Owners Pay And Profit With Partnerships

Um, yesterday on Labor Day, I was on the Gym Owners United group, and, um, I did a brief fire hose, teach everyone how the Profit First system works, how to manage your cash flow. And so today there was one specific question, um, that I for sure didn't touch on in that group. So one, I would invite you to go to the Gym Owners United free Facebook page They got a ton of free content constantly. They always have experts on. Um, and check out that video, it's a great overview of the Profit First system. In addition to that, um, anyways, I answered some questions, and so I wanted to answer this one here. It was from Jeff Zwally at Stay Classy CrossFit. You can only hope and imagine that that might be a reference to Ron Burgundy because he is in San Diego. Stay classy, San Diego. Love it. Anyways, he asks, how do you better define owner's pay versus profit payment when it comes to partnerships? Do you pay each owner an equitable owner's salary and then begin paying owner profit distributions? So first, let me start with what he's referring to is the Essential 7 bank accounts that we recommend you set up. Again, if you go back to the problem we get ourselves in as owners as to why we need a profit-first system is because of Parkinson's Law. And when we have one business bank account, the demand to spend that cash is going to continue to increase until we no longer have any cash available to spend. So what we like to do is give ourselves a false sense of reality That we have less money to spend than we really do. And in order to do that, we create other bank accounts. We have the income account, owner's pay, tax, operating expenses, equipment, and team member. So those are the 7. So what I'm going to reference, what I'm going to talk about here is the owner's pay account and the profit account. Owner's pay is designed to pay the owners who work in the day-to-day of the business. So that's the first clarification I would make. If you're in a partnership and you have an investing partner, but they're not actually working in the day-to-day of the business, they do not get any compensation out of the owner's pay amount. And you figure out the amount by running a cash flow analysis. As a reminder, you can go to profitfirstformicrogyms.com/5days, 5 days, and we run you through a very easy 5-step process that you can do 5 days in a row to analyze your cash and figure out what percentages go into each one. So let's just say it's 15% of your revenue goes into owner's pay. If you have a partner who invested in the business but isn't working in the day-to-day, they would get nothing of that 15%. Owners pay is set aside only for the partners who work in the business. I'm going to come back to that if you have partners who work in the business. Um, so then the other side is the profit account. I didn't go into, um, all the details of the profit account on my Gym Owners United presentation yesterday. So let me do a little bit more detail here about it. The profit account is designed for all owners, whether they work in the business or they don't work in the business. The profit account is designed to reward all the owners for the risk that they took by being an owner. The other team members, as great as they are, they don't have that risk. If your gym folds, they just go out and find another job. And yes, I get that, that, you know, not ideal, but it's better than your scenario. If your gym folds, you likely could be left with a lease obligation. You have to pay the team members without any more income coming in from members. Like, you have a lot more risk. And so therefore, the profit account is designed to give you a return on your investment Or pay you dividends for that ownership. We recommend doing a quarterly profit distribution. And so that means once a quarter. So let you— usually we follow the quarters of the year. So January, February, March. So when you do your allocation day the first time in April, you're going to take whatever is in the profit account. Let's say it's $10,000. You distribute half of it to the owners based on your ownership percentage. So in an example, $10,000 in my profit bank account, let's say I have a 50/50 partner. I'm going to give— we're going to transfer $2,500 to them and $2,500 to me because that would be half the balance, right? $10,000, half of it's $5,000. And then the $5,000 gets split up between your owners' percentage. I picked a terrible number for an example, so let's go $12,000 for my next example, just to clarify, to make sure we're— I'm saying this right, because I am an accountant and I'm trying my best to speak human, and sometimes I fail. Let's say there's $12,000 in the bank account, profit account. Half of it would be $6,000. Let's say I have 3 owners and we're all equal owners. So Bob gets $2,000, Susie gets $2,000, I get $2,000. Once a quarter, half the amount gets distributed. So why do we only distribute half? Is because the other half gives us a nice cushion for a rainy day fund. You hear financial experts recommend to you as an individual, you should have 3 to 6 months cash savings just in case something happens. it's really smart and financially fit if our business does the same thing. So the profit account can allow us to do that. I can tell you, like, if you think about COVID and the pandemic and a year and a half, 2 years, kind of depending on where you're at geographically, our clients who had the Profit First system in place and had a balance in the profit account, that would be a time they would have utilized that surplus that they had been saving. It helped them get through the tough months. Again, we don't want to use it as last resort, but the pandemic, in my mind, classified as a last resort. So that's the profit account. Hopefully that's pretty straightforward. All owners get a percentage out of it. We recommend distributing half. Once a quarter, and then the other half stays in there. Advanced techniques and tactics, which I won't go into too much detail, but at some point you'll probably determine how much money you want in the profit account. And once you've surpassed that number, you know, 3 to 6 months savings to cover