This article is starting a conversation on small business owners’ compensation and how they should frame their mindset for compensation. For the article, I’m equating the CEO of a small business as the same as the business owner and will use the words interchangeably. I also define small business owners as those ranging from solopreneurs to those with less than 50 employees. This is a broad-stroke approach.

Small Business Owner CEO compensation

Let’s start with some basic math for small business owner CEO compensation.

According to Forbes Advisor: “The average salary of a small business owner is just 16% above the annual mean wage in the U.S.”

According to the article, “the average small business owner salary is just 16% above the national average mean wage of $59,428^[5]at $69,119^[6]. ” Even with some variance of business success and revenues, the article cites Payscale stating, “small business owners earn an average salary of $32,000 and earn as much as $147,000 on the average high end.”

Let’s compare it to a W-2 job:

Assuming a small business owner CEO works at least 40 hours a week, this would make the wages:

1. Average salary ($69K): $33 p/hr
2. Low-end average salary ($32K): $15 p/hr
3. High-end average salary ($147K): $71 p/hr

Small business owners often work more than 40 hours weekly. According to Inc.,

1. 33% of small business owners worked 50+ hours
2. 25% work more than 60 hours
3. 70% work at least one weekend regularly

This would adjust the small business owner CEO’s hourly wage range to:

	40 h/wk 2080 h/yr	50 h/wk 2,600 h/yr	60 h/wk 3,120 h/yr	75+ h/wk 3,900 h/yr
Average Salary p/hr ($69K)	$33 p/hr	$27 p/hr	$22 p/hr	$18 p/hr
Low-End Average p/hr ($32K)	$15 p/hr	$12 p/hr	$10 p/hr	$8 p/hr
High-End Average ($147K) p/hr	$71 p/hr	$57 p/hr	$47 p/hr	$37 p/hr

So, a small business owner CEO who earns an average wage and most likely works 50 hours a week makes about $27 per hour. Even with some margin for error on earnings and time worked, $8 to $71 per hour would cover most of the low to higher-end average range.

This compensation doesn’t cover the stress, worries, and sleepless nights that most CEOs face, which are unpaid and unrecorded. The Compensation model also doesn’t include a potential valuation of the business, a valuation that can be offset by a lower wage.

Why are these numbers important?

Knowing these numbers helps put small business ownership into perspective.

1. Wage Comparison: From a financial standpoint, a small business CEO could often find a full-time job with better pay, fewer responsibilities, and additional benefits like vacation, sick leave, and retirement plans.
2. Value Creation: Business ownership is not just about wages. Owners build value in their business, which can significantly offset their immediate compensation.
3. Misalignment of effort: The business owner should be working to remove themselves from the center of the business. Otherwise, they have a job that is hard to sell.

Owning a business is not just about the wages.

A Business owner’s job is to build value into the business—or at least they should work to that point. This value-building is an offset to wages.

I think this is where small business owners miss the mark. They should ensure that their business is building value above the wage they receive. They should also build a business that can eventually run without them.

Compensation and Valuation Example

For example, in an interior design small business, the CEO owner’s job is to run the business day-to-day, service clients, and find new business. However, at the same time, they are building a team, creating processes for gaining new clients, collecting payments, doing installations, etc. All of that work and processes are part of the business’s value. If they properly document and show how the business runs and can run without them, a valuation professional can see and certify this value. A business like this could receive a valuation based on 1-3X revenue, and if they are really good, they could get a 4x+ valuation.

Sample Client

So, let’s say, in the same example, I know a client is making about $ 1 million in revenue, and she works 80 hours a week ($17 p/hr). Suppose we get everything documented and can potentially sell the business. In that case, it is worth $1 – $ 3 million in valuation. This is great.

However, what a business is valued for and what it sells for can be different. So let’s take a conservative approach and say they can sell the business at 50% of the value, that’s $500K – $1 mil in cash, with a 1x/2x valuation. She has been in business for over three years, so the value of the business sold would exceed the lost wages had she worked a W2 job. (Imagine she worked a W2 job at $147K per year x 3 years = $441,000)

In the example above, the business sold, and would justify the time invested. However, this is only if, during the 3 years, business processes were documented and the business was created to run without the owner.

Most small business owners aren’t ready to sell because the business can’t survive without them doing everything.

Selling a business has to be sustainable and documented so someone else can run or manage it.

How many business owners do you know who can hand over their business? How about taking off for a week, a day, or even a few hours?

One of the biggest reasons I started Think Adapt Build was to help business owners create a business that can run without them. It’s tough being the only person who can run and manage your business. To do this, a business owner must document key processes. They have to set up the business so the CEO/owner can be replaced. This can be achieved with a strong team and clear processes. It can also happen by having a strong operator run the business under the CEO’s guidance.

Book a Free Consultation

• If you’d like to discuss how we can help you build value, contact us,
• If you, the CEO/Business Owner, want out of the day-to-day operations, sign up for a free 30-minute session.
• If you know a business owner that is wrestling with their business have them book a call with me.

Sources:

https://www.forbes.com/advisor/business/small-business-statistics

https://www.inc.com/news/articles/200604/overworked.html