Ask Dave On Business With Dave Ramsey

Forming the Right Comp Plan

1. Dear Dave,

I’m a personal trainer. Last year, I bought into a franchise and have done a good job of building it up since then. I’m getting to the point where expansion seems possible, but what’s the best way to do this without getting involved in a partnership?

— Stephen

1. Dear Stephen,

I’m glad you’re shying away from the idea of a partnership. I don’t believe in them, but I love the idea of people participating in a winning situation.

I have lots of people on my team that are paid on a percentage of the net profits in their areas. Under this structure, it’s incumbent on them to keep expenses down and revenues up. And this concept involves generating new ideas, lots of energy, and a real sense of ownership. Technically, they’re not stockholders, but I treat them as if they were and let them have a vote in the process.

If you can hire a manager at $50,000 a year just on straight salary, then take that and divide it into your profits, you can put someone on a small draw or a percentage of the profits. That way, they make $50,000 again if they earn the same as they did previously. If they double the amount, they’ll earn $100,000. Every time you make a profit, you get some and they get some. Run a profit and loss statement every month, close the books by the 15th, and write them a check. This way, you’re putting them in business for themselves mathematically, but not legally.

Think about it. What I’m talking about isn’t a partnership. It’s an employee with a compensation plan that’s based on profits. And that’s a completely different mentality!

— Dave

When in Doubt, Overshare

1. Dear Dave,

I’m going to sell my business, and I’ve lined up a prospective buyer. When should I tell my employees?

— Mark

1. Dear Mark,

If the roles were reversed, and you were in their shoes, when would you want to know? At what point, if you’d worked for someone for five years, would you feel betrayed if you didn’t know about something like this? It may sound simple, but I think that’s a good way to process the situation.

If I make an error with my team, it’s always going to be in the area of over-communication. I expect and trust them to be adults, and they know this ahead of time. Still, I like to remind them once in a while. I’m very transparent about how we’re doing, both as a team and as a company. And the truth is, no small business owner could make it without great people around them. Your guys need to hear that once in a while, too, in addition to knowing you’re always going to shoot straight with them.

In my mind, to be a good and effective leader, you have to be willing to share and discuss things—whether they’re good or bad. I try not to say too much or get into a lot of unnecessary stuff, but if there’s any doubt, I’m going to over-share rather than leave my team confused or create a lot of misunderstandings.

Human beings want to be treated with respect and dignity, not kept in the dark and fed manure. That may be good for mushrooms, but it’s not for people!

— Dave

Straight Commission Search

1. Dear Dave,

I own a small business, and I pay my people on straight commission. We’ve started growing a bit, and I’m having trouble finding good, new reps who want to work under this kind of compensation structure. Does your team work on commission, and if so, how do you do it?

— Gary

1. Dear Gary,

I love commission plans that rely heavily on incentives. I just plain love the idea of commissions. I mean, I’d put my receptionist on straight commission if I could figure out how to make it work.

But honestly, there’s hardly anyone on my team that works straight commission. The majority of my folks work on a small salary plus commission, or some kind of draw, until they get rolling.

Now, I don’t want them fat and sassy and getting something for nothing. That’s not fair to me. But a broke salesperson smells, looks and acts desperate. They tend to promise the sky and deliver something a whole lot closer to earth.

The key is to find a happy medium. So I usually give my guys enough to get by, but if they want anything better they have to go kill something and drag it home. The base keeps the kids fed and the lights on, but if they want a little fun and some pleasure in life, they have to work for it!

— Dave

Paid from Bankrupt Vendor?

1. Dear Dave,

One of my customers in the restaurant business owes me $9,000 for equipment purchases. I just got a notice in the mail that they’re in the process of filing Chapter 11 bankruptcy. There’s no lien on the equipment I sold them, but they gave me three post-dated checks that bounced. Can’t you go to jail for that kind of thing?

— Kurt

1. Dear Kurt,

There is a criminal side to this situation, but don’t threaten or even contact them. They’re now under the protection of federal law, and there’s an injunction preventing you from trying to collect this debt by any means other than the court system.

In a bankruptcy, the court and attorneys get paid first. After that comes payroll for the employees and then preferred creditors. If you can work your way to the front of this line because of all the bounced checks, you’ve got a better chance of getting your money.

If they do make it out of Chapter 11, they will submit a plan to the court laying out how they will pay creditors. This plan can propose that unsecured creditors get pennies on the dollar. If the plan is approved by the court, you could get little or nothing, and they can emerge from bankruptcy and still be in business.

— Dave