Episode 341 | The Profit Answer Man | Luis Corrales
You crossed a revenue number this year that felt like a milestone. Maybe it was $3 million. Maybe it was $10 million, or $40 million. You told your spouse. You told your team. And somewhere underneath the pride, cash still feels tighter than it should, and you cannot quite explain why. That gap, between how good the top line looks and how tight the bank account still feels, is not bad luck. It has a name, and it is more common than most owners want to admit.
The Number You Celebrated Might Be Costing You Money
Luis Corrales, founder of Corrales & Co. and PineTree Asset Management, tells the story of a client, a construction company owner, who hit $40 million in revenue and felt like he had finally arrived. He had contracts with municipalities. He had a growing team. By every measure he was tracking, he had made it.
Then he sat down with his bookkeeper and looked at the actual numbers. It had cost him $41 million to generate that $40 million. He was not building a bigger, more valuable company. He was working harder than ever to lose a million dollars, and he had no idea the loss existed until someone made him look. In Corrales’s words, describing the moment his client realized it: “Wait a minute, I’m spinning my wheels. I’m working hard, but I’m losing a million bucks and I’m not even realizing it.”
Rocky’s read on what was likely happening inside a business that size: roughly $20 million of that revenue was break-even, meaning the owner was working for nothing, and another ten million was actively losing money, likely from underbid or mismanaged jobs. Twenty million dollars of activity, headcount, stress, and risk, producing nothing. That is not a rounding error. That is most of a business’s operational weight, running for no return at all.
This is not a story about one bad year or one careless decision. It is a story about what happens when a business grows in one direction, revenue, while nobody is tracking whether it is growing in the direction that actually matters, which is profit. The two numbers can move in completely opposite directions, and from the outside, from a bigger office, more trucks, and a fatter contract pipeline, it can look exactly like success.
Of Course You Chased Revenue
None of this makes the owner careless. Every advisor, every coaching program, every business book he had ever read said the same thing: grow. Bigger contracts. More trucks. More crews. Revenue is the number that shows up on the awards stage and the number that makes competitors nervous. Nobody hands out a trophy for margin.
The problem is not that he wanted to grow. The problem is that nobody was watching whether the growth was profitable while it was happening. The structure he was running, and the reporting he had access to, told him what he billed. It never told him what he kept. That is not a character flaw. That is a business running on incomplete instruments.
Losing money is also not, as Rocky puts it plainly in the episode, a legitimate tax strategy. A loss in year one or two of a new venture is normal. A loss buried inside a $40 million business that has been running for years is a different problem entirely, and it usually hides in plain sight precisely because the top-line number keeps climbing every year, which feels like proof that everything is fine.
Your CPA Might Have Picked the Wrong Structure for Where You Are Now
Most businesses start as an LLC taxed as an S-corp because that is what the CPA recommends at founding, and for a while it works fine. The trouble starts when the business changes and the structure does not. Corrales explains that S-corps get rigid fast: if you add a partner and want to split profits 60/40 instead of matching ownership percentage exactly, or allocate specific expenses to one partner and not the other, an S-corp makes that hard.
One fix a lot of owners never hear about is entity stacking. Instead of owning your operating LLC directly, your S-corp owns it. That keeps the operating company’s books clean, which matters enormously if you plan to sell or get bank financing, because buyers and lenders want to see high, unadjusted EBITDA. Meanwhile, the S-corp above it is where the more aggressive, fully legitimate tax planning happens: an accountable plan, the Augusta rule, a grouping election on real estate the business rents back from you. The operating business stays presentable. The tax strategy happens somewhere the buyer never has to see it.
None of this is a one-way door. Corrales is clear that you can convert an S-corp to a C-corp later, or wind an S election back down to a partnership, but the decision should be run as an actual calculation, weighing the cost of converting against the benefit, not made reactively the year you decide to sell. The businesses that get this right start planning the exit structure years before there is a buyer on the other side of the table.
The $15 Million Question Almost Nobody Asks
If you have run your business as a C-corp for at least five years, have fewer than 100 shareholders, and your business is worth less than $65 million in asset value, not market value, the first $15 million of gain when you sell is exempt from capital gains tax. That is the Qualified Small Business Stock exemption, and it got more valuable after the tax legislation passed last year.
Corrales’s firm also works with clients on QSBS stacking: layering one or two trusts, often one for each child, that can multiply that $15 million exemption by two or three, done legitimately and compliantly. He is careful to draw a line here. He has seen advisors set up eight, ten, or fifteen trusts to push the boundaries of what is compliant, and he calls that out directly as not kosher. Structured correctly, this is one of the most overlooked exit-planning tools available, and it rewards planning ahead: the five-year C-corp clock needs to start now, long before there is a buyer on the other side of the table, not the year you decide to sell.
Real Estate Is Probably Sitting on a Deduction You Have Not Claimed
If your business owns or occupies real estate, whether it is a warehouse, an office, or self-storage space you use for more than half its square footage, a cost segregation study can turn a chunk of that building into an immediate deduction. An engineering firm inspects the property and separates the value of the land from the value of the structure and its components: the roof, the windows, the plumbing, all of which wear out faster than the building itself depreciates on paper. That accelerated depreciation, paired with a grouping election that treats the rental income as active rather than passive, means the deduction can offset your operating business income directly, not sit stranded as a passive loss you cannot use.
