Guys – it is time to ditch the old ‘build a business and sell it for zillions’ goal!
Just as easy credit has passed into history so too have the dreams of becoming instant dot.com millionaires as a result of a few lucky breaks and some unknown buyer waving cheque books.
As most successful entrepreneurs know, it doesn’t really happen like that – unless you are incredibly lucky.
But, it is a common battle cry from entrepreneurs that they want to sell their business for ?5m in 3 years time – or some similar sort of goal.
This type of goal seems to be partly a response to the need to ask for funding – which inevitably invites the question ‘why would I fund your company’ to which the prepared reply can be ‘because I’ll make you rich and here is how…’
So, now that the old credit flows have dried up and we are living a more chastened business life, what kind of business goals should a successful entrepreneur set him or herself?
This is a tough question.
Okay, it has taken me about 1 year to come up with an answer – and here it is
1.5m / 10 / 3
Okay – it looks simple, it seems simple, but what on earth does it mean?
Well, it is a ratio.
It is a ratio that ensures that the business is strong, sustainable and adaptable – it has the flexibility to adapt to abrupt economic impacts or changes in customer behaviour.
To explain – the first number – ?1.5m – in this case, is the annual revenue or turnover.
The last number – 3 – is the number of employed staff. Now, I include myself in this – and you should include yourself too. So, that leaves two more staff – one of whom will be your right hand man/ woman and probably a very able PA/ Marketer/ Credit Controller / Fixer – who can help hold everything together.
So, what is the middle number – 10? Well, that is the number of equivalent staff (including the 3 actual full-time employees). That is, the number of freelance or contractor staff based in your office or at home that regularly provide you with 5 full days work per week. Now, probably you’ll have 15 to 20 part-time or periodically hired contractors – but these are equivalent to 7 full-time posts – which make 10 in total.
Right – enough of the explanations. Why?
Simple, the goal is to build sustainable businesses with strong market positions, great products and a really efficient and effective way of delivering them.
If you have revenue of ?1.5m and an equivalent full-time staff of 10 – then you have ?150k per revenue per employee. So, unless you are paying exceptionally high wages – on average – then you have a strongly profitable company.
You also have the flexibility to grow the company to ?3 or ?4m – or if you lose a contract to temporarily reduce to 8 or 5 full-time equivalents.
With a broad and experienced freelance workforce, your business can respond to changes in the market place with minimum difficulty and equally, be ready to exploit any opportunity that presents itself.
You now have a fantastically strong company. And, one that will be very easy to sell – because you have minimum employment issues and it is highly portable – so the new owner can pick it up and merge it into an existing office.
Your business sale costs will be low – because the legal due diligence will be simple – and most importantly, your business sale has a much higher chance of going through.
Best of all, because you have a highly flexible business, it is unlikely that you’ll be the exhausted / flaked-out entrepreneur desperate to sell – so you can sit tight, happily, and choose your moment to sell.
The point is that no matter how your business grows or shrinks (as it will) your job remains the same – to keep the same ratio. So…
4m / 20 / 6 is good too, as is
1m / 6 / 2
0.5m / 3 / 1
So, the new goal of successful entrepreneurs is no longer to sell for ?zillions, but to build sustainable and strong businesses – and then let the dividends roll in while you wait for a preferred buyer. And so long as you keep focusing on this ratio – you’ll be fine.
The great thing about this ratio is that it tells us one other thing too – that is, you are on your own until you get to ?500k turnover – and only then do you think about a second full-time employed member of staff.
In the meantime, get building your local freelance talent pool. Your are going to need them.