As an agency owner, maximizing profit is one of your top priorities. However, it’s not just about growing revenue or keeping expenses low—it’s also about how you structure your compensation and ensure your business is truly profitable. One often overlooked but critical aspect of this is paying yourself a market-rate salary.
Many agency owners make the mistake of underpaying themselves to boost their net profit. While this might make the numbers look good on paper, it can backfire when you try to sell the business or bring in a new leadership team. Here’s why paying yourself a legitimate salary, along with focusing on strong net profit, is essential for building a truly profitable and sellable agency.
1. The Importance of Net Profit
Net profit is the bottom-line figure that shows how much money your agency is making after all expenses, taxes, and operating costs have been deducted. This is the most critical number buyers and investors look at when evaluating the value of a business. A high net profit indicates that your agency is healthy, efficient, and generating a strong return on investment.
For agency owners, it’s important to focus on improving net profit without cutting corners. Maximizing profit often involves finding efficiencies, managing costs, and growing revenue streams. But while a high net profit is important, it’s only part of the equation when it comes to building a business that is both profitable and attractive to potential buyers.
2. Pay Yourself a Market-Rate Salary (or Better)
One of the most common mistakes agency owners make is underpaying themselves to inflate the net profit figure. While it might be tempting to take a smaller salary to make the business appear more profitable, this can hurt you in the long run—especially if you’re planning to sell your agency.
Why? Because buyers will want to know how much it will cost to replace you as the CEO or agency owner. If you’re underpaying yourself and showing inflated profits, the buyer will need to factor in the real cost of hiring a replacement to run the business. This adjustment could significantly lower the perceived profitability of your agency and reduce the valuation or sale price.
For example, if your agency shows $500,000 in net profit but you’re only paying yourself $50,000 annually when a CEO in your industry would typically earn $150,000, buyers will see a $100,000 gap in operating costs. This effectively reduces your net profit and makes the business look less profitable than it really is.
Paying yourself a market-rate salary from the start is essential for maintaining the true financial picture of your agency. It allows you to show buyers and investors that your business is running with realistic costs and that replacing you will not negatively impact profitability.
3. Why Underpaying Yourself Can Backfire
While underpaying yourself might seem like a way to retain more money in the business, it can have unintended consequences beyond just affecting your valuation. Underpaying yourself can also put strain on your personal finances and create unnecessary stress as you try to balance your personal and business responsibilities.
Moreover, underpaying yourself can signal to buyers that you aren’t operating the business at arm’s length, which could raise red flags during the due diligence process. Buyers want to see that the business is financially sound and running as a true business entity, with all costs—including CEO compensation—factored in fairly.
Additionally, when you’re not paying yourself a fair salary, you may inadvertently devalue the importance of leadership roles within your agency. If you’re not compensating yourself adequately, you may also underpay other key team members, which can lead to turnover, dissatisfaction, and reduced performance—all of which will affect your profitability in the long run.
4. Balance Great Net Profit with Fair Compensation
Maximizing net profit doesn’t mean you should sacrifice your own salary. The goal is to balance a healthy net profit with fair compensation for yourself and your team. Here’s how you can achieve this:
- Set a realistic market-rate salary: Research industry standards for agency owners or CEOs in your field. Make sure you’re paying yourself at least this amount, if not slightly more, to account for your experience, leadership, and role in the agency’s success.
- Build profit through efficiency, not undercompensation: Rather than underpaying yourself to boost net profit, look for ways to improve efficiency, reduce unnecessary expenses, and increase high-margin services. This will lead to a more sustainable increase in profitability.
- Invest in your team: Fair compensation shouldn’t just apply to you—make sure your leadership team and key employees are paid fairly as well. A strong, well-compensated team is crucial for both day-to-day operations and ensuring a smooth transition when you eventually sell your agency.
5. Position Your Agency for a Profitable Sale
When it comes time to sell your agency, having a strong net profit combined with fair compensation practices will make the business more attractive to potential buyers. Buyers are looking for businesses that are financially healthy, with no hidden costs or surprises when it comes to staffing and salaries.
By paying yourself a legitimate salary, you show buyers that the business is running efficiently with all necessary expenses accounted for. This transparency not only makes the business more appealing but also helps you avoid lengthy negotiations over adjustments to net profit during the sale process.
Conclusion: Build Profit the Right Way
Maximizing profit for your agency isn’t just about boosting the bottom line—it’s about running your business in a way that reflects its true value. By paying yourself a market-rate salary and ensuring your net profit is both strong and sustainable, you’ll position your agency for long-term success and a higher valuation when the time comes to sell.
Don’t make the mistake of inflating your net profit by underpaying yourself. Instead, focus on building a truly profitable business that accounts for all expenses, including your own compensation. This approach will help you grow your agency’s bottom line while also making it a more valuable and sellable asset in the future.