134. How to Approach Owner's Comp as a Firm Owner

We have these ideas that entrepreneurship or business ownership is going to unlock those things for us. But we start with our business goals in mind first. And what's left is our personal goals. Our business goals should be subservient to our personal goals, in my opinion. And that's. To me, the owner's comp question is a function of figuring out what. What are those income goals that I have to have? If you're not able to pay yourself, then there's something fundamentally broken about the business model or the way that maybe you're thinking about your business model foreign.

I think, like, owners get really screwy about their compensation and they basically spend all their margin reinvesting into the business, which is a celebrated and good thing. And we encourage that.

Right.

That's part of healthy growth, is reinvesting into the business. But as a result, it's like your spouse is over here being like, are we even making money right now? Like, I. Yeah, you work really hard on this and you're really stressed out about this, but we haven't gone on a vacation in two years, and when we do, we stay in the dinky hotel down the road.

Right.

And. And so I think there's ramifications for how we think about owners compensation. Thoughts?

Yes. Here's your episode. This is it.

Should we start it right now?

Let's go.

Okay, cool.

But I mean, it'll. It'll segue perfectly.

I think that owner's compensation. If there are questions about owner's compensation, it is an. It is normally a result of misordered goal setting. And so a lot of times when we as business owners get these ideas of going into entrepreneurship, we'll sit down and think about the business and what do I want the business model to be? And how much, Gosh, how much could I even charge? And what kind of revenue goals should I have? Every now and then we'll flirt with profitability or cash goals. That's a discussion for another time. And then we think about our team and service delivery and quality, all these different things. And what ends up happening is we give our families and our external from business lives the leftovers.

When in reality, when all we're left is the scraps or the leftovers, what ends up happening relationally? Well, a lot of times, resentment starts to take place. You're spending all of this time in the business and you're not bringing enough home, or you're spending all of this time in the business and I don't get to see you as often. I remember that when you Were talking about leaving your corporate job to start your own thing. One of the big reasons is because we wanted to have more family time. And this was going to be the result of your own business is we are going to be able to do X, Y and Z together. Never mind community goals that you might have from a time or a financial thing, like I want to be able to help my church build this new wing or whatever. And we have these ideas that entrepreneurship or business ownership is going to unlock those things for us. But we start by with our business goals in mind first. And what's left is our personal goals. And so that's a natural byproduct. And so what I think is.

A.

Path that will lead to more fulfillment and less resentment is, let's sit down and say on paper, what are our personal goals? And I like to break personal goals into four different categories. And they're all related, but they're distinct. The first one is income goals. And that's what you talked about a minute ago with owner's comp. How much money do I need to bring home for our family to be able to meet the needs of rent and mortgage and utilities and paying down debt or savings or whatever those things are. And I think it's important to get clear on what those income goals are ahead of time so that when you get into the business, there's no drama or ambiguity or misalignment. Number two is lifestyle goals. If you're a lady or a guy that likes to travel, or that you only want to work four days a week, or that you want to work seven days a week, there's no wrong answer here, just what's right or wrong for you. Yet you create a business model that necessitates something else. You are out of the gate, setting yourself up for failure and disappointment and resentment and burnout. And so it's income goals, lifestyle goals, and then family goals. What are those things that are core and fundamental to your family? What are those things that your family values above all others when it comes to just life? And so if you're a guy or a lady that wants to go to your kids after school soccer practices or to the games that are out of town on the, on the weekends. You know, for me, my son has cross country now at 6 o' clock in the morning. And I want to be able to go to cross country with him. And while he's running, I want to be able to go and get my cardio workout in and I want to have time to go and we go to the YMCA now and, you know, get cleaned up and then I take him to school. And so if I've created a business where I have to be at work at 7 o' clock for calls on the east coast, that's not going to work, or if I'm taking clients that are on the Pacific coast, then I'm probably going to have to work later. But I don't want to work later because I want to be there. I want to be home by five. So think through those family goals. What's really important to you? If you want to be able to have date nights with your wife or your husband or whatever those things are, think about those ahead of time. That's job one. And then community goals. And I think a lot of times we neglect the, even the consideration for what is important to us from a community aspect. And that could be any of your resources, time, energy, financial resources. And once you're armed with those four, and I would encourage you to do that, work first, maybe independently, and then sit down with your spouse or your partner and make sure that there's alignment. Because without the support of your spouse, boy, this entrepreneurial journey is going to be tough. And I can tell you, as a guy that has. I'm on my. I've been married twice now. I didn't have that support the first time, and I have been so blessed to have it in spades the second time, it changes the entire game. You got to meet her one day, by the way. I would love that she hears all that she hears about Alex Judd.

