Chapter 4
Money Matters: Funding Your Dream
Starting a business without sufficient capital is a recipe for failure, yet banks are often reluctant to lend to small businesses. When seeking funding, you need a quality presentation, solid plan, and smart strategy for using the money. I went four years without taking a paycheck from Paychex-that's the reality of entrepreneurship.
Self-financing is ideal if possible. If you're asking others to risk their money, you should be willing to risk your own. Examine your assets-real estate, investments, even collectibles-for potential liquidation. My early Paychex partners funded their businesses by selling their homes or borrowing from family and friends.
If you're unwilling to invest in your own business, reconsider your options. It's unrealistic to expect investors or banks to take financial risks while you protect your assets. Without demonstrating personal financial commitment-like getting a second mortgage or selling valuable possessions-convincing others to fund your venture becomes extremely difficult.
Banks typically hesitate to lend to small businesses, especially startups, unless you offer liquid collateral or property mortgages. Building strong relationships with bank managers is crucial-my first bank officer eventually became Paychex's CFO. When starting Paychex, I took a second mortgage on my home and obtained consumer loans that were ostensibly for consolidating personal debt but actually funded my company. As an entrepreneur, you sometimes need creative financing solutions.
Family funding is valid but comes with complications-relatives know you well, may question your business decisions, and might request repayment unexpectedly. In Paychex's early days, my sister Marie lent me $30,000 from her husband's insurance benefit when we couldn't pay software developers. Without this family support, Paychex might not exist today. Marie and her children became significant shareholders as a result.
I took Paychex public at $11 per share after discussions with investment bankers. The IPO raised $7.7 million, which we mainly invested in new computer hardware. I enjoyed running a public company because of the discipline and structure it required. Institutional investors value predictable growth, which Paychex demonstrated consistently. As CEO, I cultivated relationships with investment analysts, finding that the more consistent and predictable your company's profits, the easier it is to work with them.
I'm meticulous about financial statements, using a ruler with a built-in magnifying glass to examine every line in detail-a practice that amazed both the Buffalo Sabres' CEO and President Bill Clinton when reviewing budgets. Entrepreneurs who don't understand financial statements are essentially running their businesses blindfolded. Many get into trouble because they operate solely on a cash basis, focusing only on bank balances rather than comprehensive financial health.
At Paychex, I discovered a counterintuitive approach to profitability: servicing ten 10-person company payrolls generates 2.5 times more revenue than one 100-person payroll. Larger clients typically receive volume discounts, while the overhead costs of managing multiple smaller clients isn't proportionally higher. Additionally, smaller clients proved easier to sell to because larger companies often had in-house payroll staff and were more price-conscious. This approach helped Paychex achieve a pretax profit of around 38% compared to ADP's 19%. The lesson: question common business assumptions and look for hidden opportunities in your market.
My first advice to new entrepreneurs is always "Get a prenup!" Without a prenuptial agreement, business owners in community property states may be forced to sell their company during a divorce settlement. This creates two major problems: being pressured to sell quickly at a suboptimal price, and losing your primary income source. Already married entrepreneurs should consider postnuptial agreements to protect their business.
Chapter 5
The Power of Recurring Revenue: Would You Buy What You Sell?
Every company sells something, whether product or service, but the nature of what you sell significantly impacts long-term success. Beyond the actual offering, business formats fall into two categories: recurring and nonrecurring revenue models. I strongly prefer recurring revenue businesses, which I discovered while working as a payroll processing company salesman in the late 1960s. The beauty of this model is selling a service once and delivering it repeatedly to the same customer over years. Unlike selling furniture where customers might not return for decades, payroll processing creates predictable, stable revenue streams that banks, investors and Wall Street appreciate. This predictability extends to growth forecasting-adding 100 new clients allows easy revenue calculation.
When choosing what to sell, you must consider six critical questions: Is there a large enough market? Can you make a decent profit margin? Can your company deliver? Does it have longevity? Do you have enough capital? Can you keep up with technological change?
Entrepreneurs often dangerously overestimate their market size. I've heard claims like "They'll be lining up to buy this," but in all my years in business, I've never seen that happen for a new venture. When I launched Paychex, my goal was signing 300 clients, which I thought would come quickly. It took four years. My first direct mail campaign to Rochester prospects yielded just six clients from 3,000 mailers-a measly 0.2% return-burning through my entire investment within six weeks.
