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Ask Dave

Forming the Right Comp Plan

Stephen is a personal trainer turned entrepreneur. He bought into a franchise and would like to expand his locations. What's the best way to do that without a partnership?

QUESTION: Stephen in Mobile is a personal trainer turned entrepreneur. He bought into a franchise last year and has built it up. He’d like to expand his locations and would like to know the best way to do that without a partnership. Dave explains how he encourages a sense of ownership in his company without creating a partnership.

ANSWER: I do not believe in partnerships, but I do believe in people participating in the win. I have tons of people in our organization that get paid on a percentage of the net profit in their area. If they get paid on a percentage of the net profit, then it’s incumbent upon them to keep expenses down and revenues coming up, which involves putting out some good new ideas and lots of energy and a real sense of ownership in the deal.

But they are not technically stockholders. I treat them in every other way like they are. I let them have a vote in the process. They have ownership in the process. I don’t beat them over the head with mandates. I can, because I own the place, but I choose to treat them in a sense as if they are one of the owners because I want them to act like that.

I suppose you’re going to put a general manager in there to manage sales and everything. They’ll manage the janitorial account as an expense, so they have to watch and make sure people aren’t ripping off stuff. They won’t want to put in a new machine, because it comes out of their pocket like they own the business.

If you can hire a general manager for $50,000 a year just on a straight salary, then take that and divide it into your profit, then you can put somebody on a little bit of a draw or you can put them on a percentage of the profits. They make $50,000 if they earn the same that they did last year. If they make double from last year, they’ll earn $100,000.

Every time you make some profit, they get some of it and you get some of it. You run a profit and loss statement every month and maybe close the books by the 15th of the month following and write them a check. Put them in business for themselves mathematically but not legally. That’s exactly how you’d treat a fourth owner or partner.

This is not a partnership. This is an employee with a compensation plan that’s based on profits. That’s a completely different mentality. I don’t do partnerships. The only ship that won’t sail is a partnership.

We have 14 profit centers now, and some of those are within the four divisions of our company. I love putting people in business for themselves within our business. Neal Webb runs our publishing department. He’s the vice president of that and he gets paid based on what the publishing department nets. He has a lousy salary and a great income because the publishing department does pretty well.

I don’t put a cap on it. If the person makes 40% or 30% or 10% of what you make and they make $1 million personally, that means you made about six times that. So shut up and pay them. They killed something and drug it to the cave. Don’t be so greedy.

That’s a wonderful compensation plan. It’s a little complicated and you have to be up on your accounting. But you should be up on your accounting anyway if you want to stay open.