When Zach Dennis met Joe (name changed for legal reasons), Dennis was praying over a meal break during a landscape lighting class. “We started talking and just built up this relationship over the next few years,” says Dennis, owner of Lawn ReLeaf in North Little Rock, Arkansas. “He did irrigation and drainage work so I would throw him some work and he would throw me some work and we got to be good friends.”
For a couple of years, Joe started asking Dennis if he would buy his business out. “He was a great technician but not a business man,” Dennis explains. “He was working 80 to 90 hours a week. He was working himself to death and wanted to get away from the ownership side of things.”
Dennis asked a lot of questions and continued to explore the opportunity but didn’t jump on it for two years. “He was in my area and had a pretty big customer base — roughly 500 customers. He really wanted to sell and I had a need on the design/build/installation side of the business, so it finally made sense that he would be a good fit to run this growing division. He was a good friend, and I trusted him.”
Joe wanted $150,000 for his name, customer accounts and equipment and then he was going to stay on with the company and be given a salary to run the landscaping division. The deal was made and the two friends joined forces in January 2015.
But soon after Joe started, “he just flaked out,” Dennis says. Jobs weren’t getting completed, people were leaving work early, there were no systems or processes in place. “We were hemorrhaging money,” he adds. “My CFO, my office manager and myself were trying to figure out how it was happening.”
The situation got so bad that Lawn ReLeaf’s landscape maintenance division had to subsidize this landscape design/build/installation division $6,000 to $7,000 a month to meet payroll. “Several times, I even had to use my own personal money to float payroll,” Dennis says.
That year — 2015 – became “the first year I ever lost money,” he adds with a sigh.
From losing money to the most profitable year ever
By October 2015, Dennis sat down with Joe and explained that this business partnership couldn’t go on as it was or both companies would go under. Luckily, the landscape maintenance and landscape design/build/installation divisions were kept separate for legal and liability reasons. Joe told Dennis, “I just want to go back to what I had before.”
While this decision to separate technically breached the contract Joe signed with Lawn ReLeaf, Dennis didn’t hold him to that. Joe wanted to take back some of his equipment and keep the money he was paid as well as the salary he’d earned, but Dennis couldn’t ignore the $50,000 negative deficit Joe put the company in, the six figures Joe lost him, as well as the $45,000 of company credit card debt he racked up. “We decided we’d do jobs together and all of the profits would go toward this debt he owed me,” Dennis says. “We got it down to $35,000.”
Then, Joe disappeared. “He went off the grid and he’s not returning phone calls,” Dennis says. Dennis’ attorney has sent him a letter trying to settle the debt he owed at an even lower price; Dennis has still received no response.
In the meantime, Dennis proceeded to uncover the reasons the business was losing so much money and found that Joe did not estimate jobs correctly and then after saying a job would take two days, he’d actually take four days to complete it, doubling the costs. He also overspent on materials; if a worker lost a shovel, he’d just buy a dozen more on the company credit card without looking at how the equipment was lost or implementing systems to prevent loss.
So Dennis hired an account manager to check on jobs and assure quality control. He plugged up leaks and started selling smarter landscape design/build/installation jobs, turning down jobs that didn’t make sense for the business. For instance, instead of taking a $10,000 job and having seven workers on it for three days, he’d rather do that same job with one crew leader, two capable crew members and get it done in three days. “Our profit is astronomically higher,” he says. “Having crews with seven guys is just a bad idea; too many people are standing around wasting time. There’s no sense of urgency.”
Dennis also started offering bigger bonuses to crews if jobs are done well in shorter amounts of time. “They can earn more than $100 extra a day if they make the job more profitable by getting it done more efficiently than the job time was estimated.”
In working in this new capacity, Lawn ReLeaf is projected to end the year at nearly $1 million in revenue. The best part: “We’ve almost tripled our profitability,” Dennis says. “I wouldn’t be surprised if we reach 30 percent profit.”
The positives that come out of negatives
While this situation is not one many contractors would volunteer to go through, Dennis says there are some bright spots to the situation.
In trying to figure out how the money was being lost so quickly and haphazardly, Dennis, his CFO and office manager dove into various areas of the company to find the leaks and discovered some they didn’t know they had. For instance, he found that a few crew leaders were showing up to jobs and instead of performing the work there, they would leave and do their own work on the side for other clients during work time. This lost the company $50,000. So he installed checks and balances, such as paperwork crews must fill out at each job detailing date, time in, who’s on the job and services provided. As a backup, Dennis installed CRM software that has GPS that tracks crews and how long they are on job sites, as well as the profitability on each job.
“If a team leader or crew tried to lie on the paperwork, the backup GPS system would catch them and I’d have to let them go,” he says. “Once you make an example out of a couple of managers, the others start shaping up.”
In reflecting on his situation with Joe, Dennis says he thinks Joe just went into a depression after selling his business and lost his identity along the way. “I never saw these signs as we were talking about partnering up,” he says. “He said he wanted to grow. I thought I did enough due diligence.”
This definitely “makes it harder to trust the next person who walks in the door,” he adds.
One thing Dennis says he’s glad he had on hand in this situation were substantial cash reserves. “Every month, I set aside reserve cash and put it in a business savings account,” he says. “I cleared my reserves out in this situation and even had to take out a note … and I haven’t had to incur debt like that at all in my company history. Luckily, we should pay it off by early 2017. But if I wouldn’t have kept substantial cash reserves, the company would have gone under. In one year, I could have been taken down to my knees.”
As far as preventing the situation from happening again, Dennis says systems make all the difference in spot checking crews and ensuring accurate job costs. “I’ll make sure it never happens again,” he says, following with his new motto. “Trust but verify.”
- Put in systems to spot check crew performance and job profitability.
- Build cash reserves in case of an emergency situation where you need that cash to cover leaks or make payroll.
- When building partnerships, remember to trust but verify.