How big does your business need to be?

I explained to Scott [AJC: not the same Scott who helped us build our Perpetual Money Machine, most of last week; this Scott is one of our 7 Millionaires … In Training!] that his “zero to $10 Million in10 years” financial rocket ship would need to be powered by a potent kind of fuel: one that can deliver a 67% compound annual growth rate …

… and, that kind of growth usually only comes from one place: starting your own business.

Yep … super-growth is the just reward for the entrepreneurial mind set.

But, most won’t even start because super-high growth means assuming more risk; and, many who do take this path fail miserably … or, miss their target completely.

Still, a $10 Mill. / 10 year target – or even a $7 mill. / 7years target – can probably only be achieved with your own business … one that you start yourself so that you can minimize capital (if you buy a business, you are paying precious capital to somebody else, and usually they are selling because the growth rate isn’t stellar).

But, how big does that business need to be?

Well, if you don’t have a target, most people are happy if their business can bring in a decent ‘salary’ …

… but, that’s not enough for you. Because now you have a Life’s Purpose and that needs a certain Number to ‘fuel’ it!

For anybody in business, or aspiring to be in business, here are the steps that will tell you how big your business needs to be:

1. Get a handle on your Life’s Purpose: I’ve already laid out a step-by-step process that will only take a few days to think through (but, will change the way you think about money).

2. Derive your Number / Date combo.: Understanding your Life’s Purpose will tell you are awful lot about how much money you need to generate (Your Number) and by when (Your Date).

3. Set the future sale price of your business: The chances are, your ‘nest egg’ (i.e. your Number) will only come from one place – from selling your business (you might decide to keep it, but let’s assume that the end goal is to sell it, for now). So, let’s assume that you have to sell your business for at least the amount of Your Number (you can subtract any houses or other assets that you are sure that you will have by then).

4. Set your end profit target: Most businesses sell for 3 to 5 times their earnings after tax; professional practices often sell for 0.75 to 1.5 times their annual billings/fees … just check with an accountant and reputable business broker how similar businesses in your area are typically valued (they will usually also tell you to value your inventory, if you carry any … you can probably ignore that for now).

So, it’s simple to work backwards from your Number (hence required business sale price) to see how big your business needs to be in terms of earnings (i.e. net profit) or fees/revenue. Just a rough calc. will be plenty to …

… scare the pants off you!

I’ve said before that understanding my Life’s Purpose was the most profound thing that I ever did … and, I was talking pure finances when I said that – not visualization, self-actualization, or any kind of pop-psychology mumbo jumbo!

You see, when I did this exercise in 1998, I had two small businesses that just managed to break-even (after paying me a nominal salary) after a number of years of operation.

When I suddenly realized that I had just 5 years to turn the loss-making two businesses combined that I already owned for better or (mainly) worse, into a $1.5 million per year net profit powerhouse, I immediately started to look at the businesses very differently …

… and, that’s what suddenly took me on a global hunt for expansion possibilities, resulting in joint ventures in three countries, including the USA, growing my portfolio from 2 loss-making businesses to 5 profitable businesses in less than the 5 years that I allowed myself.

It also sparked the search for an investment portfolio (centered largely on real-estate, at the time) that actually got me to my target even without needing to sell my businesses … that just became the cream on top 😉

There’s no way any of this would have occurred without the spur [AJC: more a kick up the … ] that truly understanding the financial implications of my Life’s Purpose gave me.

Now that you know how … go and do it, too!

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9 thoughts on “How big does your business need to be?

  1. Excellent, thanks for the tip Adrian. However, I’ll definitely need to rethink my strategy, because the general consensus amongst colleagues in my profession is that a practice will sell for 60% of your annual COLLECTIONS, which is usually about half of what you bill due to the insurance industry and their quest to pay less. This means that even million dollar practice will only sell for 600k. The reason behind this is because “you are your practice” and when the dr. leaves and a new one comes in, most of the patients split because they developed a relationship with the former dr. Most wealthy dr.’s in my profession have become multimillionaires by owning 2-3 practices, run by paid associates and then investing heavily in RE. After 10-20 years, they sold the 2-3 practices and added that to the next egg that they have already obtained after acquiring RE and making 300-500k per year while living on 1/3rd of that.

    I’ll need to come up with additional ideas to go along with this for sure.


  2. Scott: that may be true in many cases, but I wonder if you could give the patients a different perception. I’m guessing most doctors don’t go out of their way to learn how to be great managers and develop a business. Between training employees well and documenting your systems you may be able to remove a lot of the personal effect.

    When it comes down to it you can’t just replace a great doctor with an average one and expect everything to stay the same, but if you train the person who will be replacing you you can show them how you create value. I don’t know how many doctors want to stick with conventional employment vs taking on more risk for profit. But if you find one who is happy to work for you you can remove yourself from the day-to-day operations (if you still like the actual work rather than business administration remember that this allows you to have move of an impact by potentially guiding several doctors – you just can’t do it all yourself). At that point the business runs fine whether or not you’re there.

