119 | Designed to Last: The Shift from Operator to Architect That Scales Your Business

Patrick: [00:00:00] What if the very strengths that built your business are the exact things, keeping it from scaling. If you’re a high performing entrepreneur or CEO, chances are you’ve hustled your way to success. You’ve built revenue, you’ve built a team, you’ve built momentum. But here’s the hard question, is what you’ve got here actually designed to sustain to the next level?
Welcome back to another episode of the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and today we’re continuing our series designed to last. In this episode, I’m joined by Michael O’Keefe, and we’re diving into one of the most overlooked inflection points in business growth. The shift from operator to architect.
Because at some point, hustle becomes a liability. We’re going to unpack why smart, profitable entrepreneurs still hit invisible ceilings while growth starts to feel heavier instead of freer. And why Success without structure quietly creates fragility. We’ll walk through the four stages of competence, why every [00:01:00] new level of growth requires you to become incompetent again.
We’ll talk about what it means to really move from solving problems personally, to designing systems that solve them without you. We will get into the financial architecture required to scale profitably, including margin guard rails, runway analysis, capital allocation and tax aware growth strategies that protect both your cash flow and your enterprise value.
If you’ve ever felt like you’re working harder than ever, but the business still depends too much on you. If you’ve ever wondered why adding more people doesn’t automatically create more freedom, or if you’re serious about building durable wealth instead of just high income, this episode is going to challenge the way you think about growth.
Now, before we dive in, if you’re listening to this and you’re thinking, I need better structure, better tax strategy and better wealth architecture, I want to point you to vital strategies.com/tax. That’s Vital strategies.com/tax. We’ve built out resources there specifically for entrepreneurs who want to scale intelligently [00:02:00] and keep more of what they earn.
And if you want to go even deeper into our Vault Tools, guides, and planning resources for tax strategy and long-term wealth building, visit vital wealth.com/resources. That’s vital wealth.com/resources. Everything we talk about on this show ultimately ties back to helping you build something that truly lasts.
So here’s the promise for today. By the end of this episode, you’ll have a clear framework to evaluate whether you’re operating at your current ceiling or architecting your next level. You’ll understand the structural shifts required to increase enterprise value, reduce bottlenecks, and create a company that can thrive without your constant intervention.
If you find this conversation valuable, I’d greatly appreciate it if you’d leave a review. It helps us reach more entrepreneurs and CEOs who are trying to build businesses the right way. Alright, let’s get into it.
Michael: Alright, last episode, we talked about financial health, profitability, reporting, and cash management, and we asked listeners to assess whether their foundation was actually [00:03:00] strong.
If you didn’t already listen to that episode. That episode is number one 16. We recorded that a couple weeks ago. Go back and give that a listen. Great episode. So let’s, let’s assume someone scored well, the business is profitable, reporting is clean. Cash is managed intentionally. Um, Patrick, why do smart, successful entrepreneurs still make financial decisions that sabotage them in the long run?
Patrick: Yeah, this is a, this is a great question. I’m, I’m actually really excited about this episode because I don’t, I don’t think this is talked about that much in, I’ll say the, the entrepreneur community. So first, let’s, let’s start off and define sabotage. I don’t think it means necessarily collapse. It doesn’t mean failure.
Uh, it means something far more common. It’s just a ceiling that entrepreneurs run into this invisible ceiling that they, they keep bumping into. And it’s, it’s not necessarily this super dramatic thing. Uh, the business is still growing, but very, very slowly. And it’s the entrepreneur’s winning, you know, they’re making a healthy income and, [00:04:00] but there’s this level that they just can’t break through because the structure that built this success.
Got ’em to where they’re at now, is now limiting it into the future. So I, before we dig too deep into that, I, I’d like to just get into, uh, a few of the problems that, uh, the entrepreneur faces when we’re, we’re thinking about this, this structural, uh, sort of redesign. And we, we start to see that, uh, there’s some external problems.
You know, there’s, there’s bottlenecks in decision making. Uh, growth is creating stress instead of creating freedom. Uh, it’s really. You’re hiring ahead of any modeling, you’re just doing it by gut and, uh, uh, generally a problem shows up and you’re like, I’m just gonna hire somebody to solve that problem.
Um, reporting is, is lagging in relationship to the, the complexity that, uh, uh, the business is at and, and scaling is not really there. It, it, you know, growth just feels really, really hard. And [00:05:00] what we see happening is entrepreneurs are attempting to scale using the frameworks. Designed for earlier stages of the business.
And it creates what we were talking about earlier, this invisible ceiling. There’s also this internal problem. Uh, they’re frustrated. They’re frustrated with the business. It seems like they’re working harder than ever to get maybe less results. They got more people problems than they’ve ever had. Uh, and they’re quietly aware that something is off.
Um, this pressure is, uh, on them to keep the momentum going. And what it’s causing is just more, you know, I, I feel this, I, I’ve gotta work harder and, uh. I feel reluctant to slow down and I’m just uncomfortable redefining my role because what I, I know what’s got us here and I don’t wanna, I don’t wanna change this.
And the tension is around, like, I built this. Why does this suddenly feel like I’m the constraint in the business? And this is the, the psychological discomfort, uh, from moving. Um. From one, one area of the business to a, a new role. And then there’s a [00:06:00] philosophical problem. And that, that problem is success should create clarity and leverage, not confusion and pressure.
And that’s, that’s where the business is at. And there’s, uh, constant heroics that need to be performed to sort of get things across the, the finish line. Uh, there’s emotional exhaustion, there’s structural fragility, and, uh, uh, often there’s bloat in the business because I just hired somebody every time I, I saw a problem and now my margins aren’t where they.
They necessarily should be. And my, my financial decisions are reactive versus proactive. And so, you know, at this level we’re, we’re finding out that hard work should produce durability, but it’s, it’s not, scaling should not require chaos. Um, and it’s, it’s wrong that capable entrepreneurs stall because they we’re, we’re never really taught how to evolve structurally.
So, uh, I’m, I’m again excited about getting into this conversation and. I think before we, we move on, we need to understand, uh, why this happens. We need to talk about the four stages of, [00:07:00] of competence.