expenses, you probably are distributing more than half. So anyways, just Things to think about. Also, if you're paying down debt, sometimes we take an aggressive approach to paying down the debt, which I think can always— it works out well, where you're actually distributing a lot more of the profit account because the purpose in that case, you're using your profits to pay down the business debt instead of taking a dividend from a company that still has a lot of debt. This technique has worked out great. If you haven't read the book, we have a great example. Our Profit First Ninja Aaron worked with a CrossFit gym and helped them pay off— pay down a crap ton. And that's an accounting term, so it might be a little unclear, but a crap ton amount of credit card debt. All right, so let's go back to owner's pay, and then I'll let you be for the day. So owner's pay, when you have partners and All the partners are working in the business. I do not agree with the stance and don't believe it's fair to just say, we're all partners, let's split the owner's pay by ownership. I think you should split the pay based on who's doing the work and what the work is that's being done. I have seen firsthand in companies that I have worked in and then with clients where One partner or a couple partners might be doing a lot of the work, and then some of the other partners do a little bit of work. I mean, I've seen a scenario where a group of owners actually realized they brought in a guy as a partner and he ended up just being a sandbagger and not doing a ton of work at all. Yet they've already— they had already become a pretty successful company before they realized that this guy was kind of a dud. And anyways, they just paid out too much money. I have other scenarios where the partners realize that, and now they're trying to buy out the partner. So I never— I don't think it's fair to just stay across the board. We're going to divide it by ownership. Let's pay it that way. I think you need to sit down and look at the tasks and responsibilities that each of you guys are taking on, or gals, or persons, each task that you are all taking on. And then determine, is equal pay fair? If it is, great, do it that way, but do it based on roles and responsibilities and time commitment. If I'm a partner and the thing I'm bringing to the table is marketing, you know, I might argue, if I'm confident in my ability, I'm gonna be like, hey, you know what, I don't actually want a pay per se. I want my percentage to be based on production. You know, I'm going to bring in a ton of leads, we're going to close a bunch of deals, we're gonna get a bunch of new members. Pay me based on that. Um, if, if I were not— if I were a dud and I was in charge of marketing, I'm going to try to convince you to pay me an equal flat amount, even though I might not be putting in a ton of hours, because it's really hard to see how many hours you're putting into marketing. All you see is the result. So if you're not getting the result, I could say, oh, I'm spending so much time on this. I don't know why it's not working out. So again, be fair across the board. I know that no one goes into business with partners they don't trust. Get things in writing. Everything is always nice and grand when everybody's happy and everyone's getting paid. But I also can tell you firsthand Once you realize that you might have a partner who's a narcissist, or you have someone who thinks they're doing a lot more than they actually are, but you've agreed to pay them, it's really hard to backtrack out of that. Also, could be all friendly terms, but the second they stop getting paid and no longer able to mooch off you, Things can get ugly pretty fast. So I recommend while everyone's happy with each other to go through this conversation. Yes, it would be considered a crucial conversation because you are going to have to be honest with each other and then tell people like, you know what, Bob, I don't think I would put $50 an hour value on you cleaning the gym. We could pay someone to do it for $20 an hour. And maybe since you're an owner, we'll give you a premium, but maybe $25 an hour is a little bit more fair in allocating the value you're bringing to the team instead of $50. And Bob might be offended by that. But if you're partners and you trust each other, you have to have those difficult conversations because we are talking about your profitability. And one thing that can eat profitability pretty fast and your ability to stay in business And your long-term legacy and the footprint you're trying to leave on your community can be a partner who really is just not someone you really want as part of the team in the long run. And a lot of times you don't really realize who, who the winners are and who the losers are until you have these conversations. Now I know all your partners are winners, so this conversation should be easy, but I encourage you to have that conversation. Whatever our— what are our roles and responsibilities? How are we divvying it out? If I'm working 10 hours a week and you're working 40 hours a week, is it fair for me to take equal pay? You know, if I can prove that if I'm working 10 hours that I'm providing as much value, sure, it could be. Again, that's a conversation that has to be had. And last thing, we're not talking about coaching classes in this scenario. Because if you're coaching classes as an owner, that compensation comes out of the team member bucket, and that's very easy to figure out. Whatever you would pay a coach to coach the class, that's what you pay yourself as an owner for coaching the class. So if one owner is coaching 10 classes and the other owner is coaching 1, that's not a conversation. It's just straight up, you get paid for teaching 10 classes, you get paid for teaching 1. It's It's the other responsibilities that we're looking at here for the owner's pay to determine what is fair for each owner. And again, just starting off the board and saying we're all gonna get equal pay, I do not believe is fair. You might reach that conclusion, but do the work and figure it out. Hey, thanks for listening, guys. Remember, profit is a choice. Have the courage and wisdom to choose it.