How to financially reward fairly multiple co-owners of a business?Oct 04, 2022
How to financially reward fairly multiple co-owners of a business?
It is important to get it right because if not done fairly, in time, it can destroy the relationship and potentially the business.
There are 2 aspects to the contribution of a co-owner and they need to be rewarded differently.
The first contribution is the investment in the business, it can be time, money, product, opportunity. Whatever that contribution it will have a perceived value for each of the co-owners. That value needs to be agree between all the owners and an allocation of shares needs to be agreed. It doesn’t have to be equal shares to everyone. Once agreed, it can only be revisited if additional contributions are made that have changed the balance of shares, so you must be a peace with it. This is the foundation for trust.
This contribution is rewarded with profit share.
The second contribution is the skill and time contribution of working in the business, the role of that person in the day to day operation of the business. Each co-owner will take an area of responsibility for the running of the business and that contribution is rewarded through a salary and each co-owner salary also needs to be collectively agreed and only revisited if roles are changing.
It is important to understand that it doesn’t matter how the rewards are classified in the statutory accounts of the business and how it is declared to the tax office. This is a fair methodology to attribute financial rewards prior to compliance obligations.
How to calculate profit shares and salaries?
Having agreed the role of each person in the business, use a job search site like Indeed to benchmark the market value of the role. In simple term how much would it cost to hire someone to do that job. If the person does the role on a part-time basis, agree an annual salary and pro rata to the time spent. This is then salary value for each co-owner.
You need to agree between the co-owners what % of profit will be drawn. Some of the profit should be kept for tax, reinvestment etc.
If you want to take profit shares every month, follow those steps each month:
1. take your management accounts, calculate your profit left after the “salaries” of the owners has been deducted
2. Apply the % profit to be drawn, for example 80%
3. Divide the profit to be drawn accordingly to the profit shares agreed in line with the investment contributions.
You can get your bookkeeper or accountant to make those calculations for you.
The sum of the salary and profit share is the total reward of the co-owner.
Revisit the agreements on investment and roles every time something changes and you will maintain a very healthy relationship between the co-owners of the business and maybe even save a friendship.