And you're kind of, Lord, that scares me a little bit.

But, but to have the. I know that she knows the why behind what we're doing. She knows that I am dedicated to those goals that we have personally. It just makes life so much easier. And then the wisdom and the accountability that I get from her when I am living my business life out of congruence with those things that we agreed upon that were our personal goals, it helps me recenter and recalibrate. So I'm like, start with those personal goals first, armed with those. Then and only then do we sit down and start thinking about what our business goals are. Our business goals should be subservient to our personal goals, in my opinion. And so we start thinking about, in the way that I like to kind of think through it, if you were to just be conceiving of a business from, from the ground level is okay, I have certain income goals that I have to make. And so let's think about the kind of services that I want to offer. What are the. What's the scope of work that would go into those? And how long do I think it would take to deliver that scope of work on a per client basis? As an example, there's all kinds of business models out there, but just in a very, like, grossly simplified kind of way. Okay, I want to offer fractional CFO services or coaching services, and I want my scope to look like this. And I think that it would take me 10 hours a month per client to deliver that scope. Well, I know what my working hours need to look like. I know because of my personal goals. I know that, you know, for me, I like to work 8 to 5. And so I'm like, okay, that's, you know, roughly 40 hours a week. 40 times 4.33 months in a year on average. Not 4, but 4.33. You can start to see there's basic math that falls into place to say, okay, I can serve 20 clients a month working the hours that I want to work. And now I can say, all right, in order to do that, I need to charge this month, this much per client per month. And then what you do is you say, all right, if I need to be charging $2,000 a client a month and my scope looks like this, what size market do I have to go after that can afford that? Where there's going to be that alignment of value against price, where it makes a lot of sense. And then do I think I can serve that audience? Do I have the chops? And so it becomes this dance all centered around and kind of subservient to those personal goals to figure out price points, to figure out what my margins need to look like, to figure out what clients can I serve and what time zones and what hours and how long can I contribute? And so you kind of take all of those things to say, this is what my business is going to look like. And that's. To me, the owner's comp question is a function of figuring out what, what. What are those income goals that I have to have so that I don't end up building a business where I feel guilty about taking too much out, or my spouse or whoever feels resentful that I'm not bringing more home. But it all starts with coming up with those personal goals and making sure that your spouse or your partner is in alignment with those. Then you go and make the business model off of it.

One of the ways that I. One of the things that I really appreciate about the way you Approach. The topic of finance in business in general is you and your team, y' all just have this get it factor around the fact that this is not strictly a math problem. Right? Like, and y' all attack behaviors and beliefs a lot. Is there anything you could speak to about the beliefs and behaviors that prevent the very common sense, logical path.

To owner's compensation that you're talking about here?

There's a couple things that come to mind in there. They, I think they, they are on different ends of the spectrum. And so not to speak in the hyperbole, but just after working with, with hundreds or thousands of business owners over time, now this has been my experience anyway, one is under compensating yourself when we tend to not pay ourselves enough. Normally, that's rooted in.

