On Revenue Quality with Bradley Roofner and Logan Brown

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(2:44) – What was the business you ran in Austin?

(4:29) – What would you say are some aspects of high-quality revenue and aspects of low-quality revenue?

(6:57) – Was there any revenue that wasn’t as clear cut to be either high or low quality?

(8:35) – How did you beef up the quality of revenue in your first 90 days?

(15:350 – How did you go about determining who your ideal customer would be?

(19:38) – What decisions are made based on the ideal customer profile?

(28:09) – How did you build out your outside Sales Org?

(31:31) – Did you have more success hiring people for Sales that had industry experience or Sales experience?

(33:15) – How did you instruct Sales people to navigate price increases?

(35:01) – Was your Sales Team compensated based on margin?

(36:07) – What were some levers in cash and collections that improved Quality of Revenue?

(44:04) – Did you find that as Quality of Revenue increased, the number of customers in collections decreased?

(46:40) – Did you find some interaction between construction and maintenance?

(50:47) – How did you go about measuring the conversion rate from low to high quality revenue?

(53:11) – How did Quality of Revenue impact your lives?

(59:11) – What advice would you offer CEO’s looking to do general clean up in their business?

Alex Bridgeman: Thanks for doing an episode on quality revenue. This is obviously a topic we’ve talked a lot about and I’m excited to hear your thoughts on. But I think it’d be helpful to start with if you just walk through the business you ran in Austin.

Logan Brown: So we grew a commercial landscaping business here in Austin, about over 100% a year for about four years. It was all organic growth. And then we sold it to a public company in 2020. But really, our story starts well before that, where Bradley and I met in college. We were going to the University of Texas at Austin. Then we later partnered with our friend Cade Thomas to acquire a business that would become WLE. So we acquired that business in 2017. And then right before that, we had bought, or we had been running a fund that was investing in small public companies. And we started that fund while we were in college. And that was before we pivoted to buying and scaling our own business. We sold that business that we scaled in 2020 to Brightview. And then we integrated the business and then that ended in April of this year. And we’ve been on sabbatical since then.

Bradley Roofner: Yeah, quality of revenue is a concept that’s very close to our heart, Alex. So we’re excited to talk about that and try and use this time to offer a lot of practical tactical advice on how to aggressively grow your business in a smart way without stressing yourself out of your mind. Because along our journey, we did several things wrong. But we also did several things right, and that helped generate a life changing outcome for us. So we want to be helpful. We want to share experiences learned from growing our maintenance business about 16 times.

Alex Bridgeman: Yeah, no kidding. So when you talk about quality revenue, what would you say is like some aspects of high quality revenue and then aspects of low quality revenue? How do you kind of define and break out the two?

Logan Brown: Yeah, so aspects of high quality revenue at the highest end of the spectrum would be it’s usually contracted. So your customer is locked in to some extent. It’s recurring. So you’re billing ideally the same amount every single month to that customer over the entire life of the contract. It’s usually very scalable revenue. So the service that you’re offering for that revenue is repeatable. You’re offering the same service every month for the same price every month for a really long time, and it’s hard for the customer to get out. That would be like the highest end. So think of like our business, one piece of it was maintenance, and that was contracted revenue. They were multi year contracts with renewals after that. They had price increases in there. And we offered the same service basically every month and got paid the same amount every month along that entire timeline of the contract. So it’s easy to scale and grow it. On the bottom end of that is something like project based revenue, total opposite end of the spectrum. You’re having to resell work every time you need new revenue. So that revenue doesn’t all convert the next year. You do the project, you finish it. Now you need to go sell a new project to get more revenue. You are usually doing new work every time. So you’re not repeating the same service or product. So it’s really hard to linearly get better at delivering that same service and product, which takes a longer amount of time. And then, there’s also kind of a billing component to that that also is really challenging from a cash flow perspective. So you’re billing for the work usually after it’s completed in arrears, the person’s going to check and make sure you did the work, then you’re waiting to get paid for it. So it’s also harder, I think, to finance low quality revenue.

Bradley Roofner: Yeah, I think we’ve got somewhat of a unique viewpoint on quality of revenue because we were running two businesses at the same time, doing almost the same amount of revenue, one being, in our opinion, very high quality, recurring revenue, the other being lower quality, project based revenue. So we really lived through the dynamics of running both at the same time, growing both at the same time. And a lot of our lived experience informs why we are very excited about encouraging people to focus on recurring revenue businesses.

Alex Bridgeman: No kidding. Was there any revenue that kind of fell in between where you weren’t really sure if it was low or high or it wasn’t quite as clear cut?

Bradley Roofner: Yeah, for sure. So if you fall in on the revenue quality spectrum from recurring down to project based, in between, you’re going to hit reoccurring and repeat along the way. And our business had a lot of reoccurring and repeat sales that were attached to our contracted maintenance revenue. So if we were maintaining someone’s property, we were kind of locked in on site, we had a lot of opportunities to sell into that relationship, which turned into opportunities every year to sell enhancements on a property, as well as irrigation repair opportunities on a property. So the irrigation repair component is one that we were very excited about. That was a high margin product for us. And we were giving a customer proposal every month to evaluate their irrigation system, make any repairs or alterations to improve that irrigation system. So that would be a repeat sales opportunity for us every month. Actually, that might be a reoccurring sales opportunity for us every month. And then in a different way, we also were selling enhancements to our customers, which is we would go in and see a small project that we thought could improve the quality of the property, and we might say that they should redo the entrance of their HOA. So we would give a proposal to put in new plants and put a new mulch, put new gravel, things like that. And we would have repeat opportunities to make those sales potentially once a year, but not on the same kind of reoccurring schedule as we were doing with our irrigation repairs, which was the same proposal every month but for different repairs, different improvements.

Alex Bridgeman: So when you first took over the business, what sorts of things did you do to kind of beef up quality of revenue maybe across the board if that was possible? What were some levers and adjustments you made early on to boost revenue? And then down the road, we can go through deeper into each lever that you pulled over time and kind of talk through those. But just initially in the first kind of 90 days, six months, year, what sorts of things did you do or maybe wish you had done as well to improve revenue quality across your company?

