Business Growth Formula. Unfortunately, for most of us, we depend on the man. That means that we require a business owner to sign our paychecks. And being the business owner has some extra stresses: the well-being of your employees, the success of your company, providing for your family. However, one area that a business owner has an advantage over is the ability to build wealth quicker. If the business is producing enough money, then they can live the lifestyle they want now, pay their taxes and put aside money in a pension plan or other accounts to build their wealth and retire in the time frame they want—and the business itself is an additional asset that can add to their personal wealth when it’s sold. Sounds like a pretty good deal to us? Right?
But as a business owner you need to make sure you don’t mess up the potential sale. You need to be sure you’re taking the necessary actions to ensure it has the highest value possible so that when you sell it, that wealth that you get at closing adds to your own personal wealth.
That’s where we come in. We’ve helped many business owners sell their companies and increased their personal wealth. If you’ve ever sold your house, you know you’ve got to maintain it and put in some money to increase its value. It’s the same with a business. How can you add “curb appeal” to your business and dress it up to prepare for sale?
It’s pretty simple: find ways to maximize your profit when you’re ready to sell. And while it sounds simple, it actually requires someone with the know-how to make it happen. Don’t worry. We have the Wealth Building Formula® for businesses. You’ve seen how it works for individuals. Let us teach you how to work it for your business.
The Business Wealth Building Formula™ for business is:
V x T x G%= $$$, or what is also called EBITDA
V is value – what you want to sell the business for.
T is the timeframe in which to sell it. Within what timeframe do you want to sell the business? Five years? Ten years? This is the time frame within which you need to increase its value.
G% is growth rate: What’s the annual percentage of growth of the business that you need to meet the value you need?
Finally, $$$ is the cash flow or the EBITDA, which stands for “earnings before interest payments you pay on loans, taxes, depreciation and amortization.” A multiple of EBITDA is the basis for how all businesses are valued.
Let’s look at an example and say I’ve got a million dollars to invest. I have two options: invest it in the market or buy a business. If I choose the market option, I can assume that I’d make about 5 percent a year, or $50,000. There’d be less risk but a limited return, so if that’s all the business is making, I’d probably pass on buying it. But let’s say the business is earning $200,000. How much would I pay for that cash stream? Well, for me to earn $200,000 in the market at 5 percent I would need $4 million. Is it worth it?
I would look at it like this: “Whatever I invest in, I want to earn 20% on my money because the money invested in a business means higher risk for me.” I might be willing to spend $1 million for a business that produces $200,000 a year for me because that’s a 20% return. So, in this case, I have valued the business at five times the bottom line (adjusted to become EBITDA). This is why focusing on your Business Wealth Building Formula™ is so important for you.
Let us help you use the Business Wealth Building Formula to your advantage. Visit tswealth.com for more information.