Full transcript10 chapters · 10,501 words
00:00Cutting sheet metal at eight in his dad’s shop
Ray Isaac: Tell me how many employees you’ve got, and I’ll tell you your revenue within a few hundred grand. It’s not a trick. It’s the one number that tells me if you’ve built a real business or just a bigger version of a broken one.
Tyler Martin: Welcome to Profit and Grit with Tyler, where blue-collar owners and insiders spill the real story behind their hustle, building businesses that thrive through sweat and smarts. We’ll dig into their journeys from scaling chaos to growing the bottom line with lessons and grit that pay off big.
Tyler Martin: Here’s your host, the Blue Collar CFO, Tyler Martin. Raymond Isaac has seen the trades from almost every angle. He grew up inside the family HVAC business, helped lead Isaac Heating from a smaller shop into a major operation, partnered with Private Equity, and now looks at other home service
Tyler Martin: companies through the lens of a buyer with Northwind Services Group. In this episode, Ray talks about the leadership lessons that shaped him, the difference between a family-owned business and a professionally-run business, and why growth can expose weak systems if the owner still caring too much. If you’re trying to build a business that’s stronger, more scalable,
Tyler Martin: and less dependent on heroic effort every day, this conversation is for you. Let’s talk with Ray now. Hey, Ray, welcome to the Profit and Grit Show. How’s it going today?
Ray Isaac: I’m good. How are you doing, Tyler?
Tyler Martin: I’m doing really well. I’m so excited to talk to you. You’ve been on my calendar for about a month and I’ve literally been really, really looking forward to this just because of the legacy you’ve already created, what you’re creating going forward. So with that, I’d love to just learn a little about you
Tyler Martin: and share what you do with the audience a little bit about your history.
Ray Isaac: All right. Well, it was a dark, rainy night. No, I mean, again, being a family business, I’m going to say participant, you know, you never know what your path is going to take you. I started at probably eight years old. I guess nobody from OSHA should be listening to this, but cutting up sheet metal in the
Ray Isaac: sheet metal shop for my dad. You know, that’s what you do in family business when you’re a very small operation and everybody plays a variety of roles. But, you know, being one of four boys, my mom figured the only way to keep us out of trouble on a Saturday was to send us to work with dad.
Ray Isaac: So we went to the shop and played around and ran our bikes around the shop, but also worked a little bit in the sheet metal shop and learned what the dangerous ends of metal were. and really got our, you know, cut our teeth in a figurative way, really learning the ins and
Ray Isaac: outs of the business at a very young age. I mean, we were 10 years, 12 years old, holding a flashlight for my dad out on service calls because, you know, he was doing everything. He was running the business during the day. He was also selling jobs and then running service
Ray Isaac: calls at night. So we got an indoctrination early on of what real work was.
Tyler Martin: really wow so to take me through because you you’ve you’ve gone from a small shop starting your own shop building something i believe it was like i believe it’s 400 plus employees now
Ray Isaac: is that correct yeah so we’re well over that now yeah now that we’ve uh since we’ve been partnered with our private equity we’re up to i think close to 600 or 700 employees now just at isaac so
Tyler Martin: they’ve done a great job uh scaling the business even after we partnered wow so let’s start we obviously can’t go back to day one, although I’d love to if we had the time. Where was the turning
03:34The dark years running a losing service department
Tyler Martin: point for you? Because as I was doing my research in 2001, I think you were about a 20 tech shop. And I’d love to talk about, maybe we start at that point. What was the kind of turning point
Ray Isaac: for you that got you to the next level? Yeah. There’s a lot of significant milestones in there. I mean, right out of college, I became a lot of different. I handled inventory and HR and things like that. And then in 1990, my dad gave me probably one of the worst jobs in the company
Ray Isaac: as service manager. It was a losing department. Cut my teeth there. That was a real, I guess, eye-opening experience for me, not in what the business was, but who I was. And it really was a self-examination. And those were what I called the dark years. I’ve said that on other interviews
Ray Isaac: before that, you know, that was a tough period for me because, you know, coming into a family business, there’s a lot that comes with that, you know, that what I call the legacy trap. Your last name is on the business. You’re a family member. They have higher expectations for you than anybody
Ray Isaac: else. Even though I worked with a lot of guys in the field in my younger years, while I was in high school and college, and my brothers all worked in the business as well, you come into a leadership position or what I thought was leadership, which was really heavy-handed management at the time.
Ray Isaac: And, you know, you learn things because people are very smart in an organization. They’re going to call you out on your weaknesses. And that was really that first period where, okay, I think dad was smart in throwing me into that position because he knew that if I didn’t, I was either going to die or survive.
Ray Isaac: And I did survive. I ended up turning the department around and learning a number of things. Still wasn’t the person that I wanted to be. Didn’t know that. But ended up becoming vice president general manager in 96. We were about 50 employees at the time, I’m going to guess.
Ray Isaac: And, you know, the company was doing about $6 million at that point. 2000, 2001, after going through Y2K and a unionizing attempt at the company, that was a great learning experience for us. I mean, I don’t know if anybody would explain it as that or describe it as that, but it was.
Ray Isaac: It really caused us to do some self-reflection and look inside. And I did as well in 2000, 2001. And I also engaged in a leadership development program, which was probably the life-changing moment for me. I guess that would be one of those points of light on my transition to who I am today was going through this.
Ray Isaac: It was a two-year program where we met every month. And here we are as participants in this going into it thinking we’re going to learn how to tell people what to do. and the coach in that, which is what he calls himself, John Angles is his name.