Michael: Yep. Okay. So let’s unpack that. The four stages of competence. Uh, it sounds like what you just described is something structural.
So what are those four stages of competence and why are they so important for entrepreneurs?
Patrick: Yeah, this is, this is good. Uh, this happens in any skill, any learning. So this could be. Whether I’m learning a physical skill, whether I’m learning a, you know, uh, intellectual skill, and, and so it always starts off with unconscious incompetence.
I don’t know what I don’t know. So, um, let’s, let’s use Rubik’s Cube for example. Um, most people before I just mentioned it, were unaware that they didn’t know how to solve a Rubik’s cube, right? Uh, they’d never really thought about it before. But now what I’ve done is I’ve, I’ve introduced. Conscious incompetence.
I’m now aware that I don’t know how to do a thing, and, and now I see this gap. Okay. So I’m like, okay, interesting. I don’t know how to solve a Rubik’s cube. Now I start to work at [00:08:00] it and I can become consciously competent. Okay? So what that means is I have to think about it to, to execute and it’s, it’s really intentional.
Okay? Um, and when we think about a sport, I think you, you see this mo most often in sports. Uh, there’s a great book called The Inner Game of Tennis. That really talks about this, this topic, when I have to think about execution, it doesn’t work. I, I execute really, really poorly. Uh, and so what I need to do is train myself to be unconsciously competent.
The skill just becomes a natural part of me. Uh, I don’t need to think about it. And we see this with athletes right now, the, uh, the Olympics are going on, and it is so cool to watch the unconscious competence of, of these athletes out there, uh, whether it’s figure skating or downhill skiing. Um, you know, the, they don’t need to think.
And as soon as they start thinking, we, we see, uh, some of these athletes start to fall apart. So the skill becomes a natural part, and that can happen in our business as well. And most of us are, are there. Um, and, [00:09:00] and where we see this is at the early stage where hustle becomes the unconscious competence.
Like, I’m just, I’m just really good at hustling. I can go drive revenue into the business. We can deliver on that revenue. But the thing that happens is scaling now in introduces, uh, this unconscious incompetence, like, I, I’m stuck and I don’t know why I’m stuck. You know, I’m unaware of the thing I need to get better at.
And so now, hopefully through this episode, the goal is to start getting people to think about, like, oh, I’m gonna go identify the areas of my business that, uh, we don’t either have the capacities for, or we we’re not structurally designed to, uh, to bring in. So. Growth requires reentering this learning curve.
You know, we, we start at the unconscious incompetence, then we move to conscious incompetence. And that’s painful. That, that is, that is a painful piece. Uh, because now I have to learn how to be consciously competent and it takes me a while to, to live in that zone before I become unconsciously competent.
And the business, I [00:10:00] can just go back into that, that sort of normal mode of, of decision making and growing and, uh. Hopefully scaling the business to, to a new level. So every level of growth requires you to become incompetent again, which that’s really, really hard.
Michael: Yeah, that’s, that’s really good stuff. And, um, this feels connected to something I heard, uh, recently on a, a podcast the other day actually.
And, um, uh, I’ll quote, if you want long-term success in business, money, relationships, or life. You have to get better at accepting uncomfortable truths as fast as possible.
Patrick: Mm-hmm.
Michael: When you refuse to accept an uncomfortable truth, you’re choosing to accept an uncomfortable future. And so, uh, I think that’s really, that’s a really great quote.
And my question would be, um, when an entrepreneur resists reentering that in incompetence phase when it’s required. Are they choosing to accept an uncomfortable future for themselves?
Patrick: Yeah, this is, this is great. And, and I think one thing that most entrepreneurs, I’m [00:11:00] gonna go back to what you, you just said.
Uh, and I, I think this answers the question, but we don’t ask ourselves those hard truths. We’re not willing to, to, to face that, that uncomfortable situation. I think if we asked ourselves this question like, what is the truth of this scenario? Uh, we would start to uncover some of these things, but, um. Uh, and, and it might be hard like that.
The answer might be, I’m the problem, or my team, the people that got us here, um, might’ve been a fantastic high school team. You know, we won the state championship, that was amazing, but now we’re playing at the college level. And that cornerback out there that keeps getting burned for touchdowns is not the right player on this team.
And, uh, that can be hard. That can be really hard. Now, there might be a way to, to move that player to a different position and still find success. Uh, but oftentimes it, it takes retooling. And the truth of the situation might be, you know, even though, you know, James has been with us and he’s been amazing, you know, helped us win the high [00:12:00] school championship, he’s not the right player, um, for this, this next level.
And the, the best thing to do for James is he’s not thriving anymore. He’s just getting killed, right? And it’s no fun getting killed every day. So, uh, the best, the best way to handle that is go look. James, uh, we need to find a new opportunity for you and let’s explore that, whether it’s in our business or outside of the business, uh, and do that in a way that like, uh, respects him.
But I, I think there’s, there’s oftentimes, um, you know, the truth needs to be to be faced and that can be really hard and it can be also hard as the entrepreneur, I think we have the hardest time. Dealing with the truth of our role and what our limitations are, and figuring out how to hand off some of those pieces or step out of some of those roles and really lean into what we consider our unique ability because we, we like to think we can do everything the best.
And, uh, if, if the business is completely dependent on me, there’s clearly a ceiling there. So I love that question in that line of thinking because I, I think [00:13:00] there’s, there’s so often. Um, it’s easier to just keep my head in the sand, uh, pretend like this isn’t a problem and it’s gonna resolve itself. And, um, I, I heard this once from a mentor and I think there’s so much truth in it.
Um, the speed in which you make decisions is the speed at which your business will grow, and they don’t have to be the right decisions. Like, you just need to make decisions. And, uh, uh, the goal is to make wise decisions. Don’t, don’t like just make foolish decisions, but the goal is to make the best decision you can.
And then. You’re measuring it, and if it’s working fantastic, you, you keep going. If it’s not working, you’re fine tuning and adjusting. So, um, I think that, uh, I, I, I love where you were going with that, that question. We are faced with this thing, and it is true. You, you totally nailed it. It’s true in every area of our lives, if we want to have success, we have to start facing the truth around, you know, I think about our health, our relationships, our.
