I hired a landscaping contractor to do my yard recently. As is usually the case, the person I talked to before the work started, Bob, didn’t do the work himself. On the agreed-upon date, he sent a team of his crew to do the job. Bob owns the business. He pockets the difference between what I paid him and what he paid his crew.
A father-and-son pair led the crew. When I spoke to the son, he told me he and his dad used to have their own landscaping business. Now they just work for Bob. That got me thinking. Why work for someone else when you can have your own business? I read somewhere every millennial should have a side business. Didn’t the book The Millionaire Next Door say these unglamorous businesses like landscaping are fertile grounds for producing millionaires?
The son told me they are actually better off working for Bob. When they had their own business, they had to go out and bid on jobs. As we homeowners are told, always get at least three bids, that means on average two out of three times they don’t get the job. All the time spent on coordinating the schedules, traveling to and from prospects and preparing the estimates end up wasted.
Now whenever Bob sends them out, there is an actual job. They get onto it right away. They always get paid. If Bob doesn’t have a job for them, they just do something else. They are always productive. They can also sign up with another “Bob” and get more jobs. In a way these Bob’s become their commissioned sales force.
In the previous post The Biggest Rock In Financial Success, I mentioned Apple CEO Tim Cook. Tim Cook wasn’t a founder of Apple. According to Wikipedia, he joined Apple when he was 38 as a senior vice president, a well paid employee, but still an employee. Before that, he worked at IBM for 12 years and other companies for a few more years, again as an employee. Tim Cook didn’t open his own business. He worked for other people’s businesses. He made his fortune from being a good employee.
I too made most of my money as an employee. It’s actually a great arrangement. Whether the business is successful, I still get paid. I retain the knowledge and experience, which makes me more valuable. It’s hard for me to find someone having a problem worth tens of thousands of dollars but when the company’s products affect millions of people, it’s easy for me to make them better off by a fraction of a penny each. The employer provides the employees a playground, problems large enough worth solving, and opportunities to apply their skills at scale.
It’s not bad working for someone else. It’s not a grind, a rat race, or slavery. As the father-and-son who worked on my landscaping project showed, you can be financially better off working for someone else than having your own business. Don’t believe it when someone says having your own business is the holy grail.
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Biglaw Investor says
In your example of the father and son team, it’s the team doing the actual work of cutting the grass and it seems like you’re presuming the team pockets 90% of the profits (with the small difference going to “Bob” as his effective “sales commission” for organizing the jobs). If that were the case with all jobs, I’d definitely agree with you. No need to go through the headaches of owning a business to only get the commissions associated with it.
The reality is that the spoils often go disproportionately to the business owner. Using an example from my field, a lawyer at a big fancy NYC firm might make $300K a year but could easily generate $1.3M in revenue for the firm. That means $1M is left over at the end of the year to cover overhead (which is definitely not cheap) and to line the pockets of the business owners.
In the second example, the “commissions” received from owning the business are quite significant and perhaps it changes someone’s calculus of whether they’d like to be the business owner or the employee.
Harry Sit says
No I don’t assume people doing the work would get 90%. I assume at least 2/3 goes to the business owner. In the case of Tim Cook, the ratio between the value he added to the business and what he earned is probably worse than the NYC lawyer. He still did very well.
Stephen L Nelson CPA says
As a CPA who serves small businesses, I am a huge, huge booster of small business ownership. But I think some people just really don’t have the skills or the discipline or maybe just the inclination to do the stuff a business owner needs to do.
In today’s digital economy, for example, I think you need to know how to do web marketing. That’s a pretty specialized skill (at least to do economically). Maybe not something everybody wants to learn.
Federal and state laws continue to complicate… and that becomes another burden which is often unbearable for micro-businesses.
And then there’s all the “old” stuff you still need to know how to do well: accounting, management of people and so on.
If someone wants to do this stuff, good for them. But I think it’s okay to let someone else carry that ball, too.
Good article Harry. One thing probably bears pointing out. It seems like your good fortune has come from a stable job with a high salary. Not all employees have it so well.
Does a janitor have problems worth solving? Yes, primarily figuring out how to not clean toilets every day. One possibility is to start a janitorial business and pay someone else to clean the toilets while keeping 2/3 of the revenue.
Employment and business ownership both have pros and cons. Neither is a holy grail.
If the new business the janitor started only wins one bid out of every three bids put in, doesn’t he end up in the same place as when he was an employee except he had to do all the work that went into getting business?
While neither employment and business ownership are holy grails readers of finance and early retirement forums are told that business ownership is the path to riches way more often than being a regular employee.
Sam S says
If it’s true that “readers of finance and early retirement forums are told that business ownership is the path to riches way more often than being a regular employee.”, I wonder why is that so?
It’s because it’s true…almost everybody who is fabulously wealthy either started their own business or inherited their fortune which was built upon a business.
There’s rarely mention of how difficult it is to achieve this. In TFB’s assumption of the average business winning one out of three bids, there will be few businesses that win two or three out of three and go on to be wildly successful and many, many more that win zero out of three and the owner loses his shirt.