Ray Isaac: He turned it right around on us and it was all about self-reflection. It was about who we are looking at us as a third person. You know, you and I having a discussion like this and there’s a third person up here directing what I’m saying, you know, using a more thoughtful approach to,
Ray Isaac: you know, how you present yourself. And that was, that was tough. I really, it wasn’t where you came out of there with an epiphany and you’re a different person. It took time then for that to settle in. And really, it all came down to, you know, who you are as an individual and being
Ray Isaac: comfortable in your own skin and knowing yourself, you know, being okay with who you are. And I wasn’t up until that point. I don’t think my whole life I was being the youngest of five kids and the youngest even of being the twins, being ultra competitive my whole life, having the last name
07:00What bad leadership cost in turnover and health
Ray Isaac: on the business and coming into a leadership or a management position. You know, you don’t get time to take a breath. And, you know, that was an experience there that really caused me to do a lot of, you know, self-reflection and introspection and, you know, decide on, okay, who am I and how
Tyler Martin: am I going to fit into this organization? Hey, Ray, if you had to put a number on those years, what do you think like that bad leadership era cost you and turnover, tax, lost dollars? Do you ever think about that? Like, and can quantify it in any way? Because I think this is something,
Tyler Martin: you know, a lot of shops, frankly, have bad leadership. And I’d be curious what your thoughts
Ray Isaac: are around that. Well, if we used to use a figure, it cost us about $30,000 to hire somebody. We put that number on it. But, you know, by the time you hire them and train them and the lost productivity and, you know, the lost productivity of the person they’re training with or the people that they’re
Ray Isaac: training with, you know, 30 grand, I don’t even want to put a figure on how many people left us because of me surmising that, but it’s got to be hundreds of thousands of dollars. And that’s that side, the business side. Then you look at the personal side, health problems, marital problems,
Ray Isaac: not being there, the emotional issues of not fully being present for your family and for those that you love in your life and not being that person you want to be for them. I mean, there’s more than just at financial cost to bad leadership.
Ray Isaac: And I guess that’s an oxymoron, but, you know, it’s one of those things where there’s, you know, inefficient and ineffective leaders. And a lot of times it comes back to, you know, the eye in that situation of, you know, who that person is.
Ray Isaac: It’s never them. It’s always the eye. You know, the leaders aren’t bad because of other people. They’re bad because of themselves. And so I guess if you tallied up all the costs, it’s, you know, it’s tremendous, you know, that not again, going back to not being comfortable with who you are and being okay with your weaknesses, because, you know, we can surmise it and summarize it to, you know, the Jim Collins good to great the window in the mirror, you know, you’re constantly looking out the window to insert blame and looking in the mirror to take credit, which is the opposite of what it should be.
Ray Isaac: So, you know, you just get caught into that doom loop of just, you know, poor, I guess, you know, poor presentation of yourself. And a lot of people aren’t comfortable in that position. They don’t want to be there. They just don’t know how to get out.
Tyler Martin: Yeah. In doing my research about you, there was a comment about the guy’s bet on the vein in your head, basically. And you’ve talked about it practically having heart attacks at certain times because of all the stress. Can you talk about that a little bit?
Tyler Martin: I think that’s so real.
Ray Isaac: Yeah, I mean, again, I was that bad manager where, you know, I thought my last name meant something, which they laughed about in the back because, you know, as my dad always said, I’ll quote him a lot. A lot of what I say is from him.
Ray Isaac: I learned so much from him. Sadly, he passed away a few years ago. And, you know, it’s weird. You know somebody so influential in your life where I still think I should call him. You know, I recently got the honor. I guess it’s the honor. it means you’re old, but I was selected to become a member of the HVAC Hall of Fame with the
Ray Isaac: Contracting Business Magazine. And, you know, I said, Jay, I got to call my dad. And it’s weird how you do that. And you think, oh, wait a second, he’s not here anymore. So a lot of what I quote, you know, is from my dad and, you know, the lessons that he taught us. And I lost my frame
Ray Isaac: of thought here on what I was going to say about that. But what was your question?
Tyler Martin: And that’s OK. You know, I just want to get old. I want to I want to connect with you here. I lost my dad two years ago. And whenever I watch a football game or a basketball game, a lot of times I used to pick up the phone and go, Dad, did you just see that?
Tyler Martin: And so I find myself even to the state two years later, I can really relate to what you just said. We’re Buffalo Bills fans together. He said he wanted to see him win a Super Bowl before he died. And unfortunately, I hope they win one before I die. So I don’t know.
Tyler Martin: Josh Allen seemed to be taking a step backwards, but hopefully that’s not true. But anyway, I was just talking about the vein in your head. The guy’s kind of betting on whether a vein would pop out or not. We were just going down that path.
Ray Isaac: Yeah. And again, he said, never think too much of yourself. Nobody else does. Right. You know, it’s something that if you stop and think about it, you know, people have this unhealthy ego. And again, a healthy ego for me, in my mind, a healthy ego is having a realistic,
Ray Isaac: accurate perception of yourself as an individual. An unhealthy ego can be low or high. You have an inflated perception of yourself, or you have an unhealthy, low perception of yourself, and neither one of those is good in a leadership position. You have to have a very accurate perception of yourself.
Ray Isaac: That’s where a lot of those self-evaluation programs come from. But my dad always say, you know, never, never think too much yourself. Nobody else does. You know, and also his, you know, your last name is the responsibility. It’s never the privilege, you know, in the business because, you know, that everybody’s
Ray Isaac: going to be looking at you. And he knew it too. You know, I guess he didn’t have that. My uncles didn’t have that because when they came into the business, there was only a few other employees. When I came in, you’re looking at dozens of employees and all of a sudden you’re put into
Ray Isaac: a position of leadership or management. And I use those, you know, erroneously interchangeably because they’re not. But, you know, you put in that management position and then you have to start proving
12:33Family owned, professionally operated, and the lifestyle trap
Ray Isaac: yourself and everybody’s going to try to call you out on that, you know, sometimes intentionally.
Tyler Martin: Yeah, yeah. That’s interesting. Very, your perspective on things. I love the way you think about things. And I want to segue into just the whole family owned business. You have an interesting line that I read. It says family owned is fine. Family operated is often the problem.
