If you work with any business consultant they are likely to emphasise the importance of knowing your exit strategy. The logic being that you build a company to sell it and that’s where you make the biggest impact on your personal wealth, not the income that you earn along the way. The logic is sound except you won’t always be able to see an exit point in your mind with any clarity. Your business might still be young, you’re building it through sheer passion to make your dent in the world and therefore the idea of selling it is unlikely to be exciting you in any way right now. But even if your business is well established, if you are enjoying owning it, it’s profitable and giving you the life that you want, then why should you sell it? Can you see Richard Branson ever selling Virgin? I can’t. It’s his empire, his life, and he loves it!
Whether you are motivated by an exit of your company or not, setting a goal to work towards is still important. It might be that you desire to be of a certain size, earning a certain income for your family, or have reduced your time working in the business. Whatever it is, the key is to choose a goal and then build a clear plan that gets you there.
Getting Clear On Your Goal
Once you’ve chosen your goal, write it down clearly. A client we’re working with now decided that they wanted to take £1.3m net cash after tax from selling their company. There are 2 shareholders in the company, both owning 50% of the shares. For them both to achieve £1.3m after tax they would need to sell the business for just short of £2.9m. We rounded this to £3m and that became the target sale price for the company.
Knowing the end number meant that we could calculate what the business would need to look like at that stage. Agencies are typically selling for a multiple of 4-8x EBITDA at the moment so we assumed that we could achieve a 5 times multiple. Of course there are many factors that go into working out the multiple and that’s why you pay to have a professional business valuation carried out as you get nearer to executing on an exit, but for now, we just needed a conservative figure to work with, so 5x was chosen for our plan.
To achieve a £3m valuation on a multiple of 5x means EBITDA would need to be £600k. We know that a well-performing agency can realistically achieve an EBITDA margin of 20%, so turnover would need to get to £3m. We had our endpoint with clarity and now we needed to put a timeframe on how long this would likely take to achieve.
Starting Point
In order to know how you are going to achieve your endpoint, you first need to understand your starting point. This business was achieving a turnover of £1.8m with a 7% EBITDA. A flat £400k of revenue growth for 3 years in a row would get us to £3m turnover in 3 years and that was agreed to be realistic, based on past revenue growth and future projections.
Working backward
With the start and end point clear we had to work back to how we made up the difference from today (£1.8m turnover; 7% EBITDA) to 3 years time (£3m turnover; 20% EBITDA). We had to grow both the Turnover and the EBITDA margin.
The following table was produced in a spreadsheet:
Beyond The Numbers
Getting clear on the numbers is essential. You won’t sell your business without proving string financials. You won’t achieve the lifestyle, freedom or fulfillment that you want without generating significant amounts of cash either.
Once you’ve got your financial goals defined, map them onto a monthly plan. In this case, it was a 36-month plan, working out the overheads that would be required and allocating the annual revenue from the table above across the 12 months in the year to hit the endpoint.
If you do this right you will be amazed how much comes out of the financial plan. You will automatically get into discussions about resource requirements, so recruitment, training, development, systems & processes, workflow, office space all come out of the plan. You’ll get a feel for what will be required to deliver the revenue requirements too – what sales & marketing people, materials, suppliers, and tools you will need. You’ll have to consider what can go wrong that would put a dent in your plan so you will consider legal agreements and insurance. The financial plan doesn’t ignore the wider complexities of the business plan, it highlights them. Most people use their financial plan and see it as a wild guess as some numbers, which makes the plan meaningless. Take time to get this right and you will gain clarity and confidence in what you need to do in your business this year, this quarter, this month, this week, and today.
If you would like to build a Financial Plan that works, arrange a call to see how we give you financial direction for a more profitable and predictable agency.