This idea that I don't deserve it or that I haven't earned it yet, or that one day there will be this magical goal line where I say, okay, when this point comes, then I will pay myself more. And so we find ourselves in this, this, this cyclical trap of always finding excuses why we don't pay ourselves more. And it's, it's normally rooted in some kind of an insecurity. But when, when I, if that speaks to you is you're somebody that's not paying yourself because of that, I would just remind you that you do deserve it. And that is indicated by the fact that your customers have agreed to pay you this money. If you have a team, they've agreed to come and work for you. You've done the work, you've created the value for your customers and your team if you have it. And that's all the validation that you need that you've earned it. Now, a lot of times we get into business in the amount that we could pay ourselves in owner's comp far exceeds the our wildest dreams for how much money we might be able to bring home. You get into a business, the business is successful, and you're like, gosh, I could pay myself a quarter million dollars a year in owner's comp. I never made more than $90,000 a year before. Nobody in my family has ever made more than X amount of dollars. And it doesn't matter what that number is. A lot of times we've just got those numbers. And so it's hard for us to wrap our heads around the fact that we could or should pay ourselves that amount of money. And so if that's kind of the trap that you're in, one of the exercises that one of my mentors gave me that was really, really useful in kind of working past this is because if you're not careful, it can become a carrot that we never. We can just serve at the almighty dollar. And we're always chasing the next. Well, gosh, I'm paying myself 100 grand. What about 200 and 300 and you get stuck in this rabbit wheel. Hamster wheel. I don't know that rabbits have wheels, but maybe there's a rabbit wheel, but there's certainly a wheel.

It's a bigger wheel.

Hamster wheel is work with your spouse to figure out what's our number. If we made this much money, we're okay not taking. We're not, we're okay not chasing more than that. That, that's the number that we pay our bills and we can tithe and we can give and we can serve and we can do all of these great things and then let anything above and beyond that number go back into the business or charitable contributions or more philanthropic efforts and those things. So come up with your number that you're okay not chasing past that number and let it be okay. But I think it goes back to your question of why. Why is it such a. Why is it so hard for a lot of owners? Well, on the one end, it's. They don't think they're deserving, they don't think that they've earned it. And now on the other end of that spectrum is ego, where we think because we have an LLC and a business bank account that we ought to be able to pay ourselves whatever the heck we want. And so, yes, that's true. You can pay yourself whatever the heck you want. You're just not going to be in business very long. And so there's this, this balance that has to come in between, yes, you're good enough, yes, you've earned it and you've put in the effort to also, there is a responsibility to be a financial ste for the money that has come into your business in the form of revenue. And you've got to manage that money in a way that's responsible, whether it's just fiscally or spiritually, whatever your beliefs are. And so you've got to find a balance between, yes, you deserve it and you don't deserve that much. And so you've got to keep all of those things kind of, kind of in mind. And that's where I think it can be very valuable to have some other people to speak into those decisions to help you kind of find where does that balance lie for you but it all hinges on good personal goals.

That's so good. And that was going to be. My next question is. So personal goals are like the desired state. Right. This is where we want to be. Maybe that's not. Maybe that doesn't reconcile currently with where the business currently is. And maybe you even have a business owner that's like, yeah, I know, like I'm not paying myself that now, but that is where I want to be. But then you're still stuck with the question of what is the responsible thing to pay myself now? And I think that's where some people can just feel a little bit like, let's just see where the wind's blowing, you know, and just choose a number. What are your thoughts on how you evaluate what should I be paying myself in this season and then how regularly should I reevaluate that?

Well, there's so much context that would go into a responsible answer to that question. And so I'm going to avoid giving a blanket statement on that because what I think might be true for my business isn't true for what's for your business. And it's also dependent on the season that our businesses are in. I believe the unfortunate reality is there are seasons in business. Hopefully you don't ever get there, but if you're in business long enough, you probably will, where you've got to throttle back your owner's compensation. And so what was responsible and proper and prudent last year may not be true today. And so I think there's just a lot of context that kind of has to go into it. And there might be seasons where you don't pay yourself.

Yeah.