Tyler Martin: And so I know, I believe your kids were in the business too. Talk about that a little bit. And what are the differences? You also talk about the legacy trap. Let’s talk about that a little bit. What’s your thoughts about that?
Ray Isaac: Yeah, and the family owned and operated, I see that as being, okay, that’s cute. But just because something is family owned, as you said, it shouldn’t be family operated. We always said family owned, professionally operated. Because family operated, you’re gonna make decisions sometimes
Ray Isaac: based on how it hits you personally. If you have to invest in new trucks, equipment, hiring people, a new facility, whatever, you look at that at the end of the year. And if you are one of the owners and also operating the business and making that decision
Ray Isaac: saying, OK, I can either buy new trucks or I can go out and buy myself a new car, sometimes that’s going to be a decision that’s hard to make. And you’ve got to have some intestinal fortitude and a real guiding light in business to make
Ray Isaac: the right decision for the business. My dad did. As I said, I learned a lot from him. And he was one of those that, you know, I’m going to do this for the business. We lived very, very conservatively our whole life. And we still do. My brothers and I, you know, we still live conservatively.
Ray Isaac: We don’t flaunt anything. We drive, you know, Chevys and Fords and such. And, you know, but, you know, if you’re going to make a decision as a family operated business, sometimes that can get stuck in what I call that, you know, the lifestyle business trap,
Ray Isaac: where, you know, the business exists first and foremost to support the lifestyle of the owners. And in family owned and operated, that happens a lot, you know, and it’s nothing wrong with it, I guess. I mean, we partner with a lot of companies where they are lifestyle businesses, where, you know, they are very creative with what they can expense through the business, all legal, all above the table.
Ray Isaac: But, you know, we’ve seen some interesting things that my dad’s rolling over in his grave when if he hears me talk about some of the stuff that is put through these businesses. and that puts a big burden on the business because all of a sudden at the end of the year,
Ray Isaac: you’re trying to share your numbers with the employees. And we did, you know, we shared them to a point where they could use that information, you know, properly. You know, sometimes you share net income in a business and they don’t understand, people don’t understand what goes into it without
Ray Isaac: looking at the numbers that lead into that. And you’re not going to give them your whole financial statement. There’s not, there’s too much there to understand. I mean, it’s hard enough understanding the refrigeration cycle, much less understanding reading a financial statement. But we used to give
Ray Isaac: them the numbers and show how we were performing. And they knew that when we gave them a number of gross profit and net profit, there was very limited personal expenses in there. I mean, when we partnered, as an example, when we partnered, you go through what’s called a
Ray Isaac: quality of earnings, a Q of E, and that dissects all of your financials. And at the end of that,
15:35Almost zero add-backs on a $70 million company
Ray Isaac: they come back to you and say, okay, what are the ad backs? The ad backs are the personal cars, the you know vacations the personal credit cards the fuel for your boat the boat itself because you took out a client and they came back and asked me okay where’s all the other stuff and I’m like
Ray Isaac: there isn’t any and we had almost zero ad backs as almost a 70 million dollar company we had very very few ad backs that were personally related because my dad said look you know we’re going to run this thing like it’s General Electric just because you have shares of ownership doesn’t
Ray Isaac: I mean, you can go in there and write checks for yourself or tell people what to do just because you’re an owner. So we ran it like it was a public company. And that, you know, it was, you know, it was tough at times.
Ray Isaac: I remember one day I bought, I think it was a new laptop or something for myself. And we were in a meeting. My dad saw it. He says, what’s that? And I said, no, it’s a laptop. I just got it. He says, oh, for the company?
Ray Isaac: I said, yeah, you know, for the company. He says, oh, he says, what’d your uncle think about that? My uncle at the time was half owner. I said, what do you mean? I didn’t ask him. Well, he said, well, you should have because he just paid for half of it.
Ray Isaac: Wow. You know what? That right there, I was like, ah, I get it. You know, and that’s lifestyle business because then in lifestyle business, if there’s only one owner, it’s a little easier because you’re not trying to keep everything even and square when you have multiple owners.
Ray Isaac: Well, okay. Cousin Joe just bought a new car for his wife. So now I need to try to get even. And what happens is you get into an entitlement trap. And the entitlement is that evil Lee that will ruin a lot of businesses.
Ray Isaac: When I talk about my 70s, that’s the evil 80. But that entitlement thing where, okay, well, then I’m entitled to do this for myself. So all of a sudden now you get this ratcheting effect where everybody’s trying to make sure that everything is square at the end of the year, all because of the personal expenses.
Ray Isaac: And nothing for those personal expenses is going to benefit the business at all. My dad always said, look, you driving a brand new vehicle does not make this company one penny. If we bought a company vehicle, we bought used vehicles for ourselves. So my three brothers and I, when we bought the business for my dad, my uncle, and my late sister, we ran it as an equity business.
Ray Isaac: And I bought used cars at auctions for us. And we realized that, look, buying a new vehicle doesn’t make this company a single penny. Me driving in comfort with leather seats and everything, does that make the company any money? No. So we looked at it very purely.
Ray Isaac: And again, not everybody does. I’m not saying it was right. That was just what we were brought up in. And being in a family business with multiple owners, it kind of was a good acid test to, okay, are we running this thing as pure as we should?
Tyler Martin: It’s interesting because when I researched about you, I felt like, oh man, you’re going to have a lot of baggage as it relates to your family business and people buying brand new cars and trying to keep score and all that. But it seems like you guys really drew a really
Tyler Martin: cool line in terms of how you ran the business. So really for you, a family business wasn’t really a tax that I often see in family businesses. Because what you just brought up, like the whole car thing is so common. Like you buy, I want a Mercedes. I bought a Mercedes, even though I don’t
Tyler Martin: need one for an HVAC shop, but you bought one. One guy had one family member has a Mercedes. The other one wants a Cadillac. And before you know it, you know, you’ve got all these expensive assets that the business doesn’t even need, but it’s kind of trying to keep everything even.
