(dramatic music)
(triumphant horns)
- Profit maximizer number four.
Here's key, very important.
You must get owner compensation right
to know what your true pre-tax profit is.
This applies to most small business owners.
They have disillusion.
You must get owner compensation right
to know what your true pre-tax profit is.
Cause you are not your business.
Repeat after me, "I am not my business".
(crowd responds)
You are an employee within your company.
You're a CEO.
You could be a VP of Sales.
But you're an employee within your--
Your company is a separate identity, yes?
It's different, it's different.
So most entrepreneurs misunderstand the relationship
between the salary and the return what they own.
Here's what I mean.
They think in terms of I don't know why, Ron you've seen
this a lot, right?
Most business owners somehow their salary
is 36,000 dollars a year, right?
Why is that?
Give him a mic.
Why is that?
How often do you see that?
Thirty-six grand a year.
Somehow that's the magic number.
- For some reason it's 36.
It depends really if it's for tax purposes, it depends
if you're really actually paying yourself or your business.
There could be a lot of different reasons why,
but the main one is simply because
a lot of people are just working so hard
they're not taking a look at what
they're doing with their company
and they're paying themselves whatever is left.
And you can't survive with that.
You can't.
- It's a good question, because they think 36 because
they want to minimize the amount of tax they pay, right?
So for years they work, I'll just do 36 grand,
but that's a false assumption because
as your company grows this is what happens.
You couldn't find someone to do
what you do for 36 grand a year.
You couldn't.
For everything that you do?
Yes?
Nope, you would not be able to find someone to do that.
So you are paying yourself below market wage,
and it gives you the false assumption
that your business is okay.
It is not okay, cause you--
If you think of how much you want to--
Imagine this, actually I have a question.
So you get paid a salary for what you do,
you get a return on what you own.
Expand on that, so as a salary I'm paying myself as a CEO,
right, but also as a business, what's my profit?
What the return as a shareholder?
Two different roles.
- We see this a lot for private companies
which a lot of you are going to be running
and a lot of you are doing, so as Dan is saying,
you really want to pay yourself as the CEO,
but at the same time you're also getting profits.
So let's just do a very simplistic example on
the income statements on page three,
they have some profits there, okay?
Let's just say they already pay themselves a salary
in the salary expense.
You're also entitled to those profits as well because
you hold your own shares of the company.
You can take some more profits out of if you want
because of your earnings there was some income there.
You issue dividends.
- Perfect, two different roles, you getting it?
Two different things.
First think you gotta think of, you gotta pay yourself
a market rate wage, market rate wage.
Because at some point if you want to replace yourself
and have someone coming in the business
to run the business, you need to pay them a fair salary.
But if you keep paying 36 grand, 36 grand, 36--
You're not gonna find somebody.
And it gives you the false illusion that your business,
I guess it's okay, it's not okay.
(audience responds)
How come some CEO pay themselves a dollar a year?
- It's primarily for tax reasons.
That's the main incentive as to why they're doing that.
Also depending on what's going on with their stock options.
There's other ways around that as well.
And that's why they do a dollar as their salary.
There's other ways to get compensated,
but probably more complicated--
- But for what we do, to give ourselves an accurate
picture of what's going on, do that.
Does that make sense?
So most entrepreneurs think they're overpaying themselves,
but at least what I believe, from my experience,
90% are underpaying themselves.
They're not paying themselves enough.
They're paying 36 grand.
Not enough!
So let me ask you, how much would you want to pay yourself?
Just yell the number.
How much would you think is fair compensation for yourself?
(crowd responds)
Six-hundred Gs? Yes.
Six-hundred G?
Good. Nothing wrong with that.
In a year, or monthly, doesn't matter.
- [Audience Member] Twenty-seven million a year.
- Twenty-seven million a year, okay good.
(laughter)
Nothing wrong with that. No, seriously.
For what you do, what's a fair compensation for yourself?
- [Audience Member] A million dollars a year.
- A million dollars a year.
(crowd responds)
- You have 100 grand a year,
but the profit more than that.
But as an employee it's 100 grand, you think.
So to point maybe you can bring someone to replace you
maybe a COO and pay them the 100 grand so they can run.
So then you get out, as a shareholder you're getting a
dividend, you're getting a profit, right?
That's what I'm saying, you gotta get
your compensation right.
So here's a good question.
If you got run by a bus today,
it's a very depressing question today.
But it's to make you what?
Think, yes.
And your family decided that it would keep the business
going in your absence, what would they have
to pay for someone to do your job?
What would they have to pay for someone to do your job?
And it's gonna be way more than 36 grand.
Probably more than 50 grand, right?
Maybe more than, maybe it's 80 grand,
maybe it's a 100 grand, maybe it's 200 grand.
Whatever numbers you have in your mind.
But know that number, and get the compensation right.
A business is like a cow, the saying.
Until you pay yourself a market-based rate, wage
and make a profit on top of that,
you have a sick cow on your hands.
Until you pay yourself a market-based rate, wage
and make profit on top of that,
you have a sick cow on your hands.
And for some of you I know what I'm sharing tonight
makes you a little uncomfortable and uneasy,
and that's fucking awesome.
Because then it means you might do something about it.
Not looking at your business thinking
it's healthier than you think, when you actually
have a sick cow on your hands.
How many of you are going through some of these numbers
thinking about your business,
now you're going back and you're looking at your business
realizing you need to make a lot more profit?
You need to make a lot more profit than you think.
A lot more than you think.
So don't focus so hard on not paying taxes,
focus instead on increasing your profits.
That's the main lesson.
Many years ago I talked to my mentor, Dan Peña
and I asked Dan, "Dan, I'm making more money
I'm paying more taxes, I feel like shit.
I'm writing some big checks, man, to Revenue Canada."
And Dan looked at me and said,
"You know, kid, if you're worried how much taxes
you're paying, you ain't making enough money."
If you're worried how much taxes you're paying,
you ain't making enough money.
Some truth to that.
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