    If you have someone who wants to end up owning their own practice, you can train them and then allow them to buy you out over a number of years – during which time you would be collecting a lot of profits without much work. To put it another way some sports teams only get by because of a few stars, but others keep winning as the players change because they have a highly effective team. A team business is worth more than a “star” business.

    At the start of this year I was a freelance worker, but I realized that I had an awful business because nothing could happen if I was away – which is just as bad for my customers as it is for me. This might seem normal to some, but I’ve worked hard to change things and start removing myself from the process. At that point I don’t think I’ll sell the business – why not just keep collecting money from it forever while I start something new? This kind of decision really depends on you more than the industry you’re in.

  3. Yeah, many are semi-successful at making a fairly smooth transition from one dr to the other, but it really depends like you said on whether or not you can find a really good dr. Even if you stay for 6 months and slowly “transition” the patients over to the new dr, there is always great turnover and the new dr is essentially “building their new practice”, just in a new location.

    Trust me, this isn’t just my opinion on the matter, or a lack of reading the right books(as i’ve read just about all the most popular one’s, and been to MANY success and finance seminars, too many to count) it’s the profession’s understanding as a whole and underground establishment that 60% of the annual gross collections is a typical sale price.

    Even the most elite and business savvy dr.’s know this and function accordingly. It’s not the same as selling shoes, sandwiches or providing computer or cabling service for large corporations. 90% of patients are coming to see YOU, not even your service. I never realized how much personality and salesmanship having a private practice would require. Those with the most salesmanship and “perceived energy” for what they do have the biggest practices and when they leave, the practice becomes whatever the new dr IS.

    You are right about the best idea being to let a new dr buy the practice over time and share profit. That’s how i’ve acquired my practice and the owner(and my former employer) has made a fortune off of my work.

  4. You know the situation better than me but perceptions can always be changed. On the practical side, you’re right that you can’t go from being the business to having someone else stand in for you in 6 months – so trying to make a switch like that at the last minute is likely to fail. But if you build the business that way from the start or plan years in advance you’re more likely to succeed.

    You’re absolutely right that personality counts. Having the actual skills only gets you into the game; to do well you need to make people comfortable with the whole process. But if you can learn this it’s likely that other people can too. Hiring people with the right attitude, reinforcing the main priorities, and training them all help make the business less dependent on you.

    Selling the business at the right price is another matter – you need to convince buyers that it really is different and a higher price is justified. Of course it would have to be based on solid revenues and profits, but to show a buyer that it’s not all because you’re there you would probably have to have them come in and see how things are run, show them people who are ready to keep coming back (maybe they don’t even know who you are), and show that real differentiation is done without you being involved. For bonus points you can offer to do consulting after selling the business to help deal with any issues that arise – it gives you a little extra income too.

    I’ve always believed that the best way to build a business to sell is to build one you want to own forever, but following these steps should help in either case.

  5. AJC,

    I’m curious how your revelation changed your business practices? I suspect you wanted your businesses to succeed beforehand? Did you take more risks? Or was it a case of finding what you were looking for? Before you were looking for how to keep status quo, but after for how to grow to $1.5 million/year?

    @Scott – It seems to me that the best candidates to buy a practice would be doctors that already have some partial ownership. If I had a practice and wanted to ease out of it I would look for a few young and talented doctors that would like to eventually run the practice. Make a plan that they can reasonably gain ownership and you can get a fair value for the practice. Then train them and insure that they succeed. Over time gradually reduce your patient count and sell interest in the practice to them.

    -Rick Francis

  6. @ Rick – Yep, that’s exactly what the most successful dr’s do and what I plan to do. SLOW exit and sell to a new dr over time while still owning shares and basically the new dr is buying your shares over time. You do get more for the business by doing that and the transition works out if it is a good dr.

    @ Richard – Definitely good advice Richard, thanks!

    @ Adrian – LoL, now what kind of post are you cooking up on the ‘frugal doctor’, Adrian? Whether your a doctor, lawyer or business consultant, isn’t it about the same business principles? Live on less, reinvest as much of your income as possible into your own business to grow it (or them) additional businesses, good strong commercial RE, or stocks? Same stuff regardless of title.

  7. @ Scott – I agree: same sh*t … different title 🙂 You pointed to one of the keys: if you are a self-employed professional, live well below your means … even better, do what Richard is essentially suggesting: look for a way to turn your PRACTICE into a BUSINESS … these terms are not necessarily the same thing 😉

    @ Rick – I guess I was muddling along, trying to work IN my business instead of really working ON it … my Life’s Purpose – then Number – really put a rocket up my … 🙂

  8. @ Adrian – Very good point! I think that is the key where most dr’s get hung up on and never turn their practice into a business and are strapped for all the hours their life provides instead of seeing patients out of purpose and the joy of helping people and not out of necessity.

    My biggest goal in practice is the vision of owning 3 practices that are being run by 3 well trained young dr’s(turning them into businesses) and I just coach them, cover for them on a sick day or a vacation week or when I want to see patients myself, then sell the practices off to them slowly over time at a good sell price.

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