Tax Secrets Every Recruiter Must Know to Save Thousands - An Interview with Michael Napolitano

Benjamin Mena [00:00:00]:
You are going to rock the year and we're going to help you do that. Here at the Elite Recruiter Podcast, we have the Rock the Year event, the recruiting growth Summit kicking off on March 10. It is going to be awesome. We're going to be focusing on mindset. We're going to be focusing on sourcing. We're going to be focusing on AI. We're going to be focusing on operations and high performance and BD and sales. Every single thing that you need as a recruiter to make sure that you can rock 2025 and make it the year, year of abundance.

Benjamin Mena [00:00:28]:
Make it the year that works for you. Make it the year that you crush every single one of your dreams. Let's go get it.

Intro [00:00:39]:
Welcome to the Elite Recruiter Podcast with your host, Benjamin Mena, where we focus on what it takes to win in the recruiting game. We cover it all from sales, marketing, mindset, money, leadership, and placements.

Benjamin Mena [00:00:57]:
As a recruiter, we are two guarantees of things that we're going to have to deal with in life, death and taxes. And we're not talking about the first one. We are here today to talk about taxes. I have a tax specialist with us to talk about everything that you should be doing when it comes to your money, everything that you should think about, be doing, and probably the things that you're doing wrong. And secondly, we're going to talk about some things like what is the financials of the business, the accounting of the business, what is your business even worth if you're looking at selling? Like, what do you like all these sort and things? So, man, I am so excited about this episode and for those that are listening, we're going to make tax and accounting fun today, especially for the recruiters out there. So welcome, Michael.

Michael Napolitano [00:01:37]:
Thank you. I appreciate it.

Benjamin Mena [00:01:39]:
All right, so Michael, real quick, before we do a deep dive in a whole laundry list of things I want to cover or a whole spreadsheet of things I want to cover, tell us a little bit about yourself.

Michael Napolitano [00:01:49]:
So I'm going to make accounting fun again. That's going to be our theme today. So pleasure to be here. My name is Michael Napolitano. I am a partner at the accounting and consulting firm Citron Cooperman. We are a national firm. I have the pleasure of working with over 200 staffing firm and executive recruiting firms. So I've been in this space for almost 12 years.

Michael Napolitano [00:02:12]:
I joke. I'm not just an accountant, I'm a psychiatrist. So my clients can pull up a chair and I can listen to them and hopefully Provide some good guidance for them.

Benjamin Mena [00:02:21]:
Okay, let me ask you this. Accounting. There are 10 billion different things and routes. You could have gone with accounting. Why did you end up working with us wonderful recruiters?

Michael Napolitano [00:02:34]:
So rewind 2010, I was a partner here at Citron Cooperman, and one of my partners came to me and said, hey, you have a good personality. You're high energy. We need someone to take over our staffing practice in New Jersey. Tag, you're it. So I wasn't looking for it, so it kind of found me. And it's been an incredible run because I love working with the high energy, sales oriented clients.

Benjamin Mena [00:03:04]:
So pretty much recruiting got you the same way it got everybody else.

Michael Napolitano [00:03:08]:
I fell into it. I wasn't looking for it. It kind of hit me in the head and I was told, tag, you're it. And when you're a young partner, you say, yes, sir, I will take that.

Benjamin Mena [00:03:18]:
All right, so before we start talking about the things that you need to start thinking about when you're growing, I got to start off, what is the dumbest thing that you have ever seen a recruiter try to write off?

Michael Napolitano [00:03:27]:
So typically, it's cars. Very fancy, expensive cars. And travel, vacations, lots of vacations. We've also had boyfriends and girlfriends. We see it all. That's why we love what we do. We get a taste of everything. So we've seen some interesting things trying to be run through a business to help lower paying the tax man.

Benjamin Mena [00:03:52]:
So when you say cars, like a.

Michael Napolitano [00:03:54]:
Car just isn't our talking Ferraris. I'm talking high end luxury cars. And the best thing we always get is, hey, I googled this. I think I can take this write off. So Google becomes our worst enemy.

Benjamin Mena [00:04:07]:
Or now TikTok. Like I saw it on TikTok. The TikTok person said, As a fan.

Michael Napolitano [00:04:12]:
Of TikTok, yes, there is a lot of misinformation that we always have to clear up. And by the way, we have clients who listen to TikTok and then they come to us after the fact. Oh, let me say yes.

Benjamin Mena [00:04:23]:
And okay, so talk about real quick trips. Like if I'm planning an elite recruiter mastermind event in Paris, France, is that a write off?

Michael Napolitano [00:04:32]:
So typically, what happens is it's not only you traveling, it's you and the family.

Benjamin Mena [00:04:37]:
Yeah.

Michael Napolitano [00:04:38]:
So in theory, if you are traveling for business and there is this elite recruiting forum in Paris, typically we can take the deductions for you for your travel, your hotels, your airfare. But again, you should not be wrapping into that the family expenses as well. How could I have ever seen that? I'm not saying, but I could have never, ever, ever. It never happens.

Benjamin Mena [00:05:03]:
All right, so anyways, let's talk about what's important for the recruiters. If you are a recruiting agency that is actually growing right now, what are some of the things that you need to be aware of when it comes to the wonderful world of finance, accounting, and the tax man?

