5 ms·

Which MBAs Make More: Consultants or Small-Business Owners?

103 points by randomname2 10y ago

deleted 10y ago
[deleted]
chatmasta 10y ago
It's nice to see this analysis actually consider growth and expected value of money rather than simply comparing raw averages. However, it neglects to consider the ceiling of income. For a "typical post MBA job," sure income might increase for a few years, and even triple as the article says. But eventually, there is a ceiling. In finance for example, the funnel gets progressively narrower toward the top. At first 50% of associates might be promoted to VP, then 25% of VPs might be promoted to MD. But there are very few C level positions, so only the top few MDs will ever be promoted further. Most MDs will eventually reach max compensation, then wait around for 10 years in the hopes of being promoted to C level. If that never happens, maybe they eventually grow impatient and leave to start their own firm. But at that point they're in the same position as the "small business owner," but ten years behind and with a limited skillset. Whereas for those who start a business after MBA, income might start slowly, but there is no ceiling. The business could turn into cloudflare (in the case of Matthew Prince, to use an HBS example) with a massive valuation that clearly beats any income earned by his wage slave peers. Or, the business might fail, in which case the MBA can either start another business, or jump into the same corporate ladder he originally avoided. Also, this article assumes that a "small business" takes investment. In this case, there is very little risk to the personal salary of the MBA, since he will have investor money to pay himself a salary close to market value of his peers, but with much higher upside. I've never understood the appeal of jumping immediately onto the corporate ladder when you're young, limiting your upside and constraining your options. It seems much more sensible to take the risk of your own business, with a much higher upside, and a downside that allows you to either start another one or join the corporate ladder anyway. If you're good enough to raise investment, there really is very little personal risk.
- simonswords82 10y ago
  You've described my thinking exactly - the only difference is that when I started my software development business (http://www.atlascode.com http://www.atlascode.com) in my early 20s I didn't have an MBA. All of my college friends jumped on to their respective corporate ladders straight out of college. They out earned me from day one. In fact, the first two to three years of being in business got me in to about £30k of debt which was used to fund the startup. In hindsight this was a small price to pay for the lessons I was taught. At the time it took a huge amount of mental strength to stay the course - my friends all seemed to have more money, more time and infinitely less stressful lives. Ten years later the business is in very good shape. I'm definitely amongst the top earners compared to my peers but that's not as important as the flexibility owning the business offers me. Amongst other things I get to: * Call the strategic shots - hire people I want to work with, work with the management team to define our company strategy and vision * Launch new software products and pitch new custom software clients - both things I enjoy and I'm good at. There's nothing more satisfying than getting a new software product to profitability or landing a new £500k software development contract * Work in the office or from home as I see fit. In fact, there have been times when I've worked from another country altogether for weeks at a time because I can I wouldn't give up my business to go work as a consultant for another company for anything at this stage. Having said that, if things went south and I was left without any other option but to take a job I would hope that my decade of experience would be of huge value.
  - gr33nman 10y ago
    I'm curious: do you extend the work from home option to your employees?
    - simonswords82 10y ago
      Yes. One guy works full time from at home because he prefers it and the project is setup in a way that we can accommodate him working at home. Other people tend to work from home on a case by case basis. So if they need to be at home for any reason they can dial in - we're not precious about people being in the office all the time. Having said that, the team largely prefer to be in the office, especially as they all live locally. If anybody else requested to work from home full time I suspect we'd create a company policy which was overarching rather than working on a person by person basis. Interestingly one of our strategic issues at the moment is finding enough office space to home all the new hires we've taken on recently. So allowing/requesting that more staff work from home might be a solution to that problem.
r2dnb 10y ago
I personally don't find the analysis relevant. The assumption is that after taking on massive debt to finance their MBA, the graduates have a few spare hundreds of thousands of dollars to acquire a business (the article is not about starting a business from scratch). I really doubt than anyone having the dollars to do that need this article, however it will mislead the rest. It is also worth noting that all the figures relating to the acquired business are purely hypothetical and not data driven. Moreover businesses having this level of predictability are usually not the most affordable. The thing is MBAs do not train people to be entrepreneurs, it trains prople to administrate a business already having positive cashflow and having access to some sort of leverage (debt, significant cash, etc...). Unless you are already in business and feel you need a MBA to complete your skillset and move from a 200 people company to a 2000 people one, a MBA should be done to work for / with a big firm. The only dichotomy is whether you buy this firm or not. The fact is rven in the case where you already own a company, it is still about managing a big firm. I'm not sure that trying to do otherwise is the smartest use of one's money. The article is not phony, but my reproach is that the discussion is of limited practical use. It's like asking : which former basketball players make more: sport consultants, or small clubs owners ? Then you click and find out that 1) what they call consultants are TV consultants paid by big firms, 2) the so called small clubs need to be based in Dubai. 3) it only applies to NBA players in the first place, exactly those who need free-internet advice the less.
- mshron 10y ago
