What issues do business owners have with internal conflict and self-sabotage when executing a profit first strategy?
Entrepreneurs frequently encounter difficulties putting a profit first strategy into practice because of their propensity to make things more complicated, their conviction that complex issues demand complex solutions, and resistance from traditional accounting practices that may not be compatible with the profit first approach.
What is the Profit First methodology, and how does it operate?
The Profit First approach is a bank-based cash flow management system that divides money at the moment of deposit among various accounts to make sure that a portion is set aside for taxes, business sustainability, personal costs, and equity ownership before it is spent.
How has financial freedom and time freedom changed the lifestyle of Mike Michalowicz?
Mike Michalowicz explains that being an author of financial books such as "Profit First" has helped hold him accountable to living by the principles he writes about. He describes that implementing a profit distribution system has allowed him to experience elements of his life outside of his standard of living and has brought about a degree of confidence he has never experienced before. Additionally, it has increased the value of his organization and allowed him to take longer vacation without having to worry about the business.
Marcus Cauchi: [00:00:00] Hello, and welcome back to Marcus Cauchi's Inquisitor Podcast. I can't begin to tell you how excited I am. I have Mike Michalowicz who's the author of Profit First on today. Profit First is a book that blew my mind because perhaps I can get the tax man as the business to pay my tax bill. So Mike, why don't you introduce yourself and then tell us how you came about writing Profit First?
Introduce yourself and tell us how you came about writing Profit First
Mike Michalowicz: Sure. So Marcus, uh, first of all, thank you for having me and, uh, for everyone watching or listening in, a big shout out here from US. I'm right outside New York city. And, uh, this is where this area is where it all started for me. I I've been an entrepreneur the entirety of my professional and adult life after graduating university, I went on to, uh, become an entrepreneur immediately and, uh, went through the struggles, uh, the pits and valleys, and also the peaks of entrepreneurship entrepreneurship, I found was very fear driven for me, a panic to always make money, but there was moments,
[00:01:00] I had the good fortune of selling some businesses and stuff where I made lots of money. But throughout that journey, as the revenues did things, you know, like this up and down, There was never sustained profitability. In fact, all my businesses over time were accumulating debt and, uh, one particular day I'll never forget.
It was February 14th, Valentine's day, 2008. Uh, I got a call from my accountant who, uh, suggested I declare bankruptcy because I had evaporated any and all of the wealth I had made when selling my most recent company. Cause I hadn't figured out profit. And, uh, that became the impetus for finding a better way.
While I had been an entrepreneur for all these years, a successful entrepreneur, meaning the revenue was growing, I had companies doing millions of dollars US, but they were never profitable. And that was the hidden truth in my business. What I discovered is I'm not alone. I, I thought I was the only one who couldn't figure out profitability.
It's the vast majority of [00:02:00] entrepreneurs. And, and I heard a study and believe it to be true that about 83% of small businesses, companies doing less than 25 million US in revenue or less is considered small. According to US standards, 80, more than 80% of these businesses are struggling check to check.
And I would presume Marcus for many people listening in right now, the vast majority of us don't have enough money to cover rent next month, or to cover payroll or to pay ourselves combination thereof or maybe all those things we're always seeking out the next sale. There's this desperation to keep selling, to stay afloat.
Marcus Cauchi: Absolutely. I mean the key rule here is profit for sanity, revenue for vanity. It makes more sense to have a half a million pound turnover business making 400,000 pounds profit than a 500 million pound business losing a pound.
Mike Michalowicz: Profit is sanity. And I, I actually argue that that, that revenue, in addition to vanity revenue is stress.
What I mean is the more revenue an organization generates, revenue translates directly to obligation. [00:03:00] So the more revenue I generate in my organization the more obligation I have to deliver my goods and services. So it actually puts stress in my organization. The stress relief is profit. If you have cash at your side, when problems happen, when, when things don't go, the way you plan that cash can afford you time, it makes you think much more logically.
Hence the sanity. That's why I wrote Profit First. I think most entrepreneurs feel that there's something wrong with their business or there's something wrong with them that they're not profitable. And the reality is it's the formula we use. The formula that tells us what profit is, says that we have to generate sales or turnover, revenue, whatever you call it.
So I call it sales. Sales subtract the expenses you incur, and then the remainder is left over. Here's the problem. It's human nature. When something is a leftover, when it comes last, it means it's not a consideration. It's something that can wait. It's the manana syndrome. So profit since profit comes last or it's called the year end or bottom line, all things indicating it comes [00:04:00] last.
We defer consideration for it till the end of the week or the end of the quarter, or from any of us the end of the year, when it doesn't happen, we say, well, maybe next year we literally defer the consideration of profit. We need to do to be successfully and permanently profitable is debate profit into our business.
