Employee vs Business Owner Income Comparison Please enable JavaScript in your browser to complete this form.Please enable JavaScript in your browser to complete this form. – Step 1 of 2Name *FirstLastEmail *Salaried Employee Let’s start by finding out what that job you’re trying to escape is really worth principal your Insurance Nominal or Pre-Tax Salary *How much they say they are paying you per year, before deductions for benefits, taxes, etc. W-2 Breakdown General benefits cost to you *How much the company charges you for non-retirement benefits per year (monthly withholdings other than taxes x 12) (whole dollars). If you don’t know and don’t have a paystub handy, use 10% of your gross pay.Retirement Plan Contribution Rate *Your 401-K or other retirement plan contributions percentage of your GROSS income (enter as a number 0-15)Corporate share of benefits cost *What percentage of the benefits does the company say it is paying for you? Enter as a number 1-100, with no percentage sign, e.g., if they pay half (50%), enter 50Retirement Plan Cost to YouTotal value of your benefitsCalculated – do not enter. This is the total amount the benefits cost, between you and your employer.Retirement Plan Employer Contribution *What percentage of your salary does the employer put into your retirement plan? Enter as a number 0-15.Net pre-tax incomeEffective tax rate *Enter the percentage of gross income that you really pay (the tax on your return vs the TOTAL income, without taking deductions etc.). So if you make $100,000 on your W-2 and you paid $20,000 in taxes, then your effective rate is 20% (enter 20).TaxTotal taxes paid (Calculated)After-tax pay – annualNet take-home monthlyNominal Salary MultiplierThe difference between the stated “salary” and the actual take-home pay, as percentage multiplierNextIncome and Expenses and a Business Owner Enter the amount of profit (in dollars) you think a business should generate for you (e.g. from sellers’ claims in online advertising for that kind of business) or what you think is an industry average profit. The tool will calculate the rest for you! Business Net Profit AKA SDE Sellers Discretionary Earnings *Your Income Until the Business Loan is Paid Off This might get scary. Remember that you are buying a businesss machine that will throw off the SDE amount plus hatever you can build it to, and after a few years you will own it free and clear. That number is in the next section. But for now, you need to make sure you can get through the next few years while the loan is being paid off. Cost to Buy the BusinessAssumes a typical SDE multiple of 2.5Loan PrincipalAssumes 80% financing (10 percent from you, 10 percent from the seller)Cash Down Payment From YouTotal Loan Payment – AnnualAssumes a 7 year loan at 7%, amortized to a fixed monthly paymentDebt to Earnings RatioLoan payment – principalLoan – interestHealth Care and Other InsuranceRetirement PlanPre-Tax Personal Earnings – annualSDE less health care, life insurance, and interest on loanEffective Tax Rate – Self-EmployedAfter-tax earnings – not your take-home yetStill need to remove debt service payment (principal portion)Take-Home Pay – AnnualRemoves the debt principal paymentTake-Home Pay – MonthlySalary Equivalent While Paying LoanLoaded back up with tax and benefits. This is how much you would be “paid” as an employee to end up with that take-home number.Salary NowSalary Equivalent While Loan Is In ForceIn many cases, that’s a lot less than you expected (or your family demands) Yep, as long as the loan is in place, that can happen. Still, it probably wasn’t what you expected. Your choices are to: (a) Suck it up. You are investing in your future. Remember that you are going to own this money machine free and clear in a few years (b) Negotiate for a lower price that you can afford. That depends on whether the business was priced fairly for the market. (c) Negotiate more creative payment terms. (d) Look for less expensive businesses (e) Keep your job and save up more money until you have enough to buy the kind of business you want. Net income to you AFTER the loan is paid off This will be a lot happier story and should be what you are aiming at. Net Earnings Before Taxes – No LoanBusiness net income less insurance and retirement (but no debt service)Net Earnings After Tax – No LoanMonthly Take-Home – No LoanEmployee Salary NowSalary Equivalent of Owner EarningsEquivalent Annual RaisesThe percentage raise every year you would have to get in your current job for the next 7 years to get to the salary equivalent to owning this business. Does that seem at all probable? If so, you could keep that job, avoid the lean years while you are paying off that business loan, and save up more capital.Hopefully, that is more like it! If you bought a business with solid profits, those profits (as a minimum) should be there for you when the loan is paid off. You will be on your way to achieving the American dream (if you run it right). What if a solid, profitable business still doesn’t meet your current or desired income (i.e. lifestyle)? Simple. You can: a. Buy a different business that will throw off enough profit to cover your living expenses. It will be more expensive, of course. To see how much profit that business would have to earn requires calaculations beyond the capabilities of this online tool. Go to the Resources page and download the Excel version. b. Get more realistic about your “needs” c. Keep your job that is meeting those needs now Send results to email
