Where Might Your Business Goal Take You?

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
etc…

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.

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ps. If you subscribe to the slightly tougher view that entrepreneurs should never employ anyone, then just put your ‘full time’ staff on long term freelance contracts. The effect is the same – continuity – need for a small office space – etc…. but the flexibility remains.

GOAL - goals for business - the good, the bad and the alternatives

Goal Setting is powerful. And I’m a big fan of setting goals… but…

… goal setting can have plenty of unintended consequences.

Like the back of bottle containing powerful chemicals – perhaps for clearing a blocked drain – they should contain the warning ‘use with caution’ and ‘discard when passed the use by date’.

A classic goal for first-time entrepreneurs – who are building their first business – is to sell the business for a set amount – say £5million – in 3 years time.

This goal has both good outcomes and some nasty consequences – so let’s have a look at each.

Good outcomes…

This goal can be shared with a team. Typically it is used to encourage shareholder partners or sometimes suppliers to buy into the business plan and ambition.

If you have no credibility as an entrepreneur – say you have just left full time employment and not previously had a profit & loss responsibility within your ex-company – then this goal is a clear sign of your intentions.

As a result, it can help to make people take you seriously.

Downsides…

However, the people most likely to take you seriously are equally inexperienced partners, freelancers or suppliers.

There is a danger here of the blind leading the blind.

More experienced freelancers or suppliers will want to wait until you can pay for their services in full (or at least in part) or can demonstrate the ability to deliver the growth required to achieve a substantial valuation within a couple of years.

Therefore, the real galvanising effect will be limited.

If however, your business has achieved growth and decides to take on new equity partners to fund further growth – then again, you may be tempted to set a ‘sell for £x million in y years’.  And this may be necessary to get agreement on investment. Still, at this stage, you will have a clear track record, assets against which the investments are being made and some logic behind your projections (hopefully).

Still, inexperienced entrepreneurs are under the false impression that business angels and investors want to hear this at the early stage.

Now, inexperienced investors may be impressed by these claims, but more experienced investors – who may also have greater knowledge and business wisdom to bring to your business plan – will be less impressed if your business lacks a track record.

However, let’s say that you do have a business which has delivered growth and that your claim to sell for a large amount is credible. Is this still a good goal?

No.

Let me explain what happened when my partners and I set this goal and what went wrong…

By 2004 we had built an online publishing business delivering £400k of revenue per year by publishing property books, analysis and information. In order to grow the business we took on a property partner and set a big goal.

The original goal of the business was to sell for £5m in 2004 – and as we had missed that goal, we set a bigger goal to sell for £20m.

The new partner meant that we built a full set of shareholder agreements that tied all the shareholders to the business until we had achieved our goal.

And, if any partner left before the goal was achieved, then that partner would forfeit nearly all of his shares. It was called a ‘bad leaver’ clause.

The result of that goal becoming hardwired in our business was that we set ourselves up to succeed spectacularly – or fail spectacularly.

In the end, it failed spectacularly. Even despite the fact that we received an informal offer for the business of £12million in 2007, the business closed in August 2009.

The trouble was that the goal which galvanised the team in the first place became the ultimate and sole focus of the business.

As soon as the possibility of achieving that goal began to fade, so the business took a dive. The partners to the business felt trapped and unable to leave because of the shareholder agreement.

The result was that the business – which still had some considerable value – was not led by motivated or driven individuals.

We were not motivated by a desire to make a difference or to deliver a better service, no, all that was left was the money. That was the sole reason to carry on and equally what made us feel trapped. Working for just money is so far away from the pure entrepreneurial spirit in which we had begun, that we felt like we’d built ourselves a corporate prison.

We had locked ourselves in, with the result that the business self destructed.

Okay, so that was the mistake – what would we do differently next time?

Change the goal!

We learned the power of goals – for both good and bad.

So, how do we set a goal that allows the business to grow?

Simple,  set a revenue per employee goal - because this goal is about creating a sustainable strong business that is low stress to manage and as a result is a lot more fun for the shareholder/ business partners. Don’t set a fixed value goal.

And, in a strong and stable business the partner exhaustion is much reduced and the desire to escape the business – whilst being trapped by the shareholder agreement – is reduced too. Lastly, partners are not trying to run to a fixed date deadline that isn’t really in their control.

A stable high revenue per employee business means that if revenues reduce, headcount reduces too at the same pace.

It allows some partners to leave the business – because the business is not fixated about a specific goal by a specific deadline – and therefore increase the strength of the business rather than diminish it (as the revenue per employee ratio will increase when a partner leaves).

It also means that partners would be paid market rate for their work – and not a reduced rate on the basis of an anticipated capital sale in a few years.

This ratio will also ensure that the business does not overload with senior executives before the business can afford them.

An alternative view on this is don’t have partners…

If you don’t have partners then you can change your business goal whenever you wish.

And that is the point about goals – their benefit is that they are powerful and unchanging – except when they have served their purpose and need to be discarded.

Think then, of business goals as a target to aim at – but ultimately, you probably will discard that target -once it has served its purpose. And, you must be absolutely certain that you retain the ability to discard any goal that no longer serves the business.

So, let’s do a health check, does your business have any goals that have passed their sell by date?