Goal Setting – What’s Your Number?

With very many things that we do, before we jump into it, it pays to spend a little time thinking about what we want to get out of it. Embarking on a business-buying adventure is no different.

With very many things that we do, before we jump into it, it pays to spend a little time thinking about what we want to get out of it. Embarking on a business-buying adventure is no different.

You need to set a goal, and that goal should be SMART – specific, measurable, achievable, realistic and timebound – because you want it to become a reality. There’s nothing wrong with daydreaming but that’s not what we’re doing here. We’re establishing what we are going to aim for so we can devise a plan to get us there. This is an element of your strategic planning.

I think the challenge many new business-buyers face is lack of focus; they spend six months floundering around not knowing which direction to go in, get disheartened, and some of them give up completely.

Even if you have bought businesses before, you very likely haven’t taken this approach to working out what it is that you want to achieve.

This gives you laser focus on what your goals are and what outcome you need to meet them, so you know exactly what you are working towards and, just as important, when you have achieved it.

There are different types of goals you can set yourself, but here we’re focusing on your financial goal. And we’re going to start by asking an important question: what do you want in life.

What do you want in life?

With a big goal like this it’s easier to start by making a list of what you want in life, then you can work out the financial requirement needed to achieve that. You’re going to start with the end in mind.

You will use the list to set out your goals and you’ll attach some figures to them, so you can refine what it is you want and what you need to do to achieve that.

Ten years in the bank

We’re going to look at an example of what someone might typically want in life, and we are going to make sure there’s enough money in the bank to cover ten years of expenses.

I want:

  1. To be mortgage-free (£500,000)
  2. To be credit card and loan free (£30,000)
  3. To have ten years of income as savings (£100,000 x 10 years = £1 million)
  4. To have money set aside for my child’s education (£15,000 x 10 years = £150,000)
  5. To be able to spend £X on holidays per year (£20,000 x 10 years = £200,000)
  6. To have a holiday home (£1 million)

Let’s take a closer look.

1. To be mortgage – free

The first goal for many people is to be mortgage-free. In this example, mortgage-free means having £500,000; that pays off the mortgage. Now, I know there is a big argument for saying that being mortgage-free on your own properties is not a good idea, a mortgage is very cheap money, you can use your pot of money for something else instead of paying off your mortgage. I get all that.

But many people just want to not have the concern that there are mortgage payments to make and interest rates to take into account. People don’t want that worry.

2. To be debt – free

The second thing on the list is to pay off any loans or credit cards that they’ve got. In this example, it’s a modest amount: £30,000.

3. To have ten years of income as savings

The third thing is income; I think that you should have in the bank at least ten years of your current income in savings. In other words, if you stop working now, whether it’s working with the business that you own or working in a job for someone else’s business, then you’d have the same amount of income for the next ten years, but you wouldn’t have to work for it. I think most people would be pretty happy with that.

In this example, our person earns £100,000 a year, so ten years of that income is £1 million.

4. To have money set aside for the children’s education

This one isn’t either relevant to everyone or everyone’s cup of tea, but our person in this example wants to set aside some money for their child’s education. Let’s say they’ve got ten years of schooling left, and they want to put away £15,000 for each year.

5. To be able to spend £X on holidays per year

Holidays are important. You might say, ‘Okay, holidays; I want to spend a certain amount on holidays each year.’ In this example, we’ve put in a generous £20,000 a year for that; £20,000 would buy you and your family some very decent holidays. Ten years of holiday money in the bank means £200,000.

6. To have a holiday home.

But then you might say, ‘Actually, I want a holiday home. I want a home in Turkey, I want to buy a nice apartment somewhere that I can call my own, that becomes part of my children’s inheritance.’

Obviously, it depends where you buy it, whether it’s an apartment, a villa, or something else, whether it’s got twenty bedrooms or two bedrooms, but in this example, the cost of a holiday home is £1 million.

Your list, your numbers

What I want you to do is to create your own list, with your own numbers. Do you have the same goals as in the example? You might have things to leave out and things to add in. What is the total number you need to accomplish all those goals on your list?

If you add up all the items in our example, they come to £2.88 million, so let’s round it up to £3 million.

If we’re going to sell a business, and the goal is to earn £3 million after tax, professional fees, accounting fees, legal fees, all of that stuff, we need a company sale of £4 million.