You must ensure you can profit on every unit sold, yet I've met businesspeople who can't immediately tell me their gross profit margin. This margin-selling price minus production cost-must be sufficient to cover corporate overhead when multiplied across all units sold. If competitive pressure prevents price increases and you can't reduce variable costs, your product may not be viable.
Before committing to a product or service, examine every step of the production process. Ensure you have vendors and key employees lined up, plus backup strategies if suppliers fail you. Conduct a risk analysis considering everything that could go wrong-material shortages, price increases that affect margins, or production issues.
Over three-quarters of products from just five years ago no longer exist. Technology makes many products obsolete, while changing consumer expectations and trends like environmental awareness reshape buying habits. When introducing something new, think ten years ahead to assess extinction risk.
A pivotal moment in Paychex's history came when my HR director suggested selling 401(k) administration. This led us into workers' compensation insurance, employee handbooks, and other HR services. Today, Paychex generates over $1.8 billion in payroll services and $1.5 billion in HR services annually. These offerings were profitable because we linked products together-processing payroll for 150,000 clients on Monday meant we could handle 50,000 401(k) plans by Tuesday morning with perfect accuracy. Always look for ways to diversify by using existing capabilities differently or piggybacking products.
Chapter 6
It's Not a Cash Flow Problem-It's a Sales Problem
When entrepreneurs struggle financially, they often blame cash flow, but the real issue is typically insufficient sales. Most entrepreneurs overestimate their ability to sell their product or service, believing customers will immediately flock to them. Even Paychex, which now gains over a thousand new clients weekly, took four years to reach just three hundred clients. If your business lacks cash, examine your sales productivity first. Nothing happens in a company until someone sells something.
Sales and marketing are different disciplines, with business schools often neglecting the critical act of selling-the personal interaction between salesperson and prospect. As an entrepreneur, you should initially sell your product yourself to experience firsthand the objections prospects raise and what motivates buyers. This knowledge becomes invaluable when training your sales team later.
Developing an effective sales strategy to identify key prospects is vital. Be creative in reaching your target market and solve the prospecting challenge early. For Paychex, a breakthrough came when I realized CPAs didn't want to process payrolls for their clients-too much work for little reward-which allowed me to reach clients through accountants. This strategy remains successful forty years later.
Large clients ("elephants") that account for a significant percentage of your revenue require caution. They take longer to close, demand heavy discounts, and often yield lower profits despite high revenues. Building capacity to service them increases your overhead, leaving you vulnerable if they switch suppliers. Paychex strategically ensures no single customer accounts for more than 1/1000th of total revenue, creating stability and predictability.
The only thing stopping a sale is an objection you haven't overcome. Rather than being discouraged by objections, see them as opportunities to return to your sales presentation. Prepare for all possible objections in advance by writing them down and developing clear, logical responses to each concern a potential buyer might raise.
Unlike entrepreneurs who disparage competitors, I made it Paychex policy never to criticize competition. Competition keeps a company alert and provides opportunities. My strategy was to compliment competitors, which surprises people and differentiates our approach. Knowing your competition allows you to position your product more favorably-when launching Paychex, I noticed ADP's high minimum charges and set our prices lower, hurting them until they could match our pricing.
Finding good salespeople is challenging. When hiring, look for prior sales experience and verify their success through references and performance records. The best salespeople often have competitive sports backgrounds, showing they work hard and are competitive. I once recruited a tire store employee who impressed me with his service attitude, and within years he became a top Paychex salesperson.
Effective sales management requires balanced compensation plans-typically a 50/50 split between base salary and commission works best. For expense management, I implemented a simple flat-dollar reimbursement system at Paychex, eliminating the need for receipts and expense reports while reducing administrative burden. We established fair sales quotas based on historical data, breaking them down to weekly targets: forty cold calls, eight presentations, and two new clients per rep weekly. Activity reports allowed comparison between reps and zones, creating accountability.
Chapter 7
People Power: The Heart of Your Business
Success doesn't come on a silver platter. Everything I've built was through hard work, enterprise, and necessity-but not alone. I learned early the importance of treating people with respect and encouraging cooperation. My HR philosophy was shaped by witnessing my father's humiliation at work. When I was seventeen, I watched his boss scream at him, calling him "incompetent" and "inefficient." My father, needing the job, took the abuse silently. That day, I made two decisions: never work for someone else, and never treat employees disrespectfully.