Every transaction must result in profitability and the, to do this, we simply flip the formula. We take sales, we subtract profit first. Hence the title Profit First. Sales minus profit equals expenses. And how we do this in execution is every time revenue comes into the organization, we collect money. We immediately take a predetermined percentage of that money as profit.
Hide it from ourselves, allocate it to an account, but hide it away and then run our business off the remainder. It's the pay yourself first principle applied to business.
Marcus Cauchi: I have to say it's just simple genius. The elegance of it is magnificent cuz great client of mine recommended it to me. We've been working with her for probably 10, 12 years.
She came across it and as soon as she read it, she told me [00:05:00] about it and uh, I read it and I was just in ratches. Interestingly enough, my wife is very good and she's been doing a lot of the principles already. The thing that I'm most interested in, which I we'll save till later, so that we can keep people on the podcast is how do you get the business to pay the tax bill?
The idea of taking out a predetermined percentage
Marcus Cauchi: We'll come back to that later, but the idea of taking out a predetermined percentage, it's just makes great sense. Because otherwise you're a slave to the business and you're a slave to the tax man of all people. Why would you spend till the 6th of June working for the tax man?
Mike Michalowicz: Right.
Marcus Cauchi: And then for the 26th of October to work for the back and then your credit cards and car payments and everything else till the 20 December.
So you've got the remaining almost a week to yourself. That's just madness. And you, you see the same thing with sales. I know sales people who are still paying off credit card debt from 1982, where they bought a jar of instant coffee from, uh, Morrison's or Safeway. And they're [00:06:00] still paying that off at 36% parameter.
Mike Michalowicz: Here is the reality. Every dollar we earn is revenue has portions of it allocated to different purposes. We do have tax responsibilities. And I, and I've had the privilege now of traveling to more countries than I even know existed. It's been such a joy yet to find a country where the government doesn't stick its long hand into our businesses and rip out a chunk of money.
It's just the reality. So a portion of the money we earn serves that legal obligation we have back to our governments. A portion of money goes on the sustainability of the business. A portion that money needs a pay for our lifestyle to support us. The whole reason we started the business. A portion of it needs to be reserved for what's called equity ownership or bonuses.
So there's all these different responsibilities the money has. Sinfully, most businesses, how we manage our money is by doing what's called bank balance accounting. And what we do is even though we have all these different accounting forms and profit and loss statements and balance sheets and [00:07:00] such and so forth, when money comes in, many of us just revert to looking at our bank account and seeing how much money we have based upon what we see,
we take action. Now, what I found is it is near impossible for us to change our habits. So Profit First, instead of selling people, never look at your bank accounts. We have to use our accounting system. I said, if, if the natural way for us to operate our business is by looking at our bank accounts, we need to
allocate this money at the bank account level, meaning when that dollar or pound comes in, we need to carve it up to go into the different accounts. So profit first is a bank based cash flow management system. When money comes into your bank, we will now carve it up before we ever spend a penny or utilizing that money.
Now we had to continue that behavior log into our bank account, but we see all the money pre-allocated to its intended use before we spend the money. And that's how it starts working to our advantage.
What are the kind of challenges you find entrepreneurs going through in terms of that internal dialogue?
Marcus Cauchi: That's really interesting because obviously it's a shift in behavior. What are the kind of challenges you find entrepreneurs going through [00:08:00] in terms of that internal dialogue?
The self sabotage, this seems illegal. I can't believe that I can do this.
Mike Michalowicz: So when, when I hear about profit first, The first thing I hear is, it's too easy. It can't work. I think it's a propensity for myself. I think many entrepreneurs who throw complexity at a situation to believe that when there's a difficult problem, it needs a difficult solution.
And, uh, the reality is the simplicity is what makes it so effective. What happens is, uh, we actually don't need to change our behavior. That's the other thing is I think if it's not our natural tendency to read the accounting forms and sheets and stuff, like that to them try to enforce that upon ourself. It may happen temporarily, but we revert back to our core behavior of let, just log into the bank account and see how much money I have.
So the fact that there is no necessity to change how you behave is powerful, but I think another stumbling block is some people hear Profit First and say, oh my gosh, I should have been doing this 10 years ago. This is so simple. I'm gonna take 50% of my money as profit. I wanna be extraordinarily profitable.[00:09:00]
They actually go into too aggressively. It's like if you don't exercise, if you don't go jogging, for example, I'll tell you the first thing to do on the first day when you commit to jogging. Don't try to jog five kilometers or five miles. You're gonna get injured. Let's just master stretching on the first day. So small increments to successfully navigate profit
first, I encourage people to start very slowly. Maybe when we take 1% of their income as profit and over time, build that to 2, 5, 10, and up to whatever we wanna aspire to. And then the last resistance I see is from the accounting industry itself. We have a presence. I was telling you offline in the UK. We have, uh, certified Profit First professionals, but the vast majority of practitioners in the UK are traditionally certified and trained accountants in the old traditional methods.