You know, [00:14:00] it, uh, it all, it all starts to show up. And if, if we take ownership in, in that answer around that, that truth question, uh, we, we, we can start to, to make some changes.
Michael: Yeah. Yeah. Uh, so sticking with our poor stages of competence here, um, how does unconscious competence at one level become a liability at the next for an entrepreneur?
Patrick: Yeah. Yeah. Let’s go back to that hustle example and, and I’ve, I’ve seen this in, in my life, in my career. Uh, I’ve, I’ve figured out how to make money just by hustling and, uh, I could go out and, and do a thing. And the, the problem would be, and I, we see this with lots of entrepreneurs is almost every time in the hustle scenario, it’s a custom strategy.
Well, custom doesn’t scale. Uh, now you can create a system and a process to get to custom. That’s great. But, um. If it’s just, you know, a client rolls in the door and wants a, um, you know, [00:15:00] purple school bus, you’re like, yes, we’ll do it. Another one wants the green rocket ship. And you’re like, yes, we’ll do it.
The next one wants a, you know, yellow submarine. You’re like, got it. You know, and, but the problem is like that, that is really hard. And that’s where the, you know, I can be really good at that hustle and creating these amazing outcomes, but it’s, it’s really hard to. Take and scale and grow that business when it’s, it’s required me or a key player to create this heroic effort every single time.
And that I might be really good at that. I might not have to think hard at that, but, uh, uh, there’s gonna be some, some real challenges there. And I think this can also, uh, show up in a number of different ways. Um, so. The speed at which the entrepreneur moves can be a problem, uh, if the rest of the team can’t pick it up, you know, they’re, they’re constantly driving things forward.
Um, and then I also see it in, we’ll say the, the financial realms. Um, you know, I’m, if I’m just making decisions based on my gut from, versus like going back to the [00:16:00] last episode and really understanding my, my financial statements and, uh, financial infrastructure really well and going, oh, okay, cool. Let’s use a margin example.
So I know my, when my margins get up to a, uh, a certain level, let’s say I’m at 30% margins, I might be like, okay, um, I know we’re getting close to capacity here. I’m okay hiring and bringing my margins down to 20%, knowing I can grow back up to 30, you know, and we can keep those, um, sort of that cycle going.
Uh, but I, I know if I hire a 20. Now my margins are at an unhealthy zone and I need to either figure out how to create more efficiencies in my, my business. Now it’s an operational question, or, uh, I need to drive more revenue into the business ’cause I’m hiring too early or I need to push that, that higher off.
So, uh, I think that’s an, uh, a, a key piece. And then I think there’s [00:17:00] also something that’s interesting about this unconscious competence piece that, um, um. We’ve seen businesses that have just been passed by, by, um, we’ll, we’ll call it, uh, time, you know, the, the marketplace has evolved and they, they’ve been stuck.
And I can think back to this was probably, uh, 20 years ago where, uh, a friend of ours owned a, an office, um, furniture and design. Firm and, um, you know, that that business started changing, it started moving online. It started, um, becoming commoditized, and they didn’t know what to do about it. Uh, they, they had this really high margin like, um, you know, direct sales model that all of a sudden just started falling apart.
And, um, some of the big players were just going direct to [00:18:00] the, the consumer with. Um, you know, their, their equipment and they didn’t know what to do, and they effectively went outta business because they, they weren’t okay getting uncomfortable again in their thinking and go, all right, we, we have to start testing out some new things to make sure that we’re, we’re moving with the, uh, the, the marketplace.
And then I think about the, the psychological component of unconscious competence. Um. Man, I, my identity might be tied to being really capable in this certain arena. And if we’re gonna change it, it’s, it’s going to be be hard. And I don’t, none of us really like being uncomfortable. You know, I think that’s a skill to, uh, to develop.
Um, uh, Angela Duckworth, uh, wrote this book called Grit, and it’s great. And we, we find out that the grittiest people, um, you know, they’re, they’re willing to just keep, um, grinding through things. And I, I, I find that’s true. In all the areas of my life that matter, I think about my faith. I think about my marriage, [00:19:00] uh, my health and fitness, you know, like waking up in the morning and working out and uh, not eating the donut, uh, is, is the, is is harder than just like taking the comfortable route.
Um, and then ultimately there’s, there’s these like structural blind spots. I think this goes back to embracing the truth that we just ignore. We, we just pretend like they, they’re not there. And so, you know, when we, we look at all of those factors together, it, it leads us to this spot where we, um, our, our unconscious competence, the thing that got us here is going to limit us from, from growing to the, um, the next one.
And so we, we just find that what we built for our first level of success is not designed to sustain it at the next level.
Michael: That’s, that’s really good. And one thing I’m thinking of is, um, I think a dangerous saying that an entrepreneur could say to themselves or to their team is, we’ve al uh, we’ve always done it this way.
Patrick: Mm-hmm.
Michael: I think that can be a super dangerous way of thinking. And you, [00:20:00] you talked about earlier how in order to grow that decisions have to be made. Yep. So, like, I’m wondering like, what’s a, what’s a common, we’ve al we’ve always done it this way, example at scale that, that you’ve seen.
Patrick: That’s, that’s a good question.
Um, you know, we, I I like to, I, I’m okay with that answer. If that answer is, we have no pride of ownership. That’s the way we’ve done it around here, and we’re, we’re willing to change it, you know? Um, ’cause I don’t think it scales otherwise. If, if, if that’s the best defense that an entrepreneur has is, um.
That’s the way we’ve always done it around here, or leadership said that’s the way we’ve always done it around here. Like that, that is very weak leadership. Like, uh, it’s interesting, we were, we were talking about this, um, earlier this week on, um, we were working with another advisor and, um, on a client’s planning and he couldn’t defend his strategy, you know, couldn’t [00:21:00] defend it other than I just don’t like it.
Hey, you’ve, you’ve done well, just pay the tax and let’s move forward. And it’s like. It’s just intellectually lazy, you know, to take that position. Um, and you know, we’ve always done it this way. We’ve always just paid the tax, right? Like, uh, from my point of view, that’s foolish. It’s like, no, let’s show up and if there’s a better way, and if you don’t like my way, that’s totally fine, but like, defend why you don’t like my way and let’s, let’s come to the truth.
