Author Topic: Owner regularly making less than some on staff?  (Read 1487 times)

Fields of Gold

  • 5 O'Clock Shadow
  • *
  • Posts: 43
Owner regularly making less than some on staff?
« on: November 15, 2018, 01:07:53 PM »
In evaluating a small business ownership opportunity:

There will be two full-time employees:
Salesperson total compensation: $68K-80K annually in US Dollars.
Manager (of part-time minimum-wage employees): total compensation is $40K annually.

After business expenses deducted (no owner salary yet included), the business profit is about: $20K (low average) to $29K (nearing upper end, due to constraints).  The owner spends a few hours per week on the business and can work remotely/phone conference.

The business netting less than either of two individual staff seems little awkward at first glance...even though it is virtually passive income for the owner.
 
Is this scenario of a passive owner making less than some of her/his staff sometimes the norm in small business?
« Last Edit: November 15, 2018, 02:10:36 PM by Fields of Gold »

bwall

  • Bristles
  • ***
  • Posts: 471
Re: Owner regularly making less than some on staff?
« Reply #1 on: November 16, 2018, 01:28:19 PM »
It seems to me to be a sub-optimal opportunity.  Or, in other words, the numbers you describe below explain why it is for sale/on offer.

Rubic

  • Handlebar Stache
  • *****
  • Posts: 1056
Re: Owner regularly making less than some on staff?
« Reply #2 on: November 16, 2018, 01:47:33 PM »
Is this scenario of a passive owner making less than some of her/his staff sometimes the norm in small business?

You're comparing compensation between yourself and your employees, which
isn't the correct way to think about it as a business owner.  The wages and
benefits you pay your salespeople are simply business expenses.  The question to
be addressed: After paying all my business expenses, is the resulting margin
worth my time, compensation, and risk?


I'm a business owner and all of my managers make more than I do, but they
own no equity in the business.

soccerluvof4

  • Magnum Stache
  • ******
  • Posts: 3953
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: Owner regularly making less than some on staff?
« Reply #3 on: November 17, 2018, 03:45:12 AM »
Is this scenario of a passive owner making less than some of her/his staff sometimes the norm in small business?

You're comparing compensation between yourself and your employees, which
isn't the correct way to think about it as a business owner.  The wages and
benefits you pay your salespeople are simply business expenses.  The question to
be addressed: After paying all my business expenses, is the resulting margin
worth my time, compensation, and risk?


I'm a business owner and all of my managers make more than I do, but they
own no equity in the business.



I agree with  ^.  I wanted all my sales people to make a lot more money than I did as long as the margins were where they needed to be because end of day it would trickle down to me.  My business had very little overhead and assets but the $ was in the cash flow as our sales were high dollars.  When the deal with my employees to buy it fell through I just took my cash flow and walked away.

Fuzz

  • Bristles
  • ***
  • Posts: 305
Re: Owner regularly making less than some on staff?
« Reply #4 on: December 22, 2018, 01:16:56 PM »
I own the business. I am place contributed more value to the business that I do, I would have no problem with the making more than me. However, the big missing variable to me in your question is the cost to purchase the business. If you are saying that the business returns 20 K to the owner, and you're dealing with a salesperson, manager, and the people the manager supervises, then I would not touch that business at all. Do you think you can increase the profits of that business? If you think you can increase the profits, then you might consider taking the business over for close to free. Even at a 1x Multiple profits, you are spending 20 K by the huge headache in my opinion.

maizeman

  • Magnum Stache
  • ******
  • Posts: 3190
Re: Owner regularly making less than some on staff?
« Reply #5 on: December 22, 2018, 01:29:56 PM »
The only issue I see is that means the business has less margin for safety than one that was a bit more profitable.

I don't know how much of the salesperson's total comp is based on commission, but what percent decrease in sales could the business sustain before you'd be having to put money in each year to keep it afloat?

