I subscribe to a lot of newsletters, and one of the best is ResiClub, usually written by Lance Lambert, but a recent article was guest written by Polina Pompliano doing a deep profile on luxury real estate broker Ryan Serhant. If that name doesn’t immediately pop into your memory, think of Netflix, because you’ve probably seen at least a preview of his reality show, “Owning Manhattan.” It was a fantastic profile from a writer who is always great at this sort of thing, but the more I read the article, the more I found myself just feeling sorry for Serhant. The man has no free time whatsoever, he’s missing out on real time with his family, which includes young children, and he’s still absolutely obsessed with being the biggest, richest real estate broker on earth. It’s an unhealthy obsession, one which he seems to be almost (but not quite) conscious of, as he talks about how he’s basically trying to show everyone from his past that he’s better than they thought he was. Reading this article made me think of how so much of what we see on LinkedIn, in business media, at conferences, etc. is focused on this idea of success at an insane scale at seemingly any cost. It isn’t healthy, and I think we need to take some time to consider that sometimes it’s perfectly okay to be a small business owner and not feel constantly pushed to scale, scale, scale!
Here at PMAssist, we’ve long been advocates of a more balanced approach, and we’ve championed the third-party PM managing less than 1,000 doors. I’m a firm believer that the “sweet spot” for a PM company is between 400-800 doors, and in today’s article, I’d like to do a deep-dive into the reasons why, and encourage you to be happy with your business at this scale and not let podcasters, tech bros, or anyone else make you feel “less than” for not running a giant company.
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The Siren Song of Scale
You’ve heard all of it, from podcasters to keynote speakers, the constant barrage of “if you’re not growing, you’re dying,” and similar sentiments. Quite frankly, it’s garbage, nothing more than a siren’s song luring you in only to end up bashing you against the rocks. That’s not to say that no one should have goals to scale big, but I do believe that the average PM is being led astray by these sentiments.
The first thing I always ask someone is “why?” Why, specifically, are you obsessed with scaling? In many cases, you just get a blank stare. They don’t know why. It’s just what you’re “supposed” to do. We hear some consultant or keynote speaker say “if you’re not growing, you’re dying,” and we just take it as truth without giving it any actual critical thought. But we shouldn’t take anything as gospel without critical thought.
So let’s look at the origins of this oft-repeated phrase. The original quote was actually “when you stop growing you start dying,” and it came from a novel, not a business book, called “Junkie.” And yes, the novel is about exactly what you think it’s about: being a drug addict, or “junkie.” The author, William S. Burroughs, was a drug addict himself, and he used that phrase to describe a cycle where addicts oscillate between constant consumption and then withdrawal and decay. So if you take the original context that Burroughs intended and apply it to business, it’s actually not a positive thing. The correlation would be the idea that relentless attempts at growth in business can lead to burnout and loss of fulfillment over time, and then you come crashing down, only to start the cycle over again. Does that sound like success?
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Then along came the snake oil salesmen to take Burroughs’ actual meaningful social commentary and turn it into pedantic nonsense for a motivational speech. Back in the 80s and 90s, Tony Robbins rose to fame with his motivational and self-help seminars, infomercials, conferences, books, etc. He tooks the phrase from Burroughs’ book and turned it into a claim that you and your business need to be constantly growing or you’ll end up dying. Of course, this is the exact opposite of the original intent, but when you’re a grifter who has never actually run a successful business and just make money off of infomercials and seminars that peddle BS, original intent and actual truth don’t matter.
Actual Research
As you know, I don’t like anecdotes and platitudes. I like cold, hard data. Objective facts. So unlike a motivational speaker, I’m not going to misuse a novel’s quote to make a point I just made up, I’m going to look at what actual academic researchers have found.
That brings us to Edward D. Hess, professor at the University of Virginia’s Darden School of Business. Darden is a graduate business school, and Hess had a career in business prior to being a professor at some of the largest consulting firms in the country. His academic work has focused primarily on the concepts of growth and scale in business. And suffice it to say, he doesn’t share Tony Robbins’ view on these things.