And I, I think there’s a, uh, Patrick Lencioni has a, a great book called The Five Dysfunctions of the Team, and part of that is. A very effective team is, is willing to challenge one another. They’re willing to have, um, intellectual discussions and disagree on things and come to a conclusion. And they don’t all have to, like, I don’t have to agree.
We have to agree that this is the plan and this is what we’re doing moving forward. Um, even if it wasn’t my idea, but I, I think that’s a. A key piece. You know, it’s about [00:22:00] the only place that I’m, I’m willing to accept this is the way we’ve always done it, is this is the way we’ve always done it, is leading to, we’re constantly evolving our systems and processes and structure, uh, to a better way.
So this is
Michael: good. Yeah. And I’m gonna repeat a key line that you said earlier that I think needs to be repeated. What built your first level of success is not designed to sustain, to sustain the next. Mm-hmm. So. If some of your old thinking needs to, uh, be replaced, then something structural has to take its place.
So what does the shift from operator to architect actually require?
Patrick: Yeah, this is, this is good. Um, because we, we need to, we need to move from this like hustle mentality to somebody that’s designing an infrastructure and a culture and an organization that, uh, can handle new levels of growth. So. We need to, we need to move from solving problems.
Like, I’m just going to solve the problem to designing systems that can solve the [00:23:00] problems. Um, and then also thinking about control. You know, control is a, is a major issue for entrepreneurs. We like to hang on to things. Uh, we feel like we’re, we’re really good at it and we want to keep being really good at it.
Uh, because if we hand it off, uh, we may not get the same, same outcome. So we need to move from that, that control to clarity. And what I mean by clarity is. This is the outcome we expect and we’re going to manage to that outcome. We’re gonna have accountability around that outcome. So I don’t need to control the outcome, but I need to control who’s responsible for what by when, uh, when it comes to that outcome.
And we’re gonna, we’re gonna make sure somebody’s in that seat that can, uh, that can drive that, uh, that outcome. And they can only do that when they have, uh, a clear path to, to get that, that done. This is, this is hard. Uh, the next one is speed. You know, we, we, we give up speed, uh, to have structure because, [00:24:00] you know, there’s, there’s an old saying, um, if you wanna go fast, go alone.
If you wanna go far, go with a team. And it’s like, uh, you know, I, I need to, I need to have a structure in place that the team can take us, uh, a long ways, effectively, efficiently, without me having to, to be in the middle of it and make it all. All go, or the entrepreneur in general, being in the middle of it to make it all go.
And then, you know, there’s also a, uh, just giving up, uh, delegating authority to people so they can make decisions. Right. Um, you know, and I, I think there’s a, a key piece of, of this. If I have to make a rule for every possible scenario, that’s really, really hard. But if the core values are just so clear in an organization and everybody understands them and.
I can make decisions based on those core values and the direction that we’re going organizationally, that’s, that’s where, uh, delegation happens really, really well. I’ve got smart people that, uh, are [00:25:00] hardworking, that know how to make wise decisions, uh, based on the direction we’re going. I think that’s, uh, that’s, that’s really good.
And then it goes back to, to like, I don’t wanna micromanage in a, a micromanaged organization. Um. Is gonna be a very slow organization because nobody’s gonna be able to do anything. They’re gonna be scared to make a decision, uh, because they, they need to sort of report back up to the top where, um, again, if we, if we don’t care how the outcome is accomplished, you know, I can, I can give you the, Hey, here’s what I think is best, but I, I trust you to make a good decision and go get this thing done.
Um. I think that’s, that’s good. Uh, to, to give, again, delegate some of that authority because, uh, people are gonna have, they’re gonna have new, innovative ways of getting things done and letting them just kind of run with those, I think is a, uh, fantastic, fantastic opportunity. Um, so I, I think that [00:26:00] that formal reporting cadence needs to be stretched out where, uh, we’re meeting, you know, monthly based on quarterly goals you’re reporting to your.
Person and, or maybe it’s every other week and it’s just like, Hey, I’m checking in. Here’s where we’re at. And it’s quick. Uh, it’s a quick check-in. Uh, I’m off track, I’m on track. Here’s where I could use some help. Uh, and just making sure that, that everything’s moving along nicely. Not what do I do next?
You know, uh, there’s a, there’s a really interesting story out there called Getting a Message to Garcia. Uh, it’s, it’s great. It’s been reprinted a zillion times. Um. And, uh, you should go look it up and, uh, ’cause it applies to our, our society today. And it’s like, well, I don’t know what to do next. And it’s like, no, just go get the work done.
Uh, be creative, be a problem solver, and, and go. So, and then when we think about it from a, a financial point of view, um, and it goes back to this our last episode, but being able to, [00:27:00] uh, model different scenarios before hiring. Uh, it, it’s interesting, uh, we had a, a friend of mine. Bought a business from, uh, the guy that founded the company and the founder was, um, he was, anytime he was irritated by something, he would just go hire somebody to fill that spot.
And he had this, uh, I’ll call it management level bloat. That was like, there was just way too many people reporting directly to him. And it was like, we’ve, we’ve gotta, we’ve gotta simplify this and that, that can be hard. ’cause now we’re, we’re moving people reorganizing the org chart reporting, having people report to somebody that used to be their peer.
Um, but having good modeling, financial modeling before you start hiring is a, is a really critical piece to, uh, I think scaling well. And then just again, runway analysis. Uh, another friend of mine, um, days of cash on hand was something that, that they measured to, to figure out the health of their business.
And, uh, this was a hospital organization and, [00:28:00] um, they figured out. When he took over the job, they had like, I dunno, 30 days of cash on hand, which is a very dangerous place to be. He wanted to be at 180 days, uh, I think 180 days of cash on hand, uh, which is about six months of cash. And, uh, you know, they, they got there, but they, they made sure that they, they spent a lot of time understanding, uh, where inefficiencies were, how to get cash, sort of start building back up again.
