Recently a social media discussion among contractors focused on whether it was possible to make $120 thousand a year as a contractor. Not only did some question whether it is possible, they questioned whether it is ethically possible. So how much is it possible to ethically earn?
The Question is Scale
The sad and sorry truth is most HVAC contractors do not prosper. This is a shame because any contractor in any city can prosper and thrive by most people’s measure. It’s a matter of scale. Grow a large enough operation that operates efficiently (i.e., profitably) and you can pay yourself any amount you want.
It goes without saying this implies giving up the tools at some point. As long as you keep turning a wrench, you will be limited in your ability to turn a substantial profit. You can stay on the truck and continue to sell labor or get out of the truck and operate a business.
Rules of Thumb For Owner Pay
Like anything, there are multiple rules of thumb governing owner pay. The one we teach to Service Nation Alliance members is owner compensation should be 5% of total revenue. Many people advocate a higher percentage. Using 5% of total revenue, a contractor who wants to earn $120 thousand a year needs to build a company generating $2.4 million in revenue ($120,000 / 5% = $2,400,000).
Another rule of thumb is, owners should pay themselves up to 50% of net profit after taxes. If a company is generating roughly 15% pre-tax and 10% after tax, the contractor who wants $120,000 must build a $2.4 million business. $120 thousand divided by 50% results in $240 thousand of net profit. If net profit is 10%, that equates to $2.4 million.
Is $2.4 million doable? Of course! It’s not even rare. It is not a question of ethics, but of scale.
What’s the Top End?
The greatest limit to your earning potential is your own limited belief in what is possible. Most contractors do not believe they can make much, so they don’t. In truth, there is no top end if you believe there’s no top end.
Knowing the sky is the limit intellectually is one thing. Internalizing it is another. It is likely that you will never truly believe what is possible until you associate with contractors who were once like you, but who achieved income levels you do not believe are possible.
The classic example of belief is the story of Roger Bannister and the four-minute mile. Bannister was a medical student attending Oxford on a track scholarship. The four-minute mile was considered a medically impossible barrier. Bannister became the first man to show it wasn’t. Once he proved it could be done, it only took 46 days for his record to be broken. Once people believed it possible, the record was broken again and again.
When you talk with other contractors who have built successful companies that pay them handsomely, you will believe it is possible for you as well. I can distinctly remember being on the other side of the world during a time when the Australian dollar and U.S. dollar was at parity. I was listening to a pair of Australian contractors talk about personal income among other issues. One said he was making a cool million dollars personally. Mentally, my jaw dropped.
As the other nodded as though a million dollar annual paycheck was the most obvious thing the world, the first declared, “A million dollars a year, that’s all I want. I can live on a million dollars.”
Why not? Does it sound unattainable? Look at the math. A million dollars using either rule of thumb described above equates to a $20 million on revenue. This is much rarer than a $2.4 million company, but it is certainly attainable. Almost every major market in the country has at least one residential service and replacement company hitting $20 million or more.
That’s great for metros, you say, but what about small markets? I can think of two companies who are better than halfway there in rural markets. They grow by adding branch locations in nearby towns and by adding other services to their portfolios.
The late, great Zig Ziglar used to say, “You can have anything you want if you’ll just help enough other people get what they want.”
This is perfect. You sell warm air when it’s cold, cold air when it’s hot, and clean air when it’s dirty. People want what you offer and will buy it from you or someone else. Why not you?
The gross revenue of your company is a measure of the value you deliver to society. The net profit is a measure of how efficiently you deliver that value. Deliver enough value efficiently and you can make as much as you want ethically.
How Much Do You Want?
Most contractors do not know what they want. They do not think about possibilities, only constraints. They live by constraining their lifestyle into whatever the business throws off. This is like a weak salesperson who receives a base on commission. The base shouldn’t be enough to live on, but somehow the salesperson constrains his lifestyle to survive on the base so that he never sells to his potential.
Think about the lifestyle you would like to have, not the one you enjoy today. Quantify it in detail. Assign costs to it. How much for your forever home? Your second home? Your club membership? Your dream vacations? Your toys? The total should be much more than you can afford today. Divide it by 5% and the result becomes your gross revenue goal. You will not get there overnight, but you can get there.
Last month, a long-time member of the Service Roundtable and Service Nation Alliance texted me a picture of his brand-new Citation jet. He said it was, “a 20-year goal achieved.” This same contractor was once told to wait in the parking lot of a supply house while the orders of the good paying customers were fulfilled first, which was the kick in the gut he needed to start thinking about possibilities instead of constraints.
Change your thinking. Change your circumstances. How much can you make? As much as you want. It’s a great industry.
A good first step for any contractor looking to improve his circumstances is to join the Service Roundtable. Learn more at ServiceRoundtable.com. Call 877.262.3341 for a complementary, guided tour of the website and all of the resources available. Membership is only $50 a month.