Paying anyone for anything is always based on the value they provide. There is no real reason why your wages should be calculated differently.
For a startup, I advise my clients to charge a flat fee based on the profit of the business for the first 3 years. This is how a 3-year pay plan for entrepreneurs could look like:
I will explain how I get to these numbers in a moment, let’s just go through some statistics and deeper into the basics around the role of the entrepreneur and the business.
What is the average salary of an entrepreneur?
Based on the statistics on Payscale, the average business owner earns around $71,335 USD per year. Of course, it depends on the niche and the industry. Your experience and gender play a role as well.
All these statistics have to be taken with a pinch of salt. There is absolutely no reason to make much more or much less money. There is also no reason why women shouldn’t make more money than men.
These numbers are just average salaries based on a fixed number of entrepreneurs willing to give out that information.
As an entrepreneur, you are in control and the amount you can pay yourself depends on your effort, your industries and your niche in that industry. This is the whole point of being an entrepreneur. Whatever barriers there are, you can find a way to break them down.
The percentages I gave you at the beginning should help you to calculate your possible income in your industry, market, and niche.
I will give you a real-life example later in the article. But before that, to better understand wages as an entrepreneur, you need to understand how a business works.
How does a business work?
The entrepreneur and the business are not the same. The business is the legal foundation on which business transactions can be carried out.
The entrepreneur is the person who initiates and fulfills those business transactions. As the initiator, you naturally have a strong interest in building your platform (business) and help it to grow. As bigger the platform, as larger the transaction can be.
In a normal transaction you have customers, suppliers and yourself, the entrepreneur involved. The base of any transaction is to exchange value to each party involved. You can see the business as a type of middleman, who is legally in charge that those transactions are done in the correct way. When a transaction takes place all parties receive their share of the total value.
In the beginning, your business is a very small platform that usually attracts only small value exchanges. As your business grows, those exchanges should, and usually do, grow as well.
How to measure value in a business
As we mentioned above, the job of the business is the exchange of value for all parties involved. Imagine it like a shop. You show off all your products and services, and your customers can come and buy (or are sold to).
If your products don’t sell, they are of limited value. Whatever you can sell the products for,
As an entrepreneur, most of the work lies with you. Your platform (business) is still small and does not attract the larger value-exchanges yet. So you have to do most of the work. As your business grows, it naturally attracts higher or more value exchanges and you will have to do less to initiate the process.
From the business point of view, your value as an entrepreneur is very high at the beginning. It needs you to grow and to establish traction. That’s why the business pays us a higher percentage at the beginning.
As the traction grows, our value decreases and our share on the profit decreases as well. If everything goes to plan, in terms of real money, it won’t be much of a difference.
How is this calculated?
To understand the numbers in the table above, you need to understand that the business does not care about your car leasing, the rent for your house, or any of the other costs you might have. The business is only interested in the value exchange.
Whatever you might think, the business is not there to serve you. You are there to serve the business. It isn’t much different from getting a job in a company as an employee. If you come to the interview and you find out that the wages they are paying are not enough to cover your lifestyle, you probably won’t take the job.
Well, it is the same as your own business. If you don’t believe that your business will eventually pay for your lifestyle, there is no point in starting a business in the first place.
The real advantage of running your own business is the opportunity to create as much value as you want or the market can give, without being restricted by what your employer thinks. It translates directly into your wages based on the value you create.
Is this valid for all types of businesses?
Yes, it is! Any business is about the exchange of value. In some businesses the platform has a lower priority or is shared by multiple businesses.
But in its essence, all businesses work in the same way and your income is directly linked to the value you provide.
As your business grows, your main job will probably shift towards management. You will be less involved in the day to day creation of value and more in managing the creation of value. This means maintaining, stabilizing and expanding the platform and taking care of staff.
But even in this position, your income should be directly linked to the value you help to create.
Should I be paid?
There should never be a reason to not pay yourself wages. That should only happen if you don’t create any value at all. In the beginning, this can be the case.
It might take you some time to create your products and services. During this time no value is exchanged and therefore you have no wages. But as soon as value exchange happens, you should get your share of the profit.
This is the reason why we always advise entrepreneurs to create and exchange value as early as possible in the startup phase. It is important to get paid. Nobody can live on hope alone. The bills need to be paid.
Another advantage of exchanging value as early as possible is to test the market and to identify if what you’re creating is of value as early as possible. Even if it means selling a lower quality product to start with.
Let’s have a look at an example
The average revenue of a hair salon in the US is about $245,000 USD per year. Out of this, the hair salon makes $19,100 USD in profit every year (after paying your wages). The profit margin is around 8.2% but can range from 2% to 17% depending on how well the salon is managed.
In this industry, a large part of the wages is calculated in time and based on an hourly rate. As it takes a person and an amount of time to provide the service, time is a major factor. The only real way to improve the hourly rate is by increasing the price of the service.
Of course, there are other factors, like sales of hair-related products or other merchandise, which can increase the profit margin substantially.
As an owner of a hair salon, you would look at an average income of $41,000 USD in an established salon. A stylist will probably be paid around $25,000 USD per year. Any tips are added on top. This is all gross income from which you will need to deduct your taxes and Social security.
This does not sound much, but this is just average in that market. This does not mean you can’t find an angle or niche which creates far more value.
I have some experience in that sector, as my parents did run a hair salon in the ’70s, but by adding some twists and applying a very different business model, they were able to turn this hair salon into a very profitable venture. You could do the same.
What are the most profitable Industries?
The following list is based on the possible profit in relation to the revenue of the business. As lower your costs are as higher are your profits. It is no surprise that the highest profit margins are found in white-collar industries. Keep in mind, these are industries and not specific businesses. I only mention it here to give you an idea for a twist for your own business ideas.
- Accounting, Tax Preparation, Bookkeeping, Payroll Services
- Legal Services
- Real Estate Brokers, Estate Agencies
- Outpatient Care Centers
- Dentistry, Physicians, Doctors, and Health Care Practitioners
- Design Services
- Equipment Rental and Leasing
- Warehouse and Storage
Depending on where you look you will find some slight variations in the order of the list, but overall the entries have been stable for many years now.
As an entrepreneur, I would look at that list and see how I can connect with people in that industry and create value for them. They can usually afford a higher value exchange.
Even as a hairdresser you could look at how to engage with these industries. Find out what they need most and what you could provide. We talk about how to do this in another article. But leave me a comment, if you want to know more.
How much should I pay myself?
That is a big question. How much do you want to pay yourself?
Imaging inviting yourself to an interview and get into salary discussions. How would you argue on both sides?
As the business, you look at the table above and make your calculation. You check out the
As the applicant, you look at the business and try to figure out how much value you can be for this business. You also want to know if there is space for you to grow and to increase your value and therefore your wages. If you don’t believe that you can be of real value for the business and that you have no room to grow, you probably look somewhere else. It’s not just how much they can pay you today, but also how much they might be able to pay you in the future.
Now start discussions and come to an agreement. Now you have your number!