  I don't think you're disagreeing with what the authors are saying. They are not suggesting that the money comes from the recent MBA grad. They're suggesting a typical private equity approach where new company debt and outside money are used to buy out the current owners. Then cash flow repays debt, investors, then finally the person who put the deal together who will earn 20% of profits going forward. This type of management (as you said, running an existing company instead of starting one from scratch) seems exactly like what an MBA prepares someone for, much more than it prepares them to launch new ventures.
  - deleted 10y ago
    [deleted]
whack 10y ago
This is a genuinely fascinating concept, one that I've never considered before. I've always fantasized about running my own business, but thought the only way to do that is to start a company of my own. The idea of "Entreprenruship through Acquisition" sounds like a very practical way for someone to marry the Entrepreneurship concept with a practical, middle-class lifestyle. Are there any recommended guides/books/MOOCs that one can go through, in order to learn more about this?
- charlesdm 10y ago
  Read up on private equity and leveraged buyouts. Small businesses usually aren't massively expensive to acquire. It's something I've been looking at as well. Most countries also have cheap debt available for entrepreneurs interested in acquiring businesses (i.e. some government agency will give you match funding, or something similar).
imcqueen 10y ago
I've discussed this topic with people in the past and I've heard one option is to find a family owned business that does not have a clear successor. In that scenario you can sometimes find a healthy, well-run business that is owned by people who need an exit strategy and are open to selling so they can retire.
neil_s 10y ago
Anyone know what kinds of small businesses this article, and the previous ones they've linked to, are referring to? I imagine running a donut shop is a very different beast from running a bespoke software development house or a plumbing parts company. Are they referring to all 3 kinds?
- analog31 10y ago
  The wikipedia article on search funds says they are typically service or light manufacturing outside of high tech.
lquist 10y ago
A few notes on this article: * It seems a bit crazy to me to have a newly minted MBA jump into a CEO role. Of course, this is not unprecedented with the search fund model (https://en.wikipedia.org/wiki/Search_fund https://en.wikipedia.org/wiki/Search_fund) but those are MBA grads from top 5 schools (and mostly just Stanford MBA grads)--very different from your average MBA grad * The top 5 MBA grad can expect to make on the order of $20-50M over the span of a career with a Mck/Bain/BCG role. Yes there is a limited number of people who make it to the top, but tbh that is much more due to people wanting to leave for other career paths than it is a weeding out.
- refurb 10y ago
  Keep in mind that there is a distribution in the quality/experience of MBA students even in the top 5 schools. A large percentage of them went to very good undergrad schools, got reasonably prestigious (at least from the outside) jobs after graduating, then decided to go for their MBA in their mid-20s. It makes for an impressive resume, but one still wouldn't put them in a CEO role right out of their MBA. An even smaller group are the students who did truly impressive things pre-MBA. People who joined a PE firm out of undergrad and were very quickly on the partner track. Or people who started a successful company pre-MBA and didn't really need to go back to school, but wanted to. There are usually a handful of these folks in every class. These are the ones where it makes sense they got a C-level role at a company right out of their MBA. Again, it wasn't the MBA that got them the role, but rather what they did before they got in.
mbesto 10y ago
This exercise is poor because it's totally unrealistic. I work with a lot of investors who buy "a $1.5 million EBITDA company for 4x paying $6 million and using 50% debt financing". But they are organizers/firms that split carry among the firm. AFAIK, if you're not working for a PE fund, this type of investment structure is only possible if you execute what's called a Search Fund[0]. I personally know a Kellogg MBA who did this, but it was after 2 years of working at a PE firm. The verdict is still out whether he'll make any meaningful return from it. The other person I know who attempted it (from Stanford) gave up after a year because it was too hard to get investment. In other words, the assumptions that any MBA (typically a 26 year old with 2-3 years of real work experience) even has access to this are fairly unfounded and not typical. What is more feasible, is that MBA grads go to PE funds and are part of a deal team. Even then, those opportunities are scarce and require you to spend another ~6-7 years getting to Principal to earn any meaningful amount of compensation ($500k+ year). [0] - https://en.wikipedia.org/wiki/Search_fund https://en.wikipedia.org/wiki/Search_fund
- charlesdm 10y ago
  Well, this has nothing to do with having an MBA. Understanding most of these concepts isn't really hard. You just need access to the capital, which has a set of challenges in itself. Any entrepreneur who might or might not have an MBA can do this if (s)he has access to the capital. The hard part is making sure you can keep the business running so you can service the debt. The company that Kellogg guy acquired, which sector was it in?
  - mbesto 10y ago
    > The hard part is making sure you can keep the business running so you can service the debt. Which, quite frankly, many MBA students in their mid 20's are unqualified to do. > The company that Kellogg guy acquired, which sector was it in? Daycare services.
- nostrademons 10y ago
  Search funds aren't all that uncommon among top-tier MBA students and graduates. There are a couple going on among my wife's MBA classmates. As a tech entrepreneur, I'm a little skeptical about whether their search will prove fruitful, but they don't seem to have huge problems raising capital. Also, don't forget part-time and executive MBA programs. Students in these tend to skew older (early 30s for part-time programs, mid-40s for executive ones), with 10/20 years of work experience in a relevant industry and deep networks that often include access to capital.
deleted 10y ago
[deleted]
fovc 10y ago
A major difference in lifestyle (and I guess also financial implications) not mentioned here or the companion article [1] is that many search funds end up buying companies in less-than-happening locations, whereas MBB have offices in major cities. So for a search fund you have to either be willing to go live in the rust belt for 5+ years or accept that your chances if finding a business in/near a big city are lower. [1] https://hbr.org/2016/03/why-more-mbas-should-buy-small-businesses https://hbr.org/2016/03/why-more-mbas-should-buy-small-busin...
PaulHoule 10y ago
It's one of those many developments that make one reconsider the question of "Why does the firm exist?" http://www.economist.com/node/17730360 http://www.economist.com/node/17730360

