How to work out your ‘magic number’
May 23, 2022 - 4 minutes read
Posted by Claire Parker
We recently hosted a small gathering of entrepreneurs to discuss the challenges of growing a business to be sold. Only about 7% of UK businesses put up for sale actually complete, a surprisingly low figure given the likely number of people expecting the business into which they’ve poured heart and soul to be their pension. So, we were keen to get perspectives on what it takes to sell a business and to explore how our entrepreneurs’ business sale underpinned their approach to personal financial planning.
To sell or not to sell…
Whilst there are other ways a business can generate an ongoing income without being sold (being passed on to a family member who can continue to grow the enterprise, for example), this isn’t a realistic or attractive option for everyone.
Having spent years building your business, it’s understandable that you may want to step away from the responsibility of its continued success. The benefit of selling a business is you can receive an immediate sum of money and move on with your life away from the daily grind (and joy) of running a successful enterprise.
The downside is that it can be hard to know when to sell: exit too soon and you may let it go for less than it could be worth or for less than you need; exit too late and you could be wasting precious time working to build a business which is worth significantly more than you need instead of pursing other passions. You can’t buy back time after all.
The importance of knowing your ‘Magic Number’…
The key here is to know what we call your ‘magic number’. This number is all to do with the cost of the lifestyle you want to lead in the future and can be used to inform the nature and timing of your exit.
(By the way, if the business is to be continued, with you taking an income perhaps as a continuing shareholder or non-exec, you still need to know your magic number so that you can put the right arrangements in place).
Listening to the delegates at our event, it was clear that understanding their ‘magic number’ was critical. Knowing how much you’d accept for your business means:
- It can be grown strategically.
You can build a business to the scale that’s right for you. You don’t need to be swept away in the complexity of a business worth £50m and a global footprint when a simpler, less stressful business will deliver the £10m/£1m/£100k you’re looking for.
- You know when to sell.
If you know how much is enough, you don’t need to hesitate when you get the right offer. Equally you can look for a buyer who has the same mindset as you.
As our delegates agreed, the value of a business is hard to pin down – businesses are bought for a multitude of reasons. If you’re a strong threat to a competitor, they may be willing to pay a higher price. If a buyer sees the potential to scale and triple their investment quickly, that too will affect the price.
By knowing your ‘magic number’ you can make an informed choice about whether the offer you receive is worth considering. If you don’t get an offer near your magic number, you know you have some tough decisions to make, or that you need to change your approach/timeframe to achieve the required valuation.
- You run the business rather than it runs you.
Knowing your magic number is a great way to focus the mind. Successful business can easily run their owners, dominating their time, energy, and resources. All too often, a successful business is created at the expense of precious family time and attention to health and wellbeing. Being clear on your personal goals and how your business underpins your personal goals helps you gain more control over what our entrepreneurs called their ‘third baby’ which never grows up. Knowing your ‘magic number’ cuts out a lot of noisy thinking.
How to work out your ‘Magic Number’
We all have different ideas of what a great life looks like but building a clear vision is the only way to know how much is enough.
If you’re a business owner, understanding your magic number is all part of our financial planning process. Most clients expect us to start with an analysis of the business and its financial health and are surprised when our first discussion is actually about them and their vision of what a life well lived would look like.
So, our unique style to financial planning, which we call WealthPlan™, is to begin with reflecting on what’s important to you. We help you pin down the material things you want to own/buy; the experiences you want to have; your family and lifestyle commitments; the amount of savings and investments you want to accumulate; any philanthropic activity you want to pursue, giving you a clear picture of the cost of your current and future lifestyle.
We build this information into our financial planning software and then ‘play’ with various ‘what if’ scenarios, stress testing against different choices and things outside your control, like inflation, interest rate changes and market crashes. It’s an illuminating experience, to say the least!
What to do next
If you’re building a business to sell, talk to a member of our team about how WealthPlan™ can help you. You can also download a copy or request a paperback version of Enough? How to know how much money you need for the rest of your life by Paul Armson. We hope this will give you food for thought and look forward to sharing your journey with you towards, during and beyond your business exit!