Logan Brown: Well, I’ll start with the things we did do. And then maybe we can move into what we wish we could do, go back and do. So the things that we did do is we implemented a new standard form contract. And we basically then launched that contract with our customers. So we wrote into a one or two page contract a handful of terms that would increase the quality of our revenue and then tried to pitch all of our customers on signing on to that contract. I think we also thought that that would be a lot harder than it ended up being. So it’s something we strongly encourage people to do. It’s good for our industry; I think it’s good for a lot of different industries like for us to move up the sort of professionalism curve as well, like offering a contract helps both sides. You’re able to make commitments to the customer, and they make a commitment to you. But that was one great thing that we did. I think everybody can improve their quality of revenue quite a bit by just trying to take whatever your current revenue is, wherever you fall on that spectrum, and try and move it towards something that’s contracted if it’s not contracted right now. So, for 500 bucks, you can pretty much pay an attorney to write up a one or two page standard form contract and implement that. We made it a little bit harder for the customer to get out of that contract than probably what was market at the time. And I think that helped us a little bit. We got a couple other percentage points probably on our retention from doing that to put some pressure back on to the customer to prove that we actually did something wrong before you can just cancel us and extend the time that we have to replace that revenue. So like extend the amount of days that you have before the contract can be terminated, that type of thing.

Bradley Roofner: I think the last thing we tried to do is embed within those contracts price increases and make the contract as long term as possible. So if you can have an evergreen contract that automatically renews every year with a price increase embedded in that contract, you can make one sale and not have to resell that customer on the same service and not have to have an event every year where the customer starts thinking about if they want to stay with you. Anything you can make that is an automatic auto renewal auto price increase, the better. It makes the business more valuable to yourself to own because you have greatly increased the predictability of future revenue within the business. And then another kind of simple, small tweak, little tactical thing you can do is, when we bought our business, the contracts were not uniform, and we made a move to change all the contracts to billing at the beginning of the month, which provided us a nice one time boost to cash flow. Because if you are billing a customer at the end of the month, you then got to turn around and build them twice as you change the way you bill from the end of the month to the beginning of the month. So that for us when we were first starting was also a nice kind of one time boost, changing the working capital dynamic of our business from one where we had to wait until the end of the month to bill to moving that upfront and billing in advance of providing the service.

Logan Brown: Yeah, I’d even say moving up kind of from the tactics to the strategy, one really important thing we did in the first six months also was cutting out a lot of bad revenue. So we took our entire maintenance book of business, and we removed all the residential contracts and only kept the commercial work. And that was after we realized that we had like 200 commercial or 200 residential contracts that were worth about 200,000 in revenue. They were like 1000 bucks each. And then we had another 800,000 that was made up of like 30 commercial contracts. So we had the contract per revenue was so much higher on the commercial side. So we’re spending roughly the same amount of time, if not less time, potentially, from an account management perspective, servicing the commercial customer than we were the residential customer. And even though it was really scary at the time, that was 20% of our maintenance revenue, getting rid of it ended up feeling like a no brainer when we looked back in retrospect because it freed us up to focus our business a lot more on a particular type of customer and get rid of a bunch of bad revenue that was like spending a ton of time servicing a bunch of smaller contracts. So I think we ended up repeating that kind of calling of bad revenue a handful of times over the course of our growth pattern. And that was a really smart strategic decision that we made early on. In terms of things that we wish we would have done, we wish we would have more aggressively started scaling the maintenance business sooner and even more specifically not tried to aggressively grow our construction business. That’ll be probably a repeated theme through some of these questions. But we kind of looked at them as both helpful for the business. And so we thought, let’s go and grow both. So we knew maintenance was more valuable, we knew recurring revenue is more valuable, then in our heads, it was like, okay, well, this one is just a little bit more valuable. So if we can, let’s grow both. And that’ll be, if we grow construction at the same time, that’s great. But we didn’t think enough about the trade off of, one, just how much more valuable is recurring revenue and how much easier it is to operate than the project based revenue. But two, if you’re spending all that time growing one side of your business, you could have used that to aggressively grow the other side. So there was an opportunity cost there that we didn’t probably fully weigh early on. I wish we could go back and much more slowly grow or just maintain our construction revenue and aggressively grow the maintenance revenue.

Bradley Roofner: Yeah, there’s an exercise we encourage everybody who’s buying a business to conduct now, and it’s something we wish we would have done, which is reaching out to the strategic acquirer in your space and understanding from them how they value businesses. Even if you’re not intending to ever sell your company, you need to have an understanding of where value is generated in your industry. So we’re very encouraging now of- because from our perspective, we knew maintenance was more valuable, we didn’t know how much more valuable it was. And so it would have been extremely insightful and encouraging to us from the beginning to know, here’s where we want to be in five years, here’s what we need to focus on to get there in five years. And just hearing it from somebody in the industry that actually buys businesses will be extremely clarifying, versus trying to kind of guess that on your own or bringing in other industries that you’re aware of.

Alex Bridgeman: I like that advice. That’s a good one. I haven’t heard that before. It sounds like for a lot of these, whether it’s calling poor customer revenue or poor revenue quality contracts or price increases or focusing on your top customers, there’s kind of an ideal customer profile that you need to create. How did you go about kind of figuring out who is your ideal customer, both for these contracts but also for kind of building the business around this type of customer kind of to your point of talking to a strategic acquirer and figuring out what customers and what contracts and what revenue they care about.

Bradley Roofner: I’ll let Logan give you kind of the list on how to approach that. I think one important way to preface this conversation is you need to have the data in your business to actually understand who your target customer is. In a lot of businesses that are available for sale or maybe you already own, that data is not going to be super clear. And if you don’t have any way of drilling down into a job by job or customer by customer or business line by business line P&L, you may not actually know who is your most valuable customer that you should be focusing on. So I think we’d start this conversation by focusing on the unit economics of a contract or customer as detailed as you can get and you may have to make some estimations. If you’re just pulling out one P&L out of your accounting system, you’re not going to see that detail. But you need to run an exercise from the beginning to understand where is margin being generated in the business, because the seller might not know, you might not know, your employees may not know unless you actually go in and do that exercise. So that, I think, kind of prefaces everything. But once you’re able to have that data, maybe Logan can share how to look at it.

