Finance

Earn Your Fair Share

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A.C. Guarino is 60 years old. He’s owned his Winston-Salem, N.C., shop, A.C. Automotive, for nearly 20 years, and he’s been in the industry for twice that long.

Guarino says he’s seen what happens to a lot of longtime shop owners, and he doesn’t want it to happen to him.

“They weren’t getting young people in to run their businesses, they weren’t holding people accountable, and they weren’t making sure they got out of the business, financially, what they should have,” he says. “Now, they’re around 60, too, and they’ve got nothing to show for it. You can find a few shops like that in every town. I don’t plan on being in that group.”

The likelihood of selling a shop, at least in a way that allows an owner to retire comfortably, is slim, Guarino says. The key is building a business that has a long-term future, he says, and that will continue to provide you with an income.

Bottom line: You need to make sure you’re getting paid.

“Once you see that truth, it’s simply unacceptable to lie to yourself,” Guarino says. “And the truth is that the business should be working for you, the owner, plus providing a place to work and financial income for the employees.”

Ratchet+Wrench spoke with three shop owners who broke down a simple process of figuring out how and what you should be getting paid as an owner.

Don’t Steal from Yourself

Having started his own shop from scratch in 1994, Jeff Van Sant knows how difficult it is to build up a business. Paying rent, paying employees, paying for advertising, parts and equipment—it all adds up. And while owners are looking for a simple solution to cut costs and build profits, they often look at eliminating a line on their shop’s income statements: their salaries.

“They’re just lying to themselves,” says Van Sant, 51, owner of Pella Car Care Inc. in Pella, Iowa. “You’re not saving money; you’re losing money, and you’re lying about what your actual profits are in your business.”

And there are obvious legal ramifications: The Internal Revenue Service requires that you pay yourself a reasonable salary for tax purposes. The requirement is very subjective, and will depend on the scale of the business.

“Would they be fine if I gave myself $500 a week? Sure,” says Guarino. “But if I’m only making $500 a week, what am I doing this for?”

Randy Hutchinson, owner of Golden Auto Clinic Inc. in Golden, Colo., says ownership comes with many risks and liabilities, and you should make sure it’s worth the effort. It can’t just be another job.

“It’s just too hard for it to be like that,” he says. “If you’re not making any money out of your business, then you need to re-evaluate how you’re doing things. You need to start making changes and make sure your cash flow is there. It’s an operations issue, and you shouldn’t be sitting by, letting that happen.”

Simple Math

All owners are entitled to a cut of the company’s profits. But how that works depends largely on what the business is registered as (sole proprietorship, limited liability company (LLC), C or S corporation, etc.).

Either way, that should not be an owner’s main source of income. “It’s more like a bonus,” Guarino says, and it only comes when there is a profit.

Guarino, Van Sant and Hutchinson all agree that there are essentially three parts that make up proper, regular and steady pay for an owner.

An important note: All three should be in addition to any portions of the shop’s profits you receive.

One: Administration Fees. Basically, this is your “salary” as an owner, Guarino says. Whether you are taking another wage for working as a tech, service advisor, or general manager, or simply acting as nothing but the owner, Guarino says you should still be taking in a regular, steady salary within your company’s administrative fees.

Figuring out that number isn’t complicated, says Hutchinson—if your shop has all of its other facets in order.

“Your [profit] margins have to be good, your cash flow needs to be right, your marketing, advertising—everything,” he says. “When you really have a good handle on it, you can determine the percentage that is coming out of the business for you.”

And this is normally based on gross profit.

For Guarino, 8 percent of his gross profit each month goes to his “owner’s salary.”

“I think it’s a solid number [to recommend to other shops],” he says. “It might fluctuate a little depending on your business, but it comes from understanding your numbers.”

Two: Job Salary.

Most owners wear a lot of hats—or some simply take on one or two specific roles in the shop. Van Sant says you need to be paid for those roles.

“I work, essentially, as our general manager,” he says. “So, I pay myself as a general manager.”

If you still work in the back of the shop, you should be getting technician’s wages. The same goes for if you’re at the front counter.

Even if you’re filling in for a stretch—after someone retired, quit or was let go—Guarino says you should be taking in that salary for that period.

“Just as you need to pay your staff for the work they do, you need to be paid for the work you do,” he says.

Three: Rent.

This portion is only for those who own their buildings. Yet, it should serve as ample motivation for those who rent.

Guarino, Hutchinson and Van Sant all own their respective buildings, and hold those as personal property. They also have their shops registered as either corporations or LLCs. This means their businesses must pay rent to themselves.

Guarino has the rent on his 5,700-square-foot building at “the market rate” in his area.

That amounts to well over his personal mortgage payments each month on the property, which in turn is another source of income.

“You’re making personal income in two ways, then,” says Hutchinson. “It’s part of your business, it’s part of your risk and liability as an owner, and it should be providing a return.”

It All Adds Up

Hutchinson felt that he was getting close to turning into one of Guarino’s cautionary tales—a shop owner that worked hard his whole career and wound up with nothing.

That was in 2005, when his shop was bringing in just $375,000 in sales.

“I bought the shop when I was 23 (in 1978), and I had a lot of energy,” he says. “If I was busy, I was happy. As I got older, it wasn’t any fun anymore. I had always counted on selling the shop as my retirement, but I realized my shop wasn’t worth anything.”

That’s when he focused on across-the-board improvements in marketing, training and operations. He also began making sure he was getting a salary based on the system described above.

In 2012, the shop generated $1.3 million in revenue, and he is in the process of opening two other locations. That is, he will soon have three separate shops giving him a regular income.

Both Van Sant and Guarino have grown their businesses recently, as well. And now, instead of focusing on selling the shops as a retirement, all three men know they have a steady income for as long as the business is around.

“I can be here all the time or be gone for a month and know that I’m still getting a check,” Guarino says. “I have people in place to run it, and I know that I will be good moving forward and taking more of a step back.”

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