Page 251 - merged.pdf

CHAPTER 8 MASTERING YOUR MONEY

For example, you agree with John (the other owner) that you
should be paid a salary of $7,000 a month (this will be based
on the market rate) to be the managing director. In addition,
you will get a bonus of three months salary (i.e. $21,000) if
the company hits the target of $1million in sales and $100,000
in net profits.

The moment the business starts operating, you have to be
paid that salary of $7,000 a month, just like any other
employee. If the company does not have the cash to do so
(and you don’t mind deferring your salary), then you will be
paid your wages (annual income $84,000) at the end of
the year when the cash comes in. Let’s say the company
does make $100,000 in net profits after deducting your salary
as managing director. You will get your bonus of $21,000 as
agreed.

The remaining $79,000 ($100,000- $21,000) will then be
divided equally between you and John as dividends or possibly
reinvested into the business.

b. Borrow the Money (Incurring Debt)
Besides giving up shares for money, your other option would
be to borrow the money. The advantage of this strategy is that
when the business becomes profitable, you get to keep 100%
of the profits and pay a relatively small price for the money
raised (5%+ interest rate for banks). You will retain 100%
ownership of the business.

The disadvantage is that if the business fails, you have to
repay the loan. Although it is the company that owes the
company and not the shareholders, most lenders would
demand a personal guarantee from you or require you to put
up a collateral.

242 SECRETS OF BUILDING MULTI-MILLION DOLLAR BUSINESSES