Tyler Martin: But it seems like you didn’t go through that, though. You personally.
Ray Isaac: No, and again, it was very tough at times, but it was very liberating and very pure. And the employees knew it. They knew that we, no private parking spots. I said, you know, you can see the, those traps or those signs of a lifestyle business where
Ray Isaac: the business exists to support the lifestyle of the owners, where you have the luxury cars, you have the personal parking spots. In the back shop are the snowmobiles, the jet skis,
19:29How his dad’s consultant picked the next CEO
Ray Isaac: the boats, the campers. Everybody that has the same last name as the company has two initials after it, VP. You have co-presidents or co-CEOs. I always look at that, and I know there are some that function very well as co-CEOs, but when I look at that, I said, yeah, somebody couldn’t
Ray Isaac: get along or somebody couldn’t agree on who was going to lead the organization. My dad actually went through a process. My dad and my uncles went through a process. Okay. They went and used a consultant to say who should be the next leader of this organization. And I was one of several people
Ray Isaac: in a pool that were in the running to run the business. And they interviewed employees, they interviewed vendors, they interviewed customers. And okay, who do you see? Who have you enjoyed dealing with? Who have you enjoyed working with? Who do you think has the wherewithal
Ray Isaac: and the makeup and the moxie and the skill to run this business. And I guess, unfortunately, I was the person that was selected in it, but I wasn’t the natural successor. I wasn’t the natural successor anyways. I’m the youngest of four boys and five kids.
Ray Isaac: So usually it would have been the oldest of the sons that would come in and take over the business. But my brothers were also very, very perceptive of being comfortable in their own skin. They knew what they loved to do because if you love what you do,
Ray Isaac: you never work a day in your life. That was another one of my dad’s sayings. So they didn’t want to be president and CEO. So I guess it kind of fell back to me. But that also then gets you into that legacy trap that we talked about.
Ray Isaac: Right.
Tyler Martin: Ray, before I move on to the next topic, I do want to just touch on you now through Northwind Services, you’re actively sometimes looking for businesses that you want to buy.
21:01What Northwind looks for in scalability and successors
Tyler Martin: I want to give some tidbit here for folks that are listening that maybe are running a family-owned business. When you look at businesses, how does that impact the family-owned business? How does that impact your decision-making? Would you give any advice to someone that’s in a family-owned situation or any type of
Tyler Martin: words of wisdom since you’ve been on both sides of the desk?
Ray Isaac: Yeah, no, great question, Tyler. Scalability. That’s the thing. I mean, because we’re not buying somebody to keep them the same size. We’re buying them to grow them. Scalability means you can double sales without having to add a lot internally. they should have the they don’t necessarily have to have complete scalability when we partner with
Ray Isaac: them but they should have the makings of that where you have either a named successor or people that could become that and you’ve already thought through that process you have the facility you have the the software systems you have the processes the procedures the standards the practices you
Ray Isaac: know those things that you manage you have those in place that allow you to to grow that business And these are things that you need to think about. And you need to have the resources, not necessarily at hand, but if we inject capital into this
Ray Isaac: business, can we grow this without having to add a ton of people inside? And do you have heroic effort overcoming a poor process? You know, a lot of times, a lot of these businesses we buy, even though they’re family businesses, not all of them are living high on the hog.
Ray Isaac: You know, you got the owner who’s also wearing 10 different hats. And, you know, that’s commendable, but it’s not scalable. So you never want that heroic effort overcoming a poor process. That’s the definition of not scalable.
Tyler Martin: How do you smell out that heroic effort? What are the triggers to find that?
Ray Isaac: Yes, okay. Who’s in the organization? We have a great team. Josh and Corbett that I work with on the M&A side, they get employee listings. We look at how long people have been there. We look at key positions and how long those people have been there.
Ray Isaac: Then we start asking questions about, okay, what’s been their transition in the business? It doesn’t necessarily mean they have to grow up through the business and from service tech to whatever to whatever to president. They can come from the outside and then we’re going to ask for, okay, what is their resume and sorts of what did they do before this?
Ray Isaac: Because we’re putting a lot of responsibility and a lot of pressure, if you will, and a lot of hinging a lot of success on that individual that is going to be taking over. Because a lot of our partners that we buy, they’re looking at this as possibly an exit strategy in the next year or two.
Ray Isaac: That’s natural. I mean, you know, that’s what you want to do. So we make sure that whoever they have coming in is going to take it to that next level. And, you know, that’s something that’s very important. If there isn’t a natural successor and it’s all hinging on this individual and all roads lead through them, that’s something that, you know, we try to sniff out.
Ray Isaac: So you look at the processes in the business, you look at the practices, you look at do they have standards, do they have program books and procedure manuals that we can implement in the business because we don’t come in and drop our book on the desk.
Ray Isaac: You know, we slowly tweak it, you know, we try to, you know, do things if they make sense and we try to achieve economies of scale and best practices.
Tyler Martin: Yeah. Do you, if it’s, you know, if you see five family members at the top of the org chart, is that generally scaring you away or what’s your thought on that? And I find this an interesting question because you’re a family owned business that got acquired.
Ray Isaac: Great question, because we do see that. You have four brothers or five brothers like our family was, and they’re all almost the same age. I mean, you know, obviously within, you know, 10 years of each other, we say, okay, who’s the natural successor here?
Ray Isaac: Is it, you know, brother Tom that’s, you know, 75? Or is it Joe who’s, you know, 55? You know, that we will put a lot on then is, okay, can he do this? And if he can’t, who can? So we do look at that.
Ray Isaac: Sometimes that’s a benefit because that’s a add back to the business. We look at, you know, five people at the top and they’re all, you know, paid the same amount at, you know, $200,000 a year. There’s a million dollars in ad back that we’re going to be able to shed from the business.