103 points by randomname2 10y ago

deleted 10y ago

[deleted]

It's nice to see this analysis actually consider growth and expected value of money rather than simply comparing raw averages. However, it neglects to consider the ceiling of income. For a "typical post MBA job," sure income might increase for a few years, and even triple as the article says. But eventually, there is a ceiling. In finance for example, the funnel gets progressively narrower toward the top. At first 50% of associates might be promoted to VP, then 25% of VPs might be promoted to MD. But there are very few C level positions, so only the top few MDs will ever be promoted further. Most MDs will eventually reach max compensation, then wait around for 10 years in the hopes of being promoted to C level. If that never happens, maybe they eventually grow impatient and leave to start their own firm. But at that point they're in the same position as the "small business owner," but ten years behind and with a limited skillset. Whereas for those who start a business after MBA, income might start slowly, but there is no ceiling. The business could turn into cloudflare (in the case of Matthew Prince, to use an HBS example) with a massive valuation that clearly beats any income earned by his wage slave peers. Or, the business might fail, in which case the MBA can either start another business, or jump into the same corporate ladder he originally avoided. Also, this article assumes that a "small business" takes investment. In this case, there is very little risk to the personal salary of the MBA, since he will have investor money to pay himself a salary close to market value of his peers, but with much higher upside. I've never understood the appeal of jumping immediately onto the corporate ladder when you're young, limiting your upside and constraining your options. It seems much more sensible to take the risk of your own business, with a much higher upside, and a downside that allows you to either start another one or join the corporate ladder anyway. If you're good enough to raise investment, there really is very little personal risk.