Hess’s book “Grow to Greatness: Smart Growth for Entrepreneurial Businesses,” is a bible for intelligent business leadership that every business owner should read. Its essential thesis is that unchecked growth for growth’s sake can outpace a company’s managerial capacity and processes, leading to value destruction rather than creation. He argues for the idea that growth should not be an end unto itself, but rather a means to bring greater value to customers, which will lead to more reasoned and stable growth. His emphasis is on “improve or die,” contrasted against the more popular “grow or die.” In his view, a business certainly does need to constantly work on improvement and innovation, but growth for the sake of growth is a mistake. Growth is more of a side rather than the main course.
Hess uses some real world examples (Darden’s teaching philosophy focuses on case studies) such as Starbucks to prove his point. He demonstrates that Starbucks embraced the “grow or die” mentality from 2005 to 2007, forcing extremely rapid growth, which led to unhappy employees and a poor customer experience. In 2008, the Board had to bring back Howard Schultz as CEO to clean up the mess, and Schultz openly admitted that growth was the problem and that they needed to refocus on the customer experience and simply providing high-quality coffee. He permanently closed a total of 900 stores over a two year period, then closed thousands of stores temporarily to re-train employees and refocus on quality and customer service. Of course, this worked wonders. Since then, Starbucks has grown by around 10,000 stores, but they’ve grown sustainably and organically, not through forced growth for the sake of growth.
These sorts of examples can be found everywhere in the business world. “Grow or die” is more of a way to satisfy quarter-focused shareholders than it is to actually run a successful business long-term. And since you aren’t a publicly traded company, your focus should always be on running a sustainable business. You don’t need to worry what Jim Cramer is going to shout like a maniac on CNBC after your quarterly earnings are in, so don’t focus on such things. Worry about what’s sustainable.
The PM Sweet Spot
When it comes to most property management company owners, even sustainable growth may not be desirable. I’m a firm believer that unless your ultimate goal is to roll up tens of thousands of doors to sell to a private equity firm or IPO on Wall Street, then you should probably intentionally stop the growth of your PM company at something short of 1,000 doors. This isn’t to say that BizDev and marketing stops (you always need to replace churned doors), but if your door count is starting to peak above this, it may be time to prune out some less than optimal doors and owners. Aim for what I believe the sweet spot is: around 800 doors (or less if you’re happy with a lower take-home income). Let’s talk about why I consider this the sweet spot.
Up to this door count, a property management company is a relatively simple operation. The Org Chart usually contains a broker, a few property managers, maybe some assistant property managers, some maintenance coordinators, a few leasing agents, and some admin & accounting support. You’ll notice something that isn’t listed there: senior and middle management. At this size, both senior and middle management can essentially be one person: you if you want to maximize profitability at around 40%, or a hired Operations Manager if you want to be more passive and accept a lower margin for lifestyle reasons. But there is no need for any C-Suite execs, no need for VPs or Directors, or even department supervisors. At 800 doors, your total team should be somewhere between 13-20 employees, easily managed by one senior manager, which can be you. But once you start to grow beyond this, it stops working. You can no longer manage a team of 25 people by yourself, or even with just an Ops Manager. You start to need department heads. And then if you keep growing, you need VPs. Then you need a CFO, and maybe nowadays a CTO. Then you need a CMO. The problem is, these are expensive people. Even a department head can be a six figure hire, and C-Suite gets deep into six figure territory. Those margins start to compress, and what was generating a 40% margin at 800 doors is now generating a 15% margin at 2,000 doors.
Let’s do some math on that. Let’s assume a PM company generating average revenue per door of about $250 per month. So at 800 doors, you’re producing around $2.4 million in revenue each year and a profit of just shy of $1 million. Now we grow to 2,000 doors and hire all of the additional management labor necessary to make that work. At 2,000 doors, we’re now generating $6 million in revenue, but with our margin shrinking to 15%, we’re only making a profit of $900k. That’s less than we were making at 800 doors! PM company owners find themselves in this situation and then realize that they can’t stop. They now truly are in the must-grow situation, just to get back to where they were previously. But on top of the new added pressure of a necessity to grow bigger and bigger, they now have the hassles of managing egotistical C-Suite execs and VPs, and they’re getting disconnected from their rank-and-file employees who are now experiencing lower job satisfaction because they feel lost in a big enterprise and now reporting to three different bosses. Employee churn skyrockets. Growth becomes next to impossible as a result as you try to just manage employee churn and keep the business from shrinking while you’ve taken on all of this additional overhead. Any shrinking at all would lead to massive reductions in profit and possibly personal financial struggles. All because some guy who’s never run a real business in his life told you that you have to “grow or die.” Does this sound like success to you? It certainly doesn’t to me.