Michael Napolitano [00:05:17]:
So for me, the boring topic but is important is compliance. So I would say 75% of the recruiting firms that we onboard are not in compliance with their taxes.

Benjamin Mena [00:05:30]:
It.

Michael Napolitano [00:05:31]:
And I'm here to say it is not difficult and it is not that much more costly to be compliant.

Benjamin Mena [00:05:38]:
Okay, real quick. What does compliant actually mean? It's a big word.

Michael Napolitano [00:05:41]:
Where are you filing? Where did your transaction take place? One of the best quotes I ever got is, I have a large Australian staffing client. And the best comment I ever heard is, why the heck are you called the United States of America? Because there's nothing united. Because every state operates like its own country. So every state has all its different rules. And in the recruiting world, the general thought is, all right, I placed someone in New Jersey, New York, Pennsylvania. I'm located here in North Carolina. I don't have any taxes. You know, I did the work here in North Carolina, and I have no filing responsibility.

Michael Napolitano [00:06:20]:
The reality is you need to understand two things. Where's your customer located and where is the employee located? So if you're a recruiter and you are crossing state lines or you have a remote employee. So over the past couple years, we're seeing a lot more remote employees, which, by the way, expands your. Your opportunity to get really good talent. But that may open up some additional filing requirements in those states.

Benjamin Mena [00:06:48]:
So, okay, let me take a few steps back. So I'm sitting here in Virginia, the Northern Virginia, Richmond is now part of Northern Virginia. And I make a placement, a direct placement, you know, DPV for somebody that's either in New York or California. I did all the work. They're not my employee. Do I have to be worried about compliance with those two states?

Michael Napolitano [00:07:09]:
The answer is yes, and here's why. Your way of presenting this is the cost of performance. So t, typically, where did you perform the task? You performed it in Richmond. And you would assume, okay, I performed the work here. I have no liability. So some of the blue states actually said, you know what? We're missing out revenue. So there is another method called the market approach, which means who is the actual beneficiary? Of that placement. So if the company is located in New York that you're placing someone to, you could have a filing responsibility in that state.

Michael Napolitano [00:07:52]:
And the caveat I give on every presentation I do is every situation is different, every state is different. So the key thing is when you're working with your accountants at year end from a filing, two key pieces of information is where are your employees located, where your customer is located. And you may, you may have a filing responsibility.

Benjamin Mena [00:08:16]:
Okay, so I am a focus just directly on retained search, direct placement contingency. Is there any other states that I have to be thinking about outside of New York?

Michael Napolitano [00:08:26]:
Yes, so there's a handful. The obvious ones are California, Illinois, New York, New Jersey, Massachusetts and Connecticut. But more states are looking at this alternative approach because it creates. There's this word out there you may have heard of called nexus. Nexus is the glue that would potentially mean you have to file in that state. So put it this way, Ben, it's gotten so crazy. I have a 20 person state and local tax team just to comply with all the states because within the states you could have localities. Ohio for example has multiple localities that you could be responsible for.

Michael Napolitano [00:09:09]:
So it sounds daunting, but with the right professionals we can make that an easier experience. And again, compliance isn't expensive, but it could be if you didn't file an estate for a number of years and they catch you and they can come back and assess you and okay, let's.

Benjamin Mena [00:09:29]:
Just say I'm listening to this podcast episode. I've been placing know, direct placement fees, engagement fees in these states, not thinking that I have nothing to do wrong. I'm listening to this and I'm like, oh shit, I can get in trouble. Like what kind of trouble can I get into?

Michael Napolitano [00:09:43]:
Well, ultimately if you are looked at, the states can go back a period of time and basically review. Hey, you've been operating in New York for three or four years. We're going to go back and potentially assess you for that. Now remember, if you live in Virginia, ultimately you're paying taxes to Virginia and you get credits for taxes you pay to other states. So in theory you'd have to file in New York, but you would get some of the Virginia taxes back because you should have reported income. So that's why I say the compliance side, it's just much easier to comply because I can't say this enough, it's not that big of a cost.

Benjamin Mena [00:10:23]:
Okay.

Michael Napolitano [00:10:24]:
To comply.

Benjamin Mena [00:10:25]:
And fast forward. Okay, now we have a few employees. You know, we're a remote team. We're not even talking about contractors yet, you know, remote team working across multiple states. As an owner, when it comes to finances and accounting, how concerned should I be?

Michael Napolitano [00:10:40]:
Well, on an employee side. So good news, you have a payroll company, so you're going to be in compliance for payroll and payroll taxes. If you have employees in other states, it's less of a potential issue than sales. But we do need to know, are there employees in certain states? What are they doing? And again, that employee in a state could just mean you have to allocate a certain amount of your income over there. I would say the bigger issue are sales. So if you have sales in different states, that's going to be a key indicator. There's what's called a three factor formula. Formula.

Michael Napolitano [00:11:17]:
Do you have to file an estate? It's revenues, it's payroll. And if you own any real estate or rent any real estate in a state, those are usually the three factors that every state looks at that could create a filing requirement.