With corporate culture, you either have one by default or create one aligned with your values. Early Paychex operated like a fraternity, with partners and franchisees largely inexperienced in business. Changing this culture had challenges, like conflicts over annual sales conferences. I refused to allow spouses to attend these work events, despite pushback, because it would reduce the number of salespeople who could participate, create cliques, and increase potential disruptions.
Hiring effectively is central to good HR policy-my second hire at Paychex is still there forty-five years later. I believe in hiring for attitude and training for skill. Being selective is crucial given the costs of training and transition time. I'm drawn to candidates who played competitive team sports, showing they like winning in team environments. Persistence pays off too, as with Jack Hartland, who was so determined to join Paychex that he quit his GM job and sold his house before I agreed to hire him.
My interviewing approach is deliberately simple and effective. I look for ambitious, energetic people who want to win for themselves and the company. I expect candidates to have thoroughly researched my company before the interview. Understanding why they left previous positions often reveals red flags-like complaining about former employers or giving long-winded explanations. My most powerful technique is silence; how candidates handle pauses tells me volumes about them.
Hiring family members creates significant risks because they're difficult to fire. I've seen businesses destroyed when family relationships soured. At Paychex, I implemented an unpopular but necessary no-nepotism policy. When supervisors hire relatives, they face impossible situations if performance issues arise-either productivity suffers from keeping underperforming relatives, or family relationships become strained through termination.
My commitment to quality training stems from my negative experience as a young Burroughs Corporation sales rep. We were housed in a converted YMCA in a dangerous Detroit neighborhood, transported by school bus to a factory building for five weeks of training. This disrespectful treatment shaped my philosophy when building Paychex. When expanding our headquarters, we deliberately placed training rooms prominently in the main lobby-revolutionary at the time when training departments were typically hidden in basements. This showcased the value we placed on training and our people. Today, Paychex delivers over a million hours of training annually to its 15,500+ employees, with training remaining visibly at the company's core.
While never enjoyable, firing is sometimes essential. I believe in second chances but advise addressing personnel issues immediately rather than procrastinating. Call the person in, hear their side, offer help if appropriate, and make consequences clear. I once had to fire an early partner who repeatedly harassed female employees despite multiple warnings. Another dismissal reason is negative energy-like the top-scoring hockey player I traded from the Buffalo Sabres whose selfish play hurt team morale.
Chapter 8
Leadership That Inspires: More Than Just Being the Boss
I kept a double-sided sign on my desk at Paychex that read "Lead, Follow, or Get Out of the Way" on one side and "It's All in the Presentation" on the other. Like a racehorse needs a good jockey, even the best business concept needs strong leadership to succeed. When investing in businesses, I look beyond just making money-I seek entrepreneurs and management teams committed to continuous improvement, common sense, and sound decision-making.
The best business leaders demonstrate deep-seated integrity and respect for everyone-employees, customers, suppliers, and themselves. I evaluate people by watching small behaviors that reveal character: Do they thank assistants who bring coffee? Do they clean up after themselves? At Paychex, I demanded professionalism in appearance and behavior, often observing employees in the cafeteria and calling out those who weren't clean-shaven or properly dressed. This wasn't mere perfectionism-our clients entrust us with sensitive payroll information, requiring the highest levels of security and professionalism.
Good business leaders need more than industry knowledge-they must understand their company's cultural dynamics and inspire people at every level. Most critically, they must recognize what they don't know. Many entrepreneurs are blind to their own deficiencies. When I invested in Zoom Tan, I backed owner Tony Toepfer, who had twenty-five years of industry experience and innovative approaches like smaller locations, subscription plans, and aggressive advertising. While Tony brought industry expertise, my contribution was helping him better understand financial statements-a critical skill for any business leader.
Conviction in your capabilities is essential, but arrogance can destroy potential partnerships. When entrepreneurs insist on retaining 51% ownership while seeking investment, they signal they want others to finance their risk without sharing control. At Paychex, I never owned more than 50% of the company, eventually holding just 30% after consolidation. This wasn't risky because stockholders would only vote me out if I truly damaged the company.
A CEO should work ON the business, not IN it-they should be the least busy of all managers. Good management means seeing both the big picture and the small details others miss. At Paychex, I would personally review branch invoices, once discovering triple-billing for cleaning rugs that had gone unnoticed by branch managers.
