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Entrepreneurship

The sweat equity myth

Entrepreneur.com

Venture capitalists call it “sweat equity”– the idea that business owners shouldn't pay themselves a salary while they're building a business.

When I see owners not paying themselves the full value of their services, I shudder. Of the more than 6,000 small businesses my company, American Management Services, has worked with, I can't think of a single one that failed because the owner paid himself or herself a decent salary. The inability to pay yourself is symptomatic of a much deeper financial problem; it should serve as a red flag that your business is not working. Lack of sales or quality control, bloated overhead and other financial woes are the real reasons you're not making a salary.

Sweat equity doesn't just mask problems in the business; it also weakens your position as a leader within the organization. Salary has a huge impact on how your employees perceive you. The big boss should get the big bucks. If you reward yourself less than your employees, you undermine your credibility.

You'd be amazed at how many of our clients fight us on this one. Most business owners underpay themselves. There's a pervasive belief among small-business owners that one day they'll get what they deserve. These are good people raised with the simple edict that you should work hard, treat people fairly and be patient. They think if they keep sacrificing, they'll eventually be able to sell the business and retire. The sad fact is that there's often nothing left to sell when the time comes. Instead of accumulating wealth, they've slaved at a job for decades just to cover payroll and pay the bills.

The desire to create wealth and live a comfortable existence isn't a crime. It's the whole point of entrepreneurship. It's what motivates us to make a profit and build a viable business that puts cash into our pockets both now and in the future.

Instead of investing sweat equity, start taking care of yourself first. Not only is it looking out for No. 1 to pay yourself a reasonable income, it's also taking care of business.

Here are a few things to keep in mind:

  • Always work to make a good salary. Then cover the expenses. Not the other way around.
  • Reward yourself (but within reason). Here's a rough formula: Pay yourself 3 to 4 cents on each dollar of revenue for doing the job of CEO.
  • Imagine you weren't in the picture. Ask yourself how much you'd pay a general manager to run your business if you had to go away. That's the least you should be paying yourself.
  • Remember your priorities. Don't lose sight of why you're running a business in the first place – to improve your quality of life.
  • Spread pay cuts around. Take a 5 per cent cut along with the rest of your staff, but don't put a 30 per cent pay cut on your own back.
  • Ask yourself this question: If your business doesn't allow you to pay yourself a living wage, what are you doing wrong?
  • Remember: There are no rich martyrs.
  • You have to take care of yourself first so you can stay sharp and become the kind of boss you need to be to take your business to the next level. You have a duty to your business, your family and your employees. Most of all, you have a duty to yourself. You are the one who holds all the risk, so you should reap the rewards.

George Cloutier is the author of Profits Aren't Everything, They're the Only Thing: No-Nonsense Advice From the Ultimate Contrarian and Small Business Guru (HarperCollins, Sept. 2009). He is the founder and chairman of American Management Services, a management firm that specializes in turning around small and mid-sized businesses based in Orlando.

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