Benjamin Mena [00:11:33]:
Now let's talk about the staffing side of the house. Like, you know, if you're not using an EOR and you're doing everything like in house or not using a factoring company, when it comes to accounting, is there things that I should be like, really thinking about or is there things that I should be getting prepared for?

Michael Napolitano [00:11:48]:
Well, if you are, if you're getting into that side of it where you're now doing temp staffing, what's interesting with new business owners is understanding gross margin versus markup. So it's amazing how many recruiters I've met where we sit and we talk about markup versus versus gross margin, and most people think it's the same when it's not. So now you're getting into a little more complicated where you have to understand your cost so you can determine what the appropriate markup is. So this is where we excel. This is the fun stuff. Because every state has different tax rates. You have to worry about certain states. And for example, in New Jersey, you place, you know, you have a client in newark, there's a 1% city tax.

Michael Napolitano [00:12:34]:
So. So that's why you need to have internally or externally the right people who can cost out that employee. So you're marking it up correctly.

Benjamin Mena [00:12:45]:
Have you seen a lot of people make mistakes there all the time? And how bad are those mistakes?

Michael Napolitano [00:12:50]:
So here's the recruiter mindset, and this is a great example. We onboarded a client years ago. And listen, if you can close a $4 million deal, you're going to close a $4 million deal. It's pretty impressive. This particular client was not very profitable. We spent hours showing him that your markup needed to be this. We shake hands. Thank you so much.

Michael Napolitano [00:13:12]:
Week later, he calls me and says, hey, I can close this $4 million deal. And the markup is less than what we came up with for him to be profitable. Right, because you're attracted to the revenues. One of the greatest lines a staff and client said to me is, revenues are for your vanity. Net income is for your sanity. So that is the best line. So don't get caught up in your vanity. If you're not making money and you're increasing your revenues, you're increasing your exposure to a lot of issues.

Michael Napolitano [00:13:46]:
So focus on your bottom line.

Benjamin Mena [00:13:48]:
Okay, real quick, that line one more time.

Michael Napolitano [00:13:53]:
Revenues are for your vanity. Net income is for your sanity.

Benjamin Mena [00:13:57]:
I love that. Okay, so here's another thing a lot of recruiters do. I see this in the groups all the time. I'm looking at expanding my recruiting team, but I'm only going to hire somebody on a 1099 basis. You just laughed at me.

Michael Napolitano [00:14:09]:
I'm going to cringe.

Benjamin Mena [00:14:10]:
You're listening to this. He actually just started laughing at me. I see this all the time. Should people be worried about expanding their team? Whether sales or recruiting wise, just doing a 1099.

Michael Napolitano [00:14:23]:
Okay, so 1099s. As each year passes, Ben becomes a higher priority for the federal government and the states. There is very few instances, and I can't think of any, where a recruiting firm can bring on Michael as a recruiter and pay me by 1099. And here's where it gets exponentially worse if you get caught. So use round numbers. You bring me on and you pay me $100,000 as a recruiter, you win the audit lottery, Right? The lottery no one ever wants to win. The IRS will come in and assess you what's called the FICA and Medicare taxes both as employer and employee, because you didn't do it correctly. So that's 15.3%.

Michael Napolitano [00:15:10]:
So you're like, all right, it cost me 15 grand. But the IRS is going to assess you the federal withholding of 25% that should have been withheld from an employee. So you're looking at a 43% tax, plus probably another 10 to 15% in penalties and interest. And remember, payroll liabilities cannot be removed from bankruptcy. That's the one liability that follows you forever. So if you're a recruiter and you were thinking about a 1099, I would urge you, there are very few instances. One of the few instances you can. There are two.

Michael Napolitano [00:15:47]:
If you're an IT firm and you're typically what we call corp to corp. I'm an IT staffing firm and I'm bringing in other companies, retaining them to perform the Service. They're an LLC, they're an S Corp. You can issue a 1099. The only other field is what's called locum. You're placing doctors. Doctors. You can issue 1099s.

Michael Napolitano [00:16:08]:
But to answer your question, Ben, if you're issuing 1099s to recruiters, internal employees, employees, it's 99 chance it's wrong.

Benjamin Mena [00:16:18]:
Even if, like you just talked about, like, you know, they spun up their own llc, it's still wrong.

Michael Napolitano [00:16:24]:
Yeah. So what we see all the time is Ben's going to form his own llc. Right. And you're going to be a single member LLC and you're going to work for me. The exposure is this is the test for the irs. They're going to look up your company. They're going to see if you're advertising or you're offering your service to any anyone else. And if you're working 100% just for me, they could reclassify you as an employee.

Benjamin Mena [00:16:48]:
Has the government come in staffing companies and done that?

Michael Napolitano [00:16:51]:
What they do is they enforce through fear. So basically what's happening? The penalties keep increasing. I'll give you a real world in New Jersey. New Jersey has came out, I think it was two or three years ago. In addition to a reclassification to an employee, it's a $10,000 fine per misclassification. So if you have five employees that you misclassified, that's 50 grand. Are the audits out there? I haven't seen many of them, but to me, the exposure is so great, I wouldn't even consider it.