Now where the danger is with that is that needs to be true for a season and you need to have a very clear path out of that season. Otherwise you're not going to be in business very long. You just won't be. If you're not able to pay yourself, then there's something fundamentally broken about the business model or the way that maybe you're thinking about your business model. There might be some blind spots that just need to. To be addressed. A lot of times for people that are servant hearted, what we find is we're overpaying our teams. We want to pay people as much as humanly possible and that comes at the expense of us paying ourselves. But the truth is we've taken on the burden of risk and so we should be paid for that at some point. So I don't want to avoid your question altogether, but I would say you need to Just kind of take an honest look at where your business is at. And if you're not paying yourself enough to make your basic needs as, as a person, then you need to figure out a clear path. How are we going to get there in a, in a timely manner and execute on that path with excellence and get yourself there as quickly as possible?

One of the things that you already alluded to associated with this topic too is like, man, invite other people in this conversation. I, you know, I heard someone say once that, like, shame lives in the details. And I think what we're talking about a lot here can be shame associated with. I either think I'm paying myself too much or I'm not paying myself. And I'm afraid to tell anyone that. And in reality, until you tell someone that, they can't help you. But that's a, that's a really hard thing too, because it's like, who do I tell and how do I share that? And how do I know whether or not to trust their advice? Anything you would caution people against or give people wise counsel on in terms of how they invite people into these conversations?

That's a great question. I've never thought, thought it through that way. But the, the answer that immediately comes to mind is if I would receive their feedback, whether positive or negative, in the same meaningful way, then I would trust them. Then this is something I would trust them with. So as an example, if I, if I went to you and I said, hey, this is kind of where my business finances are at, and this is where my owner's compensation is at, and you responded positively, how would I receive that versus if you responded negatively, how would I receive that? If both of those would be meaningful responses to me as I'm thinking through if I should trust you, then yes, you would go through. I would say maybe that's the right person to talk to. So it's really just in evaluating.

How much you value positive or negative feedback from that person, and if you're able to receive both from that person in a meaningful way, then they, they are likely to be someone you could trust with that conversation.

Man, that's, that's a really good litmus test for trust in multiple arenas. So I appreciate your thoughtfulness there.

But also this also comes to mind. If I watch the way that you live your life and I see that you're living your life in a way that's not in congruence with the values that I have, then I'm probably not going to take your advice on money to heart. And so if. If I'm somebody that's super conservative and I believe in saving more than I spend, and yet I see you with a new truck and the big house and the boat, and you're on a private jet and all those things. Well, and I kind of have a directional idea of what you make. You're probably not the right guy to go to for talking about odorous compensation.

And that kind of hits at. Like.

I heard someone talk recently about, you got to be really careful about adopting people's tactics and processes, because when you adopt their tactics and processes, it's really. You're very capable of also packaging in their essence isn't that powerful. Right. And. And sometimes we think we're just picking up the tactics and processes, like private jet, like pool. Right. Like. Like all of that.

Right.

And in reality, like, we're picking up their essence and we didn't even think through, do I want that essence? Is that in alignment with my philosophy and belief about life, my faith, all of that? And so I would just love to hear a little bit from you. I know you're a man of faith. Like, how is the strategy as it relates to owner's compensation and how we're thinking about our business undergar undergirded by your faith? And like, what does your faith say about this strategy?

Important questions today.

Gosh. And help me remember, too, there's something else that I want to add on to that last part of the conversation. In fact, let me hit that and then I'll circle back to you because I will forget it. Also, remember, when you're seeking advice on owner's compensation or really anything in general in business is, it can be very easy, as the requester of the advice or the giver of advice to try to compare you that might be on chapter two with me that might be on my chapter 15. And so it's really easy to say, hey, from an owner's comp perspective, I'm on chapter 15. This is how I approach it. This is how you should approach it. And that isn't really applicable or appropriate with you where you are at Chapter two. And so watch out as the giver of that advice and the recipient of advice to make sure that you're not trying to apply someone's chapter 15 to your chapter 2 on what's proper or prudent today.

Yeah. So good. And now we get an inside look into everyone's chapter 15. So it's really easy to play that comparison game.