Logan Brown: Yeah, once you have your unit economic data, you then would start by sorting basically all of your current customers by gross profit percentage, then sort them by total revenue. So now you’ve got your largest customers who’s giving you the most revenue and who has the highest gross profit percentages. Then once you’ve added those two criteria to your sorted list, I would then take like the top 20 or so and have a discussion amongst your team about the other sort of anecdotal information about each customer. So how hard are they to deal with? How much time does it take to manage them? If these are different product lines, think about how hard it is to offer certain products to certain customers. How big of a challenge is it to do the fulfillment for each of those customers, and then think about cash flow. So are they a fast paying customer, are they a slow paying customer. And after I’d say a couple hours of this, if you’ve got this list, and you’ve got some good feedback from your team on what it’s like to deal with these customers and how they affect the other parts of the business, you’re going to start to build out the archetype for what an ideal customer looks like. So they’re probably  a large customer, they that probably provide you a lot of revenue, they probably do that- with time you offer the service at high margins to them. So they’re a profitable customer to have. And they’re fairly easy to deal with. Your product fits well with what they need. And your product generally makes them feel satisfied at the end of it. So they feel like they’ve- their customer satisfaction is high. So there’s not a lot of complaints. There’s not a lot of problems to deal with. The delivery of the product or service is fairly smooth. And then therefore they pay you on time because they’re happy with the service, they’re high credit, they’re able to pay you on time. And those characteristics, I think, make up what your ideal customer is. For us, that’s the process we went through. And we landed on, okay, our ideal customer has these types of criteria, they meet all these- check all these boxes. And so now we’re going to aggressively pursue adding these types of people to our business rather than just taking whatever revenue comes in the door.

Alex Bridgeman: Yeah, I know outside sales was a big focus for you. But before getting to outside sales, what else do you do with that ideal customer profile within your business? What decisions are made off of that outside of the sales team? Because I definitely want to hear all about that, too.

Bradley Roofner: I think it just helps the whole organization focus on where value is being created. And it allows the team to also start sharing stories about how you’re servicing those customers well. One thing culturally we tried to do at WLE was call out in our town hall meetings every month what customers are getting a high level of experience out of WLE and who in the company is providing that and try and start to create kind of a bank of these exceptional stories of customer service, or the types of customers that are really important to the business. And it just gets everybody starting to think about those customers, how they can serve those customers with excellence. And it’s really getting the whole team aligned and organized around serving that type of customer.

Logan Brown: Yeah, maybe one more thing that we did was, it started to give us as operators and owners a better feel for what revenue to say no to. As much as we were aggressively pursuing the right kinds of revenue, some of the harder decisions were saying no to bad revenue. So I think where you start- you start building that muscle. And the muscle is being able to have somebody come offer you, say, hey, I’d love for you to come service my contract, here’s revenue, and you have to say, that doesn’t fit our ideal customer type. We are actually going to turn down that revenue. That was so hard to do, especially in the beginning. But it was something that really freed us up to scale the business much more quickly. And actually, in this crazy kind of not so obvious way, it actually would have slowed us down if we had taken on that revenue. It would have slowed our overall growth down which is very counterintuitive.

Bradley Roofner: Yeah, it’s a good point. Like I’m glad you said that because it’s not always the case that the easiest revenue to get is the highest quality revenue. It’s not always the case that the projects or the revenue that are coming up to bid for you or the types of revenue that you should target. Because what’s available on the market is somebody that’s trying to change, so maybe they’re a non sticky customer. And I think generally speaking, if they’re coming to market, they’re probably price conscious. Versus if you can create a sales opportunity, you can sell on quality, you can sell on something other than price as a factor. You can certainly sell price is a factor. But there’s an opportunity to craft that pitch differently than somebody coming out to market on price.

Logan Brown: Yeah, and I’m glad you asked about the non sales stuff because I’m actually thinking of some other things that we did that I wouldn’t have otherwise. I think, operations wise, we started building our entire operation around how we service the ideal customer versus building it to serve a more vague set of customers. So we started investing in the types of things that we know this ideal customer is going to like. So our ideal customer is a little bit higher end, it’s a little bit larger contract, it’s a particular type of community that we were servicing. And so we would invest in the kinds of things we know they care about. So we wanted to have a fresh logo on the side of brand new trucks. We wanted to have great looking uniforms. We wanted to prioritize safety and making sure that when people were on the property, and somebody’s driving through the neighborhood, if they want blinking lights on our mowers and our zoo zoos, we’re going to have blinking lights on the zoo zoos and the mowers. But that that product started to shape around the things that the ideal customer cares about. And as we got better and better at implementing those changes to the product itself, the service that we were offering, the customer then starts to like it more because they can tell it’s built for them. Like, okay, like you’re really targeting me in the way that you’re building this service or product. And the more specific you can get with that, I think the customer does pick up on that. And if you start building your product in a really vague way to try and fit a lot of different customer types, you start to lose track of exactly who you’re trying to service and what was your product really for. So it helped clarify like the ways that we shaped the product we’re offering, and I think that ended up being really important for the scalability.

Alex Bridgeman: I think, if I remember right, you also would take pictures of the work afterwards and send it to the customers.

Logan Brown: Yeah, we’d have like a report that we would send to the customer. So monthly, we would try and get a lot of feedback to the customer on how that month’s service went. So that would include some updates on things that happened or any issues that came up. And it would include some photos of things that we did that month.

Alex Bridgeman: I imagine that would keep you fairly top of mind for those customers, too, if they’re getting these reports and feedback from you as well, in addition to all of the other feedback that they’re giving you about the different services.

Logan Brown: Yeah, definitely. I mean, the amount of communication that we had with customers, especially our large customers was super frequent. So, this was kind of one piece of many throughout the month, but they would have gotten a report amongst a bunch of other things. And that wasn’t even the only report they got. They received multiple deliverables, I’d say, is maybe a better way to summarize it from the company that helped communicate everything that was going on at the property and felt like a very high touch service that they were offered. A phrase we used in the company a lot was white glove service. So we were trying to offer a white glove service to a landscaping customer. And I think that they picked up on the fact that we’re trying to offer something that’s much more professional than maybe the typical experience they have with a contractor.