Even small companies can assemble advisory boards at minimal cost. Look among your business contacts for specialists-lawyers, accountants, tax experts, industry specialists, HR consultants-whose expertise could improve your business. Treat them like a formal board by preparing agendas and financial statements in advance, meeting quarterly, and perhaps providing a simple meal.
Effective leadership follows four essential steps: create the vision, sell the vision, execute the vision, and monitor the results. Good leaders maintain an open-door policy and stay close to frontline operations. At Paychex, I regularly visited training rooms and ate in the company cafeteria. Leaders must communicate effectively and demonstrate empathy, decisiveness, and collaborative skills. They must hire and trust the right people, develop talent, delegate effectively, and never fear asking for help.
Chapter 9
Creating Win-Win Deals: The Foundation of Lasting Success
My philosophy of creating mutually beneficial deals began shortly after launching Paychex (originally Paymaster). Though I initially had no intention of expanding beyond Rochester, I formed a fifty-fifty partnership with Phil Wehrheim, an ex-colleague from EAS, allowing him to open offices in Buffalo, Syracuse, and Albany. This partnership, struck without lawyers, marked the beginning of my approach to business relationships. Later, Chuck Wollmer wanted a franchise, and others like Bob Sebo followed. Making deals good for everyone became our corporate philosophy-by the time we consolidated, we had seventeen partners and franchisees who felt like a fraternity.
Despite being divorced three times, I've paid less than $6,000 total in legal fees across all divorces by working out reasonable settlements directly with my ex-wives before lawyers became involved. With my first wife Gloria, I faced a liquidity issue when she requested the New York City Paychex franchise. After considering her social skills and our ability to support her with technical aspects, I agreed. She became an excellent franchisee, eventually owning 5% of Paychex after consolidation-shares that would be worth over $1 billion today.
When consolidating Paychex from individual partnerships and franchises into a corporation, I faced the challenge of satisfying sixteen partners with inflated views of their worth. Knowing individual negotiations would create a chaotic "moving target," I worked with Bob Beegen and Philip Wehrheim to develop a non-negotiable formula considering territory size, management quality, and profitability. At our Nassau meeting, I announced: "This is it, this is the deal-we're not changing it." Despite breaking the "never negotiate from an ultimatum" rule, every single person accepted. The smallest shareholder's portion would now be worth $250 million.
In 2002, I acquired Advantage Payroll Services for $240 million in just 45 minutes of negotiation. While attending an investment conference in Chicago, I called the venture capital firm that owned the company and quickly realized they wanted to avoid the hassle of taking it public. I calculated what they'd need based on the company's current value, IPO costs, and post-IPO potential, then made an offer they immediately accepted. Effective negotiation requires thorough homework to understand both what represents value to the other party and what constitutes a good deal for yourself.
Professional service providers who charge by the hour can drain your operating budget if not carefully managed. I particularly distrust law firms that delay billing or charge $200-250 hourly for junior associates earning $30/hour, not to mention templated documents billed as custom work. During my first franchise negotiation, I realized the lawyers were the only ones arguing, so I asked them to leave. The franchisee and I struck a deal in ten minutes, then told the lawyers to handle just the paperwork.
One of my favorite negotiation tools is the "pregnant pause"-a well-placed silence that encourages agreement or reveals additional information. When our negotiating team failed to thoroughly read a player contract with the Buffalo Sabres, we discovered we owed a traded player $250,000 due to a games-played bonus rider. During our review meeting in Florida, I confronted my management team about this oversight. After confirming the situation, I employed a forty-five-minute silence while everyone squirmed uncomfortably. Eventually, Larry Quinn tried to leave, crashed into glass doors, and Darcy finally offered to reimburse the loss.
I frequently use direct questions as a negotiation technique-not to make people uncomfortable, but to get straightforward information. When interviewing candidates, I ask about current salary and whether spouses support relocation. For business acquisitions, I probe about concerns, personal investment, and commitment to staying with the company post-acquisition. These direct questions force people to make decisions or disclose information they might prefer to withhold.
Chapter 10
Planning Your Exit: Nothing Lasts Forever
Eventually, your role in your business will end, whether through retirement, illness, or pursuing new ventures. Being "company rich and cash poor" means having all the responsibility without the benefits, so planning your exit strategy early is crucial. When Paychex was just seven years old, I realized our fragmented structure of seventeen separate companies with different partners created a liquidity problem. My solution was consolidating into one company we could take public, though this five-year process presented some of my toughest business challenges.