Benjamin Mena [00:17:23]:
We just talked about how I've seen a lot of recruiters try to 1099 other recruiters to grow their company. But I see a lot of people when they start off on the actual staffing side of the house, and they don't use Factoring, don't use EOR. They try putting all those contractors in as 1099s. Are you running into the same issues you literally just spoke about?

Michael Napolitano [00:17:39]:
Less and less. As time is passing, I think there's been so much fear garnered because of all the publications coming out. We're seeing less and less. And the reality for us is I wouldn't even onboard a new client. If we see there is ramping. 1099, it's not worth it.

Benjamin Mena [00:17:58]:
You just like, they come knocking on the door and you tell them.

Michael Napolitano [00:18:00]:
We tell them no. Because here's what human nature is. They get caught, they owe hundreds of thousands of dollars. Then they say, my professional never told me. So we at this point, because the exposure is so great, all kidding aside, I will not onboard a firm that is incorrectly classifying. Now you have one or two. I get it. We can look at it and say, all right, maybe this one.

Michael Napolitano [00:18:25]:
It is an llc. You know, it seems like they are offering their services to other companies, but if I have a new client, they have five recruiters, and they're all 1099. I am not onboarding them.

Benjamin Mena [00:18:37]:
Okay, so we've talked about compliance. 1099. I'm kind of curious when we talk about. To look at the financials, like we're looking at the big picture of the financials of a recruiting business. Are there some things that we should really be focusing on outside of income and revenue? Talk about that a little bit. You are the expert.

Michael Napolitano [00:18:56]:
Yeah. So I know this year our executive recruiting firms had a down year. And I'm talking generally. So we had some that were up, but in general, it's a down year. What we've seen happened over the last couple of years is as times are good, we tend to spend more money, incur more costs. The good business owners are constantly looking at their. Their profit and loss statement and making adjustments as the market is either going up or coming down. So for executive recruiters, it's not rocket science.

Michael Napolitano [00:19:31]:
Right. Your financials, you have your fees, you have your expenses. The question is always, what is your internal employee expense for payroll? During the good times, did we add too many internal employees that we need to refocus on our costs? So we've seen this year a lot more attention spent on cost. How do we reduce costs? You know, there's more optimism for next year in 2025. I think, collectively, regardless of politics, everyone's glad the election's over. Meaning that there's. The tax code isn't changing. Right.

Michael Napolitano [00:20:05]:
So you don't have to worry about 25, 26, any major change in taxes. So that's great. And I think a lot of our clients are just waiting to see how this first quarter shakes out. Okay.

Benjamin Mena [00:20:15]:
Now moving forward to this is like, is there any tools that a recruiter, a firm owner, should be looking at to kind of prepare for all this tax planning stuff?

Michael Napolitano [00:20:25]:
Yeah, you know, the easiest tool, and it's a program so widely used is QuickBooks. QuickBooks. And I'll give you a real world example in the recruiting words. So you have multiple owners and usually when you have multiple owners, the way you're allocating income is based on production. Right? So QuickBooks is great because a, it'll manage your income and expenses. You get a multi year snapshot. So you can see instantly how did you do this? Same month, last year, this quarter. But also I can create individual profit and losses for each recruiter.

Michael Napolitano [00:21:00]:
So yeah, it's, it's fantastic. It's an easy tool. What's great with QuickBooks Online? Me as the accountant. I have access to your QuickBooks so I can look at it with you at any point in time. Time. So it's a great tool. If you're not using some type of accounting program to manage the business, then you're managing your business blind.

Benjamin Mena [00:21:21]:
Okay, we're going to switch gears a little bit. I've had my firm for like seven, eight years. I've grown it to XYZ revenue. I want to sell. What's your thoughts on selling a recruiting company?

Michael Napolitano [00:21:31]:
So now you speak my language. So we do a lot of M and A. And I think there's something everyone has to understand in an executive recruiting firm versus a temp staffing firm. Two different values. Okay, so I'll give you real world. In 2022, I presented at a group called Pinnacle. If you're familiar with Pinnacle, it's an executive recruiting organization. And in October of 2022, if you asked me that question, and you're probably going to wince a little bit when I tell you this.

Michael Napolitano [00:22:04]:
So back then, firms were selling for one and a half to two times gross revenue. Okay, that's in October of 2022. Today it's back to what I would call traditional values, which is anywhere from 0.75 to 1 times revenues.

Benjamin Mena [00:22:25]:
Okay, so I've been building this and we're going to stay on the executive search side of the house for a while. I've been building, building this retained firm. I've been building this exec search firm for a while. I do almost all direct placement and we'll talk about getting into Tampa in a bit. I'm pulling billions of dollars a year revenue with my team. It's only if I go try to sell it and walk away, it's only.

Michael Napolitano [00:22:43]:
Worth 0.75%, 0.7511 and a quarter. So you have to think about it is, hey, if I'm making all this money and I sell my company, it's basically a prepayment of what I'm making for two or three years. You know, whatever that time period is, is it really time to sell? Because what am I really getting? But I think what everyone has to understand is what makes you more valuable. Right? Why would you know, one executive recruiting firm be a 0.75? Why would another one be one and a quarter? And there's a lot of things you're looking at. It's customer frequency, how many times are your customers using your services, candidate pool, your processes. And you know right now in the recruiting staffing industry is people process technology. That's every convention I've attended, which was eight of them this year is people, process and technology. So how are you and your recruiters leveraging technology? How are recruiters embracing, embracing technology and not afraid of it replacing them? And that's where my larger executive search firms are really trying to leverage that technology so recruiters can do less admin and more of the recruiting.