Bradley Roofner: Yeah, Alex, I think the landscaping industry, and this probably applies to several other industries, is not known for being proactive. And we were often selling against customers- or sorry, selling against competitors that the customer was waiting on that competitor to provide them a proposal for something. And that shouldn’t happen in business. If the market is efficient, there is a competitor that has a solution to a problem and is bringing that solution to the table quickly. And we tried to go one step further of not only being responsive, but how do you intuit the needs of a customer. So we were always trying to find ways of giving the customer a solution to a problem that they didn’t even have to bring up to us yet. And that helped us a ton and in terms of creating a good customer experience, retention, having the customer know that we’re thinking about one of their most valuable assets, their land. I mean, what is worth more to an HOA than their common areas? Like that is the asset of a community. So if they understood that we were thinking about what they cared about and providing them solutions to problems that they didn’t know they had yet, that was an excellent customer experience.

Alex Bridgeman: I imagine that would also allow you to direct customers to other high quality revenue sources. Like you probably wouldn’t send them to a low quality revenue product for you, you’d probably send them to another similarly high quality revenue source, right?

Logan Brown: Yeah, I think the way we would have thought about it is the more that we service the customer with a high amount of- like a high touch experience, basically, the higher touch experience we can deliver, the more likely they are to buy our follow on products, which were irrigation repairs and enhancements. So the happier you are with your iPhone, the more likely you are to go buy a pair of AirPods. And I think if we could convince the customer we were an excellent provider of our maintenance product, that made them way more likely to buy the other things that we were trying to offer to them. And the more excited they are to buy those extra things, that tends to be the higher margin you can charge. We weren’t necessarily adjusting margin on the fly to try and charge our happiest customers more, but it just plays out that they’re going to buy more products, there’s going to be fewer complaints. And if you’re not having to make a bunch of adjustments to the service you delivered, you’re going to be at a higher margin. And so I think it does play out that way. I think you’re right, like they do become more likely to buy other what we call high quality revenue sources so our irrigation repair and enhancements that were nested into the existing customers’ maintenance contract. They were they were follow on sales to that recurring service that we were offering.

Alex Bridgeman: And then let’s talk about sales, too, because I’m really excited to hear about that. So when you have this ideal customer profile, how did you use that to build out an outside sales org?

Logan Brown: Yeah, so the sales story is fun. So I mean, we started out pretty rough. We had one salesperson who did not come from a sales background. And we were trying to turn him into a salesperson. And it didn’t go super well at the beginning. We were even like- very early on, we were trying to kind of give him sales to keep him energized and motivated because he was having such a hard time getting ramped up and getting started. And we didn’t have a very good sales structure in place. And then over time, we got better and better at it. Eventually, we had a full sales team built out with a VP of Sales who ran it and sales operations support person. So it had a lot of capacity as we built it. And along the way, the things that sort of got us from point A to point B were defining this ideal customer so that we could then focus the sales team on selling to that customer. So a specific sort of tactic that we implemented there was once we had that list that we talked about earlier of our top customers, we went found all the people in our service area who fit that customer profile. Once we found those people, we put them on a big list, and we then divided that list up amongst our salespeople. And then we highly incentivized them to go sell to those specific large, high quality, ideal customers. And we gave them bigger and bigger incentives the better and better the customer got. So, the top few highest quality possible customers in our area had these huge bonuses attached to them, if a salesperson could go close that deal. And then it went down from there. So we were trying to motivate them on top of just their normal commission structure to go attack the type of business that’s best and healthiest for the company to take on. And that helped prevent some of this like salesperson going and taking in the easiest sale that they can close. So if they look at their list, and they’re trying to make money that quarter, what are they going to do? They’re going to go close the business that’s the easiest to close. And typically, that’s not always the revenue that’s best for the company. So we tried to reverse that by adding incentives on to the biggest, best, highest quality customers. And that ended up working out really well for us. So we were able to focus them on this list of ideal customers, highly incentivize them, and then kind of unleash them on the market. And then we just had a great sales training process. I think we were constantly refining how we had them make their pitch to these customers. We were doing all the things that great sales organizations do. We were doing role playing exercises. We had them repeat their pitch in different ways and drill them with really tough, unanswerable questions and put them in high pressure scenarios so that by the time that they actually got in front of the customer, whoever they were dealing with, whoever they’re having to sell to is going to be much easier person to deal with than having to answer questions from us in a conference room in our office. So we did a bunch of little fun things like that. But I really do think the incentives and the customer, the top customer list that we gave to them to help focus them was it a really major piece of it.

Alex Bridgeman: And in hiring for your sales team, did you have more success hiring folks with sales experience or industry experience? Or do you need some combination of both for it to work the best?

Logan Brown: Yeah, I think back to how I talked about our rough beginning, that person who started out as someone we were having to basically give sales to ended up being one of our top salespeople in the company. And I think that just goes to show how a great sales structure and great sales training can turn just about anyone into a great salesperson. Or at least it can turn the average person, I’d say, into a great salesperson. We ended up- this person that started with us was a rock star, and put up-  was very patient with us. But our sales team was made up of a diverse group of people. I think they had- some had experience, some didn’t in sales, some had experience in our industry, some didn’t. And I think your ideal is to just go take someone who’s already selling in your industry, like go pay whatever you need to pay if you can to take the top salesperson in your industry. But if that’s not available, or if you’re trying that, and you want to run our parallel strategy, I think hiring people and placing them into a great sales structure, you can do that with people that are not from industry, from industry, from sales, not from sales. I think you can eventually get just about anybody to be a great salesperson. And at least in our experience, we were able to turn both kinds into successful salespeople. And a lot of it had to do with their overall like attitude. Were they coachable? Were they persistent? Were they positive? Are they proactive? More than it had to do with the fact that they were in sales or not in sales or in landscaping or not in landscaping.

