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Hi {{first_name}},
Anyone who plays fantasy sports has felt it: the strange clarity that comes from a hard cap. You can’t have everyone. Every dollar on one player is a dollar off another. So you get honest, fast, about who actually produces.
Then Monday morning comes, and most of us walk into businesses where payroll was never designed at all. It accreted. A hire made sense in 2021. A role grew around a person. A department kept its shape because that’s the shape it had.
Nick Howley, who built TransDigm into one of the great compounders of the last 30 years, had a framing that cuts through this. He refused to let his teams debate fixed versus variable costs, which he saw as a gaming exercise. His definition: your cost base is your revenue minus your EBITDA. Everything counts. Nowhere to hide.
Put the two ideas together and you get what I’ve started thinking of as the salary cap test:
First, start from the result. Decide the EBITDA the business genuinely needs to produce, for its debt, its owners, its reinvestment. Subtract it from revenue. That number is your cap.
Second, take a blank sheet. Design the best configuration of people and spend you can buy under that cap. Fantasy-draft rules: you can have anything, but not everything. Which seats create the result? What would you happily pay a true A player in the critical seat? What wouldn’t exist at all?
Third, compare the designed roster to the real one. The gap is the finding.
When I’ve worked through this on businesses I’ve been around, the uncomfortable part wasn’t discovering seats that shouldn’t exist. It was realizing how much of the roster I had simply inherited and never questioned. And the sharpest finding usually runs the other direction: the people who actually move the levers are almost always under-invested, in pay, in support, in scope, because the drift quietly taxed the stars to fund the accumulation.
To be clear about what this is not: it’s not a layoff exercise, and it loses its value if it becomes one. It’s a design exercise you run on paper, maybe once a year. Sometimes the answer is reallocating a seat. More often it’s finally paying your best operator like the franchise player they are, before someone else runs the resignation test on them for you.
Every business has a cap, whether or not anyone names it. The only question is whether the roster under it was designed, or just accumulated.
Talk soon,
Matt
P.S. When I’m not writing this, I’m buying and operating founder-led businesses for the long term at Eidolon Capital. If you’re a founder thinking about your next chapter, or you advise one who is, just hit reply. I read every note.