By Karen E. Klein
One of the thorniest topics each small-business owner must tackle is just how much to pay themselves, both as a straight salary and in the form of the little perks that go with the job. So what's an aspiring entrepreneur to do when factoring his or her own worth into the calculations of a business plan?
The problem with finding a hard-and-fast answer is twofold: One, the vast majority of small businesses are not public companies, and since their financial records are closely held, there isn't a lot of reliable data that might serve as a guide to others.
The second foggy area is a consequence of the sheer breadth and depth of the small-business community. Since entrepreneurs run the gamut from mom-and-pop service providers to retailers and manufacturers, trying to come up with a universal rule of thumb about what represents "typical" compensation is nearly impossible.
THE RIGHT QUESTIONS.
The best advice may be to conduct your own informal survey. Ask folks who own their own businesses how they're doing, observe their lifestyles, and make your own informed surmises. Focus on the wealthiest people you know, then ask them how they handle the compensation question. Allowing that they don't mind being reasonably candid about their finances, that simple investigation will probably paint a remarkably good picture.
If you're extremely motivated, and financially able, there are companies that sell financial information obtained from extensive surveys of bank documents, which these outfits gather and analyze. Financial Research Associates and RMA publish studies of private companies' financial data, which you may find useful. Similarly, firms such as Towers Perrin and Radford Surveys release the results of their pay-and-benefits surveys.
When it comes to an owner's draw, however, you should remember that small-business owners take all kinds of benefits and perks that aren't recorded as compensation. Many CEOs drive company cars, maybe they even have a boat for entertaining clients. Then there are the generous insurance policies and golf-club memberships that help them meet new prospects. They also may take business trips that do double-duty as family vacations.
Are these luxuries a "salary"? No. Could these entrepreneurs afford them if they were working for somebody else? Perhaps not. For tax purposes, business owners generally attempt to minimize the "official" amount of money that they take as personal compensation.
Another point to consider is that, even if they're not taking home a whopping salary, a small business is an asset that is gaining in value and can be sold for a profit at some point in the future. For many entrepreneurs, their business is the legacy they pass on to their children, a place to employ friends and family, or a job that also confers leadership status in their communities. What price do you put on those intangibles?
If you're interested in a particular industry, look up the professional organization for that industry and find out whether it has done surveys of members' compensation. Of course, their data may be based solely on what their membership chooses to report -- possibly not what they really take home. Regional surveys can provide an even better data.
If you're interested in franchising, you could contact organizations like the International Franchise Assn. and the American Franchisee Assn. or go straight to the franchise operators themselves and ask for financial information. If you're a potential buyer, there are legal requirements about financial disclosures that would help you to make a reasonable evaluation of a franchise opportunity. That financial data might be very useful in your research, but common sense will tell you that popular chains wouldn't be proliferating if they weren't decent moneymakers.
WHAT PRICE FREEDOM?
The bottom line that emerges in surveys done by government and lobbying organizations is that most small-business owners are not lighting their cigars with $100 bills. The majority are probably earning no more than they would in a job, and they're working harder, putting in longer hours, and coping with more stress. The upside -- which matters more than money to a lot of people -- is that they can be their own boss, set their own hours, determine policy, hire and fire as they see fit, and "live the American Dream." There's a lot of appeal for certain people in being their own masters, and oftentimes that appeal goes beyond the financial reward.
Most entrepreneurs will say that if you have the right temperament, run your outfit right, work hard, and get lucky from time to time, you can probably live pretty well and build a nice nest egg in the process. That's not a hard-and-fast bottom line, but it's one with an enduring appeal.
Klein is BusinessWeek Online's Smart Answers columnist