In This Episode:
Ben walks you through how to make concrete plans to exit your business and maintain the lifestyle you want. It’s closer than you think.
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Welcome to the Business Numbers podcast. I’m your host, Ben McAdam. I’ve helped over a thousand business owners with growth, profits, and clarity around the numbers, and I created this podcast to help you with that too.
In this episode, we’re talking about exiting sooner.
[00:00:15] One of my clients found step helpful one of the steps in the goals section of my new program. And it usually helps people when I tell them about it, so I thought I’d share it with you guys.
[00:00:27] It’s part of an overarching theme that seems to keep coming up. It’s that your goals aren’t as far away as you think. So for this episode, let’s say the goal is to exit the business, invest the lump sum, and live off the proceeds.
[00:00:44] Most people leave the goal at that, or they go only one step further and pick a high, round number of income that they’d like. And then they assume it’ll be some long time into the future before they can actually achieve the goal.
[00:00:58] So whether the goal is to exit the business, invest it, live off the proceeds, or exit the business, invest the lump sum and live off $10,000 a month of income… investment income from the proceeds. That’s as far as a lot of people go.
[00:01:13] And this isn’t useful because that’s still kind of vague and it’s really difficult to make concrete plans. And if you don’t have concrete plans, you can’t fight off shiny objects.
[00:01:27] Speaking of shiny objects, I finally played with Chat GPT the other day and it’s very interesting. But maybe I shouldn’t start a content agency based on Chat GPT.
[00:01:43] Because I have a concrete plan to get to where I want to go, it’s very easy to say, “Okay, that’s fun.” I might play with it in my spare time, and maybe I’ll incorporate some aspects of it in my business, but I’m not going to dramatically overhaul my entire strategy because there’s some cool new, shiny thing.
[00:02:01] Typically, many years ago, I would occasionally do that if there was some cool new marketing thing that I heard about. I would want to throw out what I was doing and give the new cool thing a try.
[00:02:14] But as I said, concrete plans are very helpful for you to say, “Okay, is this new thing better than what I’m currently doing?” No? Okay, then let it go.
[00:02:22] And the other reason why it isn’t useful to have such a vague objective of a goal is that when you have a really concrete goal that you really get how you’re gonna get between where you are and that goal, you’re motivated. There is this motivational fuel that helps you, especially when going through the difficult things that come up when you’re running a business. Or life circumstances that derail you. Having that motivational fuel can help you get through those or get through the crunch periods, for example.
[00:02:59] There’s more reasons why it isn’t useful to just leave your goal at, “Oh I’ll exit the business and have $10k a month of income.” But I’m gonna try and keep the episode to a reasonable length.
[00:03:11] So let’s instead work out exactly how much revenue and profit your business needs and what you’ll need to do to exit in the next one to three years instead of the “in three to five years” period that never seems to get closer.
[00:03:28] I dunno if you’ve done that too. I’ve seen it with a lot of people, including a younger version of me, who would set goals of like,” Oh, three to five years. That feels kind of close but far enough away to do some big things.” But let’s get a bit more accurate and let’s do it sooner.
[00:03:45] So let’s get a bit more clear.
[00:03:50] First, we got a couple of calculations, said the business numbers guy. I’ve got a simple spreadsheet where you can just change a couple of numbers, and all the calculations are done for you. I’ll put a link to that in the show notes. But for those of you who can’t look at the spreadsheet right now, I’m gonna talk you through it. And even if you do have it open, this will be helpful.
[00:04:14] So first off, with the calculation, we need to start with how much do you actually want in monthly income from the investments. After you’ve sold your business, invested the lump sum you get from it, and you’re getting some sort of an income. How much per month do you want it to be?
[00:04:32] Do you want it to be $1,000, $5,000, $10,000, $50,000, or $100,000? A million? What is it exactly? Be clear on what would be worth exiting your business for.
[00:04:48] Try not to continuously move the goalpost because there’s potentially some of you listening right now that could exit your business and have an exceptional quality of life, but you’re just kind of thinking, “Oh, well, what if I just put in three months, six months more growth, maybe like another year. I reckon I’ve got another year in me. I can do that. “
[00:05:09] I’ve had some clients who were on the path to a good exit, and then the recession started happening. And they were forced to put their exit plans on hold for a few years. So sometimes, if you say to yourself, “Oh, just one more year. Oh, just six months”, it might not actually be the case because you might not be able to actually sell the business at the time that you wanted to if you keep putting it off. You might not be just putting it off for six months. You might be putting off for three years until the economy improves.