Um, and we touched on this, this next one earlier, but margin, guardrails, you know, just having. Um, some, some upper ends. Like the upper end can actually tell you some things too. You know, if you’re running at really high margins, you might be, uh, burning your team out. Uh, hey, we’re running really fast. We’re producing really well.
Uh, it might be time to hire because for us to continue to grow, uh, we’re gonna have to, to bring more people in so that margin can be, uh, something. And it can also be on the bottom end if we’re running. Poor margins. Um, you [00:29:00] know, we gotta go figure out how to be more efficient. And it’s so interesting to see the margins.
I’ve, I’ve sat in on some, some conferences that, um, um, where we’ve done some speaking and they’re talking about industry-wide. Our margin are, you know, gross margin needs to be 30%. So you’ve got revenue, you’ve got, uh, cost of goods sold. You need to be at 30% for us to be a healthy business. And then all the operating expense sort of falls underneath that, uh, 30% sort of the bottom line.
And if you’re not there, like go fix that. And, uh, uh, so it’s, it’s interesting to just see from industry to industry where those, those margins start to line up and to know those, to know those really well and make sure that you’re, uh, making wise decisions based on those, those margins. And then, you know, how do we allocate capital?
Uh, this is one of those things that. We, we might’ve been able to get away with, uh, by, by using our gut in the past, going, yep, now is the time to go invest in that software. Now [00:30:00] is the time to go, um, you know, buy a new office building or rent new office space. And it’s like, geez, that, that may not be the case.
Uh, and again, it goes back to those, those margin guardrails. Like, um, how are we doing this? And are we doing this because I like it as a, an ego boost for us to. Live in that office space that looks really cool. Or is this like the best decision for the, um, the business? And then this next one, uh, tax aware scaling.
Uh, so interesting. We, we’ve seen clients get in a really tough spot. They have a great year. They go pay cash for a capital asset and it’s not tax deductible. Now all of a sudden they’re sitting in a situation where they’ve got a tax liability that they weren’t planning for. And no cash because they spend it all to just continue to grow.
And so that’s, that’s something that I think is, is awfully important as well, is just have, have a very clear picture of, again, all of the financial aspects of, of this, uh, running a business as an entrepreneur to make [00:31:00] sure that you’re, you’re not wandering into, uh, dangerous territory. You know, it, it, it was easy to shoot from the hip, uh, when you got started, but as the business matures and as you start to grow and you really wanna scale, you’ve.
Um, you’ve gotta get this, uh, dialed in. And so I think the, the key thing here is our ambition without financial architecture is how entrepreneurs go broke. Uh, you’ve gotta have the infrastructure in place to make sure that, uh, uh, the decisions you’re making are going to help you get to the next level.
If today’s conversation sparked something for you, if you realize that. You might be operating with outdated architecture or making bad decisions without the right financial guardrails in place, I wanna point you to a resource that can help. We’ve built a curated vault at vital wealth.com/resources, specifically for entrepreneurs who are serious about scaling with intention.
Inside you’ll find tools, guides, and strategic frameworks around tax [00:32:00] strategy, cash flow, wealth building, and long-term planning. These are the same types of conversations we’re having with clients. We want to move from reactive growth to. Designed durable growth because here’s the truth, scaling without structure creates stress.
Scaling with structure creates freedom, and the right resources can help you make that shift faster with more confidence. If tax strategy is one of those areas where you know you need to tighten things up, I also want you to visit vital strategies.com/tax. That’s Vital strategies.com/tax. We’ve outlined key strategies and insights to help you think proactively about minimizing tax as you grow.
Don’t wait until the end of the year to figure it out. Start now@vitalstrategies.com slash tax.
Michael: Yeah, so aside from getting new systems and financial architecture in place. There’s a human element to this new structural change. Mm-hmm. We think about the [00:33:00] four stages of competence from earlier, not just entrepreneurs, but their employees to, uh, move into the conscious incompetence phase. And so when you install new structures, why does that feel harder than expected?
Patrick: Yeah. This is, this is really good. And I think this is underestimated in organizations when we go change things as again, as entrepreneurs. We may be okay with change. We, we actually kind of thrive on change. Uh, uh, I’ve, I’ve heard this saying in entrepreneur circles that, um, you know, sometimes the best firefighters are arsonists, right?
Like, we like to go create a problem so we can solve it. And, uh, um, but one of the things that that happens in our organizations when we start to force change on everybody else is the team is losing familiarity and. Those processes that once worked. You know, going back to the, if we look at why people say, well, this is the way we’ve always done it, it’s because it’s comfortable, right?
Hey, this [00:34:00] thing got us here. Why are we gonna change that thing? And so, and it forces people to move into this conscious incompetence piece. And so I, I think about, um, what happens to productivity, it actually goes down when we, we start to make these new structural changes. So. We have to prepare our team and we have to be prepared ourselves.
We can’t be overly optimistic like, Hey, we’re gonna come in, change everything. Everybody’s gonna love it, and we’re gonna go farther faster today. Now we’ll go farther faster. It’s just not going to happen today, more than likely. And so we, we have to be, as leaders, we have to be very patient in the process.
We have to double down on clarity. Like we have to be super clear on. What outcomes are expected, that it’s not going to be easy. Um, and I think with that clarity comes repetition. There’s a, I think it’s another Pat Patrick Lencioni comment. Um, [00:35:00] people don’t realize you’ve got core values until you’ve said them seven times and it’s like, oh, I recognize we have core values.
I can’t name them, but I recognize we have them. So you’re blue in the face from saying this thing, and now people are just starting to recognize that you have these things. And so. This can be true with, with change. We just have to keep saying it over and over again. And then there also needs to be this, uh, emotional awareness.
Um, I don’t wanna be overdramatic with this, but there’s, there’s almost this level of like, you know, grief, grief or loss that that takes place when we start changing the systems and people were like, man, I don’t know if I like this. Uh, I used to be able to run and do my job really efficiently and effectively, and now I, I feel like I’m.
Uh, I went from, you know, riding a, uh, in a car to trying to learn how to ride on a unicycle. And I don’t know how to do this, and it’s really hard and it doesn’t feel efficient, doesn’t feel [00:36:00] effective. Uh, I’m falling down, getting banged up. I’d rather just go get back in the car and drive, right? Um, and maybe that’s a terrible example because the reason we would wanna move to, you know, a unicycle is to go farther faster and the car would be the better example of that, but.
