Being the CEO of a small business has its advantages: flexible hours and pride of ownership, to name a few. But how does the actual monetary compensation compare with other more traditional MBA career paths?
Everyone's experience will be different, but many graduating MBA students can expect a traditional career path which climbs the ladder to senior membership of a consulting, investment banking, or private equity firm. Beginning with the average starting salary for this type of position, and assuming a 12% compound annual growth rate, the compensation for these traditional MBA careers nearly triples over the first ten years.
Compare that to MBAs who take the alternate path of entrepreneurship through acquisition. If these new CEOs also begin with the average MBA starting salary, and its growth is tied to company performance, then a typical slow-growing small business would put this at about a 5% increase per year - far below the traditional career path. But there's more to CEO compensation than just salary. The purchase of a small business also leaves the entrepreneur with significant ownership interest in the company.
For example, say an MBA acquires a business with an annual cash flow of 1.5 million dollars, and she owns 20% carried interest in that company. Even accounting for her debt and interest on the purchase, and assuming the company does not grow at all, her implicit annual cash flow from the carried interest would be around $270,000. Add that to the average salary expectations, and the acquisition career path starts to look a lot more appealing.
But this is not a very realistic timeline. In truth, the bank and investors get paid off before the CEO gets any cash for the carried interest. But once that money starts flowing, the initial salary flatline is more than made up for - and even more so upon exit. While this is all very theoretical, graduating MBA students should consider the two paths carefully. The perks and payoffs of small business ownership could be well worth the risks, for those who are willing to wait.