One key to managing success is having a realistic understanding of how successful you are. Too many entrepreneurs enjoy immediate success and start spending lavishly on cars, houses, and other luxuries. Remember, especially early on, there are no guarantees your current success will last. Ask yourself if your revenues are sustainable. Some businesses like Paychex, with recurring revenue, are more predictable than those with wild fluctuations. Don't get a big head when successful, as businesses can turn quickly.
Deciding when to step down is entirely your choice, with numerous factors to consider-from how you feel about walking away to your company's value and sustainability. Ask yourself: "Is my long-term goal selling the business, or will I stay until they wheel me out in a box?" and "Do I want someone in my family to take over?" It's never too early to start thinking about your exit strategy, even if I didn't have one from day one at Paychex.
When seriously considering selling, be careful about making long-term commitments like real estate leases or equipment purchases that might obstruct a new owner's plans. Regarding employees, it's best they remain unaware of your intention to sell until later in the process. People naturally worry about job security, though these fears are often unfounded-most acquirers want key employees and management to remain, sometimes offering incentive contracts to those integral to the company.
You might sell because you've achieved your goals, you're bored, you have another business concept to explore, or you're ready to retire. There's no bad reason to sell unless you're trying to unload a failing business. Consider what you'll do afterward-many owners in their late forties and fifties sell only to find themselves bored.
Timing is crucial but not always in your control. With Safe Site, when our controller was caught kiting electronic transactions, Iron Mountain tried exploiting our situation with a $14 million lowball offer. Rather than accept, I increased my equity position. A few years later, Pierce Leahy offered $40 million, which prompted Iron Mountain to counter with $63 million. This demonstrates how perseverance and selling at the right time can dramatically increase your returns-we went from near bankruptcy to financial success by waiting for the right moment.
If selling doesn't appeal to you, consider stepping back while putting someone else in charge of daily operations. When I stepped down as Paychex CEO fourteen years ago, I still maintained ownership and became chairman of the board. I made a point of not interfering with the new leadership-I didn't return to the office for three months except for a legal matter. When our initial CEO choice didn't work out, we hired Marty Mucci, who remains CEO today.
My retirement package reflected my contrary philosophy about executive compensation. I've always believed CEOs are paid too highly, especially when not tied to company performance. When I stepped down, I took no golden parachute or stock options-just my desk and credenza, items I treasured. The relationships I built over 33 years as CEO created a unique bond with the company. At a 2016 Employee Meeting, I received an overwhelming standing ovation and spent hours taking selfies with employees. Running Paychex was a privilege, and I achieved my aim of eventual liquidity and a sound exit strategy.
Chapter 11
Learning from Mistakes: The Path to Wisdom
During my entrepreneurial career, I've learned more from failures than successes. Understanding what went wrong in businesses helped me avoid similar pitfalls in my own ventures.
In Paychex's early days, my lack of a growth strategy led to haphazard partnerships and franchises, resulting in seventeen direct reports-an inefficient structure that slowed our growth. I also missed an opportunity when Electronic Accounting Systems rejected my merger proposals, both before launching Paymaster and when Paychex was preparing to go public. They later sold for far less than their potential value as part of Paychex.
Post-IPO, I made a costly mistake launching a pre-internet job-matching service. The timing was wrong, the technology inadequate, and it strayed too far from our core business. We shut it down after ten months, damaging our credibility with investors. Other unsuccessful ventures included Pay to Play (children's party facilities) and Equipoise (alternative health center)-both failing due to insufficient market research and weak business plans.
Networks, providing music programming to senior residences, was a sentimental investment I maintained too long. Despite reaching 300 facilities, high costs and long sales cycles led to its closure in 2017 after $12 million invested, as smartphones and tablets made the service obsolete.
When selecting my successor as Paychex CEO, I regret not trusting my instincts. The initial replacement left after five years, though his successor, Marty Mucci, has proven excellent over eight years.
Like many entrepreneurs, I regret not balancing work and family better. While striving to provide for my family, I should have dedicated more time to them.
Throughout this book, I've shared practical business advice, but it's worth noting that entrepreneurs-who employ 58.9 million people across 30.2 million small businesses-often lack adequate support from educational institutions, government, and business associations.
Writing this book has been deeply satisfying. Watching Paychex grow from a two-person operation with $3,000 to 15,500 employees serving 670,000 clients has been remarkable. My final advice to entrepreneurs: "Don't forget to have fun!"