Michael Napolitano [00:24:04]:
So it's layering in the right technology.

Benjamin Mena [00:24:06]:
So you do a lot of M&As. And this is going to sound like a dumb question if I'm deciding to sell, like what do I freaking do? Just like go talk to you? Do I go talk to sellers? Do I? Where do I even just go if I want to?

Michael Napolitano [00:24:17]:
Here's what I tell everyone and I am a big proponent that everyone should be attending some of these national conferences. Two reasons A, what's going on in the industry? You get to talk to your peers. And trust me, at night when you're at a bar with a few adult beverages, you get great conversations. Talking to your peers, you get a lot more, I would say honesty on performance, but it allows you to network. So for example, we are an accounting firm. I've got 220 staffing clients. But guess what, I work with a whole host of executive recruiting staffing firm experts, insurance lenders, attorneys. That is the pool of people that you go to.

Michael Napolitano [00:25:00]:
So I get calls once a week from referral sources, from people I've met. Hey, I'm thinking of selling. Hey, I'm thinking of buying. And if you're selling, you gotta be prepared for the first time someone to come in and say your business is not that great.

Benjamin Mena [00:25:16]:
Well, that goes my ego.

Michael Napolitano [00:25:18]:
Absolutely. What do they want to do? They want to lower the price. So the first thing they're going to tell you is by the way, you're not that great.

Benjamin Mena [00:25:24]:
Well, okay, so before we talk about getting into temp, I have a temp business and I'm looking at selling and we're going to go two different ways. I want to talk about having pretty much your entire temp business run through an EOR or factoring company. And then you have everything in house. Is there valuation differences between the two?

Michael Napolitano [00:25:45]:
So possibly. Because when you're valuing a traditional staffing firm, so executive recruiting is actually a little easier. It's based on revenues.

Benjamin Mena [00:25:55]:
Oh, so real quick, executive search firm.

Michael Napolitano [00:25:58]:
Is easier to sell revenues. It's. Yeah, it's easier to value because if your revenues are, you know, 5 million and you're consistently at that amount, you know, it's a Percentage of revenues. 0.751 Area easy. Right, Fair. On the temp side, everything is based on what we call ebitda. Earnings before income taxes, depreciation. So it's a net income approach versus your gross revenues.

Michael Napolitano [00:26:25]:
So you asked earlier about putting expenses through a business. What's deductible? So now when you're selling a business based on your net income, we now have to, what we call, scrub your expenses. What we're personal in nature because we need to get your income as high as possible. So when you're selling a temp firm, it's a lot more labor intensive, it's a lot more work because we need to make you the, as I say, the shining star of the industry to get you the highest multiple. Number two. Every industry has a, every sector has a different multiple light industrials, about a four multiple professional services could be, you know, in the five, maybe five and a half, six range. Healthcare took a major dive in the last two years. Two years ago you had a healthcare firm, you were selling eight or nine.

Michael Napolitano [00:27:17]:
Now you're selling five and a half, six and a half. So the beauty of working with professionals that know what they're doing and have that industry expertise is you have that information readily available. Hey, I'm thinking of selling. I've got a temp side. I'm doing light industrial. You mean to tell me I can only get a three and a half, four multiple? Is it even worth it? So that's where, you know, having the right people around you can give you that information.

Benjamin Mena [00:27:42]:
Okay, this is gonna sound super stupid if I'm sitting there having a conversation with you and you tell me my evaluation sucks, even though like my ego's gray because I've spent my entire life, blood, sweat and energy into this time period and you said I'm not going to get that much money out of this. Do you ever recommend anybody to get an operator put in place instead of you.

Michael Napolitano [00:28:00]:
So, yeah, that comes especially in family businesses. Family businesses tend to be more dysfunctional. So you talk about therapy, you know, work with a family business. So ultimately, it's real simple. I always say the business is the golden deuce, right? That's what's feeding everyone. That's what's making money. What do we do to feed that golden goose to make it grow? So if it's not the time to sell, and by the way, 2024 in the industrial market is tough. You know, you're selling at a low.

Michael Napolitano [00:28:31]:
So the next question is, what do I do to grow back wealth and value? Right. How do I get that back? Well, everything goes to sales and recruiting. So what are you doing on the temp side for sales and recruiting? To grow your headcount? Because on the temporary side, it's all about headcount, right? If I'm at 100, you know, 50 a week, how am I going to get to 60, 70, and so on? And anyone buying you wants to see you're making that investment into tomorrow.

Benjamin Mena [00:29:00]:
No, I kind of asked this a while back, but if I've built up a staffing company through factoring or using an eor, can I actually still sell it?