And when they hear profit first many of them, and this is not just in the UK, this is globally. Many of them, that's not how accounting works. Well, first of all, this is not an accounting system. It's a cash flow management system. So there can be a misconstruct there, but they say it doesn't work. [00:10:00] Secondly, they start making arguments of why this is too cumbersome.
The reconciliations will need to do, and the effort need to be made. And then often they'll revert to simply run your business by the books. Simply do your accounting. What they don't understand is even though they accountants have been telling entrepreneurs for hundreds of years since the invention of modern accounting to run our business by the books, we don't. We've run our business by the banks.
So we need a system that works on natural behavior. We have to overcome that resistance. Accountants are not trying to hurt our business. They wanna help us. They just simply don't know that the system's not working and they're just instilling an old established mindset. We need something that works with our natural behavior.
Marcus Cauchi: Woodrow Wilson said, "If you want to make enemies, recommend change."
Mike Michalowicz: Exactly. Oh, I love that.
Marcus Cauchi: I have a poster on my wall from my third favorite website, despair.com. I dunno if you've come across. It has de motivational posters and there's a picture of the Pamplona bull run, and [00:11:00] it says "Tradition. Just because you've always done it that way,
doesn't mean it's not incredibly stupid."
Mike Michalowicz: I see that in sales. Yeah.
Marcus Cauchi: The traditional sales approach is qualify, present, close, follow up with a proposal. What we teach is close, disqualify and present only if you have to. And only if they've agreed, what goes into that presentation. So they buy from you.
Mike Michalowicz: I love it
Marcus Cauchi: by shipping the whole thing on its head.
One of the things that profit first allows you to do is scale
Marcus Cauchi: You see, you can generate hyper growth of 3, 4, 500%. Now tying that with profit first. Strikes me as a recipe for building incredibly strong businesses, because I think one of the things that profit first allows you to do is scale.
Mike Michalowicz: It does allow scale and that that's the most magnificent and unexpected benefit of profit first.
So we have an estimated over a hundred, 100,000 businesses implementing profit first. And that's now on the pessimistic side, we think it's more than that. And we, based upon the distribution of books, the feedback we get, we have 2000 documented case studies. So [00:12:00] we collect all this. And that's our estimate now from our reports, we've gotten from people who've implemented profit first,
consistently businesses that have implemented and stuck with profit first have outpaced their competitors in growth. They've actually grown faster, which sounds initially counterintuitive because if you start allocating more and more money toward profit, you have less money to reinvest or plow back as they say into your business and expenses.
So you've less money to grow. So you think you would actually slow down growth. But here's, what's fascinating when a business starts reserving money for profit, it forces you to reverse engineer that profitability. You take that money and you say, okay, I took this. I'm not gonna be able to afford all these bills.
What bills are unnecessary? It'll force you to look at your offering your products or services and say which ones are truly the most profitable? It'll look, make you look at your customers and say which customers are the best customers. And it starts to narrow your focus on serving the best customers with your best offering
the best way. When you do that, you start building a reputation for excellence, [00:13:00] which facilitates faster growth. So it actually is a technique also of reverse engineering, specialty skills, niche specialization, and, uh, facilitates faster growth.
Marcus Cauchi: So again, I'd like to tie this back to what we do in terms of helping people to achieve more sales, more often predictably without losing control.
How does a profit first environment change the culture of sales?
Marcus Cauchi: How does a profit first environment change the culture of sales? If you're focusing on profitability, what have you been able to clean anything from your clients on that basis?
Mike Michalowicz: Yeah. So when it comes to sales, it does force better to your point, uh, your second stage, your disqualification of customers or prospects, or, or if you wanna talk about the flip side of the same coin, it's the qualification of customers.
When we take our profit first, we look at the customer, we're looking to serve and say, is this a profitable opportunity for us is a profitable opportunity for the customer. Meaning are both sides gonna come out ahead and [00:14:00] you are focused on offering your most profitable offerings to your best customer base.
So you, you actually start bifurcating the weak customers from the good ones. There's the application of the Pareto principle. Or the 80 20 rule, they call it where they say 20%, for example, of your customer base yields, 80% of your revenue and 80% of your customer base, therefore yields 20% of your revenue.