Personal Wealth
Where many business owners get hung up is that they tie their own personal financial success to their business alone. They get to that 800 door level and then they say “is this it?” They feel like if they want to continue to grow their personal wealth, they have no choice but to keep growing the business, when in reality their personal wealth may actually shrink for a long time if they continue to grow. Why do we put all of our eggs into one basket?
Imagine this: you keep your business at 800 doors with its massive 40% profit margin, and you invest a big chunk of your profits into passive investments. So at 800 doors, your total profit is at $960k (it could actually be much higher, but I’m using conservative numbers based on industry average revenue per door). Taxes take maybe $200k of this if you’ve got a smart accountant, so you’ve got about $760k to play with. You take home $500k and you invest $260k into stocks, bonds, angel investing, whatever piques your interest.
Now, I already hear the growth bros screaming “but I get a much better rate of return by adding more doors!” No you don’t. You just think you do, because that’s how it’s worked up until now. Going from 600 doors to 700 doors was an enormous windfall, because your revenue went up by $300k and your expenses only went up by $100k. But that’s not how it works when you go from 1,000 doors to 1,100 doors. Now those expenses are going up exponentially, because you’re no longer hiring a $40k employee, now you’re hiring a $150k manager. Your rate of return is now negative as your margin collapses. You would have been much better off to take your spare $260k and drop it into an S&P 500 index fund.
What you’re really having to ask yourself here is whether this is really about personal and generational wealth, or is it about your ego? And I don’t say that judgmentally. There’s actually nothing morally wrong if it’s about your ego. If your personal satisfaction in life is going to come more from being able to say that you manage 5,000 doors than it would from having greater personal wealth, then by all means, focus purely on growth. But I would encourage you to really sit down and meditate over that first. Will that really make you happy? Or do you just think that that’s what you’re supposed to do, and you’ve been told that you’re a failure if you don’t? If it’s the latter, then change your priorities and focus on what will actually bring you fulfillment. For most people, I simply don’t think that scale is what will bring that fulfillment.
Lifestyle Matters
It’s not just about personal wealth, either. It’s also about lifestyle. While reading the profile on Ryan Serhant, I felt exhausted just reading about his life. He can’t possibly enjoy it. And it seemed obvious that his wife and kids were just tolerating it at best, making excuses for it, as if it would all pay off eventually. But it won’t. He’s already at the peak, and he’s still not satisfied. He’ll never be satisfied, because the growth is the drug that he’s addicted to. He very well could reach his goal of being the biggest real estate broker on earth, but that won’t end the obsession, just like reaching an incredible high doesn’t mean the junkie gets sober. He’ll be looking over his shoulder realizing that the guy who’s number two can overtake him, so he’ll become obsessed with making sure he stays at the top. It never ends, just like it never ends with the junkie.
Instead, ask yourself what your real priorities are. The best guide for this is psychological research that’s been done on palliative care (dying) patients. While the hard research may be a little dry to read unless you’re a nerd like me, the research is basically identical to the anecdotal examples provided by an Australian palliative care nurse who wrote a book called “The Top Five Regrets of the Dying.” In short, no one on their deathbed regrets spending less time at the office. Here are the actual top five regrets of the dying:
“I wish I hadn’t worked so hard.”
“I wish I’d had the courage to live a life true to myself, not the life others expected of me.”
“I wish I had let myself be happier.”
“I wish I’d had the courage to express my feelings.”
“I wish I had stayed in touch with my friends.”
Notice a severe lack of any business or financial regrets, except for a specific regret of spending too much time focused on work. Do you think this might be instructional in the goals you set for yourself and your business? Don’t you think that you should listen to the advice of the dying so that you don’t end up as just another anecdote for a palliative nurse’s book about how much regret you have for being obsessed with door count instead of other more important things in your life? Maybe you’re the rare exception who actually will achieve true peak life satisfaction based on the ego high of managing so many doors, but you’d better be damned sure that’s the case, because you only get one go on this spinning orb in the cosmos. Don’t waste it.
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!
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