This kind of stuff is also more interesting to read about. Everybody likes to read the feel good story of a small business growing or how an 18-year-old created an app that was bought out for millions.
Many comfortable retirements were created by employees focused on doing well at their jobs and getting paid for it, keeping expenses low, and investing over a long period of time…but this is boring to read about in the news.
It’s better to be a business owner than an employee. You have more freedom. That is important to me. Money is not everything. You can probably spend more time with your family.
Sam S says
“I read somewhere every millennial should have a side business.”
Yes, it seems millennials are encouraged to do so.
Why is that?
Stephen L Nelson CPA says
Just re-reading one of Thomas Stanley’s books, “Stop Acting Rich…”
Literally just read the chapter where he quotes this from his first book, “Marketing to the Affluent,”
Proprietors of small businesses (such as Carlton), the segment I estimate to contain the largest number of American millionaires, are ranked fifth or third from the bottom on a seven-point scale of status characteristics. On the other hand, one can be very upper middle class and have a level of net worth nowhere near seven figures…. It is my belief that the number of households in America that are interested in looking wealthy is far greater than the number that are interested in being wealthy.2
Stanley, Thomas J.. Stop Acting Rich: …And Start Living Like A Real Millionaire (p. 122). Wiley. Kindle Edition.
I think this answers the questions from Sam S
It depends on the business and the individual.A small business owner does not profit 2/3rds from the labor of their employees.The owner has a lot of expenses that the employee does not.
Owning a small business normally requires a lot of hours as well,depending on the business and how much one delegates.Every situation is different and it is foolish to act like one business is comparable to another.
I read this a week ago and have been thinking about it since. When I re-read it, I now see why this is a tough business. It is a series of one-off contracts. That seems tough for sure. Lots of overhead.
One thing that Biglaw Investor will likely concede is that the lawyers with the biggest “book” of business turn into partners. That book is usually repeat business. That is a whole different ball game.
So if the landscape contractor instead did some repeat business, like cutting lawns, then the 33% rate is not as much of an issue. One in 3 bids might turn into a weekly job. Then the ratio of bids to work goes way up.
My main business is more like smalllaw. I’ve seen many compensation schemes. Most lawfirms have a 3 way split of revenue. 1/3 goes to the person doing the work, 1/3 goes to overhead, and 1/3 is profit. Some places are more generous an pay 40-50% to the person doing the work, with less profit . Some have a lower overhead. My place tens to have super low overhead, and high pay outs.
With all that said, I don’t know why, but I know it happens – the owners (like me) get stuck doing anything that slips through the cracks. Some thing are decided – like taking on more accounting tasks to keep the overhead down. Some things just happen though – like pulling a weed in the parking lot, or picking up a cigarette butt by the door on the way in.
In the past my theory was this was some sort of passive aggression. My modern theory is that the employees just don’t see these things – they are unaware. The small example here can be extended though the spectrum of work performed. My old theory was everyone could be an owner if they had a chance. My modern theory is that some people are just not meant to be owners because they just don’t see what it takes to get it done. I’m not sure if everyone gets to decide, some things just happen. Doors are there to be opened.
“My modern theory is that the employees just don’t see these things – they are unaware”
“My modern theory is that some people are just not meant to be owners because they just don’t see what it takes to get it done. ”
Certainly there is some of that, but also because these people aren’t as invested in the company as you because they don’t own it, much like renters may not treat their houses with the same reverence as owners.
I’m glad I didn’t know about this website until today. Otherwise, I would’ve read this article. I wouldn’t have started my business and invested in real estate. I’d still be working in 9-5 job earning a lot less than I earn now and afraid of losing my job.
Harry Sit says
Have you heard of survivorship bias? A successful business owner or real estate investor by definition should’ve started their business or invested in real estate. The unsuccessful ones are no longer called a business owner or real estate investor.
I didn’t know I’d become a successful business owner and real estate investor. It took a lot of hard work. If I had read your article, I wouldn’t have started because, obviously, you know what you’re talking about. Regarding survivorship bias, how does it not apply to employees like Tim Cook?
BTW, you didn’t mention that long-term full-time secure jobs, thanks to technology, are going away. Skills acquired over many years of employment are becoming obsolete very quickly. More and more people have to work on contract basis w/o 401k and insurance. And technology advances daily. Also, you didn’t mention that US tax laws favor small business owners rather than employees.
“Whether the business is successful, I still get paid”. No. If the business is not successful, employees get laid off before the business is closed. Sometimes, long before. Owners will try very hard to stay in business. They may be able to sell it when costs are reduced while employees look for jobs.
Of course, business ownership is not for everyone. Thorough analysis has to be done before going in. A person would be a good entrepreneur but a particular situation may not be advantageous to start. Someone may not have a clue how to run a business but may have an enormous opportunity that will allow room for errors.
Overall, it’s such a pleasure to be a business owner than an employee even if a business doesn’t generate huge profit.