So let's focus on that top 20% tier of customers and grow them also in the Pareto of principle. There's the concept of our offerings. That 20% of our offerings yield 80% of our profits. So now what happens is by taking our profit first, it forces us to consider profit. We apply to our sales by looking at who are the best customers at top 20% who are buying our best offerings, the most profitable stuff, and let's match that.
So as sales people for our organizations, we become more concentrated on a specific community, offering a specific offering. Therefore sales are more profitable and we're more successful in selling because we're serving the same [00:15:00] community. We start becoming an expert, a master to a smaller community than trying to be broad and serve everybody.
Customer experience is about putting the customer at the center of everything that you do
Marcus Cauchi: I couldn't agree more. I was working with a client just before Christmas first session and they were sweating blood over a 20% increase in their target, segmented the customer based along the lines of what we call the care model. I call it the SKARE model S stands for Sack. K for Keep. A for Attain. R for Recapture. And E for Expand.
And what we did was we identified the top 20% in the expand category and we identified 153% growth potential that was latent within their existing accounts. That was just sat there on the table that they were leaving behind. Emphasis was on revenue, not on profitability. The emphasis was on acquisition of new logos rather than servicing to death and loving the customer.
And again, I'd like to just explore a little bit more around that customer experience piece, that profit [00:16:00] first drives, because I think for most people, customer experience is the tail end of customer complaints and customer service. Whereas in fact, customer experience is about putting the customer at the center of everything that you do.
You're in business because of them not in spite of them. And it's your job to make sure that from the moment they even know you exist till 20 years down the road, when you're selling to their kids and their grandchildren, and you are working with them to make sure that that experience is phenomenal. I don't believe you can do that.
If you're scrambling around for 3% profit here or there. You need to make hyper profits to be able to love them to death.
Mike Michalowicz: The reality is our customers want us to be hyper profitable. Now let me put a disclaimer on that. They'll never say that, like you'll never have a customer saying rip me off, you know, take all my money please, but what they will say in
not so many words is when I buy from you, I wanna make sure you're around. I wanna make sure you're gonna deliver on all your promises. I wanna make sure I can depend on you. I [00:17:00] wanna make sure as time goes by, if I have to rely on you and go back to you because of issues or problems that you're gonna be there for me. Those are all explaining that they want your stability.
No customer says, I hope that as I'm buying from you, you go bankrupt. I hope your business collapse overnight. I hope that you can't deliver for me. Of course, they don't want that. So they're not gonna say the words, I want you to be hyper profitable, but they will say they want all the manifestations that hyper profit points to, which is sustainability, reliability.
So customers want that for us.
How does it affect the ability of your users at profit first to attract the best talent, keep the best talent, drive the best performance from the best talent?
Marcus Cauchi: Let me ask you this then, Mike. How does it affect the ability of your users at profit first to attract the best talent, keep the best talent, drive the best performance from the best talent?
Mike Michalowicz: When we focus on profitability, we have discovered that we can bring on employees and pay them extremely well better than our competition does for the equivalent position
but hire less employees. I met with, uh, and let me [00:18:00] explain this a little bit better. I met with the founder of the container store. I don't know if it's in the UK, but there's a franchise here in the US called the container store. They have 250 or 300 locations and all they sell are a mix of boxes. Containers.
They have an excellent reputation for their service? Well, the founder I asked, how could he do so well? And he said, he drew it on a napkin when I was having lunch with him, he said one a equals three B, and I said, Kip, what, what does that mean? He says one A performing employee, one employee who's loyal to the organization.
They thirst to learn. They care about the customers can perform at the level of three B players, people that are doing the works. They have a job, they do a okay job, but they don't care. And he continues on the formula. One B player equals three C. He said, therefore, by hiring just one A player, you are getting the performance of three B players or nine C players.
So these other organizations are hiring the C players. They have to hire nine people to do what I can do with one [00:19:00] person. They pay nine salaries. I pay one. Now I pay one that is so extraordinary that they can't find that salary elsewhere. So I actually pay them more. Since I only hired one person, their cumulative salaries are still far, far more than me.
So they incur far more expense. So profit first doesn't mean squeezing the dollar out of every expense you have. It means using the revenue, you, the, the reduced revenue you have very intelligently. So how we've done it is my colleagues here are breathtakingly extraordinary. They, they would take a bullet for this company and I would take a bullet for them because they care so much about us.
I have very few people. I run a very thin organization. We have six people here at our offices that runs a global presence where in a traditional mindset, I think I'd have to have 25 or 30 people. But with this profit first mindset, I simply found the absolute best people and I'm able to pay them more than if I had this larger organization.
Marcus Cauchi: It's interesting, cuz that must drive an [00:20:00] enormous amount of passion and people being created feeling like they're doing important, meaningful work and the no doubt that will drive retention and loyalty.