Michael Napolitano [00:29:08]:
That's how most are being run. So think about using a factoring or an eor. So in eor, there's pros and cons. Each EOR takes a lot of that off your plate. But there's a cost because you got to pay a fee, so that's going to lower your margins. Right? So when you're using an EOR or peo, your margins may come down, which will affect your ebitda. And remember, your EBITDA is a multiple. So if your EBITDA drops 100 grand and you're selling out a 5 multiple, that's a $500,000 loss of potential value.

Michael Napolitano [00:29:38]:
Right? And factoring, believe it or not, you're just incurring an interest expense, and interest expense is excluded from your income number. So if you're borrowing to pay your weekly payroll and you're incurring that interest expense, that is not included in your ebitda, so it won't impact your valuation.

Benjamin Mena [00:29:59]:
Awesome.

Michael Napolitano [00:30:00]:
Okay, so little nuances.

Benjamin Mena [00:30:01]:
I know.

Michael Napolitano [00:30:02]:
This is.

Benjamin Mena [00:30:02]:
This is why we have you on the podcast. Okay, so I'm running an exact search firm running a few million dollars a year, and I'm sitting there listening to this episode, and I'm like, God damn it, I can't freaking sell my company. Is it worth getting into the Temp.

Michael Napolitano [00:30:15]:
Side of the house, an executive search firm. You're doing really well, right? In these years, you're doing really well. It's much simpler, right? Getting into the temp side requires now potentially different recruiters, different accounting Systems. Because now QuickBooks, right, is not the right tool for temp side. On the temp side, you may want to bring in different software. You know, one of the big companies out there now is Aviante. So what they do is, you know, when you pay Ben on a weekly basis, $20 an hour and our markup is 24, this software allows you, your billing will be instant as soon as you do payroll, because it would all be based off payroll, your markups. So you want to go into a more sophisticated.

Michael Napolitano [00:31:03]:
Then you need an applicant tracking system. You need a front end on the ats, you need a back end from the accountant. With that said, from a value proposition, from a building wealth in a company. The temp side is where you're going to get a lot larger sale number.

Benjamin Mena [00:31:22]:
So looking at those larger sale numbers, how quick have you seen somebody actually build and sell a temp side?

Michael Napolitano [00:31:29]:
I'm going to give you the best example. Every recruiter I meet who's starting their own business, I shouldn't say every. Many will say, michael, I'm going to build this out in five or six years, sell it and make a lot of money. And I just laugh. So wait, pause there.

Benjamin Mena [00:31:46]:
You hear that? And internally you laugh at that.

Michael Napolitano [00:31:49]:
I do because it's a tough, you know, it's a tough business. It is very difficult and you can have some small wins. But when you become a business owner and now you're managing people, employees, customers, vendors, it can beat the heck out of you, as you know. So the best example, 2017, I met these two women, they had a California based healthcare company, zero revenues, met them, told me, Michael, six years growing it and flipping it. And I smiled and I said, that's great. And after working with them for a year or two, I'm like, they're special. They are great operators. And in five years they built it from 0 to 50 million in revenues and sold the company for I think it was 60 or 70 million dollars.

Michael Napolitano [00:32:41]:
That is awesome. And to this day they remain clients. And I think we spoke earlier is the next step. You become a recruiter, you start your own business. It's people process technology. It's people process and managing. But the process side I think is key in order to expand so you have consistency in what's being done. Okay.

Benjamin Mena [00:33:04]:
So actually let's talk about that. You know, so often I think the life cycle of an agency recruiter is get in, learn the skill set, do great, crush it. And then your boss yells at you one time and says, like, hey, you can't take the vacation as promised. And I'm like, but what if you're the top biller? Who cares? You need to build more. And then they're like, screw it. I can do this on my own. If I'm that recruiter that's hit that point where I can do this on my own, what do I need to do to prepare from all this financial big stuff that you're talking about to jump out on my own?

Michael Napolitano [00:33:34]:
You really do need to find an accountant who can help you set up the firm. Because here's what you have to think about. Am I doing it on my own or am I going to have a partner? Big difference. If you're doing it on your own, you. You do it the way you want. You grow, you figure it out. But if you're going to have a partner, so let's just say, Ben, you and I, we want to leave and do this together. Now you get into legal issues, there's something called an operating agreement.

Michael Napolitano [00:34:01]:
The operating agreement will spell out our partnership. What you get, what I get. The best term I've heard, it's our prenuptial agreement in case we ever get divorced. You have a written document so there's less fighting. And a lot of it is, how do we split income? Is it 50? 50? Is it based on production? What perks do we put through the business? So when you're going into business with a partner, it adds a whole new dynamic. You need an attorney. I know we all hate attorneys, but we need a good one. And you need to have the right accounting professional, the right attorney to set it up correctly, which is so important.

Benjamin Mena [00:34:36]:
Okay, so we've covered a lot. And I feel like if we're sitting down for a glass of wine, I feel like we could probably spend another three hours going down deeper on all these subjects. But because we're going to run out of time, this. Making sure this doesn't turn into a five hour podcast that I would actually enjoy that most people probably wouldn't. We covered a lot. Is there anything that you want to go deeper in, in any of the topics we covered?