Ray Isaac: And that’s kind of the, a lot of times that is a indication of somewhat of a lifestyle business where they’re all at that top making that money. We never had that at Isaac. We got paid for what we did, not for who we are.
Ray Isaac: That was one of the things that we brought up. I was paid as a CEO and president. My brother David was a service tech, loved what he did. And that was what I was going to say before. I was quoting my dad, if you love what you do, you never work a day in your life.
Ray Isaac: He loved what he did. And he was a service technician, a very good service technician, top craft professional in the whole US. So we didn’t have that very top heavy organizational chart where we had all these huge salaries up there that were just paid because of our last name.
Ray Isaac: The highest paid people in our company were a lot of times the salespeople. we had many years where our top salespeople made more than my dad and my uncle combined. We’re talking one salesperson made more than my dad and my uncle combined. And I asked my dad,
Ray Isaac: does that bother you? He goes, no, that’s the plan we set up. That’s the game plan. Those are the rules of the game. And he sold a lot. He did great. He actually helped this company because he sold so much that he was able to pay our bills. We didn’t do well. So your uncle and I shouldn’t
Ray Isaac: have taken home a lot of big paycheck. They paid themselves very small salaries. And at the end of the year, they would bonus themselves, you know, a certain amount and also then retain earnings in the business and reinvest and buy new buildings. So, you know, I learned from the best. My dad,
Ray Isaac: my uncle Bill, and my other uncles, when they were there, but eventually it became down to my dad and my uncle. You know, we learned so much from them on, you know, how to interact, how to support each other and what a business means and treating it as a business.
Ray Isaac: And again, this isn’t a hobby. This isn’t because you got 400 people coming there every day. And my dad always drove that in our heads. Look, you make a decision. It doesn’t just affect you. It doesn’t just affect your family. It doesn’t just affect your extended family and the management team.
Ray Isaac: It affects 400 people times four because of their family. So if you make a dumb decision, you got 1,600 people that you can affect with that in a bad way. So he always put the gravity of every decision on us. It doesn’t mean that you got paralysis through analysis, but make sure you’ve thought through your decisions.
Ray Isaac: My PI, my predictive index profile, is a controller.
27:33Predictive index profiles posted on every door
Ray Isaac: The controller is somebody who likes to get a lot of information, but then is going to make the decision and stick with it. Then that was me. That was my profile. we did a PI for everybody in our company. Everybody knew what somebody’s personality
Ray Isaac: was. So when they came to my door, they could look and say, he’s going to want a lot of info. He’s going to want the facts, good or bad. He’s not going to want a crap load of small talk. He doesn’t want to sit and talk forever because I’m a type A personality. So if you come into Ray’s
Ray Isaac: office, this is what you need to give him. So somebody that didn’t even know me could walk up, look at the PI on our door. We had that on everybody’s door. They could look and say, this is what Ray likes. So if nothing else, it was a reminder. I still have the employees that
Ray Isaac: would come and sit down and you know we’d chat for an hour and i was fine with that you know but we got a lot of business done at the same time so as a controller i like to get a lot of info but i
Ray Isaac: was going to make the decision and i live by it yeah a pi is that similar to disc i’m not familiar with yeah pi this you know um you know myers briggs or you know they’re i think they’re all pretty much the same but predictive predictive index was pretty good because it was a i like
Ray Isaac: things that are useful. It was a tool because you got that takeaway. Then there was a bunch of other tools that it provided to us in doing employee reviews and performance improvement plans and also development plans for our employees and leadership team. I had things in there too that
Ray Isaac: I needed to work on from my PI. At what point did you introduce PI that is sitting on the doors of everybody. Is that like early in your company or once you get into hundreds of people? No, it’s once we got to probably, I guess it was probably 2018, 2017, when we went through
Ray Isaac: several re, I guess, engineerings of the company. A lot of the stuff will come out during what we call our step process, strategic thinking, execution planning. We didn’t do the strategic planning. We added T and E, strategic thinking. So our first session, we would come in and just
Ray Isaac: everything against the wall. Nothing’s a dumb idea. You know, just let’s just go. No, you know, no assumed constraints. And then we would go into execution planning. Now, in the middle of those, we filtered out the horse race of, okay, what are the leading ideas? What are our five rocks,
Ray Isaac: our priorities? And we got this from, uh, from scaling up, uh, by Vern Harnish. You know, again, I, as I said in a other podcast, you know, I, I don’t have any original ideas. I’ve R&D’d everything robbed and duplicated. So, you know, everything came from either a book or somebody I
Ray Isaac: listened to or, you know, got an idea, even watching a TV show or something, I’ll get ideas from that. So I probably don’t have any original ideas, but, you know, that’s how I put them together. That’s why I say I’m not a very good leader. I probably was a great team builder.
Ray Isaac: I was, you know, great in putting things together and having them work. But yeah, that step process was great because, you know, we got that down to a one-page, one-page strategic plan. Everybody
Tyler Martin: could look at it, boom, you’re there. Yeah, that’s cool. Ray, and that’s, I know, Vern Harnish’s program has that one page. I remember it, although sometimes it’d have two sides to it, but it’s still mostly one page. We’re writing on the margins and on the edge
Tyler Martin: of the paper, but it was there. But Ray, for like the folks out in the audience, let’s say you’re, I don’t know, 20 person shop, 50 person shop. Would you recommend, at that size, do you have your personality profile on the door? Do you think is there a benefit to it?
Tyler Martin: You’ve gone through it. So I’m wondering, at what point does it make sense to introduce? Because I hear this, I’ve interviewed 70 guests now, and I hear this frequently where they’re sharing Treasure Boston, I interviewed a couple of weeks ago, and she literally in their conference
Tyler Martin: room has their disk profile of everybody there as a way to learn how to interact with each other. So what’s your thoughts? When does it get introduced?
