10% Net Profit: Get Your Fair Share
Joey Doughnuts works at Sal’s Automotive. Has for years. Joey got set up with a 401(k). There’s no company match, but he puts away about 6% of his $70,000 a year salary (let’s just make the math easy and assume he never gets a raise — poor kid). At the end of his long and successful career working at the shop, Joey has about $700,000 socked away for retirement.
Now let’s look at Sal himself. The entrepreneur. Turned his back on the corporate world to make a name for himself. Sweated out the first couple years — sometimes thinking he made a big mistake. Some weeks, he went without a paycheck, so he could afford to pay his people. The business had its bumpy start. With a lot of hard work, trust in his employees, and an honest work ethic, Sal’s Automotive turns a profit. Not much, but it’s consistent. From about $1.5 million dollars in sales, Sal’s turns 2% net profit. $30,000 a year. It’s not a lot, but the other shops Sal talks to seem to be the same. Matter of fact, he’s heard that’s about industry average. Sal is proud of his shop, and he should be.
Yet, Sal is starting to feel a lifetime of working on cars, working in the cold, kneeling on hard concrete. He doesn’t complain, but he has sure slowed down on any work he personally does in the shop. He tries to stay “up front” and talk with customers. A lot is going through Sal’s mind lately. He hasn’t really set up a plan — you know — what’s he going to do when he actually decides to call it a day? His daughter wants nothing to do with the business. She’s a successful physician’s assistant. Maybe one of the techs or sales staff wants to take over? Maybe one of the competitors a few miles away, or the big chain store one town over has some interest?
Sal doesn’t know what the future holds, but he spends an awful lot of time thinking about it.
If Sal were to put his business on the market today, he would, or at least be advised, to use a term called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to figure out what his business is worth. Essentially, since Sal runs a pretty clean business, let’s assume his EBITDA is $50,000. Sal’s Automotive is in a desirable location, good town, too. So let’s further assume there’s interest by a few parties. Sal can collect what is called a multiplier of his EBITDA of about three times the base amount. Sal can sell his business for $150,000. Yikes. Let’s not even talk about what part of that $150k is actually Sal’s. We haven’t mentioned debt or taxes yet.
How is Sal’s employee enjoying nearly three quarters of a million dollars in retirement and Sal is trying to find a buyer so he can retire on less than $150,000?
Every year, you have a chance to be fair to your customers, your employees, and yourself. Earning 10% isn’t a crime.
Easy. Sal accepted the “industry norm” of about 2% to 3% net profits. If Sal had managed his business financially and made the tough, results-oriented decisions he needed to make, Sal would have earned 10% net profit year-over-year. That would have resulted in $150,000 a year in net profit on the same volume of sales. At three times EBITDA, that puts Sal in a much more comfortable $450,000. And since he was making $150,000 a year net profit, Sal also paid off all his debt. He even bought the land the business sits on, so now he can sell the business and be a landlord, earning an additional $75,000 a year. If Sal lives for 10 years after he sells his business, he will have accumulated $1.2 million dollars in retirement. That makes a lot more sense, doesn’t it?
Earning 10% net profit isn’t easy. It isn’t supposed to be. If it were, there would be four shops on every corner of America, and two more in the middle of every street. It’s not easy, but it’s the fair share, the payout the business earns for the risks it takes (10% net does not go in the owner’s pockets). The business has a high probability of worker injury. It has a high probability of vehicle damage. Relative risk of an oil out, wheel off, an angry customer who wants their money back even though the business didn’t’ do anything wrong they were just the “last ones to touch it.” Lawsuits. Long hours. Ten percent should be the bare minimum a business should accept for all the risk it takes. The owner should demand these results. Because eventually, there will come a day where it’s someone else’s turn to take the risk. And like a lot of entrepreneurs, many won’t be eligible for social security. All they can rely on is the profits from the sale of the company. If owners play their cards right, maybe become a landlord.
$150,000 or $450,000 plus rent. As an owner it’s up to you. Every year, you have a chance to be fair to your customers, your employees, and yourself. Earning 10% isn’t a crime. It’s 10 cents on every dollar sold. The rest (90 cents of every dollar) goes to vendors, employees and expenses.
Make good sales. Earn gross profit from those sales, pay your bills, and start earning your retirement. ■