Quick Consultant: Minimum Owner's Salary Required to Establish Business Value

I remember failing one of these security questions a year ago and I ultimately was forced to call customer service so I could get back on my account. A young woman was helping me and I remember pleading with her, “Look, just give me some hints, that’s all I ask. I’m 67-years-old and my memory is failing, how about if I toss out a couple of names, like Margaret or Cathy, and you tell me which one I listed or if I am close? I’m sure I loved both of them.” I think she giggled and gave me the name.

New Security on the Horizon

I just want to know whether most of these 20- and 30-year-old security experts follow their own advice. Do they really use different passwords for all their accounts and do they change their passwords every six months or so?

Of course, these types of discussions will become academic in the next five years as more and more computers, portable or otherwise, start coming with biometric authentication systems that will automatically check your retina, palm, or fingerprint.

Of course, no system is fail proof, and I am looking forward to reading the first few stories about how users trying to log on to their computers reacted when a bug in the software or hardware claims their retina or handprints cannot be authenticated: “Please verify you are using the correct eye or hand and try again.”

Where Does Value Come From?

Last month I talked about the economic value that a firm might represent to owners; as opposed to the value that firm might represent to an outsider looking to buy a company that could generate a good salary and a return on his investment. Are printing companies capable of doing both? Of course they are, but the more critical question is how that applies to your firm.

Fortunately, the quick printing segment of our industry has an abundance of good statistical and financial data. So I thought I would turn once again to some of those reports and share with you some of the answers.

Below is a chart I prepared using data extracted from the NAPL Financial Benchmarking Study, 15th Edition. This study is packed with information so valuable that it has helped turn around companies that were otherwise headed for disaster. How? When you can determine what the very best companies (the top 25%) in the country spend for payroll, cost of goods, and overhead, it is very easy to see what needs to be done to turn a company around. That is, of course, unless you are really good at rationalizing.

Clarifying Owner’s Compensation

No matter how many times we have defined it in the past, it is necessary to do so once again. Owner’s Compensation (columns #1 and #2) is defined as “That money which is left over after covering all the expenses of the business, but before paying the owner a salary or giving the owner any fringe benefits.”

The average owner’s compensation figures in the accompanying chart (both percentages and dollars) represent what a single owner in this industry is currently withdrawing from his or her own business. It does not, and should not, include any additional salary or benefits paid to spouses or partners.

So, before you go off and start bragging to yourself and others that, “Hey, Harriet and I make a lot more than those folks,” make sure you re-read the section above. You don’t count both salaries.

Put another way, it isn’t kosher to combine the salaries, benefits, and perks of two or three partners, or a husband and wife team, and call the combined total owner’s compensation. It may be considered economic value to those taking it out, but those salaries and benefits cannot be added together into one lump sum and defined as owner’s compensation.

On the other hand, if there are two partners and each withdraws $100,000 in salary and perks, yet one of those partners could be easily replaced by a $65,000 individual, then there is, in fact, $35,000 in excess compensation being paid to one partner. That would be added back to the salary of the remaining partner. These are the types of calculations that occur all the time when a company’s financial statements are recast for the purposes of a valuation. Your monthly P&L may or may not provide this type of detail.

Average Industry Compensation

As you can see from our table, average owner’s compensation, as a percent of sales, actually varies little, regardless of whether one is in the $500,000 range or the $3 million range. Of course, you do not spend or eat percentages; you spend real dollars, so this is one case where size does matter. And larger firms simply produce more in hard cold cash than smaller firms.