[00:05:45] So get pretty clear on how much you want and decide on a monthly income.
[00:05:49] Next, we can work out how much money you’ll have to have invested, how much capital you have to have invested to get that amount of income.
[00:06:00] There are various investment returns out there. You can get, you know, a few percentage points for bank accounts, savings accounts, and bonds or treasury bonds, all the way up to, you know, well over a hundred percent if you invest in a business and the business goes well. There, that is a riskier type of investment.
[00:06:19] So there’s a big, big range here. For the sake of not making this episode really long and discussing all those things, some of which I may need to have a license to even talk about here in Australia or in whatever country you’re listening.
[00:06:36] What I usually suggest is 10% as an investment return to use for this calculation. Partly cause it makes the calculation easier to follow and partly because there’s a lot of stuff all over the internet. You don’t have to take my word for it. That investment returns between 7% and 12% can be found, and they’re not necessarily hugely risky. But I will leave that to your own inquiries and speaking to professionals because, insert a disclaimer here, et cetera, et cetera.
[00:07:10] So let’s say you want $10,000 a month from your investments, and let’s say you get a 10% investment return, then you need to have a $1.2 million investment. Not $5 million or $10 million, like people seem to automatically assume. Maybe you do want more monthly income. Just go with me on this example here.
[00:07:34] So we’re at $1.2 million of invested capital. We’ve worked that out.
[00:07:37] Next, if you need that much capital invested, then how much do you need to sell the business for in order to have that much capital left because there are taxes you’ll have to pay on the sale of the business, and you’ll probably have to pay a fee to a broker to help you sell the business.
[00:07:58] So we can work backward from $1.2 million invested capital. We can say, all right, let’s say you pay 20% tax on the business sale. So that brings us to $1.5 million in pre-tax proceeds from the sale of your business.
[00:08:16] Then from that $1.5 million, we then go, okay, well let’s say a 5% broker fee. So that means the business buyer, whoever buys the business from you, needs to pay a little under $1.6 million.
[00:08:30] It’s $1,578,947, but let’s say 1.6 million…
[00:08:38] Where we are so far is in order to get $10,000 a month of income per month from your investments, you need to have a business buyer agree to pay $1.6 million for your business.
[00:08:56] So that’s an interesting bit of clarity. Most people, you know, always think $5 million, $10 million, $20 million, $100 million. No, not really. The number is always lower than you think. More on that later…
[00:09:07] But we’re not done, let’s take it a step further. If the business buyer is gonna pay $1.6 million for your business, how much profit does the business need to have?
[00:09:17] Well, when you sell a business, depending on the type of buyer you’re selling to (more on that in other podcast episodes), the buyer will pay anywhere from 2x to 10x the annual profit. 3x or 4x… 3x is common. 4x is if the business is in a good position or it’s more profitable in the hands of the buyer who buys the business.
[00:09:49] So let’s say 4x profit multiple that you’d be aiming for because you are working hard making the business great. So you might as well do a few little tweaks to get a 4x multiple instead of a 3x one.
[00:10:02] So, for a business buyer to pay you $1.6 million, you would need $400,000 in annual profit.
[00:10:10] And from there, we can say if you’ve got a 30% net profit margin, which means that 30% of the revenue is the amount of net profit you have. Then the annual revenue target you’re aiming for is about $1.3- $1.4 million in annual revenue.
[00:10:27] So, in order to achieve $10,000 a month in pre-tax income from your investments after you exit your business, your business needs about $1.3 million in revenue and about $400,000 a year in profit.
[00:10:45] So now we’re a bit more concrete than, “Oh, I’d like to sell my business and live off the proceeds one day”, now we have something that we can plan towards.
[00:10:56] But before we talk about that, I’ve gotta mention that almost everyone is surprised that the revenue and profit targets are smaller than they thought.