Mike Michalowicz: This is outside profit first. We're all on a common mission. So, we as an organization, have a very committed mission to eradicate entrepreneurial poverty.
And what entrepreneurial poverty is, is this misperception, the outside world who are not entrepreneurs think we as business owners are all millionaires and we sit on the beach, drinking mai tais and margaritas, and the reality is we are working our butts off and we have no money. So it's this disconnect.
And our mission is to resolve that. And there there's a personal reason. My own experience is that drive that for me. Every one of my colleagues here has experienced that. A parent who was an entrepreneur that couldn't survive and the, the family needed government support to move on. Those stories are throughout our little tiny organization. Every morning,
what happened today? We have our morning huddle where we talk about the days plans and we start off by just talking about the necessity. We all have to [00:21:00] eradicate entrepreneurial poverty. That common mission, company with our focus on profitability has driven to your point mark, as a very passionate team here.
Marcus Cauchi: That's a lovely tale.
Marcus Cauchi: I mean, again, the idea that you're doing huddles. There's common purpose. Everyone knows why they're doing it. One thing I know that you've brought out this other book clockwork, which I can see over your shoulder. I noticed you stacking them up at the beginning. It was lovely. Talk a little bit about time imprisonment, then we'll come back to profit first again.
Mike Michalowicz: Yeah. So I, I believe there's multiple forms of poverty or imprisonment. So one form is financial poverty where we don't have enough money to support a comfortable or sustainable lifestyle. And sadly many entrepreneurs are in that position. Once we overcome that, I think there's another challenge presents itself.
And it's time impoverishment. I've experienced this. I, I brought this upon myself for decades. I worked so hard. I wouldn't be home for family dinners. I, I. Things with my children as they grew up. And it's devastating in reflection when it's [00:22:00] happening. I'm like, oh, it's just, just today. Well, just today happened for 20 consecutive years.
So I wrote Clockwork. The subtitle is Design Your Business to Run Itself. I boil down the essence, the steps to make a business go from where the owner is doing the work to where they're actually designing the outcomes of the work, where they are a true owner, where they're not doing any of the work.
And the, the organization is carrying itself along. That's a necessary freedom that so few entrepreneurs have most entrepreneurs are beholden to their businesses. And that's what I'm trying to resolve with Clockwork.
Marcus Cauchi: I'd love to do another podcast in future, specifically on Clockwork. Once I've had a chance to read it, if you'd be willing
Mike Michalowicz: Oh, I would love to do that. Yeah.
How do you get the business to pay your personal tax bill? And is it possible to do that in the UK?
Marcus Cauchi: Let's come back to my burning question. How do you get the business to pay your personal tax bill? And is it possible to do that in the UK?
Mike Michalowicz: Yes, yes, yes. So, and we have businesses doing it in the UK.
Marcus Cauchi: You have a hundred percent of my attention.
Mike Michalowicz: So I'll first talk about the behavioral aspect and then I'll talk about the tactical, the actual execution of it.
So the behavioral [00:23:00] component is perhaps the most important. There is a behavioral tendency. It's wired into every human being called loss aversion. And loss aversion is that when something is threatened to be taken from us, that we have an adverse relationship with that in a visceral response. Here's a example.
Maybe there's a Porsche or some car that you want to purchase and you see it in the window and it's that beautiful red Porsche every day, you walk by the store and you see it, it's appealing and it's exciting, but you may not pick up another job. You may, you hope that you can earn more money, but you may not work a second job to get it or something like that.
Once you buy that Porsche, though, now we'll go to extraordinary measures to keep it. If the sales, the company that sold it, two calls and says, Hey, you missed a payment. We're gonna reclaim the car. We will get a second job. We may keep the car locked up in our garage and never drive it and take the insurance office to reduce cost.
Cuz we wanna protect our baby. Cause it's our baby now. Once we possess something, we'll take extraordinary measures to retain it. [00:24:00] Yet when we want to gain something, we often don't take the same extraordinary measures that we could have taken. So we put more value into keeping something. Well, how taxes work is once you have money, that's come to you.
So you've earned money, your businesses made sales and now money has come to you. And the government says that money's ours. We experience a visceral loss, aversion response, like, hold on. This is my money. Thanks, government. You, bunch of idiots. You're taking from me and then we will do often illogical things. In the US,
a lot of people will try to spend money to, or try to spend $10 to save $3. It's illogical, but that's what we'll do. Try to incur more expenses and justify it. How profit first works is the money before it ever comes to gets diverted to a tax hold account. So you get earnings in, like I shared in the beginning of a podcast together, when you earn a pound or whatever it is that full pound isn't for you, it gets divided up to other purposes, profits being won expense to the [00:25:00] business, but taxes being won.