In principle* my concern would be the same if profits were $100k/year but you had 4 sales people and 4 managers, each making less than you so it's not specifically about how your profits compare to other people's salaries.

*In practice with a business with 4x the profit and 4x the people you'd have more flexibility to lay people off if business slowed rather than either shutting down the business entirely or put in more and more of your own money.

Kroaler

  • Pencil Stache
  • ****
  • Posts: 770
  • Age: 27
  • Location: Greenville, South Carolina
Re: Owner regularly making less than some on staff?
« Reply #6 on: January 04, 2019, 09:49:39 AM »
I own the business. I am place contributed more value to the business that I do, I would have no problem with the making more than me. However, the big missing variable to me in your question is the cost to purchase the business. If you are saying that the business returns 20 K to the owner, and you're dealing with a salesperson, manager, and the people the manager supervises, then I would not touch that business at all. Do you think you can increase the profits of that business? If you think you can increase the profits, then you might consider taking the business over for close to free. Even at a 1x Multiple profits, you are spending 20 K by the huge headache in my opinion.

The total revenue and more importantly.... Purchase price .... would be useful.

Kronsey

  • 5 O'Clock Shadow
  • *
  • Posts: 70
  • Age: 33
  • Location: Midwest
Re: Owner regularly making less than some on staff?
« Reply #7 on: January 04, 2019, 11:11:55 AM »
Is this scenario of a passive owner making less than some of her/his staff sometimes the norm in small business?

You're comparing compensation between yourself and your employees, which
isn't the correct way to think about it as a business owner.  The wages and
benefits you pay your salespeople are simply business expenses.  The question to
be addressed: After paying all my business expenses, is the resulting margin
worth my time, compensation, and risk?


+1 to everything Rubic said. I will add a few of my own thoughts:

Current owner is lying if he says he spends no time on the business (or even just a few hours a week). If it was almost completely passive as he is describing, why sell? Most businesses sell for around 3X multiple of net profit. There are a lot of variables on top of that, but it is a decent rule of thumb. So why would the guy/gal sell a business for $60-$80K if it is already netting him $20K/year while only spending 100 hours year to manage/oversee? Most prudent folks would simply keep the business for cash flow and not sell IF what he is telling you is the truth!

"Passive Income" is all the rage these days. In the small business world (think under $100M in revenue), it is almost all complete BS. Yes, you can create systems, hire key employees, etc. But EVERY SINGLE SUCCESSFUL small biz owner I know or provide services for works A LOT. Most love the work, and the biz is their entire life (hobby, identity, fun, etc). I am not bashing that lifestyle, but I think you are living a pipe dream if you think you are going to purchase a business and work 5-10 hours a week.

Might as well throw your money out the window...

What is the owner asking for the business?  Could you replace one of the higher compensated employees to increase your income?

My main advice would be to give up on the passive income pipe dream unless you are willing to work 10 or more years to give the business a chance at becoming a passive income source.

AlexMar

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Owner regularly making less than some on staff?
« Reply #8 on: January 09, 2019, 04:18:42 PM »
I'm a business owner and all of my managers make more than I do, but they
own no equity in the business.

I think I'd rather be a manager at your business...

I can't imagine the equity being worth all that much in a business with such little profit.  (it's generally how businesses are valued)

AlexMar

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Owner regularly making less than some on staff?
« Reply #9 on: January 09, 2019, 04:21:24 PM »
I own the business. I am place contributed more value to the business that I do, I would have no problem with the making more than me. However, the big missing variable to me in your question is the cost to purchase the business. If you are saying that the business returns 20 K to the owner, and you're dealing with a salesperson, manager, and the people the manager supervises, then I would not touch that business at all. Do you think you can increase the profits of that business? If you think you can increase the profits, then you might consider taking the business over for close to free. Even at a 1x Multiple profits, you are spending 20 K by the huge headache in my opinion.