You know, it, it is something that, um, you know, there, there needs to be this, this acknowledgement that it’s going to be uncomfortable for people. We have to work through the process with them. We have to be patient. We’ve gotta, again, create that clarity and repetition, just be over and over again. Here’s why we’re doing what we’re doing.
This is the outcome we’re expecting, uh, and then helping people along the process. So, you know, when we, we look for this, if we don’t. Financially planned for the discomfort that’s gonna come with the growth. We’ll retreat back to what, what feels familiar. And so having, again, that, that financial margin, you know, in the, the LA the last topic we were talking about was that, uh, runway, you know, like, do we have enough runway to, uh, get us through some of these [00:37:00] dips, some of these changes, some of these new initiatives we want to, to roll out because it might be painful in the short term from a.
Revenue, cash flow margin perspective because we’re, we are, we are changing things.
Michael: Yeah. Uh, going back to, um, just what you were talking about the team, um, maybe not, I don’t know if this is the right way of putting it, but not wanting to, um, adopt these new, new changes or, um, um, growth. Um. I’m wondering, how do you prevent the team from retreating to those old habits that you were talking about that is it gonna prevent the, the overall business and the entire team from evolving together?
Patrick: Yeah. I, I think there’s a, there’s a top-down approach here and, and leadership really has to be firm and accountability. Um, you know, whether I like it or not, I, I’m finding myself, I’ve got teenagers and I find. [00:38:00] Um, helping my teenagers be productive adults is at times similar to running a business. And what I mean by that is if I outline, Hey, kids on Monday night, you need to have your laundry done.
Your room needs to be clean, uh, and your car picked up, you know, and that’s the end of that conversation. Guess what happens Tuesday morning? Their laundry’s not done. Their room’s not picked up, and their car’s still a mess. And so. What happens is if you create some accountability and communication around all of that, uh, hey kids, it’s Sunday night.
Um, how are things going with room, car, and laundry? And uh, um, if everybody’s like, great, I’m on track. Cool. Um, and then if Tuesday morning comes around and those things aren’t done, we’ve just found, uh, having some consequences. Like our kids really like their phones and, uh, you take their phone away. It gets their attention.
So, um, we’ve just made it a rule, Hey, [00:39:00] it’s totally fine if you don’t get your stuff done. We’re just taking your phone for 24 hours. Uh, we’ll check it the next morning and if it’s done, then, then great. If it’s not, we’ll just hang onto your phone for another 24 hours. So, um, having a level of accountability on, on these things.
And again, you wanna come alongside people. You don’t wanna beat ’em up in the process. You wanna understand. Um. And communicate that you understand it’s hard. Um, but we need to make this change for us to get to where we want to go. And the the challenging part is there’s gonna be people that are like, no, I’m, this isn’t for me.
You know, I’m that, I’m that all world High school cornerback and I’m not gonna make it as a college cornerback and I’m gonna go find another high school team to be on. And that’s okay. Um, it’s totally okay. You can let people self-select out in some of those scenarios, but, uh, I think that’s a. A key part of the process, and whether you like it or not, you’ve gotta demonstrate performance in these new things.
You know, uh, if [00:40:00] you’ve gotta show up and, and do the thing and your leadership has to do the thing, and you gotta start holding yourself accountable and working your way down, uh, through the ranks to just make sure that it’s, it’s adopted through the organization.
Michael: Mm-hmm. Okay. So now tying all this together, can you walk us through what this looks like at meaningful scale?
Patrick: Um, you know, there’s, uh, we’ve got a number of clients that have gone through this and it’s really interesting to see what happens. Um, you know, I’m thinking of one in particular that had, um, you know, probably a two or $3 million net income, you know, $10 million valuation. You know, they’re, uh, they’re growing, but it’s very much a hustle culture.
And, uh, I remember. On one of the early conversations that one of the key people was doing everything from like facilities management to financial management. Like, you know, if there was a leak in the bathroom, he was fixing it. And if there was a [00:41:00] leak in the financial statement, he was trying to fix it.
You know, it was, uh, uh, it was really incredible. And, um, but as the business started to grow, there was conversations about, Hey, we’ve gotta get, we’ve gotta get different people, you know, we can’t have you. Fixing leaky sinks. We’ve gotta have you, you know, focused on these key areas. And, um, it was really interesting to see that happen.
Um, you know, the, the scaling started to expose the bottlenecks. Um, and going back to my leaky sinks, leaky financial statement, you know, the reporting starts to get messy when you don’t have the right financial information. And just seeing how their, their financial tools changed, you know, going from.
QuickBooks Online to Fathom, uh, which is a sort of financial planning, not planning, financial forecasting tool, um, and ties into some more complex tools that they just needed to get to the next level. Um, and then also this, just [00:42:00] having a hierarchy on decisions and who’s responsible for making those decisions and, um, getting those things done.
And you know, it’s, it’s interesting, you know, oftentimes the, the founder thinks that it’s a, it’s a people issue, man, we’ve gotta, uh, we’ve gotta go replace that person. Uh, but really it, it shows up as a, and, and sometimes that’s true, but oftentimes there’s a, there’s a structural problem. And once you fix the structure, now, now the people can get back to, to thriving.
And, and a lot of times it’s interesting, especially in these like. These organizations that are on this rocket ship trajectory, everybody’s kind of used to this change. You know, uh, they’re used to making changes on a regular basis, and so bringing in a structural change isn’t the end of the world. Um, you know, oftentimes people were interested or used to like, Hey, we’re gonna change the product offering.
We’re gonna change how we deliver it. Hey, we’ve got, you know, this deadline that we’re gonna have to work really late to get to. Um, and that’s all. Hard. [00:43:00] Um, the structural changes at times can actually not be quite as hard, uh, because it’s like, okay, we just have to figure out this new infrastructure we’re working in.
We gotta figure out where the problems are in it, uh, adapt it and adjust it and keep it it moving forward. And so, uh, the interesting thing that happened is, you know, starting to install some of the more of these executive roles, you know, instead of having people like going way deep on the org chart.