Alex Bridgeman: The contracts you developed, did they have a standard percent price increase annually or was that kind of up to the discretion of the salesperson too?

Bradley Roofner: So, we would give our salespeople a goal, a target in mind, like if we could have a uniform same price increase across the board, that would be great. But we certainly wanted to make a sale. And if that was something that the customer cared about, that would be an area we would concede on and kind of give them leeway on being able to reduce that price increase. Something we always tried to do in making a sale if a customer was price conscious is to change the scope of the contract, not the margin of the contract. So if we’re able to reduce the number of visits, but keep the same margin, that would be a win. If we’re able to shrink the service area, but keep the same margin, that would be a win. We didn’t necessarily want to change price in relation to the value of the contract to us in terms of margin. So I guess the price increase was an area that I would probably put on the middle of the list of what we were interested in changing. But we certainly liked changing that versus my budget is 15% lower than your contract, can you drop your price 15% and change nothing else?

Logan Brown: Yeah, margin would be the last thing we try and change. So there’s a bunch of other ways that we can alter the offering to try and match what the customer wanted, which is usually a lower budget, but not affect our margin. And I think that’s a lot of the magic of how you maintain a high percentage of earnings as you’re scaling your company, just getting creative about how you can close the deal, but not alter your margin.

Alex Bridgeman: So was your sales team also compensated based on margin partially as well? Was that part of it?

Logan Brown: We really tried to take that out of their hands. So there were some checks and balances in place so that you didn’t have the problem of a salesperson trying to negotiate margin or a salesperson trying to erase price increases in order to get a deal done. So we took all of that out of their hands and put that in a separate department, which was estimates. So there’s a group that put together proposals, and there was a group that sold proposals and to get approval on anything that was going to change margin, they had to go to their VPs. They had to get an extra level of approval on that. They couldn’t do that themselves. And that was very much a last resort to close a deal. And there were certain things we just wouldn’t budge on so that we could have the uniformity of knowing that all of our contracts meet basically this same set of criteria when it comes to margin, etc.

Alex Bridgeman: You mentioned cash flow earlier in regards to kind of having cash coming in at the beginning of the month versus the end of the month or at least invoicing that way. What are some ways, what are some levers within cash and collections that improved quality of revenue?

Bradley Roofner: So I think a big thing we’re an advocate for is establishing a credit department in your business. And if you have a small business that might look like you being the credit department in the beginning, but having a focus on credit from the beginning as a key component of your business and thinking about cash flow, not just thinking about revenue, not just thinking about EBITDA. So I think step one to getting paid well, getting paid early, is by billing the customer exactly the way they want to be billed, on time or early. We have never had anybody complain with an invoice being sent on time or early to the right place. And those get fast tracks. It’s magic. You get put right to the top of the queue. And there’s a reason why a customer has a billing procedure in place. And some of your highest quality credit customers are going to have the most complicated billing procedures because they probably have their own payment related department that needs to follow a certain structure to issuing payments, which means there’s somebody hired to pay you at that company. So you really want to think about your business as integrating with a customer’s payment arm, customer’s payment department. The same way that an amazing tech company will have their software installed on site at a business, you want to have your invoicing system effectively installed directly into the way that they cut checks or send ACH payments. So that’s our biggest thing that you need to focus on to make sure you’re doing right. And if a customer is complaining about anything in payment, if they don’t want to send you a check, you need to figure out a way to accept ACH payments or figure out a way to accept credit cards and charge it back to your customer. So you want to reduce as much friction as possible for getting your money from the customer for what you build.

Logan Brown: Yeah, don’t always assume that it’s the customer. Like it’s not their fault a lot of times. That was always the first place we’d go to if we had a collections problem. We’d look at our side of the billing process and see what we could improve to create less friction. And magically, most of the situations can be solved by us being a little bit better on the revenue management side. So I think that helped us as we scaled. But there were several other things we did. I think, from a collections perspective, having a funnel you’re working through that has increasingly aggressive messages is really important. So knowing where you’re going to draw the line. For most businesses, we think that you can set your goal at 30 days. We’re not going to let anything go over 30 days. If you’re in a particularly bad spot right now, maybe you need to set your goal at 60 days. We’re not going to let any bills go past due 60 days. But let’s say you set it at 30. Anything over 30 should get a certain level of message. And if you’re running your own credit department, you should set aside a couple hours every Friday or whatever day you choose to call all your customers and deliver that scripted message or send out an email blast to all of your customers that are past that 30 days that has a scripted message. And you’re letting them know, hey, we take this seriously, we expect the bill to be paid on time. And if you don’t pay, we’re going to have to move on to the next step of this process. And you sort of let the customer know we have a credit department, we have a process for getting things collected, and you are now in the funnel. And we expect you to pay. And then those messages can get increasingly more aggressive. And the next time you reach out, like, hey, you’re past due, and you only have, whatever, you have seven more business days to pay. And then by the time you get to the end of the funnel, you start threatening with things that are more aggressive. Like in our instance, we had hired an outsourcer, an attorney type consulting business to help us draft out letters that let them know that we would pursue this revenue. And if we needed to, we would file legal documents in their particular state that put a lean on their property, that type of thing. So you can get pretty aggressive with it, especially as you get out further and further. If somebody’s at 90 days plus, you need to have a fairly aggressive way to try and go after that revenue. And so yeah, I think having that funnel, knowing where you’re going, and having a script for each part of it, then allows you, if you’re your own credit department right now, to eventually hand that off to somebody else. Maybe at some point that could become part of an admin’s job or at a future point, it’s worth hiring your own person who just does revenue management, right? Maybe their only job is to work on collections, which might sound like just a cost center. But if it’s helping you finance your growth, then it’s worth it. So one little tweak to that too is that like if you’re at the very beginning of this journey, a great place to start is just trying to turn your statements that you should be sending out into a collections tool. So you should be sending out statements of customer AR balances to the customer every month. Most accounting systems can do that. And most accounting systems can automate that. So, you can right off the bat start by making sure you’re sending out statements to every single customer, highlight in red everything that is overdue, and attach some sort of message to that statement that lets them know that this amount is overdue, we expect it to be paid. If you want to charge late fees, start talking about how you charge late fees past a certain amount of time, etc. But that’s a great place to start. And then you can start layering in these other scripted messages and ways of collecting the money as it gets further and further out.