Our example person, who wants to have ten years of salary at a £100,000 a year, ten years of private school fees, a £1 million holiday home, pay off a £500,000 mortgage and a few credit cards, and to spend £20,000 a year on holidays would need to sell a business at £4 million.

It’ll be very interesting for you to find out what your number is. Right now, you probably don’t know what it might be – I’ve never met anyone who’s done this exercise without me prompting them to do it.

When you know what the number is, life becomes an awful lot easier. If you’ve come across The Seven Habits of Highly Effective People, written by Stephen Covey more than thirty years ago, you’ll know that one of the seven habits of highly effective people is starting with the end in mind. Doing that is going to help you in your whole business plan.

The world of business acquisition

That was interesting, wasn’t it? Let’s now bring it into the world of business acquisition.

When you sell a business, a value is prescribed to that business and it is typically a multiple of your earnings before interest, taxes, depreciation and amortisation – that’s the EBITDA.

There are lots of influences on that figure. The sector that you’re in is going to influence that exit multiple, the size of the business is going to influence that exit multiple, and you or your representatives’ ability to negotiate is going to influence that exit multiple.

Let’s say our exit multiple is a modest seven times EBITDA. To achieve a £4 million exit we’d need to have £600,000 – roughly, I’ve rounded it up again – EBITDA. That’s what would give us that £4 million sale price.

How do you find out what exit multiples are?

I get asked this an awful lot. Sadly, there’s no easily accessible single source of information giving the exit multiples of different businesses. You need to find your own sources.

The best source is always insider information, so that’s industry gossip, or maybe it’s actually been published in a sector publication or on an industry website.

In my sector, which is early years education, there are three websites I look at every day, because this is where deals are announced. If a sale is announced there are a couple of people I might send a text to, saying, ‘Hey, what do you know about this one?’ And they might say, ‘Yeah, that was an eight-times’, or ‘That was a twelve-times’, or whatever it might be.

You start to develop a network of people who fill you in on what’s going on. And since you can’t go to somewhere it’s written down to find out what that number is, it’s all about the network and putting your feelers out.

It’s all about the profitability

We were talking about a business that’s making £600,000, and you’ll notice we haven’t talked about turnover at all. We’re just talking about profitability here because that’s the metric that we’re going to be using to multiply our number against.

In this example our exit multiple is seven, so we need £600,000 of earnings – profit before tax, effectively – in order to get us our £4 million. Now, remember, our £4 million, when we take off taxes and fees and everything else, ends up being £3 million, and our £3 million allows us to buy the holiday home, have ten years of income and all of those other things we identified earlier.

You might be thinking, Jonathan, I wouldn’t get out of bed for a £4 million exit. Fine. Your numbers are going to be bigger, then.

However, what I think people always find surprising, and I’ve been given this feedback when people have done this exercise, is the number they need might not be as big as they thought it would be. Everyone thinks, I need to sell the business for £50 million to be happy. But when we work it backwards, the number often isn’t quite as big as people thought it would be.

The goal

The goal is to buy EBITDA at the lowest possible price. If we can buy £100,000 of EBITDA for £300,000, effectively three times, but it’s worth £700,000 when we sell, our seven times exit multiple, and the £300,000 purchase price is paid off during the period of ownership, that is a great result; that is what we need to do.

In this example, the goal is to get to £600,000 EBITDA as quickly as possible, so we achieve the £4 million exit, which gives us £3 million after taxes and costs, so we can do all those things that we identified earlier.

Now, can I just tell you, having worked with hundreds of people who want to buy businesses, that what we are talking about here is far in excess of what the majority of people who want to buy a business ever do.

They never say, ‘What do I need the money for? How much money do I need? What do I need to sell a business for? What is my exit multiple, and what number am I going to be multiplying?’ But when you do that, everything is measurable and you will recognise when you have reached your goal.

Three ways to get to your goal

There are three ways to get you to that £600,000 profit.

The first is by acquisition, and that’s the most certain way.

The second is organic growth, and organic growth is a bonus. Organic growth means you get some more customers, you win a new contract, and that boosts your profitability. That’s all absolutely wonderful – but you can’t count on it.

The third is cost reductions from synergies. If we take two businesses and put them together then there are going to be some cost reductions, because we don’t need two offices and we don’t need two receptions and we don’t need two HR departments or whatever it might be.

