Back in early 2015, after having been laid-off for three months, I had the chance to buy my own company, replace my old salary and be my own boss. I could have been master of my own destiny, taken the bull by the horns, freed myself from the corporate shackles, and escaped the soul-crushing pressure cooker that is corporate America. What did I do?
Centuries ago, Confucius observed, “I hear and I forget. I see and I remember. I do and I understand.” I had a plan for what I was going to do if and when I was ever laid off, and that plan including striking out on my own. I learned a lot about life and about myself during those months that I was laid off and I can testify that Confucius was right – sometimes you have to do something to fully understand it. But, what does that really mean?
Until you actually live through a situation, you can’t really understand how you’ll react to it. You might think you have a plan, but when the big moments in life actually happen, you don’t know how you will react and how you will feel until you live it. Here’s what happened.
Our group had been going through a reorganization for several months, and no one knew exactly what was going to happen or when. Luckily for me, when my boss realized the specifics of what was going to happen to our group, she gave me an early heads up that my job was likely going to be eliminated in a few weeks. I started working the plan.
If you’ve been reading my series on how to buy a small business, then you can probably guess what I was up to during those first few months after getting laid off. After licking my wounds and buying my Martin guitar, I immediately got to work looking for a small business to buy that could replace my income. Since I had several months of severance payments coming, I did have some time to play with.
In addition to learning a ton about what is involved in finding and buying a small business during that time, I also learned one very important thing. My job at a global mega-corp was giving me a lot more compensation than I ever realized.
It didn’t dawn on me until mid-March 2015. I had already provided a letter of intent to the seller of the small business that I was getting ready to buy. I had finished the preliminary due diligence and was getting ready to hire an accountant to start our confirmatory due diligence. At that point I had no corporate job prospects.
Then, out of the blue, I got a call from my old employer that the position they were working on getting approved finally became available and, they were wondering, would I like to come in for an interview? CRAP!
It’s great to have options, right? In theory, yes, but unfortunately it forces you to make difficult decisions which maybe you would rather not make. If I didn’t have the option to go back to the global mega-corp, then my decision was easy – buy the business, be your own man, get on with your life – after all, you need the income, right? But if I could go back to the global mega-corp, then things get complicated. I had to make a decision and it had to be the right one, as my family’s entire financial future depended on it.
I decided to take a rational approach and lay out the financial aspects of either heading back to the global mega-corp or striking out on my own. Here’s what I learned.
Total Corporate Compensation
If you’re working for a big corporation, you are probably being fairly compensated. They likely benchmark your role with other employers and most will make a good faith effort to make sure that they are competitive with the market for your particular position. So, from a salary perspective, I knew that I was doing fine. But what about all of the non-salary compensation?
In addition to my base compensation, I would also get an annual bonus. They would also add to my 401k with company matching annually and the value of my pension would go up each year as well. I’d receive four weeks of paid vacation in addition to 12 paid holidays each year.
As an employer, they’d also pay half of my Social Security obligation and I would also accrue a small benefit towards retiree medical insurance that I could use later. What about the percentage they would pay towards my current medical insurance and the money they’d kick into my Health Savings Account? Huge!
In order to make a decision, I decided to add it all up to see what I would be walking away from. When I finished the exercise, I was shocked at how much total compensation I would be receiving.
Here’s the breakdown as a percentage of my base pay:
- Base pay: 100%
- Annual bonus: 17.5%
- Pension: 15%
- Health insurance, dental insurance & HSA contribution: 12%
- Paid vacation & holidays: 32 days – 12%
- Social Security: 6%
- 401k matching: 4.5%
- Total Compensation: 167% of base pay
Wow! So, when I was comparing the relative security of a corporate paycheck compared to going out on my own, I would need to make 167% of my base pay to just break even. That does not even compensate me for the increased risk and volatility of the entrepreneurial lifestyle.
To be fair, it’s not all about the money, right? If I bought a small business to run, it would be a great challenge (in a good way), I would learn a ton, and it would likely be tremendously satisfying.
On the other hand, it could all go south as well for reasons outside of my control. In the worst case scenario, it could end in filing for personal bankruptcy. But, I wasn’t worried about that, I’m an optimist and as my wife always tell me, I have a strangely high level of confidence in my own abilities! Ha, ha.
The difficulty came in weighing the guaranteed financial return of the corporate job compared to the unknown of buying a new business.
Ultimately, you know where I netted out on the decision. I went back to a job at the global mega-corp. I know what you are thinking, “What the heck is wrong with that guy? I would kill to have the chance to be my own boss!” I get it, I really do.
As the primary bread winner for the family and two kids getting ready to go to college in the next few years, I went back to corporate America. Was it the right decision? I think it was for us at that time. If the business I was looking to acquire was bigger, then perhaps there would have been a different outcome.
The question is, how much bigger would it have needed to be to compensate for the risk? And the bigger question is this, would I have pulled the trigger even then?
As I mentioned earlier, “I hear and I forget. I see and I remember. I do and I understand.” It’s hard to know what you will do in a particular situation when the stakes are high and you have lots of people depending on you and your judgement.
You won’t really know what you’ll do until you are living it. Having been there and done that, I have a newfound appreciation for my corporate gig and if I’m ever in that situation again, I’m curious myself to see what I would do.
How much of a pay cut would you take to be your own boss? How much income volatility would you be willing to accept to strike out on your own?