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Large owner salary

Discussion in 'Business Operations' started by dmk395, Nov 2, 2002.

  1. dmk395

    dmk395 LawnSite Senior Member
    from Ma
    Posts: 992

    I started the topic, If I only had the salary lol
    Anyhow I think once one gets to a certain size he is somewhat indebted to his employees, as the business is what keeps their standard of living intact. Huge draws won't ruin the owner,but surely his workers.
     
  2. Nebraska

    Nebraska LawnSite Senior Member
    Posts: 525

    An established company, with no long-term debt, has no desire to expand. Wants to maintain it's revenue where it's at with slight increases taken into account for the rate of inflation. Does about $800k per year at a net profit margin of 50% consistently year after year. Again this established company has no long term liabilities, owns the land and building outright...pays cash for all equipment etc.... Only wants to maintain it's existing revenue with very slight increases of 5-8% to keep it above inflation. This would obviously result in $400k at the end of the season. If that owner paid himself the magic number of $250k there would still remain $150k as retained earnings to be used for equipment upgrades and the like every year.

    Tax implications?

    Is this a dream landscape or landscape maintenance company?

    Does a company exist like this in other industries?

    I know for a fact that these %ages exist on a smaller scale with a close friend who owns a concrete related business. Gross is consistently $400k with a net in excess of 55%. The owner consistently pays themself 30% or more each year with 25% or less retained in the company. He has no long term debt and has NO LARGE SCALE PLANS FOR GROWTH.

    The %ages are going to decrease as the revenue becomes a larger number and as plans for modest to rapid growth are incorporated coupled with the amount of debt that is assumed.
     
  3. John Allin

    John Allin LawnSite Bronze Member
    Posts: 1,489

    50% net ?? On $800k gross sales.
    Forgive me. I'm flabbergasted by that.
    I'd say it's a "dream" company......
    That's not the norm in the landscape industry.
    That's not the norm in any industry.

    (remember... I said "norm")
     
  4. Stonehenge

    Stonehenge LawnSite Bronze Member
    from Midwest
    Posts: 1,277

    Whew!

    I'm glad you said so John. I read that and was thinking "I am definitely doing something very wrong, because that is not even within the realm of possibility for me."
     
  5. Nebraska

    Nebraska LawnSite Senior Member
    Posts: 525

    Guys!!.... The first scenerio I have no first hand experience with.

    The second scenerio I do have experience with it through family; it is my brother. Is it out of the realm of possibilities to be replicated in this industry?

    The dream company exists in the right here and now with the reported net and reported anticipated revenue by a very active participant on this forum on another forum with a net of 18%.

    In your expert opinion then, does the possibility exist whereby the hypothetical small landscape maintenance company with $220k revenue and 42% net replicate that over and over into $40mil revenue with similar net profit results?
     
  6. 65hoss

    65hoss LawnSite Fanatic
    Posts: 6,360

    I agree completely with all the above statement. Although, I don't always get a kick out of the assumptions. It sometimes ticks me off.
     
  7. Lanelle

    Lanelle LawnSite Bronze Member
    Posts: 1,361

    The organization of a $250K company will look quite different from a $42Mil company. Read Kevin Kehoe's article about managing growth in this month's L&L magazine. There is more than replication involved and he seems to get to the core of the situation.
     
  8. JasperStorm

    JasperStorm LawnSite Member
    from WA
    Posts: 71

    If I had a dollar for every idiot I have met in this industry, I'd make a $250,000 salary.

    The penny wise, pound jackass types with their duct taped, baling wired equipment downtime, the owners who suck cash out of their businesses to buy toys that they haven't the time to enjoy, owners who cannot bid/buget, demanding fewer site visits and then chewing everybody out for poor quality, inability to determine, through proper cost allocation, profitability of entering into different areas of the business, etc. etc. etc.

    But they sho' can brag about how many backpack blowers they run (as seen in the trade mag business profiles.)
     
  9. LawnLad

    LawnLad LawnSite Senior Member
    Posts: 738

    I heard Chuck Vander Kooi a while back state that an owner's salary, plus administrative salaries, should not exceed 9% to 14% of revenue.

    One thing that I think is being rolled into one in this discussion is the difference between profit and salary. Granted the profit from the privately held company does go back to the owner in one form or another, either retained earnings, draw, investment in capital, etc.

    However, if you take a $1 mil company with a modest 15% profit margin, assuming the numbers above. If you take 15% for administrative salaries, assume a $100,000 income for the owner, with $50,000 available to hire a full time and one part time office person, the owner in essence would be making 25% of sales, 10% from salary and 15% from profits. What he chooses to take from the business is obviously his choice as already mentioned.

    Though the distinction is slim, I think there is a distinction to be made between profit and salary.

    Without knowing what is being taken out for administrative salaries/expenses, it's difficult to have a hard core discussion of what profit truly is. Though S Corps are taxed at the individual level, I think many people talk about the owner's take home in terms of a sole proprietorship where it does get all rolled into the same cookie jar.
     
  10. John Allin

    John Allin LawnSite Bronze Member
    Posts: 1,489

    Yup... I do believe Lawn Lad is correct. LOTS of owner/operators do confuse gross profit with salary. Sole Prop's reportable, taxable income includes all profit, and some misconstrue that to mean that's what they made, forgetting the eventual reinvestment needs that must come from the profit.

    Also... Lanelle has a tremendous piece of advice there.... read Kevin Kehoe's article in this month's Lawn and Landscape and you'll better understand where I'm coming from. You can't replicated what happens at $200K into a $4M company in order to achieve the same bottom line at the $200K level.
     

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