Ray Isaac: I would do it earlier if I was to redo it. I’d do it earlier. And again, for selfish reasons, because I was the biggest idiot in the world. It would have at least been another thing pointing to me saying, hey, look at yourself, dummy.
Ray Isaac: How many people’s personalities change? Now, again, mine modified a little. I’m still the same core person, but I learned to function and perform better and also be more perceptive. But your personalities don’t change. So if you’re going to build an organization around a team,
Ray Isaac: let’s know who that team is early on. Being comfortable in your own skin, And if you’re going to build a team around those individuals, you need to do it from more than I think you’re this, that, or the other thing. Having that data.
Ray Isaac: I love data. And having those analytics that are done by somebody other than maybe your coworkers or your family members or whatever. I think even in a family business, people are going to go, there’s a lot of aha moments for people that are family members where they know this person is like this their whole life.
Tyler Martin: but they have the validation. This is pretty refreshing. Yeah, that’s a good one. Hey, speaking of data, I want to go into our next segment. My favorite segment is called the number. And usually what I do in the segment is I like to pick out a couple of numbers that are meaningful
Tyler Martin: to you. One of, based on my research, revenue per employee based on the whole org blended,
32:39Revenue per employee and office salaries under 10%
Tyler Martin: and then direct labor as a percentage of revenue, I believe are two signature metrics that you’ve looked at. So assuming my research is accurate, I’d love to talk about those a little bit and how you looked at them. And I know I’m sure there’s some ancillary data too. I’d love to just kind
Ray Isaac: of go through that. Yeah, no, thank you. Yeah, the revenue per employee, that was one of our key figures from the scaling up one page strategic plan. That was one of our key metrics that we would look at. In our business, I looked at that as being a great test of, okay, are we efficient?
Ray Isaac: Are we productive? Are we overloaded in the organization on people and belly buttons? Because belly buttons are very expensive. And I always looked at the old rule of thumb used to be, and again, I didn’t come up with this, but it was $100,000 per employee.
Ray Isaac: That was in the old days. Now we’ve kind of risen that to probably $2,000 to $250,000 is what we look for when we’re partnering with somebody. And for us, it’s a nice balanced metric to say, okay, that’s everybody, myself included, number of people divided into your revenue as a corporation.
Ray Isaac: You should be right in that range. Now, again, that is just a very pure number. It can change. I mean, if it’s manufacturing or even if it was just commercial installation, that number may go up. That could be $500,000. So you should know what that metric is.
Ray Isaac: you should get a history for your business and see if it’s improving over a period of time and how it relates to others in the industry that are like businesses. So that was the very pure number. On top of that, we would look at what I call our net promoter score, which was from the ultimate
Ray Isaac: question by Frank Reicheld. And it was a way of testing, do you have promoters in your organization, outside the organization as your clients? Are those the people that are going to be singing your praises as a client of the organization? On top of that, then, we would also layer on the employee loyalty score.
Ray Isaac: This was a survey we came up with and devised, and we did our own employee survey to test, I guess, yearly how the employees are feeling about the organization. And I asked them to be very honest, brutally honest. I probably should have de-emphasized brutal because sometimes the responses we got back were pretty brutal.
Ray Isaac: A lot of times it showed, I’m not going to say it was miscommunication on our part that we weren’t telling people enough. We weren’t sharing with them information that we should have. We weren’t giving them the meaning of the numbers in the business.
Ray Isaac: So, you know, we would look at that. And then I would have meetings for months after that survey and share the responses. Now, some people would not sign it. They do it anonymously. I had people that beat the hell out of us, me personally, with their survey responses.
Ray Isaac: And they’d sign it at the bottom and say, you have any questions? Come and see me. You know where I am. And you know what? I’d bring those people in and we would implement some of the things that they suggested or at least modify what we’re doing.
Ray Isaac: Sometimes we would lock, stock, and barrel implement a program that was suggested by one of the employees because they weren’t happy with what we were doing. And we changed our health insurance program. We went to a cafeteria plan at one point because we had people that said, I get full health insurance through my spouse, but I lose that benefit value.
Ray Isaac: Somebody then at the end of the year is getting $5,000, $10,000 more than I am in total income and total compensation because they’re getting that. So we introduced a cafeteria plan. So a lot of good came out of that. So we used that one as our key factor to see if we’re efficient.
Ray Isaac: And then we worked out from the other ones. The other one we did use was not necessarily direct labor. We would look at that. But I always looked at employee salaries as a percent of revenue. So in our business, I like them to be less than 10%.
Ray Isaac: You know, that always said, okay, are we top-heavy or not? And again, employee salaries meaning, you know, what is the leadership team getting paid in their W-2? Now, that isn’t bonuses or anything like that at the end of the year, you know. We took that out because we weren’t burdening our financial statement with that.
Ray Isaac: We only got paid if we made money. You know, that was the key success thing at our company. We didn’t burden our budget with all these big salaries throughout the year. We burdened it with a very reasonable salary. And we went out and did salary.com.
Ray Isaac: We said, OK, what are the reasonable salaries for these positions? I was paid because of salary.com. My dad and my uncles did the research on, OK, what should the president of a, at that time, a $20 million company be paid? And they used that as my guide.
Ray Isaac: So that allows you to be very efficient. And then every job you sell, you’re not overburdening it with this very high number that you then have to start explaining to your salespeople, okay, why are we only making 5% on this job? We should have been making 15.
Ray Isaac: Well, we got all these salaries at the upper end. So there’s a lot of reasons why you want to make sure that it’s a very accurate and a very reflective budget. And you’re making sure that you’re not overburdening the company with not just salaries, but everything else we talked about, the luxury cars and you name it.
Tyler Martin: Right, right. So I, two things I want to clarify on. So the 10% of, of labor, that’s just management labor. Is that correct?
Ray Isaac: 10% of revenue should less than 10% should be your office salaries. And that’s an office salaries. That’s all office admin, uh, anybody, anybody back office, basically. BSR dispatchers. Yeah. So less than 10% for all of that.