Doing everything from fixing the toilet to, you know, the financials, and it’s like, all right, let’s, let’s move people into these roles. And, and those conversations can be hard, uh, just because somebody helped you get there from an operations point of view. And, and we see this, uh, especially when private equity enters the conversation, they’ll be like, Hey, you were able to go from a, um, you know, $10 million company to a 30 or $40 million company?
We’re gonna bring in an executive team that’s really good at taking people from [00:44:00] 40, 50, 70 million to a hundred, 200 million. Uh, they’ve done it before they’ve been there. They have that unconscious competence on how to run businesses from, from those levels. They, they’ve, they’ve got the, the playbook and the experience to, to get that done.
And that can be really hard on, uh, some of the internal staff that’s helped people get there. But again, it goes back to facing the truth, you know? Um. Uh, now the old team might help us get there, but, uh, uh, probably not as quickly as somebody that, uh, you know, if I need somebody to do, you know, an incredible tumbling pass, I’m gonna go bring in Simone Biles to do that, right?
Uh, versus hope to train, you know, my 12-year-old daughter to, to do that, uh, that tumbling pass. And it’s, it’s not that my daughter isn’t incredible. Human being, it’s just she doesn’t have the skillset to be able to get that, that that past done. And same thing in our business, right? Um, there’s gonna be people that just like know exactly what to [00:45:00] do to get this thing to the next level.
And, um, that can be, that can be hard. So I think as a leader, managing that, those transitions well is, is really, uh, good. And you’ve gotta be, you gotta be emotionally in tuned to your people, uh, having high eq, right? The emotional quotient. For how to, uh, manage folks. And, and again, we saw this business go from um, $10 million valuation to a $75 million valuation in, I dunno, four or five years.
Uh, and they just kept the foot on the gas. They weren’t afraid to make hard decisions and bring in the right people and, and do that in a way that, um, the folks that that got ’em there were, were also. Respected. And most of those people stayed, uh, as key players in that organization as they, they, they grew and are continuing to grow.
So, uh, the valuation wasn’t created by revenue loan. It was created by being very intentional on the architecture, the [00:46:00] structure, the people, uh, designing it in a way that, uh, was, was made, made to last.
Michael: Yeah. And there’s, there’s also a risk for the business. Um, and that is what happens if, um. You are the entrepreneur, founder doing everything.
You’re cleaning the toilets, hiring everyone, doing all the financial reporting, and what if something were ha were to happen to you?
Patrick: Yeah.
Michael: Um, you know, it’s, it’s ultimately about designing a company as well that can survive your absence and the business can continue to run and grow in the balls. Um, so at the highest level, what, what separates operators from architects?
Patrick: Yeah. I, I think it’s the. It’s the willingness to recognize that there’s, uh, there’s a better way. And, and we see this, this happen. And it doesn’t matter what business you’re in, and it doesn’t matter what stage of business you’re in to get to the next level, it’s going to take some retooling. You’re [00:47:00] going to have to slow down, retool part of the business so you can go farther and faster.
And so, um, the, the operator. Just isn’t aware. They’re, they’re just gonna keep doing more of what got ’em there. And, uh, that can unfortunately lead to just like, burning out most of the people, uh, or yourself, right? You’re like, man, um, I thought if we just, we had one team that got us here, if we had two teams, that would be easier.
Well, uh, it might be to some level it might help you get the growth you need, but now you’ve got twice as much to do ’cause you’re managing all of these. People, you’re responsible for twice as much business development if it’s your job to bring the, the business in. So yeah, there’s, there’s a, uh, the operator, you know, needs to start thinking more like, I need to design this in a way that is going to, um, build systems and processes to, to, to get us to the next level.[00:48:00]
Michael: Okay. So for those listening right now, how should they evaluate themselves?
Patrick: This is, this is good. So, um, again, I’m just gonna reiterate a summary here. If you’re an entrepreneur, if you want to build something that lasts, you must become the architect of systems and culture. And I think the way we do that is, uh, back to one of the points you made earlier, and it is just, I need to, I need to start thinking about the truth of this scenario.
And so. We’ve got a quick assessment here, and you can also download1@battlestrategies.com slash planning. Uh, that will help you, uh, go into a little more detail, but just rate yourself one to five on, on these five questions. So the first question, I recognize when my thinking has expired, uh, at the current level.
I, I recognize when I need a new level of thinking. Um, to, to [00:49:00] move us beyond where we’re at. So, one to five. Do you recognize? ’cause I think that’s probably the one that most entrepreneurs miss. They don’t realize that they’re, they need to adopt new, new levels of thinking to move past the current level. So where are you one to five?
And on that next question, I intentionally redefine my role as we scale. So, Michael, you touched on this as the entrepreneur when we first start. If there’s something that needs to be done, I’m the one that’s doing it, right? If I’m the business owner, uh, I’m the one out there cleaning the toilets to making the sales.
Um, but I, if I want to create a business like you were talking about as well, that is, is self-managing. I need to lean into my unique ability and just do that thing. So, uh, again, here’s the question. I intentionally redefine my role as we scale one to five. Rate yourself on that. Level the next question. I [00:50:00] stress test major decisions financially before executing.
So before you make that hire, before you make that purchase, before you spend, uh, again, we, we had a, um, a friend that came to us and they had, they had the wrong management team in place. Uh, they spent three quarters of a million dollars renovating some office space that they were occupying. The same year, they lost $2 million.
And it’s like, what is happening here? Right? Like there was no stress testing major financial decisions before executing. Um, if anybody with a brain would’ve looked at that, they would’ve gone, no, this is a terrible idea. So, um, so one to five, do you have some mechanisms in place to stress test major decisions financially before executing on this next question?
Number four, I lead structural train change with clarity and patience. So when you roll out a new initiative, are we giving our, our team an opportunity [00:51:00] to sort of grieve that loss? Like, man, I’m going from this thing that I’m comfortable with, that I know how to execute on to this thing that I, this skill I don’t have, uh, I’m not good at it and we need to, to retool.