Most owners who own their building have never heard of this. It is not aggressive. It is not a loophole in the pejorative sense. It is simply a deduction that exists and goes unclaimed because nobody asked the right question at the right time.
The same accelerated depreciation applies to heavy equipment and vehicles over roughly 6,000 pounds, which matters directly for trades and construction owners. A tractor, a work truck, or a fleet vehicle bought and used legitimately for the business can generate a large first-year deduction rather than one spread evenly over its useful life. Structured through the right entity, that is real cash kept in the business the same year the equipment goes to work.
Selling the Business Does Not End the Tax Decisions, It Starts a New Round
How you sell matters as much as what you sell for. An asset sale and a stock sale are taxed differently, cash and rollover equity are taxed differently, and a sophisticated buyer already knows exactly which structure benefits them. If you do not know which structure benefits you, you can agree to terms that quietly cost you a meaningful share of your proceeds, and you will likely never know it happened. Corrales is direct about when this gets negotiated: before the term sheet is signed, not after. Once a term sheet is signed, it becomes the document that governs the purchase agreement, and retrading it later is possible but difficult, which is exactly why deals fall apart deep into due diligence when an owner finally understands what they agreed to.
For owners who have already built wealth outside the business, there is a related tool worth knowing about: a portfolio line of credit against liquid investments. Instead of selling assets and triggering capital gains tax to access cash for a new opportunity, real estate purchase, or anything else, you borrow against the portfolio, use the funds, and repay the line later. It costs nothing to have in place, and it is a different risk profile than selling outright, but it is a mechanism wealthier clients use constantly to avoid unnecessary tax events.
You Are Probably Paying Yourself One Number That Is Trying to Be Two
Rocky’s read, echoed by Corrales throughout the conversation: business owners routinely underpay themselves in salary, then treat whatever cash is left at the end of the year as their “income,” conflating a market wage for the job they do with the profit they are owed for owning the business. Those are two different numbers. If you had to hire someone to do exactly what you do, what would you pay them? That is your salary. What the business earns beyond that, after real overhead, is your profit distribution, and you should be seeing both on paper, separately, every year.
Rocky’s Perspective
Here is what I see when I sit down with an owner who just crossed a revenue milestone they are proud of. I do not ask what they billed. I ask what it cost them to bill it. In Luis’s client’s case, my guess is that roughly half of that $40 million was break-even work, the owner grinding for nothing, and another ten million was actively bleeding cash from underbid or mismanaged jobs. If that is close to right, the fix is not more revenue. It is less of it. Get rid of 75 percent of a business like that, get rid of 75 to 80 percent of the headaches that come with it, and you can walk home with three times the money.
That is exactly what happened. Two years after cutting revenue from $40 million to $10 million, this owner was clearing $2 million in profit instead of losing one, a 20 percent margin, with a fraction of the staff and none of the whack-a-mole stress. The business did not get smaller in any way that matters. It got real. Every dollar of revenue left in that business is now a dollar that is actually doing something, instead of a dollar that exists to make next year’s growth chart look good.
I hear owners talk about their revenue number the way people talk about a scale. Up is good, down is failure. I think that is backwards. The only number that tells you the truth about your business is the one at the bottom, after everything else is paid, including you.
The One Thing
Before you plan your next growth push, pull last year’s numbers and calculate your actual margin by job, client, or division, not in aggregate. You are looking for the segment of your business that is break-even or worse, the twenty million dollars doing nothing, hiding inside a forty million dollar top line. You will not find it by looking at total revenue. You will only find it by looking underneath it.
Once you know where it is, you know exactly what to cut and exactly what to protect. That is one afternoon of work, and it is the difference between finding out what Luis’s client found out on his own timeline, or finding it out two years and a million dollars later.
You opened this post wondering why a record year still feels tight. The answer was never that you are bad at business. It is that revenue and profit are two different questions, and only one of them has been getting asked. Luis’s client found that out the hard way, then built something smaller and far more valuable because of it. You do not have to find out the hard way.
About Luis Corrales
Luis Corrales is the Founder & CEO of Corrales & Co., a boutique multi family office that helps entrepreneurs and high net worth families navigate the biggest financial decisions of their lives.
A specialist in exit planning, tax strategy, and wealth management, Luis helps business owners prepare for successful exits, reduce tax drag, and preserve wealth across generations. He is also the Founder & CEO of PineTree Asset Management, a multifamily real estate investment firm focused on acquiring and managing properties across South Florida.
Originally from Peru, Luis combines decades of experience with a practical, relationship-driven approach to advising entrepreneurs before, during, and long after a business sale. His mission is simple: help founders keep more of what they build and create lasting financial legacies for their families.
Links
Website: https://corralesco.com/
LinkedIn: https://www.linkedin.com/in/luis-corrales-7056365/
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Music provided by Junan from Junan Podcast
Any financial advice is for educational purposes only and you should consult with an expert for your specific needs.