simonswords82 10y ago
You've described my thinking exactly - the only difference is that when I started my software development business (http://www.atlascode.com http://www.atlascode.com) in my early 20s I didn't have an MBA. All of my college friends jumped on to their respective corporate ladders straight out of college. They out earned me from day one. In fact, the first two to three years of being in business got me in to about £30k of debt which was used to fund the startup. In hindsight this was a small price to pay for the lessons I was taught. At the time it took a huge amount of mental strength to stay the course - my friends all seemed to have more money, more time and infinitely less stressful lives. Ten years later the business is in very good shape. I'm definitely amongst the top earners compared to my peers but that's not as important as the flexibility owning the business offers me. Amongst other things I get to: * Call the strategic shots - hire people I want to work with, work with the management team to define our company strategy and vision * Launch new software products and pitch new custom software clients - both things I enjoy and I'm good at. There's nothing more satisfying than getting a new software product to profitability or landing a new £500k software development contract * Work in the office or from home as I see fit. In fact, there have been times when I've worked from another country altogether for weeks at a time because I can I wouldn't give up my business to go work as a consultant for another company for anything at this stage. Having said that, if things went south and I was left without any other option but to take a job I would hope that my decade of experience would be of huge value.
- gr33nman 10y ago
  I'm curious: do you extend the work from home option to your employees?
  - simonswords82 10y ago
    Yes. One guy works full time from at home because he prefers it and the project is setup in a way that we can accommodate him working at home. Other people tend to work from home on a case by case basis. So if they need to be at home for any reason they can dial in - we're not precious about people being in the office all the time. Having said that, the team largely prefer to be in the office, especially as they all live locally. If anybody else requested to work from home full time I suspect we'd create a company policy which was overarching rather than working on a person by person basis. Interestingly one of our strategic issues at the moment is finding enough office space to home all the new hires we've taken on recently. So allowing/requesting that more staff work from home might be a solution to that problem.

r2dnb 10y ago

I personally don't find the analysis relevant. The assumption is that after taking on massive debt to finance their MBA, the graduates have a few spare hundreds of thousands of dollars to acquire a business (the article is not about starting a business from scratch). I really doubt than anyone having the dollars to do that need this article, however it will mislead the rest. It is also worth noting that all the figures relating to the acquired business are purely hypothetical and not data driven. Moreover businesses having this level of predictability are usually not the most affordable. The thing is MBAs do not train people to be entrepreneurs, it trains prople to administrate a business already having positive cashflow and having access to some sort of leverage (debt, significant cash, etc...). Unless you are already in business and feel you need a MBA to complete your skillset and move from a 200 people company to a 2000 people one, a MBA should be done to work for / with a big firm. The only dichotomy is whether you buy this firm or not. The fact is rven in the case where you already own a company, it is still about managing a big firm. I'm not sure that trying to do otherwise is the smartest use of one's money. The article is not phony, but my reproach is that the discussion is of limited practical use. It's like asking : which former basketball players make more: sport consultants, or small clubs owners ? Then you click and find out that 1) what they call consultants are TV consultants paid by big firms, 2) the so called small clubs need to be based in Dubai. 3) it only applies to NBA players in the first place, exactly those who need free-internet advice the less.

mshron 10y ago
I don't think you're disagreeing with what the authors are saying. They are not suggesting that the money comes from the recent MBA grad. They're suggesting a typical private equity approach where new company debt and outside money are used to buy out the current owners. Then cash flow repays debt, investors, then finally the person who put the deal together who will earn 20% of profits going forward. This type of management (as you said, running an existing company instead of starting one from scratch) seems exactly like what an MBA prepares someone for, much more than it prepares them to launch new ventures.
- deleted 10y ago
  [deleted]

whack 10y ago

This is a genuinely fascinating concept, one that I've never considered before. I've always fantasized about running my own business, but thought the only way to do that is to start a company of my own. The idea of "Entreprenruship through Acquisition" sounds like a very practical way for someone to marry the Entrepreneurship concept with a practical, middle-class lifestyle. Are there any recommended guides/books/MOOCs that one can go through, in order to learn more about this?

charlesdm 10y ago
Read up on private equity and leveraged buyouts. Small businesses usually aren't massively expensive to acquire. It's something I've been looking at as well. Most countries also have cheap debt available for entrepreneurs interested in acquiring businesses (i.e. some government agency will give you match funding, or something similar).

imcqueen 10y ago

I've discussed this topic with people in the past and I've heard one option is to find a family owned business that does not have a clear successor. In that scenario you can sometimes find a healthy, well-run business that is owned by people who need an exit strategy and are open to selling so they can retire.

neil_s 10y ago

Anyone know what kinds of small businesses this article, and the previous ones they've linked to, are referring to? I imagine running a donut shop is a very different beast from running a bespoke software development house or a plumbing parts company. Are they referring to all 3 kinds?