The business also has high expenses (if the staff alone are 6 figures) with almost no profit.  The idea that a business that requires sales people will safely return $20k/year is absurd, at best.  There is no room at all for error, down turns, changes in the business, nothing at all.

Total waste of time and money and I would MAYBE take the business over for $20k if I saw potential.  But most likely it wouldn't be worth the headache.  OP suggests they will make the $20k/yr and all dandy.  I can't see any scenario where that is a good bet.

AlexMar

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Owner regularly making less than some on staff?
« Reply #10 on: January 09, 2019, 04:25:58 PM »
"Passive Income" is all the rage these days. In the small business world (think under $100M in revenue), it is almost all complete BS. Yes, you can create systems, hire key employees, etc. But EVERY SINGLE SUCCESSFUL small biz owner I know or provide services for works A LOT. Most love the work, and the biz is their entire life (hobby, identity, fun, etc). I am not bashing that lifestyle, but I think you are living a pipe dream if you think you are going to purchase a business and work 5-10 hours a week.

Maybe every small business owner YOU know... But that doesn't include me.  I could easily work 10 hours a week and earn a substantial income from my business. I could probably get away with close to 0 hours.  I work now because I want more and to grow the business even more, I like it.

It's not uncommon to have a business that operates well on it's own with the proper management and procedures in place.  You then oversee it and make sure standards are met.  If all of the people you know have to work "A LOT" - then their businesses are probably NOT that successful, or they are sub-contractors.  Successful businesses don't need that much babysitting.  I'm not only defining success by income, FYI.

Fishindude

  • Handlebar Stache
  • *****
  • Posts: 1874
Re: Owner regularly making less than some on staff?
« Reply #11 on: January 13, 2019, 10:37:40 AM »

You're comparing compensation between yourself and your employees, which
isn't the correct way to think about it as a business owner.  The wages and
benefits you pay your salespeople are simply business expenses.  The question to
be addressed: After paying all my business expenses, is the resulting margin
worth my time, compensation, and risk?


I'm a business owner and all of my managers make more than I do, but they
own no equity in the business.

This is the right way to look at this.
Employees of a business need to be paid fair market value for the job they do, and this has nothing to do with the business owners compensation.  Nothing wrong with employees making more than you, if you are otherwise happy with the arrangements.

Kronsey

  • 5 O'Clock Shadow
  • *
  • Posts: 70
  • Age: 33
  • Location: Midwest
Re: Owner regularly making less than some on staff?
« Reply #12 on: January 14, 2019, 07:10:57 PM »
"Passive Income" is all the rage these days. In the small business world (think under $100M in revenue), it is almost all complete BS. Yes, you can create systems, hire key employees, etc. But EVERY SINGLE SUCCESSFUL small biz owner I know or provide services for works A LOT. Most love the work, and the biz is their entire life (hobby, identity, fun, etc). I am not bashing that lifestyle, but I think you are living a pipe dream if you think you are going to purchase a business and work 5-10 hours a week.

Maybe every small business owner YOU know... But that doesn't include me.  I could easily work 10 hours a week and earn a substantial income from my business. I could probably get away with close to 0 hours.  I work now because I want more and to grow the business even more, I like it.

It's not uncommon to have a business that operates well on it's own with the proper management and procedures in place.  You then oversee it and make sure standards are met.  If all of the people you know have to work "A LOT" - then their businesses are probably NOT that successful, or they are sub-contractors.  Successful businesses don't need that much babysitting.  I'm not only defining success by income, FYI.

I am very happy for you. I really wish all business owners were able to accomplish what you have described. It truly is a dream lifestyle if you are able to build it.

You may not think my experience amounts to much (and I would agree it is jaded by my experiences), but I think real world statistics would agree with me. For every 1 business that is built like yours, there are 100 or more others that are either financially unsuccessful or the owner(s) work a lot of hours to make the ship sail. I was simply trying to warn OP that what has been described smells fishy for all the reasons I mentioned in my original post. And I'm not sure what you mean by client's businesses "NOT being successful" nor do I see how it pertains to the conversation. I have a couple clients netting 7 figures a year which I think is "successful" by any stretch of the imagination.