So we're gonna take a portion of that money. We have a legal responsibility to pay taxes as a citizen of our countries, we have a legal obligation to pay taxes. So our business is going to allocate that portion of money to a tax holding account. It will never go into our personal pockets. We'll never experience it.
Then when the tax bill comes due, the company releases that money to pay the taxes and it avoids loss aversion. I can now testify to the thousands of emails I get around tax time. And the US tax time is starting now. April 15th is our big day, but it's just starting to come up. People email me every year now saying, I can't tell you how excited I am to pay my taxes or what an exciting thing it is for the business to be paying this.
And even though it feels like a shell game, we're just moving a dollar from here and we're putting a dollar there, moving a pound here, putting a pound there, even though it feels like a shell game, it actually addresses that behavioral response of loss aversion. And that's why it works getting to the tactical [00:26:00] execution of this,
I'm not familiar with UK law, and that's why we have accountants and bookkeepers certified in this process in the UK. But how it works in the US, there's different types of company formations and in the US, some formations, there's one called an LLC. A Limited Liability Corporation. The business can actually just write a check out to the government.
So it automatically releases. I never see it. Some companies in the us are called corporations, S CORPs, and C CORPs. How the structure works is the owner, the equity member actually must release the check. The company then does what's called a reimbursement process. I write the check to the government at the same time, the business is writing a check to me and it reimburses me.
So I don't get that loss aversion. So that's how you do it on a tactical basis.
Marcus Cauchi: Very interesting. Okay. Cause that money would be stay in the business.
Mike Michalowicz: It stays in the business. That's the key. It has to stay in the business.
Marcus Cauchi: That makes it a lot clearer. I mean, it would still be treated as income and taxable, but because it's stayed there, you can't touch it.
Then it's taken care of deals with the [00:27:00] loss aversion.
Mike Michalowicz: All citizens are agents for the government. We are tax collecting agents effectively, and the government says every time you earn money, you are responsibly that some of that money you earn goes to the government as a tax. So what I have in my own companies here is I have an account that says it literally says the government's money.
I, I nicknamed it the government's money. So when a dollar comes into my company, 30% of it, which is a sound size, but you know, 30 cents goes into the government money's account. When I log into my bank, I see that I have 70 cents left over for these other purposes and 30 cents in this government account.
And because it says it's the government's money. I am not tempted to steal from the government. I'm not gonna take that money. It's the money that I'm required to pay and I've collected from the customer and I've stored for them by seeing it that way, fully avert around loss aversion and, um, tax time is as crazy sounds is a joyful experience.
Marcus Cauchi: This is so interesting because you talk about the pain fear gain kind of model. [00:28:00] What's really interesting is in sales. If we see gainers a one, typically you'll close five times more by selling on fear. 12 times more by selling on pain, which is trouble today. And what you're tapping into
Mike Michalowicz: Yeah
Marcus Cauchi: is the same emotional hard wiring in the brain.
There's no point trying to buck 200 million years of evolutionary hard wiring.
Mike Michalowicz: That's what accounting tries to do. It tries to bring logic to emotionally behavioral driven animals, what we are. So let's leverage our natural tendencies to your point.
If we look at the kinds of opportunities and options that having this financial freedom and this time freedom has afforded you, how's it changed your lifestyle?
Marcus Cauchi: What I'm very interested in also is if we look at the kinds of opportunities and options that having this financial freedom and this time freedom has afforded you, how's it changed your lifestyle?
Mike Michalowicz: One thing is interesting about being an author of these books is it is the ultimate accountability mechanism. Like I write these books, I have to live by it. My first reference to Profit First, this concept was in my very first book. So I wrote a book 10 years [00:29:00] ago called the Toilet Paper Entrepreneur.
And in there I made reference to it and it became an enforcement mechanism cuz readers would email me and say, are you doing Profit First? Here's how it's manifested. I've been doing private first. Now I've just entered my 10th year of this. I've had. 38 consecutive quarters of profit distributions. Now let me say the very first profit distribution I took was probably like $6 in my first business.
And I went to the local coffee store, but I tell you, I've never enjoyed a cup of coffee so much, cause my business paid for it and I have to worry about it and it's grown over time and uh, it's now allowed experiences I was actually out your way as an Ireland. So your neighbors there just six months ago, because on a profit distribution and what profit does is two things.