Michael Napolitano [00:34:56]:
You know, I think the best advice you asked earlier as a client of mine, he always said to me, don't overthink it, right? Because you'll never do it. But if you are going to do it. Make sure you're supported by those professionals that can help you succeed. And your professionals should allow you to run and manage the business. And your professionals should be guiding you on legal compliance. Right. You shouldn't be figuring that on your own. If you're a recruiter who started your own business and you're trying to figure it out on your own, that means you're spending less time recruiting, making money, and more time trying to figure it out right there.

Benjamin Mena [00:35:32]:
So we are going to jump over to the quickfire questions and we're going to mix it up a little bit because, you know, technically you're not a recruiter, but, you know, I love recruiters.

Michael Napolitano [00:35:39]:
I'll do my best.

Benjamin Mena [00:35:40]:
Well, okay, so you've talked to hundreds of staffing firm owners. What stands out to you about the great ones that you've worked with?

Michael Napolitano [00:35:49]:
It's leadership. It's you as the business owner have to lead by example and it's the management of people. I think the biggest hurdle going from employee to owner is it's not about you anymore. It's about everyone else working together and producing, which will then make it about you. It's really the leadership and understanding. You're not a solo shop anymore. You're not a solo recruiter. You're now, you know, incurring additional.

Michael Napolitano [00:36:22]:
There's a lot more. When you go out on your own and you need all of your recruiters and employees to understand what the goal, the mission is, the process and the outcome compensation. We work a lot with executive recruiters and certain commission structures. How are your other clients doing it? Just make sure it's transparent. You went through your career transparent cop. Don't make it difficult for anyone because that's when it creates problems.

Benjamin Mena [00:36:51]:
Okay, so all the hundreds of companies you've worked with, other hundreds that you've advised, have you seen like a recurring issue or something that has stopped firms from growing? Yes.

Michael Napolitano [00:37:04]:
The business owner holds everything too tight and will not delegate. If you don't delegate and you don't give other individuals responsibility, you're never going to grow. You can only grow as much as you can hold on to what you have. So you have to learn to trust your key management, trust the process, step in when needed, but you cannot hold on to everything because you will never grow.

Benjamin Mena [00:37:29]:
Has there been like a company or two that you sat down with and you're like this. This person's different. This company's exceptional. And was there something that stood out about those?

Michael Napolitano [00:37:38]:
The beauty of what we do I've worked with hundreds of business owners and you can tell pretty quickly which owners that will become successful and which ones will not. And it is a mindset. It's who's listening and who's willing to make changes. A lot of business owners are stuck in their way. Those successful business owners adapt, right? Whatever it is, they adapt, they make changes and they move on. And the faster you can adapt and change, the more successful you'll be.

Benjamin Mena [00:38:11]:
So I'm sure you're probably looking at all the, the fun stuff, the backend, QuickBooks and all the other software. Of all these staffing firms that are growing and doing great, has there been like a tech tool that you have seen that kind of stands out in those statements or that has been helping some of these companies grow?

Michael Napolitano [00:38:27]:
On the executive recruiting side, from an accounting measurement, QuickBooks is fantastic. It works, it's great. You don't need much more than that. On the temp side every convention right now, Ben is AI. AI Technology Technology. So what we're seeing is on the report reporting side, more of these. You know, again, there's Temp Works, there's Aviante, there's so many of them, they're now incorporating AI into their reporting, which is only enhancing. So the information is valuable.

Michael Napolitano [00:38:58]:
On the temp side, you want to know your top customers, revenues by customer gross margin, head count and all those tools are there and you're able to put it in a dashboard now. So a lot of us business owners have add, myself included, where you know, you want everything quick. And that's the beauty of what's happening now. You can get these dashboards getting you the information you need to make decisions.

Benjamin Mena [00:39:22]:
Dashboards. Superpower of 2025. Has there been a book that has actually had a huge impact on your own personal career?

Michael Napolitano [00:39:31]:
So for me, because I work with so many business owners, so many different industries and the interesting thing is I have 15 clients in light industrial or 15 executive recruiters. Everyone's different. So Jim Collins is an author who had three books Good to Great. I had to write it down because I forgot and it's been so long. But it's good to great. Then the second one was Built to Last and the third one was how the Mighty Fall. Those three books I recommend because it'll take for me showing my age. Nike versus Reebok in the 80s and what did Nike, they sell the same darn thing.

Michael Napolitano [00:40:09]:
But what did Nike do to become the preeminent powerhouse? And it really gets into the mindset of the decision makers and Then built to last. How do you sustain it? And then how do you get complacent and fall? So to me, those three books cover the entire cycle.

Benjamin Mena [00:40:25]:
And real quick, you look like a young guy, so I don't know what you said about age. Well, okay, so because you're a therapist also, and you're like, you see the numbers, you see like the actual data, but you're sitting there having these conversations and I'm sure some of it over the last year or two, like some of these firm owners are calling you, like, shit just stinks right now. How have you seen some of them get out of a funk?

Michael Napolitano [00:40:50]:
It's interesting and I think that comes with age. I think as you become older and wiser, you realize you need to find an outlet to get away from the everyday work because you can't clear your mind. So listen, for my clients, you know, whether it's golf, whether it's sports, whatever it may be, it's that ability to clear your head. And if you ever worked with a business coach, I did for a while, I tried it out. And it's all about clearing your mind. And I think the best thing a client said to me, think of us as an athlete. The business owner who gets over their mistake the fastest becomes more successful. That business owner that holds onto that mistake, you're preventing yourself from moving forward.