With your business currently operating smoothly without much of your time, would you sell for a small multiple of net profit if you were only working 5-10 hours/week? I'm guessing the answer would be "of course not!" unless you were wanting to retire. That would be an even more of a unicorn scenario. Not saying it is completely impossible, just very highly unlikely. I didn't want the OP to make a big financial mistake thinking what you had described is the rule instead of the exception to the rule.

What type of business do you operate?

AlexMar

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Owner regularly making less than some on staff?
« Reply #13 on: January 15, 2019, 06:10:09 AM »
"Passive Income" is all the rage these days. In the small business world (think under $100M in revenue), it is almost all complete BS. Yes, you can create systems, hire key employees, etc. But EVERY SINGLE SUCCESSFUL small biz owner I know or provide services for works A LOT. Most love the work, and the biz is their entire life (hobby, identity, fun, etc). I am not bashing that lifestyle, but I think you are living a pipe dream if you think you are going to purchase a business and work 5-10 hours a week.

Maybe every small business owner YOU know... But that doesn't include me.  I could easily work 10 hours a week and earn a substantial income from my business. I could probably get away with close to 0 hours.  I work now because I want more and to grow the business even more, I like it.

It's not uncommon to have a business that operates well on it's own with the proper management and procedures in place.  You then oversee it and make sure standards are met.  If all of the people you know have to work "A LOT" - then their businesses are probably NOT that successful, or they are sub-contractors.  Successful businesses don't need that much babysitting.  I'm not only defining success by income, FYI.

I am very happy for you. I really wish all business owners were able to accomplish what you have described. It truly is a dream lifestyle if you are able to build it.

You may not think my experience amounts to much (and I would agree it is jaded by my experiences), but I think real world statistics would agree with me. For every 1 business that is built like yours, there are 100 or more others that are either financially unsuccessful or the owner(s) work a lot of hours to make the ship sail. I was simply trying to warn OP that what has been described smells fishy for all the reasons I mentioned in my original post. And I'm not sure what you mean by client's businesses "NOT being successful" nor do I see how it pertains to the conversation. I have a couple clients netting 7 figures a year which I think is "successful" by any stretch of the imagination.

With your business currently operating smoothly without much of your time, would you sell for a small multiple of net profit if you were only working 5-10 hours/week? I'm guessing the answer would be "of course not!" unless you were wanting to retire. That would be an even more of a unicorn scenario. Not saying it is completely impossible, just very highly unlikely. I didn't want the OP to make a big financial mistake thinking what you had described is the rule instead of the exception to the rule.

What type of business do you operate?

That was my point!  My comment was in a response to SUCCESSFUL business owners having to work an obscene amount of hours.  I pointed out that this doesn't suggest they are terribly successful.  Those 100 business owners just trying to keep the ship sailing are not successful.  It's fine, I'm not being judgmental, that was my business when I started, too.  And then when you finally reach success - well, that's the entire point of building and owning a successful business.  So you can reap the rewards.

If your clients are pulling 7 figures - there is absolutely no reason they should be locked in working "A LOT" of hours.  That's by choice, not by necessity.  They can obviously afford management to handle the business unless they are doctors/lawyers/employees who have to slave for their wage.  Even then, a lot of lawyers at that point have associate attorneys who handle most of the work.  But these types of people aren't really business owners, they just own their job, in a sense.

I think we agree about the OP.  I've clearly said I wouldn't do this deal.  There is almost no reward at $20k/year and way too much risk.  A payroll in the six figures and you only pull down $20k/year seems insane to me.  Everyone is doing well except the one person with ALL the responsibility and risk.  Heck no.

I'm in manufacturing.

« Last Edit: January 15, 2019, 06:12:04 AM by AlexMar »