What’s Your Number?

Phil Hendry02/12/2020

As a business owner, do you think about “your number”?  Why is it important, and how to find it?

 

Many of us tend to go into business, certainly your first business, for a similar reason…..to support your lifestyle and / or family.  Yes, of course we want to build something we’re proud of, and passionate about, but when it comes to buying a big enough house for, or feeding your family, this ultimately comes first.  When you really take the time to think about it, unless you are somehow (inheritance, previous career, previous business sale / exit etc.) financially independent from your business, this is a large part of what drives you.

Lets say you can fast forward in time and you have built a business which has a value, and it is appealing enough that someone wants to buy it.  Most business owners we speak to aspire to this sort of scenario.  But why?  They want to realise a capital value for what they have poured their time, money and emotion into for so many years.   After all, according to the Office of National Statistics (ONS), 60% of businesses fail in the first 5 years….let alone sell!*

Crucially though as already suggested, its to take their chips off the table, and be less reliant on the business remaining successful , to the extent it throws off the income you need to meet your lifestyle requirements.  But how much do you need to sell it for to do this….this is your number.

Thinking about this well in advance can really make a difference…

Why?

This helps inform you of where to go next: Let’s say your business is worth £500,000 at age 50, but you have poured everything you have into it.  You feel you are running out of steam and aim to sell by 55, and you need to sell for £5,000,000 to meet your needs and live the lifestyle you want with your family.  You have some work to do….but you know your sector / industry, and therefore know what a business worth £5,000,000 looks like (revenue, number of locations, products / services sold, people, number and size of clients).  If you don’t, it’s time to do some research!  Armed with this information, you can plot your steps over the next 5 years to build a business worth £5,000,000.  Whether it’s raising capital, hiring the right people, or introducing complimentary services / products, you know you need to get started and where.

At the point of exit, it informs decisions and strengthens the negotiations: Conversely to the above, let’s say you are 5 years on and you have built that business.  Now obviously selling a private company is not like selling a property, or a share in BP for example.  So without putting out your intention to sell, you cannot be sure of the current appetite.  You speak to your advisers and they start rooting out interested parties.  You have interested parties, who move to making offers, they are around the number you need.  But they all present very different prospects, such as earn outs, loss of jobs, you staying involved etc.  If you need to derive a higher price, or can accept less for a better structured sale, knowing your number allows you to know where you can and cannot make compromises.

Makes you think about what is really important to you: Because your number is a means to facilitate the lifestyle you want, it makes you think about how you most enjoy spending your time.  If hitting your number allows you to not worry about accumulating more money, you are no longer being driven by it to make decisions.  This doesn’t necessarily mean never working again and just travelling, but it might mean only working on things which you genuinely love doing, which give you meaning and purpose.  Not because of a monetary incentive.

How?

Understand what lifestyle you want for you and your family if you were no longer running your business:  How much would you like to travel?  Would you like your children to go to private school?  Would you like to spend 6 months of your year at a holiday home?  These things are all individual to you.  I bet you have thought about them, but never articulated it….you should.  Talk about it, how much it would cost, and build this picture out as much as possible.

When you want to be able to do this by:  This is just as important as what your lifestyle would look like.  Because if a business sale needs to fund life for more like 40 years v.s. 20 years….that’s a very different number.  If you think you may run out of steam and want to cash in your chips in 5 years at 55, you can begin to know that statistically you realistically could easily be funding your lifestyle for another 30 years.

Understand the amount of money you would need to then live off to create this lifestyle:  If you know your lifestyle, and you know when you want this to start, you can begin to understand the amount you would need to walk away from your business with….in CASH.  But as Ray Dalio (think the Tiger Woods of investing) says currently, “cash is trash”, and you certainly wont get any help from the banks with interest, in making your money last a little longer.  There are however ways to invest which are worlds apart (in terms of less risk) from running your own private company.  Be honest with yourself, can you still stomach some risk in this form in order to walk away from your business with a little less / a little earlier, because if you can, it can seriously change the business value you need to create.

Would you want to go again:  Do you think you would yearn to start another business, or invest in and mentor other smaller businesses as part of your lifestyle after you have left your business.  This is really common, as ultimately entrepreneurs cant just walk away overnight….its not how your wired!  Account for some capital to be left aside for this if you do, which is a sum you can ultimately afford to lose.  This tends to be anywhere up to 10% of sale proceeds for most (former) business owners.

I know you don’t want to get ahead of yourself, but think ahead, think positively, and be specific.  Being trapped in a mindset of scarcity and avoiding risk leads us to stand still.  Work on what your number is, work through what it would take to get your business there, and you will begin to see what is possible and what needs to be done….because with clear goals, come easy decisions!

*ONS data