[00:11:04] Even if, you know, in this example of $10,000 a month, maybe you want $50,000 or $1 million a month, doesn’t matter. Usually, whenever I walk anyone through this process, the number is always smaller than they think. That’s what this exercise is designed to fix, is that thing and our thinking, our default thinking that a great outcome is a long way away. That’s what it’s designed to fix.
[00:11:33] Now, there are some people that have a bit of a cynical response. And that might be you, you might be thinking, “That can’t be right!” And you might try and pick one of the numbers apart.
[00:11:44] If you can go get the spreadsheet and fiddle with it, check the formulas, and have fun. Or he might dismiss this as like, “Ben doesn’t know what he’s talking about.” that’s something else that comes up. “It can’t be right. Ben mustn’t know what he is talking about. He mustn’t. Why is he doing this coaching thing he does? He’s no good! Look at all these numbers, he’s obviously screwing up because it can’t be that good. It can’t be that close.”
[00:12:08] That’s your fear or ego talking. It’s trying to protect you from this truth for some reason.
[00:12:16] There are two occasions in my life, two truths that stick in my mind where my fear or my ego were blinding me from those important truths and I could have been a lot further along if I hadn’t listened to those voices.
[00:12:38] One of the things, for example, for me, is like there is a limit to how much you can earn if you’re just doing 1-1 coaching. It’s a pretty high limit, but it’s still a limit. And if you have some pretty ambitious goals, then it can’t just be 1-1 coaching as the revenue source.
[00:12:57] And my fear, my ego said, “No, I can do it! These other people can’t do 1-1 coaching and earn tons of income, but I can totally do that. I’m amazing!” Says my ego.
[00:13:12] Or it was my fear of I don’t know how to sell people into a group program. I don’t know how to do leveraged coaching and deliver it in a way that gets people great results. Like, “How will I do that? I can’t do that!” That’s the fear talking. Fear and ego.
[00:13:29] And yeah, if I had started working on that a few years ago, I’d be a lot further ahead than I thought.
[00:13:36] And it’s a similar thing that might be going on in your head if you are having a bit of fear or ego-based cynical response to these numbers.
[00:13:48] Feel free to play with the numbers in the spreadsheet. But don’t just keep fiddling with them until the outcome is what you believed. Don’t just keep making the numbers worse and worse until the revenue is like $100 million or the horribly large-sounding number that you thought it should be. Don’t game the system. Don’t let your fear or your ego win. Enough on that.
[00:14:15] There are a couple of things that could change this calculation if I’m being honest. But sorry cynical voices, they actually make the calculations, and everything seem more achievable.
[00:14:27] The first one is that an acquirer might want to pay you in shares rather than cash. And they’ll exit with the intention that they’re gonna exit a couple of years later themselves. In particular, if they pay you in preference shares, you have a certain amount of income coming because you own those shares. And depending on the exact wording, it could be guaranteed income. Plus, you can have some exposure to that future exit. So the sale of the business comes with an investment return. And sometimes that can be higher. I know somebody who was offering 12% instead of the 10% we used in the calculations.
[00:15:07] Now, the second thing that could change the calculation is the right acquirer will pay a much higher profit multiple if your business will be more profitable when they own it.
[00:15:19] So, for example, if you have a service business or a product-based business or anything, really that’s complimentary to what they currently offer their 100,000 customers, and they can just immediately tell those 100,000 customers about your thing, and suddenly a whole bunch of them buy without them having to spend anything on marketing, then your business is much more profitable in their hands cuz they haven’t had to spend the marketing spend to generate that revenue.
[00:15:50] Plus, there’s more dollars of profit coming from the business as well if they’re able to suddenly increase the revenue very profitably.
[00:16:01] You might not know what your ideal acquirer, kind of like your ideal client or ideal customer avatar but ideal acquirer, you might not know what they’re looking for. So you can just ask. Ask a broker his coaches and consultants or people who’ve recently exited and so on that you could talk to.
[00:16:18] But the ultimate aim is that you want to know what revenue, what profit are you aiming for? Because then you can create some business plans around your goal of a certain amount of income from investments.
[00:16:33] But even still, if all you do is just get an idea of your revenue and profit targets, that’s a big improvement in clarity. And if you can make a plan, then that’s great.
[00:16:43] But we’re not actually done. There’s more calculations! Hurray! I won’t do them on the episode.