It is. It is.

And.

And you know, the guy with the private jet in the pools. He may be living a life that's in alignment with your values, whatever those are on his chapter 15. He may be doing a great job stewarding that money. And. And, you know, if he's got a billion dollars, then for him to have a boat in a private jet isn't a big deal. But it might not be for you that's making 100,000 dol year. So just really watch out for that, that comparison trap because it can get a lot of people in trouble. And a lot of times, as advice givers, we may forget to ground ourselves and recognize, hey, they're at a different stage than I am today. And so what works for me today may not be appropriate or prudent for them today as well.

Man, that's so good. It's a little bit of a tangent, but I think it's worth sharing because it's applicable to what you just said. I feel like I end up in a lot of conversations that compare Chick Fil A to Raising Cane's Chicken, Right? They're both chicken restaurants, and I don't know why, but I think I end up in lots of conversations just with people in the car talking about business, stuff like that. And. And oftentimes you'll see Chick Fil A very near raising canes. And a lot of times the conversation can veer to look at all these amazing things Chick Fil A is doing and then look at raising canes. It's like they're trying. They're trying so hard, but it's just not the same as Chick Fil A. And it doesn't have the same vibe and all of that, Right? And then one day, someone in the car just was brilliant and asked the question, I wonder how long both of those have been in business. And we looked it up and it was like raising Cane's is like, I mean, 15 to 20 years, and chick Fil A is like more than triple that. And we looked at that and we were like, dang, Chick Fil A better watch out. Because raising canes is like done a ton in like a third of the time. And that's what we do personally, I think too, is we look at people that are 30 years ahead of us and we say, look at all they've done. I really need to get my act together. And in reality, you just haven't had as much time.

We're yes. And where we can get into trouble with that is when we say, hey, what would you do if you were me? If, you know, if Raising Canes went to Chick Fil A and said, what would you do if you were us? It's hard a lot of times for the, the Chick Fil A in our metaphor that we're carrying on the chapter 15 person to take themselves out of their current state.

Yes.

And go back to where they were at the 15 year mark and think about like, well, what's reasonable and what's practical and realistic to do at that time. So there's this balance that I think Eleanor Roosevelt said, like, you know, life's too short to learn all the lessons on our own. Right. Or something along those lines. So you want to be able to gain value from the evaluated experience or wisdom. I think I stole that one from you. At some point you want to be able to gain wisdom from others experiences, but you've also got to remember that you have your own context and you're at a different place than they are. And so there's a marriage between those two things that I think is important to balance out.

This is so good. And I think people, it's so crucial that people take what you just said and apply it to the way they receive guidance in general. Because there are so many people in you and my space right now, whether they have a podcast or a YouTube channel, that their method for delivering content is I did this, so you have to do this. And man, I would tell people, if you are listening to those folks, do not touch that with a ten foot pole. Right. It's one of the things I love about sitting down and having breakfast with you like we did this morning, is you will tell me what you did, but then you will also say, do not copy and paste this because you are not me. Let's look at the principles associated with this and then let's talk about how this could potentially affect your business or your situation. And that's what I think we should be looking for, for and healthy guidance, whether it's related to owner's compensation, finances of the business or growth and leadership in general.

One of the things that, that I probably should do a better job of saying out loud. I've said it before, but gosh, I think it's so important is when you're giving advice or receiving advice, go into it with this idea that the advice should be used for inspiration, not duplication. If we can, just like you said, like, let's use it for inspiration. Let's, let's see, what are those principles that we can pull out of it. Which of those principles are appropriate in the context of my business and my values in my team, in the market that I'm in, how can I apply them, discard the rest and move forward and be in a better place? But so often we get into like. Well, their model was this. I need to copy this and I need to do X, Y and Z just like they did, or else catastrophic catastrophe awaits me in the future. So, again, it's. It's like that idea of, like, use it for inspiration, not duplication. Duplication implications where we get into trouble.

So good.