The question a market-rate salary answers
What would it cost to hire a stranger to do the owner's job? Putting that number on payroll reveals more about the business than any report.
Here's a question with an uncomfortable amount of information in it: if a stranger had to be hired to do the owner's job, what would that cost? If the answer is $90,000 for a working general manager, then $90,000 is a real cost of running the company — whether or not anyone is currently writing the check.
A business that only works because the owner works free isn't really profitable; it's a job with extra steps and worse insurance. Putting the owner on payroll at market rate does two clarifying things at once. If the business can't afford it, that's the honest profit figure finally showing itself — and every conversation about pricing, costs, and which customers to keep suddenly gets more truthful. If it can, the household is now separated from the company's mood swings, which tends to be worth more than the money.
Banks run this math before they lend. Buyers run it before they make an offer. The IRS runs a version of it too. The only open question is whether the owner runs it first, on friendlier terms.
Filed under Strategy & the Owner's Seat