Understanding Commissions in Your New Small Business
Chris Barrett
Understanding Commissions in Your New Small Business
When you’re buying or starting a small business, there’s a lot to think about! From staffing and systems to customer relationships and finances, many things will need your attention. One area that’s often overlooked but can have a significant impact on your bottom line is commissions. Understanding how small business commissions work is essential to ensure you’re not caught off guard by unexpected expenses or unbalanced compensation structures.
Let us walk you through why commissions matter, how they can affect your profitability post-acquisition, and what steps you should take to manage them effectively in your new business.
Why Commissions Matter in Small Business Acquisitions
Commissions are a form of variable compensation typically paid to salespeople based on the revenue they generate. In small businesses, especially those heavily reliant on relationship-based sales, commissions play a critical role in motivating staff and driving growth.
Unlike fixed salaries, commissions tie employee earnings directly to performance. This can be a major asset for small businesses looking to keep payroll costs flexible while incentivizing results. However, it also means that commission structures must be clearly defined and financially sustainable.
When acquiring an existing business, it’s important to look closely at how commissions have been used and how those structures might need to change after you take over.
One of the most common issues in small business acquisitions is that the current owner is also the primary revenue driver. They’re making a large percentage of the sales but often don’t pay themselves a commission. That might make the business look more profitable on paper than it will be under new ownership.
As a buyer, this is a critical detail. If the current owner walks away and you’re not stepping into that sales role, you’ll need to hire someone to replace those efforts, which means paying commissions that weren’t previously accounted for in the business’s financials.
In Practice: The Million-Dollar Commission Gap
Let’s break it down with an example. Imagine you’re buying a business that generates $5 million in annual revenue. Of that, $1 million comes from sales the owner personally handles. Because they’re the owner, they haven’t been paying themselves any commission on those sales.
Now, once you acquire the business, unless you’re going to continue making those sales yourself, you’ll need to bring in a salesperson. If you offer that person a commission, which is standard, that $1 million in revenue now comes with a new cost attached, possibly tens or even hundreds of thousands of dollars annually, depending on the commission rate. That’s a massive shift in profitability you need to prepare for.
Questions Every Buyer Should Ask Before Closing a Deal
To avoid surprises, here are some critical questions to ask during your due diligence:
- Who currently generates the revenue in the business?
- What percentage of sales is done by the owner?
- Are there formal commission structures in place?
- How are commissions tracked, reported, and paid?
- What will need to change in the compensation plan once the business changes hands?
Getting clarity on these points can protect you from inheriting a model that doesn’t work without the original owner in place.
How to Structure Commissions Post-Acquisition
If you’re planning to bring in a sales team or redistribute sales responsibilities, it’s important to build a clear and effective commission plan. There are different options to model out to see how they might affect the new profit margins, and help your bottom line if you aren’t planning to take on the former owners sales role. A few common structures to try:
Percentage-based commissions: A fixed percentage of each sale, often used in retail or product-based businesses.
Tiered commissions: Higher rates for hitting sales milestones, ideal for encouraging growth.
Flat-rate commissions: A set dollar amount per sale, useful for services or subscriptions.
Your structure should reflect your profit margins, sales goals, and the complexity of your sales cycle. Make sure you model out different commission scenarios to ensure you can maintain profitability while rewarding your team fairly.
Avoiding Commission-Related Pitfalls in Your New Business
Many new business owners fall into the trap of assuming past financials will continue into the future. But when it comes to small business commissions, what worked under the previous owner may not work under your leadership, especially if the seller was carrying the bulk of the sales load.
Here are a few tips to help you avoid common pitfalls:
- Include commission structures in your financial modeling before buying the business
- Ask for detailed compensation records and clarify any undocumented arrangements
- Plan ahead for hiring, training, and paying sales staff post-acquisition
- Build flexibility into your budget to adjust compensation plans if needed
Understanding small business commissions is a critical step in evaluating the real cost of acquiring or launching a company. If the previous owner was doing most of the selling without paying themselves commission, it could create a financial gap once they leave. As the new owner, you’ll either need to take on that sales responsibility yourself or be ready to compensate someone else to do it.
A thoughtful, well-structured commission plan can keep your team motivated and your business profitable. Do your homework, ask the right questions, and don’t underestimate the impact commissions can have on your success.
Disclaimer
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.