However, that’s a little bit unpredictable because, typically, what you work out on paper isn’t what happens in reality.

Here is a bit of information that you will discover by understanding the sector that you are buying in: if a typical smaller business in your sector makes £200,000 EBITDA, £200,000 earnings before interest, taxes, depreciation and amortisation, then you just need three acquisitions to reach your goal.

That information takes you further than 99% of people who want to buy a business have ever gone. They don’t get this far, they don’t think like this.

When someone says, ‘I want to buy a business and I want to make millions of pounds,’ that is so vague that the chances of it happening are quite slim. What we’re doing here is, we’re focusing on a goal with a very clear number. We’re working backwards to how much profit we need to get that exit number, and now we’ve gone a step further. The step further is, if a typical small business in that sector makes £200,000, we just need to do three deals.

Here’s the thing: let’s say you did buy three businesses, all making an exact £200,000, and you put them together to make one business. It’s obvious that three times £200,000 would give you your £600,000, but remember, there’s some organic growth that’s going to happen in there. There are also some cost reductions that are going to happen in there. So that £600,000 might become £700,000 without you doing very much at all – but you should think of that as a bonus, because you can’t count on it.

What you need to do is just focus on the EBITDA of the businesses that you are buying.

Key numbers you need to know

I said a little earlier, ‘We want to get there as quickly as possible.’ Of course we do. So, if we want to get there as quickly as possible, what is the timeline we’re working to? Here are a few key numbers that you need to know.

Typically, on average, an asset purchase will take you six weeks and a share purchase will take you twelve weeks. You should allow twelve months for the complete integration and consolidation of the businesses that you buy, and while twelve months might be an outside number, it gives you that opportunity to turn – in our example – three separate businesses into one well-oiled machine.

And then the exit; everyone wants to sell instantly, which is to your advantage if you’re buying, but if you’re selling and you want to get the best price, it is a six-month process. Even though you might want to do it tomorrow, it’s going to take you six months. It can take more time, it can take less, and this isn’t because it’s going to be hard to find a buyer. This is because we want to run a process that gets you the very, very best result.

Asset purchase – 6 weeks

Share purchase – 12 weeks

Integration & consolidation – 12 months

Selling for the best price – 6 months

Now, just coming back to an asset purchase taking six weeks, a share purchase taking twelve weeks; what typically happens is that the more deals you do, the faster they become. But there are always anomalies. There are always situations where things just take longer. There’s a tricky landlord, so the lease assignment takes forever; the solicitors for the seller are a nightmare, they drag their heels over everything. So there are situations where those numbers just go straight out the window, but they give you some sense of how long something takes, and that can help with the ‘timebound’ element of your strategic goal setting.

Once you know how many businesses you need to buy, I want to give you an idea of how you can plan out your time to get there as effectively as possible. Let’s move to a subject that we’ll be talking about in a lot more detail in future issues: deal sourcing.

Deal sourcing

In our example, three deals are needed to get to the desired goal. So, what do you need to do to find three deals?

Well, realistically, you need to speak to at least thirty owners to find three deals that work. That might horrify you, you might say, ‘Jonathan, I’ve got to go and speak to thirty people?’ Yes, but some of those calls might only last five minutes. Some might be thirty minutes. We’ll be talking about this in detail in future issues, too.

Let’s say every initial call is thirty minutes – and it shouldn’t be any longer than that, by the way. Those thirty phone calls only amount to fifteen hours. You do realise that people work forty-hour weeks, don’t you? Fifteen hours is not a long time.

In this example, we’re going to be hunting for three deals that work, that are going to help us get to our goal. Remember, our goal is a holiday home and all those other things we wrote down on our list. You see, when you get focused on that outcome it makes life so much easier.

Here’s something else to remember: goals are dynamic, they change with time. I remember very, very clearly in the late eighties, I think it must have been, writing down my goals, and I wanted a fax machine. Can you believe that? That was one of my goals. I remember it very clearly indeed.

We’re still working backwards here. If, to buy three businesses you need to have thirty phone calls, how many letters do you need to send to find those thirty owners and to strike those three deals? The answer is, it depends, because there are so many variables, and we’ll talk about this in future issues, too. I generally recommend starting with a thousand – get a thousand letters out of the door and you’ll generate some momentum.

So, what’s your number?

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