A few weeks ago one of my peer boards was discussing the hiring of a new salesperson. One owner asked the others “What is the most important trait you look for in a new salesman?” Another member immediately burst out: “Someone who doesn’t feel guilty about my profits!”
It’s something we don’t think about, but it is a critical foundation of your company culture. We enshrine it as Right Number Three in our Rights and Obligations of a Business Owner: “You have the right to all the profits.”
All ownership rights come with attached obligations. In this case, it’s the obligation to use profits to pay your employees and your bills before you pay yourself. Unfortunately, many employees as well as many entrepreneurs feel that profits should be limited to a comfortable living wage for the owner, and everything in excess of that is profiteering.
Profiteering is variously defined as making money by unethical means, and making a lot of money by charging high prices for goods that are in short supply. There is no definition of “excess” profits other than certain arbitrary measures from governments seeking to levy additional taxes.
Many small business owners suffer from profit guilt. They subconsciously limit the amount of money they make to a number they feel is “fair.” They find ways to keep profits within a range that is comfortable by foregoing price increases, offering discounts to customers who aren’t asking for them, and voluntarily increasing expenses.
If you keep your financial results secret from your employees because you are afraid that they will think you are making too much money, you are suffering from profit guilt. If you don’t want employees or customers to visit your home because they might think you are “rich,” you are suffering from profit guilt.
Profit guilt is most common in entrepreneurs who started out as technicians. That means those who did the work of the business, whether carpentry or engineering, and then took the leap to do that work for themselves. Technician owners frequently are indoctrinated with a mental balance scale that measures their personal work output against the amount of income they receive.
The primary reason to start your own business is to disconnect the link between personal work and personal income. Getting paid for what you do is the definition of a job. If your business is just a job, it is one with too little security and lousy returns. Profits are your compensation for investment and risk.
Try this exercise. Begin by writing down the actual cash amount you invested to start your company. Add to that the difference in any income between what you paid yourself and what you could have earned as an employee at another company, for as long as that condition existed. Now add the value of the hours you’ve worked beyond what you’d normally expect from your employees. The resulting number is probably huge, and it represents your investment; the total contribution that you made personally to get the business to where it is today.
Professionals who acquire small businesses, such as Private Equity Groups, roll-ups and larger corporations, target a Return on Investment ratio of between 25% and 35% annually. That’s a fairly consistent number across industries. It has been determined in the open market to be what is necessary to offset the risk of investing in a small company.
A small business should therefore generate a salary for the owner that fairly compensates his or her work, plus from a 25% to a 35% annual ROI on that owner’s total contributions to the company. That is a baseline. Regardless of what your accountants or the IRS say, only the amounts over that are really profit.
If you are making more than that, I congratulate you. Your are among the very few small business owners who have built something that creates wealth beyond a return on your personal investment. Unless you are doing it using unfair or unethical means, you deserve every penny.