So. Um, the fourth question, I lead structural change with clarity and patience. One to five, how do you rate yourself there? Then the next question, I’m willing to reenter the learning curve at higher levels. So again, are you willing to go back into that, uh, consciously and competent level? You know, uh, I recognize things that I need to change and I don’t know how to, I’m not skilled at that yet, and I need to figure it out, or we need to figure it out organizationally.
So. So I think a, a key thing here is if you hesitated on more than two of those, um, you might be building with outdated architecture. And so I, I think that’s something to, to keep in mind as you’re looking at your business. I know it’s still, uh, fairly early in the year. Uh, there’s lots of runway to, to start making [00:52:00] some, some adjustments and, uh, putting yourself in a position to to scale.
To scale well.
Michael: So if this revealed any weaknesses, um, for anyone, what’s, what’s the next step? What can people do? Where can they go? Yeah,
Patrick: yeah. This is, this is good. So, um, we just think, uh, vital strategies.com/planning. We’ve got an assessment there for you to just take a look at and really just get your self in a, a space where you’re thinking about your business from a level of.
What, what truths do I need to acknowledge? Uh, what truths do I need to acknowledge around my business? Where am I at from a, uh, a financial standpoint, a financial reporting point of view that I can make wise decisions on my business? Um, and are those, is the, the financial health of my business, supporting the strategic evolution of where we’re going?
Because if we don’t have both of those things in place, if we’re, if we’re trying to grow strategically without. Paying [00:53:00] attention to the financial metrics. Like it’s, it’s, it’s going to be a problem. And if we’re, have really great financials, but we’re not paying attention to where we’re at from a strategic, you know, architectural business point of view, you know, where, where are we at, uh, on designing this thing.
So without both growth becomes really, I would say, really, really fragile. But, uh, I, I think that the thing that people need to, to recognize is. If you, if you start to evolve structurally, you, you break through these invisible ceilings, your role becomes strategic and not reactive. Growth becomes modeled and you, you have a clear path.
It’s not, not necessarily assumed. Uh, our capital is allocated intentionally and the team starts to execute without dependencies. You know, there’s, there’s not a micromanagement. Uh, everybody understands the direction we’re going and they can make wise decisions. And then ultimately our enterprise value is, is starting to grow.
Our optionality expands, and then we, we think [00:54:00] about as a, as a business owner, the freedom that it creates for us. Um, and what happens is you become, you know, more of an architect leader than an operator leader. And, uh, you get really good at allocating capital and you’ve built durable wealth inside of your business.
So scaling feels more purposeful instead of chaotic. And when we think about what happens if we don’t take action with this. Uh, the growth, it really becomes heavy because it’s all on me. It’s all on you as the entrepreneur to like, just keep pulling this thing along. That’s just gotten bigger and harder.
Uh, the bottlenecks start to intensify. Decision fatigue increases. The margins really start to compress and hiring becomes reactive. The cash stress, uh, can go up because we’re, we’re not making wise decisions. We’re not modeling these things out. And then tax inefficiencies start to multiply again, because we’re not wise in how we’re, we’re doing these things and our enterprise value is just, uh, not growing at the level that [00:55:00] we would, we would like it to be.
So eventually we, we hit a ceiling, uh, or worse, uh, attempt to scale aggressively without any architecture and. The business gets overextended. So when we start to think about the architecture, and, uh, I was reading an article about Falling Water recently. The, uh, Frank Lloyd Wright designed house, uh, one of the most famous houses in the United States.
Um, it was beautifully designed, but poorly engineered. And so, uh, an architect has to make sure that the engineering’s proper, uh, because this house is, they’ve spent many, many multiples of what it took to make the house. Uh, just trying to keep it from, from falling apart. So, you know, as if we scale aggressively without, you know, architecting our, our business as well, there’s a, there’s a problem.
Uh, the tragedy is not collapse. It’s just this, uh, unnecessary limitation. The ceiling we keep bumping into and the business feels heavy. You’re remain a high income hurry. It’s not that. But, uh, [00:56:00] we don’t have this, this durable wealth. So, uh, I want you to transform from a capable operator to, uh, this successful business architect that.
Um, build systems and culture and build wealth, uh, really intentionally. And, you know, I want you to move from being the, the engine of the business to designing the engine. And, uh, instead of growth by effort, having the growth be carried by your, by your structure. So, uh, I think all of these, these pieces matter as we really want to grow and scale our business.
We, uh, need to be aware that. We have to retool. Uh, if we’re gonna design something that lasts, uh, we’ve gotta be willing to, uh, go through these, these processes.
Michael: This is, this is great. Uh, thank you so much Pat. Uh, this is all super insightful and, uh, I’ll see you in the next episode. Wonderful. Thanks Michael.
Patrick: Alright, as we wrap up today’s episode, I want to say thank you for tuning in. I know your time is valuable. The fact that you chose to spend part of the year with us means a lot. My hope is that this [00:57:00] conversation challenged you in the right way. Not just to work harder, but to think differently. To step back and evaluate whether you’re still operating at the level that got you here, or whether it’s time to architect the next version of your business.
If something we discussed resonated with you, I’d encourage you to share this episode with another entrepreneur who might need to hear it. These are the kinds of conversations that can truly change the trajectory of a business, and if you find value in today’s episode, I really appreciate it. You take a minute.
And leave us a review. It helps us reach more business owners who are serious about building durable wealth and designing companies that last before you go, make sure you visit vital wealth.com/resources. We built out a vault of tools, guides, and strategic insights specifically for entrepreneurs. We want to minimize taxes, build wealth intentionally, and scalable structure.
And if tax strategy is top of mind, head over to vital strategies.com/tax. That’s vital strategies.com/tax. We’ve put together resources to help you think proactively about your tax planning instead of reacting after the fact. [00:58:00] And remember, you’re a vital entrepreneur. You’re vital because you’re the backbone of our economy, creating opportunities, driving growth, and making.
An impact. You’re vital to your family creating abundance in every aspect of life. You’re vital to me because you’re committed to growing your wealth, leading with purpose, and creating something truly great. Thank you for being a part of this incredible community of vital entrepreneurs. I appreciate you.
I look forward to having you back here next week on the Vital Wealth Strategy Podcast, where we help entrepreneurs minimize their taxes, master wealth, and optimize their lives.