One is it it's allowed me to experience elements of my life outside of my standard of living. Meaning my business does two things for me. It pays me a salary, which is my standard of living. And then it pays me profit distributions, which is this quarterly bonus [00:30:00] period, which allows me to go above and beyond. Sadly, most business
accumulate all money and they just give it to the owner. And then the owner's lifestyle adjusts up to all this money becomes an expectation. And therefore, if the business has a bad month, that bad month comes home. So this is a way of that not happening. The second thing is to bring, it's brought about a degree of confidence
I've never experienced before. I have very little stress financially related because the coffers, how the profit system works is you distribute profits, but you also accumulate profits. The money gets divided in certain ways. So my business has a, uh, a vault, if you will, of money. And what that does is if my business goes through a dip or has problems or struggling with something, I know I have a longer runway.
So that confidence prevents me from being reactionary. I am much more methodical in my considerations of what I'm gonna do and move my business forward because I don't have to panic. I'm not in a survival mode of living check by check. So those [00:31:00] are some of the, the emotional benefits that have come out of it.
But there's also benefits like from the outside financial benefits, the more profitable my businesses have become the more outside acquires. Like we want to own that business. We want those profits. So the value they're putting on my organization has increased. The interesting thing with Clockwork. Clockwork,
I released as a book last year. I have though been implementing the system for about three years for myself already, as I was writing the book I'm I'm in I'm guinea pigging on myself. I just returned. And for a European, this may not be so crazy, but for an American is I just returned yesterday from a four week vacation.
Now in Europe, I think that's, that's relatively standard. Like in, you know, August you take the month. Off in the US, we don't take vacation as a general population, which is insane. And many people I do go on vacation, actually work through the vacation. The problem with that, besides just the pure mania is that the business becomes dependent on the performance of the owner.
It becomes a conjoined twin as my health goes, so [00:32:00] does the business health, we become too locked in. So by working on the clockwork system and extracting myself from the business, we are now two separate entities. If I do decide to go away for another four, six weeks, the business hums along, it's not dependent upon me.
The value the business has increased too. Cuz now acquires are like, the business is highly profitable. And if Mike decide to not participate in the business or kicks the bucket, doesn't matter if we own this business, it's gonna keep humming along. So the valuation has increased even more. So it's interesting addressing profit and addressing time.
Not only does it serve us in our needs as owners of a business, it also becomes very appealing to the outside acquirers, too.
Marcus Cauchi: This is really interesting. Um, in March, I'm speaking at an event that we're running called Growth To Exit. And it's looking at how do you create, you've got a two to five year runway to build a business that is organically able to operate on its own [00:33:00] highly possible.
And the owner doesn't have to work an earnout. You walk out with a check of eight times your profit on the day that you sign and that's it. You just walk away from it. And this is really fascinating because the principles that you're talking about seem to be universal, but largely either overlooked, overcomplicated or treated as if they're evil, dark magic.
What kind of multiple with the valuation of the business, do you find that your clients are having and you've had by being financially free and time free and the business being able to run itself?
Marcus Cauchi: It's just fantastic to hear this. I'm so pleased that I stumbled across your book and I'm delighted that we've had this conversation because it's been enlightening. Tell me this, what kind of multiple with the valuation of the business, do you find that your clients are having and you've had by being financially free and time free and the business being able to run itself?
Mike Michalowicz: This is the most interesting.
So, you know, traditional acquisition considerations are, is either multiple revenue or more often a multiple of profit. [00:34:00] And it can be, you know, one times, four times, if you're in the right industry, you have 20 times multiple. What I found is the concept of multiples to some degree, go out the window and it becomes a new consideration.
Owners of these businesses have no necessity to sell their business. Meaning, it's profitable and I don't need to work in it. Why would I ever wanna sell it? Which puts an astronomical when the seller side says, I really don't care if I sell it or not. The buyer side, only way they get the acquisition is to get to a point where the owner says, you know what?
That's such crazy money. I'll do it. So there's a company, a technology company going through this right now, the multiple from traditional calculations that they're in negotiations over it's like a 40 times profit multiple. It's ridiculous. But why I don't like to call it multiples is because it's simply, what's the number that is so big
that it's, it would just be, it'd just be ridiculous not to take it. And that's what the conversation comes. It's because there is no motivation to sell it. The most valuable companies are the [00:35:00] companies that you really have no motivation to sell you're so you are so in love with it performs so well, it's doing so great that you, you don't wanna sell it.
Those are the most valuable companies. It's the you the prettiest girl to dance and that's what our objectives should be. That's just one example. It, it's hard to put a number on it when people don't wanna sell their business, the valuations, then really sky rocket.
Marcus Cauchi: Wow. That's really inspiring.
Mike Michalowicz: And the funny thing is he may walk away from it.
There's still negotiations. I had drinks with him just last week and he is like, I, I don't know. I, I just love my company so much and the things I relate to that I, I love my company so much too. I, I, own a few businesses, but I'm thinking of one in particular right now. I don't ever wanna leave. I don't wanna go through the process, starting another business.
