody, whether they have an idea percolating in their head, they currently started and they’re just struggling to ramp up or they’re realizing they’ve plateaued, and what am I going to do to fund my retirement, as you just talked about, where should they start or are the answers different where they are along their journey?

The answer is different depending on where you are along your journey. We put together an infographic, which we call the success path for cash flow freedom, and it shows the five steps, five stages that people go through to create cash flow freedom in their business, financial freedom in their business. It’s a nice, little useful thing, but if I haven’t started my business yet, I’m going to have a different problem than if I’ve got 25 employees and I’m stuck. If I have 25 employees and I’m stuck, it’s usually me that’s in the way. I’m the bottleneck. If I’m starting my business, it’s do I have a good enough idea that will create enough customers who give me enough cash before I run out of my source of funding?

It’s a whole different problem you’re trying to solve. You solve that problem and you go into a transition that’s your next stage in business. With that comes a whole new set of problems that you’re going to have if you want to keep moving forward. Most businesses get stuck at about stage three.

What’s that?

That’s where you have to learn how to delegate. That’s the step there. Learning how to delegate is probably the most difficult skill a business owner ever has to learn and few learn it well.

Was that a lesson you had to learn when you grew from one to 90?

That was a big one for me because again, I used to be a screamer. Everything was somebody else’s fault. Well, if you’re going to run your business that way, you can’t delegate because there’s no trust. One of the biggest issues around delegation is trust. If the delegatee does not trust you and you don’t trust them, there’s no way for you to be successful in delegating. If you think when I’ve delegated something to somebody else and they make a mistake and you think they did it on purpose because they’re an idiot, you’re never going to be successful in delegating because you’re not going to trust him enough to actually do the job even though they might make some mistakes along the way.

It really comes down to trust and learning to tolerate mistakes. Most business owners never get past that. Most businesses never grow past 15 to 20 employees.

Interesting. Well, Josh, we’ve hit the clock. We’ve run out of time. I could talk to you for hours about this because I’m so passionate about helping small business owners, not only with their marketing, but ultimately build what you call a sustainable business so they can have the freedom and the independence. You mentioned an infographic that has these five pillars. How can people perhaps get a copy of that and/or learn more about you?

Well, that’s easy to do. To get a copy of that, you go to www.sustainablebusiness.co/cashflow, one word, and you’ll be brought to a page, and you get the infographic there. www.sustainabilitybusiness.co happens to be our website where you can go there, and we have videos and a podcast and some written stuff and a bunch of things around that. We also have …

I just finished doing a program that allows people to figure out where they are on the road to cash flow freedom. To get that, they just have to go to www.thecashflowcode.com and you can take our quiz. It does ask for a bunch of personal information, which we don’t share, but you’ve got to put it in there to get an answer. It’ll show you whether you’re on the road to being cash flow free from your business or you’re not. You’re actually going to learn something just by putting the numbers in because you’re going to say, oh, gee, I got a lot of assets here but nothing over there, so maybe I should do something over there, which could be real estate or it could be your retirement plan.

Great. Josh, you shared so much helpful information. I know that you’re committed to helping tearing down that stat, nine out of 10 businesses fail. What you’ve shared today can get that small business owner on the right track. Definitely tap into Josh, his wisdom, his free reports and his website full of valuable content. Any last parting words, Josh?

Yeah. Enjoy the journey. It’s really about that as far as I’m concerned.

Yeah. Hashtag #smallbusinesslife. It is a journey.

Right.

All right, everybody, this is Small Business Stacey, your Small Biz Marketing Specialist here to help you get your marketing into action so that you can have a sustainable business. I’m always here to help you become a #SmallBizMarketingWiz. Bye-bye.