Bradley Roofner: And just for encouraging, I bet some of these things sound like they’re going to be viewed as negatives from the customer’s perspective. And I think we found that customers did not mind getting a statement that has the balance on your account. Like that’s something that helps somebody in accounting do their job well. So I think there’s ways to look at all these different steps of the process, too, as a way to be collaborative with your customers, especially if you have a contracted revenue business and you’re doing all the right things to get approval on all the business that you’re conducting with the customers. Like there’s an agreement to pay there. And we can’t forget that as the business owner asking to get paid. And there’s ways to do this in a collaborative, working together, trying to solve problems that may arise. They may not have gotten your bill, they may have changed their Gmail server, and it may have gone to nowhere, they may have added Barracuda to their tech stack and it may be capturing your invoices. You never know why a customer is not paying if you don’t start that conversation. And it just gives you so much more clarity into the quality of your AR if you are able to flag every single invoice that’s after 30 days unpaid with a note about why it’s not paid.

Logan Brown: Yeah, we ended up training the person who ran collections for us eventually, when we handed it off to someone else who really trained them to be an excellent negotiator. So it was a very collaborative environment when they would get on the phone with someone and they were able to split that balance between being aggressive and making sure they knew we were taking this seriously but also being collaborative, so that if it was our fault, we were able to fix it and correct it and set up the process for success next time. But I think it was worth every minute we spent training the person who handled collections on sort of some great negotiating tactics to try and make sure that we were getting this cash flow in. Because it was a huge element of what allowed us to actually grow the business. And I think Bradley and I would say that every business should have one of their KPIs as your DSO. You should always be managing how quickly can we turn revenue into cash. And you should be tracking that as a team, get your team aligned around that, excited about it, report on it at least every month, and get people rallied around trying to hit a target of a certain DSO number, so that you’re helping fuel your own growth.

Alex Bridgeman: Yeah, it sounds like that could be its own podcast episode just on building a credit department. Did you find that as your quality of revenue overall as a business increased that the number of customers in collections decreased? Or was it pretty steady throughout?

Bradley Roofner: Absolutely. I think there’s definitely a correlation between high quality of revenue and high likelihood of receiving that cash. Just because if you think about the highest quality of revenue, which would be contracted, billed at the beginning of the month, credit card on file would be amazing. Your DSL would be zero, Alex, that doesn’t necessarily exist in our world in commercial landscaping. But yeah, absolutely. If you have predictability in what the future revenues of your business is going to be, that creates future predictability in what the payments a customer will need to make if they hire you as a service provider. So 100%.

Logan Brown: So another great feature of recurring revenue is that you’re ideally sending the bill to the same place, the same company, same address, and it’s usually for the same amount every month. So there’s very little friction after the first couple months of getting that process set up and getting that customer information entered into your system correctly and them being able to enter you as a vendor correctly into their site. After all that gets set up, the likelihood of that payment process going well in the future is very high versus project based. Once you close the project, everything you learned about how to build that customer, how to receive cash from that customer goes away and you’ve got to start all over again, entering in a new way to do it, they have to enter you in as a vendor, etc., etc. Even if you’re working for the same customer doing a new project, chances are you’re probably might be working with a different billing department or you’re going to be billing different amounts on a different timetable and the person who’s now working with you has a different way that they want to receive their invoices with a different PO number. We just experienced a lot of that, where even when you’re working within the same firm, there’s so many changes to the revenue management process that you then end up encountering more friction in trying to turn that revenue into cash when you’re on the project based side.

Bradley Roofner: A key tenet of recurring revenue is you’re providing the recurring service over and over and over to the customer. So that gives you the ability to get better at doing that service. And better at servicing that service. So even down to billing, there’s benefits, and you can get better and better at billing and receiving payment from your customer. Because it’s two people learning how to do the same thing over and over and over, the person who’s billing and the person who’s paying.

Alex Bridgeman: You talked a little bit about how, actually, we’ve talked a lot about this away from the microphone, but just talking about different- the construction versus maintenance sides your business and how you would have rather invested most of your time in the maintenance side. But we talked a little bit earlier about how perhaps there’s interaction between the two, that maybe you predicted would happen or you could imagine happening, similar to going into a grocery store and buying produce and having that be a low margin, but it’s low margin just to get in you the door to go buy a high margin product. Did you find some interaction between construction and maintenance whereby construction might send you a new maintenance customer? Or did reality perhaps differ quite substantially from a dynamic like that?

Logan Brown: Yeah, the punch line is that a lot of small businesses justify bad revenue because they think it will lead to good revenue. And I think that that is really a fallacy. And it wasn’t our case. I would say, a lot of the times when we talk about construction versus maintenance or project based versus recurring revenue, people will quickly ask the question, well, didn’t the construction revenue or the project base revenue then lead to a recurring revenue contract or maintenance contract? And in our experience, it was actually a fairly low conversion rate. So less than 10% of our construction projects would turn into maintenance revenue. And for us, that took a long time to realize. And once we did, amongst a bunch of other things, it changed the way we thought about how much time and energy and money are you willing to spend on lower quality revenue in order to get the higher quality revenue because you could have taken all that time, effort, and energy and just directly put it into trying to grow your sales team or offer incentives to customers or improve your marketing or there’s so many different things you could do to try and accelerate the increase in revenue that will far exceed the rate at which you can convert your bad revenue into good revenue. And all that sort of time and energy and stress that we put into aggressively growing our construction department, we wholeheartedly believe would have turned into even faster growth on our maintenance side, and we were growing 100% a year for four years. So who knows what we would have been able to do if we weren’t trying to also grow a large construction company at the same time.