Michael Napolitano [00:41:38]:
And I thought that was great.

Benjamin Mena [00:41:39]:
This is gonna be a fun one. So looking back in time, if you got a chance to sit down with yourself early on when you first started working with like recruiting companies and staffing firms, because you're giving them advice, if you could give yourself advice during that point in time, way back when, now with everything that you learned, what advice would you give yourself?

Michael Napolitano [00:42:00]:
So I give this advice. I have two daughters. I've got a 21 year old and 17 year old. And I think what was never taught to any of us is how to manage people. I think when you learn how to manage people, manage potentially to the desired outcome. You know, thinking ahead, I think it's a, it's a tool. And I watch it with my young staff. I watch it with my young business owners.

Michael Napolitano [00:42:25]:
It's the art of managing people. I wish I knew that earlier on.

Benjamin Mena [00:42:29]:
That's good. And a quick book question before we wrap up this podcast. Have you ever read the Psychology of Money?

Michael Napolitano [00:42:35]:
I have not.

Benjamin Mena [00:42:36]:
Oh, add it to your list.

Michael Napolitano [00:42:37]:
I'm going to add it to my list. Thank you.

Benjamin Mena [00:42:40]:
Well, okay. So because of all the conversations you have, the clients that you say yes to, I'LL work with you. The clients that say you look down at everything, you're like, you are a horrible person and you are going to be a huge liability for me. I'm sure. You get asked from recruiters and firm owners constantly tons of questions. Is there a question that you wish they would actually ask you but never really do? And what would be that answer?

Michael Napolitano [00:43:07]:
From my perspective, it's interesting. It's all about how much money you make. Everything starts with a sale, right. I had a client tell me when I was in my 20s, everything else is irrelevant unless you sell. Right. Which I agree with. Without selling, there's nothing else to worry about. And I think that the question is, as you're growing the business, you start on your own, it's all about profitability.

Michael Napolitano [00:43:32]:
You know, how do we get more profitable? What are your other clients do? Like, it's simple, right? At the end of the day, your business should do two things for you. Earn income, which is your pay, your drop, but create wealth, which is what we talked about on the sales side. So what do we do with that business to create more income? And then the other thing is, how do you create that wealth? And creating that wealth is you have to grow. That's the only way you increase that wealth. Hmm.

Benjamin Mena [00:43:58]:
You just mentioned something about creating wealth. There's a lot of recruiting firms that are lifestyle companies.

Michael Napolitano [00:44:04]:
Absolutely. And that's okay.

Benjamin Mena [00:44:06]:
Okay. Just wanted to ask him that.

Michael Napolitano [00:44:08]:
You know, it's all, what is the business owner want? And. And there's absolutely nothing wrong with a lifestyle business. If that's what you want and you're enjoying it, then just understand that the value on exit won't be the same. So when you exit the company, typically that lifestyle business is to be a lot less value. But that's okay.

Benjamin Mena [00:44:28]:
Can I exit a recruiting podcast?

Michael Napolitano [00:44:30]:
We'll see where it's worth. Yeah.

Benjamin Mena [00:44:33]:
Well, anyways, before I let you go, if somebody wants to follow you, what's the best way to do that?

Michael Napolitano [00:44:39]:
So, yeah, I'm a LinkedIn is the best way. I wish I was better with social media, but LinkedIn, I'm @citroen Cooperman. That's the firm. You can always find me there. So those would be the best places.

Benjamin Mena [00:44:51]:
Okay. And we covered a lot. We talked about a lot of different things. Everything from, you know, starting your business to growing your business, to valuation of business to selling your business. Is there anything that you want to share or leave with the listeners before I let you go?

Michael Napolitano [00:45:05]:
All I can say is this year, and I think you said earlier was a choppy year. Stay focused, stay in the game, get involved with the industry. And I'll leave you with this. Everything is technology right now. And I think for the, I would say us older business owners, you have to make sure that you are staying in touch with the technology changes and you want to have someone within your organization who is on top of that because I think we're headed for a tremendous change in the next five years.

Benjamin Mena [00:45:39]:
So true on that. Well, Michael, I just want to say thank you much for coming on.

Michael Napolitano [00:45:43]:
Oh yeah, I welcome. I appreciate you having me.

Benjamin Mena [00:45:46]:
One of the things that we are always going to have to face in life, especially if, if you're listening to this and you're in America, is the tax man. So thank you for like, I hate to say this, enlightening, scaring us, showing us some of the things that we need to be prepared for and need to be doing, like compliance again. I truly believe 2025 is going to be the year of abundance, is going to be a start of the wealthy recruiters out there. So let's go make that happen. Let's go and not make 2025the year that counts for you. So thank you for listening.

Michael Napolitano [00:46:15]:
Thank you.

Intro [00:46:16]:
Thanks for listening to this episode of the Elite Recruiter podcast with Benjamin Mena. If you enjoyed, hit subscribe and leave a rating.