I, I wanna stay. So it really has to be an insane offer for me to even consider it.
How do we get hold of certified accountants over this?
Marcus Cauchi: So tell me this. I mean, you mentioned that you have a few certified accountants over this at the end of the pond. How do we get hold of them?
Mike Michalowicz: Yeah. So when Profit First, the book rolled out very quickly. I started getting [00:36:00] inquiries from entrepreneurs who said, I understand the concept.
Now I want a professional to service me in this, and it has become knock on wood. We have a global presence now, so we're in multiple parts throughout Europe, in the UK. Don't quote me this. I think we have somewhere between five and 10 active, certified Profit First professionals, people that study Profit First implemented it in their own companies and rolled out for clients and modified the system to speak to local and country based law.
To get hold of them, you go to profitfirstprofessionals.com. That's our home base here that will bring you to our website here. Profitfirstprofessionals.com and click on Find then use enter some criteria about your business. Where you're located, our system then will identify the best match for you in the UK to serve you.
Many of our members, UK included have become niche specialists. So maybe you have an online business in the UK, but we have a, a [00:37:00] member that really understands that market versus retail or something like that. And can even further modify the profit first system to accommodate your objective.
They don't have to be accountants to become a profit first professional?
Marcus Cauchi: They don't have to be accountants to become a profit first professional?
Mike Michalowicz: That's correct. We have three types. We have accountants. They don't have to be, but we have an accountant. We have bookkeepers and we have business coaches that have taken on this system. They're all qualified by our organization and they all not just tested and certified, but we actually audit these companies to ensure proper implementation and mastery of it.
Because we know that selfishly our brand is only as strong as our weakest members. So we, we, it's a pretty rigorous process of making sure that they're extraordinary at what they do.
If people want to sign up and become profit first professionals, how do they go about doing that?
Marcus Cauchi: There is a really simple rule in recruitment, which is better. No breath than bad breath. You never compromise on recruitment. If people want to sign up and become profit first professionals, how do they go about doing that?
Mike Michalowicz: Same process.
Go to the Profit First [00:38:00] professionals website, but instead of clicking on Find One, you click on Be One. We have a vetting process and interview process, and we will make sure that this is a mutual win. For many people, it is a, it's a significant shift in what they've done. Many people have not done profit consulting in the past.
So, um, we'll make sure it's a mutual fit before we proceed forward.
How do people get hold of you?
Marcus Cauchi: Fantastic. Mike, I'm conscious. We're coming up to time. How do people get hold of you?
Mike Michalowicz: My primary endeavor is I'm an author. I just happened to be blessed by owning few businesses, but I have presidents people that actually are the day to day operators and, and runners of the business.
So I'm a full-time author. And, uh, my website is mikemichalowicz.com. Here's the thing. No one is able to spell Michalowicz so there's a shortcut. It's Mike Motorbike. I've never driven a motorcycle, but my nickname in high school was Mike Motorbike. So I purchased the domain. And if you go to mikemotorbike.com, bring it to my site,
you can get excerpts from all my [00:39:00] books. I used to write for the wall street journal for many years, that's available for free. Um, my articles and I'm a podcaster too.
Marcus Cauchi: Excellent. Mike, I can't thank you enough. It's been fantastic. It's been inspiring. It's been educational and have to tell you I'm pretty tempted to even contemplate becoming a Profit First professional myself.
Mike Michalowicz: Oh, I would love that at dialogue with you .
Marcus Cauchi: But I've got a few people that I'm gonna refer your way, because I think this is something that's utterly necessary. I'm on a mission to help people to sell freely. And my focus is on scale ups and turnarounds, which again, I think there's a very natural fit and I'd love to partner up with you guys because I think the people that I'm working with really need your help.
Well, let's, let's do that dialogue.
Mike Michalowicz, thank you so much for your time. It's been an absolute joy and pleasure and once again, this is Marcus Cauchi from the Inquisitor podcast saying thank you for listening and look forward to speaking to you soon. If you have any comments, if you wanna get hold of [00:40:00] Mike, read his books, he's got a number of books and Profit First and Clockwork and the Pumpkin Entrepreneur,
Mike Michalowicz: Pumpkin Plan
Marcus Cauchi: Pumpkin Plan, and the Toilet Paper entrepreneur.
So look him up, buy his books, get them on audible, get them in Kindle. Get them in hard copy. Get three copies of each.
Mike Michalowicz: There you go.
Marcus Cauchi: Thank you very much, Mike. Take care now. Bye.
Mike Michalowicz: Take care, Marcus. Bye-bye.