Bradley Roofner: Yeah, I think you can just miss this fact in landscaping so easily because a lot of these businesses started by saying yes to everything. The way a lot of landscaping companies get off the ground is by being a one stop shop for anything horizontal that has a customer’s need. And they grow by servicing those customers and saying yes to things. But we can’t overemphasize enough the repeatability of a service. If you think about a construction business, if you’re doing landscape construction, for example, once you finish a project, that revenue is gone. You have to go resell that new project. I mean, your turnover is at least one time a year, you’re turning over 100% of your revenue, 100% of your revenue. And if you compare that to maintenance industry standard, you’re probably retaining about 90% of your revenue into the next year, only losing 10%. So we’re talking about the difference between turning over 100% of your revenue and 10% of your revenue. That’s 10x, Alex. So it’s just really hard to get away from some of these features. And we talked about this a lot. We’re actually very proud of a lot of the construction work we did as a company. Like I still point out projects to friends when they’re in the car that we did in 2017, 2018 that I’ve already pointed out to them before because it’s really gratifying to see so much land turned into something that wasn’t there before. But from a business management perspective, it’s just really hard to think about the two against each other. And then that’s just one example of it’s conceivably 10 times better to focus on maintenance than construction, and that one aspect.

Alex Bridgeman: How do you go about measuring that conversion, so trying to put the math together for figuring out what is my actual conversion method or conversion rate from that low to high quality revenue?

Logan Brown: Yeah, so there’s kind of two different ways we looked at it. One was just from a percentage of total customers, how many customers by volume turned into maintenance customers. So if we worked for like 100 construction customers that year, how many of those projects turned into maintenance. So maybe we converted six, and we worked for hundreds, that’d be like 6% conversion. Then we also looked at it from a dollars perspective. So if we did 10 million in construction, hypothetically, and we converted 300,000, that was 3% of our revenue we were able to convert into maintenance contracts. And those numbers were- I mean, I’m not using real numbers, but those are, let’s say, ballpark type of figures percentage wise, and that would have been a corollary to at least what we were doing. So it was just very low. Maybe even a more clear example is that, let’s say we converted in total a few 100 grand of revenue that year. So we added from all of our combined construction work we did, we got $300,000 in maintenance contracts that we can trace back at all to any kind of construction work that we did. Well, that $300,000 we could have sold on one contract. So, if our sales team went out and just sold, what if we used all the money, we had spent all the time and energy we had spent running the construction department and put that into just selling one more contract, it would equal out in terms of the net revenue. And I think a lot of businesses are like that, but they don’t either know how to track it or think about it, or they just don’t bother to because it seems so obvious that like one should be leading to the other or that, oh, maybe later, you’re right, maybe we’re just not very good at converting them right now, we just need a better process. But I think a lot of that is just justifying bad revenue because it’s much harder to, in our experience, call revenue or getting rid of revenue, saying no to revenue than it is to- it’s harder to get rid of it than it is to add it. Like it’s harder to say no to something than it is to say yes to something when it comes to adding revenue dollars.

Alex Bridgeman: So taking a higher level question, how did quality of revenue and high quality revenue, how did that impact your life both at the company but just on a high level personally too perhaps?

Logan Brown: Yeah, I think the experience of running the maintenance business, especially towards the end when we had built the management structure, we had a lot of our ideal customers that were now a part of our portfolio, we improved our collections process, we made all these sort of operational improvements over the course of three or so years, the maintenance business was a lot of fun to run. It was running like a well oiled machine. We loved checking in on our KPIs. We loved working with our team to continue to grow it. And the construction story was very different. I would say it was much more stressful. We’re working on these large projects for customers in these sort of very high pressure environments. So we might be installing a small piece of a project in a really big project, like working for a big public project or something like that. And you’re kind of a small piece. And so the general contractor’s putting a ton of pressure on you to finish on time. And you’re also coming in sort of at the end of a lot of projects. So if there’s been mistakes or delays or budget problems, a lot of people are looking at you to make up those budget problems and delays, mistakes. And so it was a high pressure environment. And there’s a fair amount of stress related to that as well. So I think the process, that the feeling of what it was like to grow the construction side versus the maintenance side was more stressful. It was harder. And we were always running into cashflow problems because of the things we’ve kind of already mentioned here. But in trying to scale a project based business, probably one of the most stressful elements is that you’re almost always running into a cashflow problem because you’re adding on more and more revenue. So you’re having to put more and more costs for servicing that revenue. But as you’ve now added on more revenue, it’s going to take, in our case, 60 to 90 days to get that revenue converted into cash, so you’re floating more and more and more cost every month that goes by, and you’re hunting down that revenue trying to turn it into cash. And so all the times where we would get to these really low cash balances in our bank account, and me, Bradley and our third partner Cade would all be like sitting down with a list, like, alright, here are the top 10 collections we’ve got to go make this week if we’re going to be able to make payroll on Tuesday. Those memories are not so great and were really stressful times. We’re all sitting around going, alright, how much money do you have? How much money do you have? We might need to like write a check to the business to be able to like fund payroll for next week before we get XYZ customers to pay us. So yeah, those parts are really stressful. And then just the general dynamic of working on big projects where there’s a high pressure environment, I think, can be stressful, versus providing a routine maintenance service is just a generally lower stress environment to begin.

Bradley Roofner: It’s also hard to get a round conversation around terminal value. Like what are you building in your business when you’re pursuing different types of revenue. And because of things we’ve already talked about, this lack of repeatability of service, lack of predictability of future revenue, lack of predictability future margin, because you’re having to rebid the new work every year, it’s just really hard to get at any sort of expected future cash flows to use to value of business. And even if you have some insight into that, it’s hard not to put a pretty heavy discount rate on that. So it’s like, what are you working towards and what are you building in terms of what is the terminal value of this business other than the cash flow you can pull out of it each year. And you compare that to maintenance, where you have a very high predictability of future revenue, you’re not rebidding those contracts every year, there’s embedded price increases in those contracts. So you get this beautiful kind of obvious predictability of revenue, predictability of cash flows that you can use to value a business. And it’s so much more transferable than a construction business. So you’re really buying hard assets, assembled workforce, some backlog. It’s hard to really get around what you’re placing value on in a project base revenue business, versus how obvious it is to see what you’re putting value on in a recurring revenue business.