analog31 10y ago
The wikipedia article on search funds says they are typically service or light manufacturing outside of high tech.

lquist 10y ago

A few notes on this article: * It seems a bit crazy to me to have a newly minted MBA jump into a CEO role. Of course, this is not unprecedented with the search fund model (https://en.wikipedia.org/wiki/Search_fund https://en.wikipedia.org/wiki/Search_fund) but those are MBA grads from top 5 schools (and mostly just Stanford MBA grads)--very different from your average MBA grad * The top 5 MBA grad can expect to make on the order of $20-50M over the span of a career with a Mck/Bain/BCG role. Yes there is a limited number of people who make it to the top, but tbh that is much more due to people wanting to leave for other career paths than it is a weeding out.

refurb 10y ago
Keep in mind that there is a distribution in the quality/experience of MBA students even in the top 5 schools. A large percentage of them went to very good undergrad schools, got reasonably prestigious (at least from the outside) jobs after graduating, then decided to go for their MBA in their mid-20s. It makes for an impressive resume, but one still wouldn't put them in a CEO role right out of their MBA. An even smaller group are the students who did truly impressive things pre-MBA. People who joined a PE firm out of undergrad and were very quickly on the partner track. Or people who started a successful company pre-MBA and didn't really need to go back to school, but wanted to. There are usually a handful of these folks in every class. These are the ones where it makes sense they got a C-level role at a company right out of their MBA. Again, it wasn't the MBA that got them the role, but rather what they did before they got in.

mbesto 10y ago

This exercise is poor because it's totally unrealistic. I work with a lot of investors who buy "a $1.5 million EBITDA company for 4x paying $6 million and using 50% debt financing". But they are organizers/firms that split carry among the firm. AFAIK, if you're not working for a PE fund, this type of investment structure is only possible if you execute what's called a Search Fund[0]. I personally know a Kellogg MBA who did this, but it was after 2 years of working at a PE firm. The verdict is still out whether he'll make any meaningful return from it. The other person I know who attempted it (from Stanford) gave up after a year because it was too hard to get investment. In other words, the assumptions that any MBA (typically a 26 year old with 2-3 years of real work experience) even has access to this are fairly unfounded and not typical. What is more feasible, is that MBA grads go to PE funds and are part of a deal team. Even then, those opportunities are scarce and require you to spend another ~6-7 years getting to Principal to earn any meaningful amount of compensation ($500k+ year). [0] - https://en.wikipedia.org/wiki/Search_fund https://en.wikipedia.org/wiki/Search_fund

charlesdm 10y ago
Well, this has nothing to do with having an MBA. Understanding most of these concepts isn't really hard. You just need access to the capital, which has a set of challenges in itself. Any entrepreneur who might or might not have an MBA can do this if (s)he has access to the capital. The hard part is making sure you can keep the business running so you can service the debt. The company that Kellogg guy acquired, which sector was it in?
- mbesto 10y ago
  > The hard part is making sure you can keep the business running so you can service the debt. Which, quite frankly, many MBA students in their mid 20's are unqualified to do. > The company that Kellogg guy acquired, which sector was it in? Daycare services.
nostrademons 10y ago
Search funds aren't all that uncommon among top-tier MBA students and graduates. There are a couple going on among my wife's MBA classmates. As a tech entrepreneur, I'm a little skeptical about whether their search will prove fruitful, but they don't seem to have huge problems raising capital. Also, don't forget part-time and executive MBA programs. Students in these tend to skew older (early 30s for part-time programs, mid-40s for executive ones), with 10/20 years of work experience in a relevant industry and deep networks that often include access to capital.

deleted 10y ago

[deleted]

fovc 10y ago

A major difference in lifestyle (and I guess also financial implications) not mentioned here or the companion article [1] is that many search funds end up buying companies in less-than-happening locations, whereas MBB have offices in major cities. So for a search fund you have to either be willing to go live in the rust belt for 5+ years or accept that your chances if finding a business in/near a big city are lower. [1] https://hbr.org/2016/03/why-more-mbas-should-buy-small-businesses https://hbr.org/2016/03/why-more-mbas-should-buy-small-busin...

PaulHoule 10y ago

It's one of those many developments that make one reconsider the question of "Why does the firm exist?" http://www.economist.com/node/17730360 http://www.economist.com/node/17730360