Tyler Martin: That’s good feedback. That’s really good feedback.
Ray Isaac: And what happens is you, you look at, okay, well, everybody else makes up around 9%. So as a owner, as a CEO, you know, you can’t overburden that number very much to keep it less than 10%. So you had to make sure that, okay, I’m going to pay
Ray Isaac: myself reasonably, but at the end of the year, you know what, if we do everything right, we’re going to make a lot of money. And at that time, then we can decide if we’re going to bonus
Tyler Martin: ourselves or not after we decide what we’re going to reinvest. Yep. And then another question I have going back to your revenue per employee, all employees, simple question, but I’m just curious, how did you deal with like part-time employees and stuff? Was it just head count?
Tyler Martin: You didn’t really care and that got divided by even if they were part-time or did you do kind
Ray Isaac: of like a full-time equivalent type thing? Yeah. Yeah. Part-time we would say, okay, how many hours? If they were 30 hours, we consider them full-time. But if they were 20 hour a week, okay, two part-timers equal a full-timer. You want to make sure you’re being
Tyler Martin: at least accurate in that calculation. Awesome. Okay. That’s really good feedback. Okay. So we’ve got time for one more segment. I’d love to just talk about what you’re looking for these days. So now you’re on the buy side. We talked about it a little bit, but I’d love to know what you’re
Tyler Martin: seeing in the marketplace, what you’re ideally looking for when you run into a business. What are some red flags? What are some green flags that look really good? Talk me through that.
39:55Why a 20% net margin can be a red flag
Ray Isaac: Oh, wow. Holistically, before we even do an on-site visit, we look at their Google reviews. I mean, who would think? But we look at the Google reviews. We look at what the region is that they’re servicing. We look at their website. Is it a professional site? And then once we,
Ray Isaac: green flags are, again, scalability, everything that leads to that, a software system. It doesn’t necessarily have to be the one that we’re using. We’re going to switch them over to that. That’s one of our must-haves after we do a partnership. But if they have a software systems and they’ve
Ray Isaac: used it efficiently and effectively and they’ve integrated it through their organization, that shows that they are active in the business. We want to make sure this isn’t a hobby business for somebody. I mean, I’ve seen some businesses that are eight, nine million dollars that still
Ray Isaac: look like a hobby. I’ve seen some two million dollar businesses that are buttoned up tighter than you can find, and that is going to be a 20 million dollar business with just adding a little bit here and there. So we can kind of flesh that out a little bit on what we do look for.
Ray Isaac: Red flags, if all roads lead through one individual, if they don’t have that succession plan, if they have a culture that really doesn’t fit what we’re looking for, if they have bad Google reviews, nature of the work that they do. We’re kind of focused on the residential-like
Ray Isaac: commercial side now, so we’d like to see that. I’m probably forgetting a lot of the items that We look at, you know, financial performance, obviously, the numbers got to line up. It doesn’t have to be, you know, they’re making a killing. You know, sometimes we like to have, you know, some dry powders still.
Ray Isaac: You know, if they’re maxed out and they’re making 20% net, we kind of look at that as a negative. You know, it’s like, geez, you know, there’s a sweet spot of profitability. You know, I always said that that was one of mine in business, you know, that there’s a very sweet spot.
Ray Isaac: If you’re making too little money, sometimes that’s sometimes better. there’s only a few things you got to tweak and you can change those and start making a reasonable profit. If you’re making too much money, you know, that sometimes that is a can be a negative where
Ray Isaac: if you’re making too much money, chances are you’re not giving your clients the value that they’ve paid for. You’re not giving your employees the income that they deserve. You’re not supporting the community with charitable endeavors that you should be. So sometimes making too much, and I know it may sound weird if people listen to a podcast like this, but I always look at it.
Ray Isaac: There’s a sweet spot. And sometimes if somebody’s making too much money, and I saw this even before we partnered with the private equity and I was in peer groups, sometimes I looked at it, and usually it would lead to one of those things that they weren’t taking care of.
Ray Isaac: Their employees might have been underpaid or they were maybe charging the customer too much, too. You can throw a high price on an inefficient operation and make money. It’s like spaghetti sauce on a bad meal. It’s going to make any meal taste okay if you throw spaghetti sauce on it.
Tyler Martin: So, Ray, I don’t want to put words in your mouth, but are you saying, because 20% was one of the figures that you threw out, if net profit is 20%, are you saying that could potentially be a red flag?
Ray Isaac: It could be a red flag.
Tyler Martin: Really?
Ray Isaac: I mean, and again, it depends on the business, but back when we were running our business, 20%, you know, sometimes you start adding things up. Okay, gross profit of 55%, 60%. If you’re reasonably operating a business with all the things that are needed to do that with, you know, taking care of your trucks, your benefits, your employees, your insurances, make sure you’re covered properly, your rent.
Ray Isaac: There’s not, I don’t know. And then paying commissions. And then, you know, the things that come off of that, it’s like I always had a hard time saying, OK, where is this coming from? Usually it was either they’re charging more or they were trying to spend as little as possible.
Ray Isaac: Now, and again, it’s not bad. You know, we’d love to see a business that was at 20 percent. I’d love to analyze that and see, OK, how are they making it? We do have those. You know, I don’t want anybody to, you know, to die on that number.
Ray Isaac: But, you know, sometimes that was a that was a number that seemed just, I don’t know, it seemed like there was very few companies could do that, especially in a Rochester, New York. That’s the other thing. You got to look at the demographic.
Ray Isaac: I mean, Atlanta, Georgia, Dallas, Texas, New York City, that might be achievable. You get into Rochester, Richmond, Virginia, you know, some of these smaller communities, Pawtucket, Rhode Island, you know, the AAA baseball cities. You know, these are very close-knit Syracuse, Buffalo, where we operate, Corning, New York.