Logan Brown: I’d say one of the jokes that Bradley and I make often is that when you’re buying a construction business, you’re really just buying a really high risk, high reward job opportunity much more than you’re buying a business. Because if you don’t have a lot of terminal value, I think the feeling, to your original question about like how it feels to run one versus the other, I think when you wake up and you realize I own a business that unless I find someone exactly like me, who’s another like search funder who’s just really wanting to close on a deal, I’m not going to be able to sell this business for really anything. And it’s not a great feeling, that you’ve maybe spent countless hours and put blood, sweat, and tears into something that after five years of working on it, you may not be able to sell for anything of any net value to you. Now, obviously, that’s not to say that that’s every situation. Like we can’t speak to the exact multiples that anyone would or wouldn’t pay. But just when you compare it to recurring revenue businesses like you just went and did your own research in the market, you look at businesses that are project based versus businesses that are recurring, you’re building a lot more value in the recurring side. And so I think it feels great to wake up and think, man, all that EBITDA we just added last year has now increased our business value by X. It’s a very different feeling where you’re like man, we just put all this blood, sweat, and tears into this business and now it’s worth the same exact thing it was worth last year because we’re not getting- we’re not increasing really the enterprise value of the thing that we own, even though it might be growing, even though you might be adding on more revenue.

Alex Bridgeman: Before closing, What advice would you offer CEO’s looking to do general clean up in their business?

Bradley Roofner: Yeah, I think we’ll start on just some general cleanup items. I think an area to look at is when you buy a business, what are all of the ancillary activities that is not core to the business but are normal things that would be in place for a larger business in your industry. I’m talking about like legal, HR, safety, risk, insurance, and just finding ways to evaluate where the business is at in those categories and make improvements in the beginning. Because a lot of stories we hear are these areas become neglected until something bad happens, and then you learn and then you focus on it, then you prioritize it. We think that there’s a lot of creative ways to get out in front of any issues like that by using resources that are outside your business. Like you don’t need to hire an HR person to have HR activities happen at your company. You can hire a temporary worker. You can hire somebody who is as an expert in that field to work for the business for a month or two and come up with the correct best in class employment applications and onboarding documents for your company. If you’re unsure if all of your risks are being captured in insurance, it’s very easy to ask a different insurance company, different insurance agent to bid, what would be a best in class kind of insurance suite for your business. That’s something you don’t have to spend any time on. And it’s somebody else’s sales activities. They would love to do that audit and look at that for you. And I can think about a lot of different areas like this. I mean, safety is another one that comes up. Does your business have a safety manual? If not, how do you use an outside service provider to come up with a safety program for the business, reoccurring check ins to make sure it’s actually being followed? There’s a lot of these ancillary departments within the business that are not going to be able to be their own departments from day one with a manager of them. But you can get out in front of a lot of future headaches by using outsourced service providers in the beginning.

Logan Brown: I’d say the way that you hire in general is a good cleanup item. So in the first six months, you should probably sit down and have either a consultant or an attorney help you review your employee application, create a handbook if you don’t already have a handbook, if you already have one, have them look over it and make improvements to it, and then put together an onboarding plan for how you’re going to onboard every employee. And it should be proportional to the responsibility you’re going to hand to them. So if it’s a really low level employee, maybe it’s only one or two weeks. If it’s a higher level employee, you probably need at least a month or two to onboard that person. And then make sure you have all the proper legal paperwork set aside and put together for the onboarding or exiting of an employee. And like Bradley said, I think one of the cheat codes to be able to do this is instead of paying like a really expensive attorney to come do all this for you, you can go to like a temporary staffing company. And for a fraction of the price, you can have like an HR expert come in once a week for like the first two months of you being at the company and spend just a few hours helping you write out these documents and put them together and then at the very end, just get them reviewed by an attorney, instead of having them write them for you. I think to our earlier conversation about unit economics, another cleanup point would be making sure that you can at least tell by a sort of customer by customer breakdown, what the gross profit percentage margin is for each customer. How much revenue are they bringing in, and what is their gross profit for each customer is really important information that a surprising amount of small businesses do not have a way of putting together. And if you don’t know that, you won’t be able to put together your ideal customer list. And if you don’t have an ideal customer, then you probably don’t have a product that fits very well with your current customer base. So I think that’s a really important cleanup point. And then another exercise that we went through that’s pretty close to an exercise that a book called The E Myth suggests, we did basically a spin on this, but if you pencil out your current org chart, so just write out exactly as it is right now, and then pencil out the org chart of a company that you respect, like go look for, like Bradley said, maybe a strategic acquirer in your space, somebody that you would love to sell your company to even if you don’t plan to sell your company at any point. Just go find a company you respect. Figure out through LinkedIn and other publicly available means what their basic org chart is, and pencil that out. And then think pretty clearly about how you’re going to map from where you are now to where you want to be as you scale your company. And if it takes you writing in your own name for almost all the roles at the beginning, that’s okay. But at least you know what the roles are supposed to look like one day, and then you can start building out some of the structure for each of those roles, some of the documentation for how those roles are supposed to be done along the way so that by the time you actually need to hand off maybe one of those roles to a person you hire, you’ve been inhabiting that specific role within your company and it fits into the system of how you deliver your product or service versus you’re just dumping a bunch of new responsibilities on to someone that you hired. So I think penciling out those two org charts is a really great way to start getting clarity around how your business should be structured from a people perspective. And it’ll allow you to start in some of the documentation early on in your process before you get to the point of really needing it.

Alex Bridgeman: Yeah, I love all the kind of built to sell ideas from here. This was fun.

Logan Brown: Yeah, I would suggest reading that book. But I think we read that book four times. And I really do feel like we created a lot of value in our company by following the main value drivers. I can’t remember exactly how many there are, but I think we had kind of five that we really pulled out of the list – the quality o revenue, facilities, reviewed financials, professional management team, outside sales team so you’re not the one selling the product. That became very much the blueprint that we used to be able to grow and scale our business 16x.

Alex Bridgeman: Yeah, that’s impressive growth. Thank you both so much for sharing a little bit of time on the podcast and talking about revenue quality. This has been really, really fun and I’m excited to publish this. But thank you for sharing your time on your sabbaticals. I hope they’re going well.

Bradley Roofner: Absolutely, Alex, thank you.