|
CompensationMaster Newsletter Article, October 2005 "Of
course we're profitable," says the broker. "I take a quarter million dollars out
of this business every year."
Every so often we hear statements like this from brokers.
Sometimes it's an owner who is ready to retire and wants to sell the business to
one of our clients.
But when we analyze their books, we discover that although the
company appears profitable on the surface, it is actually barely breaking even.
To help determine a company's true profitability, here are the
first three questions we ask brokers:
1. If you sell, are you paying yourself the appropriate
split?
Very often, broker/owners don't take their split. They leave the
money in the company account, and pay themselves out of what's left over after
expenses are covered.
While this helps ensure that the company has the necessary cash
flow, it can mask profitability issues. If the owner is the top-producing agent,
that can really skew the results.
2. Are you paying yourself for the time you spend managing
the company?
You need to determine how much of your time is devoted to
administration and management. Then you need to figure out how much it would
cost to hire someone else to perform those functions. Until you hire that person
(or those people), you should pay yourself the same amount of money.
3. Are you getting a return on your investment?
You need to have profit built in separately from your split and
the money you make performing management duties. This is your return on the
capital you invested to buy or start the business. If there is no return on
capital, you are going to have a hard time selling your business for any
significant amount.
The bottom line is that you need to structure your business
financially so that if you decided to go live on a beach in Fiji and do nothing
more than sip mango daiquiris in your beach chair, your company would still be
profitable.
You have to make sure that you are paid for all the functions
you perform: as an agent, as a manager, and as an investor.
Once you have done that, you will be able to sell the company at
a substantial profit—or hire someone to manage your business while you go off to
Fiji.
Back
to Newsletter Archive
|