Ray Isaac: You know, everybody knows somebody, and somebody knows somebody else. So, you know, you want to make sure that you’re very careful on your pricing strategies in those markets and how you’re going to market. Nothing stands on its own. Nothing exists in a vacuum, especially in running business and pricing and how you go to market.
Ray Isaac: But you’ve got to be perceptive of all those things because they can affect your next job that you may or may not get.
Tyler Martin: Yeah, yeah. Hey, when you started this out, you said you look at reviews and then you look at their website. When you’re looking at their reviews, are you looking, is it quantity? Is it this number of stars? Is it a little bit of everything? I mean, when do you get concerned? Is it a 4.7? Is it 20 years in business and they only have 100 reviews? Or is that opportunity? I mean, it’s hard. I’m curious what you’re thinking.
Ray Isaac: yes yes and yes but you’re right they get on the one you know they say they’re doing 10 million dollars in revenue and they got 20 reviews it’s like all right the things they need to pass the smell test 4.7 or what’s whether they related to we’ll read them if it was pricing sometimes you
Ray Isaac: know what if there was an old saying if you’re not getting any price complaints then you’re not charging enough so that’s that’s a common one but you know if if there’s business practices um And if they, you know, if they had an employee that, you know, just was not happy, then we’ll start digging in a little bit on that.
Ray Isaac: If we see a pattern of that where the guys were rude when they were on the job, we start looking at that and saying, okay, that is a true indication of, you know, the fish rotten from the head back. You know, something’s happening at the leadership level or somewhere culturally in that organization.
Ray Isaac: So you got to read between the lines a little and you got to make sure you do your research to, you know, paint a picture. It’s not just one pixel. It’s all of them that paint the picture of this business. And that just then decides whether we go on site or not and submit a IOI, an indication of interest on whether or not we think the business would be somebody we’re interested in.
Ray Isaac: Because we want good quality businesses. We don’t want to have to do work in that area. It’s hard enough trying to optimize the business. If you have to go in and try to culturally change one, that’s a tough haul, man. And I tell you, I don’t know if I have the strength anymore to do that.
Tyler Martin: Yeah. Before we wrap up here, last thing here, what generally business sizes are you looking for? Is it a revenue number or what’s your target?
Ray Isaac: Yeah, I mean, it depends. If they’re in a market where we already have a partner company, we can take a little bit smaller business. It doesn’t mean we’re going to roll them or tuck them in underneath the other one, but there’s support structure in it.
Ray Isaac: So anywhere from, you know, two, 2 million, 3 million up to, you know, 20 or 30 million. We like that 9, 10, 15 million dollar business. They’re big enough where they have the processes. They’ve thought through things. They have professional leadership. They have systems in place.
Ray Isaac: They’re computerized. They have good benefit programs. They’re competing for labor. It’s not just somebody’s guy, if you will. And, you know, so they have that. But they’re small enough where we can still, you know, inject the, you know, a little bit of our process into them to double their size.
Ray Isaac: You can double a $15 million company to $30 million and not have to do a lot. They’ve already hit that, you know, what we call level of complexity. You know, they’ve hit that spot where all we do is got to bridge that little chasm there to get them to that next level.
Ray Isaac: And off they go.
Tyler Martin: Wow. Okay. So your website. So I’ve got IsaacKeating.com. Is this your family business? Your family business. then of course, uh, northwindservices.com and I’ll put this in the show notes is if people, and maybe there’s someone out in the audience and they’re like, Hey, I’d be curious to talk
Tyler Martin: to Ray and just learn what this means. Maybe it’s today, maybe it’s five years, who knows? But I think having that conversation always is, is, is good for both parties. And then of course, I’ll include your LinkedIn, Ray, you’re amazing. Uh, sadly, this was only about a 45 minute
Tyler Martin: conversation. I feel like we could easily go another two hours. You said so many things I want to dig in on, but just time doesn’t allow for it, unfortunately.
Ray Isaac: Yeah, I hear you. Well, we can do part B, you know, whenever you want. It’s an open door.
Tyler Martin: I’d love to, because there’s a lot of things you said. So thanks again for your time. And I really appreciate talking with you. Can’t wait to talk again.
Ray Isaac: Oh, thanks, Tyler. Thanks for your time today. And thanks for the opportunity.
Tyler Martin: What I loved about my conversation with Ray is that growth only works when the business is actually built to support it. You could add trucks, hire more people, grow revenue, and expand into new markets. But if every decision still runs through the owner, the business is going to feel heavy.
Tyler Martin: Ray made a great point that strong companies are not just bigger, they have leadership, systems, clean numbers, and a healthy culture and a structure that allows the company to keep moving without one person carrying the whole load. I also liked how Ray was with numbers, revenue per employee, office salaries as a percentage
Tyler Martin: of revenue, employee loyalty, Google reviews, and succession planning all tell a story about whether a company is scalable or just stretched thin. And that’s the CFO mindset. It’s about knowing what your numbers are telling you before growth creates more stress, more overhead, and more pressure on the owner.
Tyler Martin: Hey, if this conversation makes you think a little bit differently about your shop, book a free intro call at CFOintroCall.com or go ahead and check out my free cash flow scorecard on the homepage of Profit and Grit. It’s a real short test that you take and it gives you three different areas that you fall into.
Tyler Martin: And I think it’s really informative. It may help you. As always, thanks so much for listening. Have a great one.
Related Episodes
- How a Family HVAC Company Grew to $20M Without Selling to PE – Cody Martinez
- The $3M to $6M Growth Trap for Home Service Businesses – Janeen Norquist
- Become Your Own Private Equity in HVAC and Plumbing – Dillon Caraway
- The Shift That Took This HVAC Company From $5M to $11M – Darren Yarbrough
Tyler Martin works with owners on the numbers behind these stories: profitandgrit.com or Book a free intro call. For where your business sits right now, read the $3M to $15M scaling breakdown.