[00:16:55] From your revenue and profit, you can work out more detailed targets.
[00:16:59] So from your revenue goal, you can work out how many customers, you can work out how many customer service type people you’re gonna have to have on your team given the amount of customers. Given the amount of customers that you work out, you can work out how much you’ll need to spend on providing the service, or creating and sending the products, or providing the digital product, or access, or whatever it is that you’re selling. With a revenue target, you can work out a customer target, and then you can also work out what it’s gonna cost you to deliver those things and how big of a team you’re gonna need.
[00:17:38] You’ll also be able to work out your whole marketing and sales funnel targets. How many visitors to your website? How many people go into your buy page? Or how many people booking a sales call? What’s the show-up rate? How many salespeople are you gonna need to handle that many sales calls?
[00:17:52] All that stuff you can work out from the revenue and the customers. Probably need to throw in like a churn formula or something in there for people that do have recurring revenue.
[00:18:02] But yes, from a desire of a certain amount of income per month for you to have coming in from investments, you can work out exactly what your business needs to look like.
[00:18:15] I’ve mentioned this process in a previous episode, so I’m not gonna dive any further deep into it here. But you can use those numbers.
[00:18:25] Once you’ve got those more detailed targets, like the number of customers, and marketing and sales targets, you can set them as KPIs and goals for your team and design projects that will get the business to those targets.
[00:18:37] Projects like, for example, increasing the volume of leads in your funnel to the volume that you just worked out. Or hiring an Ops Manager to manage and grow the size team you just worked out that you’re heading towards.
[00:18:51] Add in a few projects as well to help the exit, like removing the business’s reliance on you, the owner. Build a track record of it running well. Have it be on a good growth trajectory. Maybe leave some opportunities behind for a buyer, and you’ll need to source a buyer or a broker or something.
[00:19:13] So there’s some projects you could add as well as the ones that will get you to the detailed targets you’ve worked out.
[00:19:20] Once you’ve got your list of projects, and things that need to be worked on, you can schedule them. Schedule those projects across the next year or two or three in an order that makes sense and gets the business to those detailed targets at the right time without overworking anyone, including you, along the way. So you can schedule them in…
[00:19:40] And that’s how you create a plan on how to exit your business in one to three years. Sooner than maybe someday or the never gets closer “three-to five-years from now” timeline.
[00:19:55] So quick recap, ’cause we’ve been through a lot of things. I normally go through this in a much longer process with people, but I think more people would benefit from the concept so that’s what I’m talking to you on this episode .
1) Decide on your goal income.
2) Calculate a picture of your business at the point of exit so you know what you’re aiming towards in great detail.
3) Decide on the projects that will get you there and the business-exiting projects you’ll have to do towards the end too.
4) Schedule all those projects into a reasonable plan.
[00:20:37] The final step I haven’t talked about yet, step five, is to review your progress at least monthly to make sure the plan is on track. Maybe you need to correct course, maybe there’s an opportunity to go faster. Maybe you could exit sooner than the “Exit Sooner” plan you put together based on this episode.
[00:20:57] So remember that spreadsheet with a calculation on it. You can get it in the show notes.
[00:21:02] I hope that this helps you bring your goals a lot closer, whether that’s an exit goal or anything else. You can use the same process for an income goal that you want from the business or the amount of time you don’t want to spend running the business. All of your goals you can use as a similar process. This is what I’ve… I think it’s a couple of hundred business owners at least; I’ve helped with this process. Always helps them feel more motivated and clearer on what they need to do, and I hope it achieves that for you as well.
[00:21:37] If you have any questions about how this works or you gave it a go and you’re not sure, or you get stuck with it or anything, reach out. Social media, or in the show notes, there’ll be a link to reach out somewhere around there.
[00:21:51] Love to help you do this. One of my favorite things about what I get to do is helping people hit their goals sooner than they thought possible.
[00:22:00] And with that, I’ll see you in the next episode. Thanks for listening.
[00:22:05] Thanks for listening. If this was helpful, please subscribe, follow rate, like, share, comment, and all the things. Show notes are at www.profitscollective.com/podcast or www.businessnumberspodcast.com.
[00:22:19] If you want some help with growth, profits, and clarity around your numbers, go to www.profitscollective.com for more resources or to book a quick chat about working together.