After you know the order at which things need to be done, you need to make sure obviously that it’s realistic in terms of you spending your time and your energy and perhaps your loved one supporting you doing this endeavor. You need to make sure that everything that you’re doing will end up rewarding you and at this point, we’ve talked about the important of execution and how it multiplies the value of our business. So at this point, you need to decide what are you going for, right? What is the end goal? What is the number that would make you feel successful?
Once you have a number that will make you feel successful, you want to reverse engineer the would-be path of the company over the course of say 3, 4, 5 years, right? Once you have an idea of what you’re sales goals should be because you know how much you want to get out of your company at the end, then you can basically derive what this month should be in terms of revenue. Once you have these numbers, it becomes easier to figure out whether your plans have realistic chance at hitting your goals because if they don’t, then you need to recalibrate your strategy.
So let’s think about this, so let’s say that my goal at the end of this is a $25 million exit and I want to accomplish this over 5 years. I know that whenever an acquire goes out and purchases a company, typically what they’ll be paying is about 3 to 10 X EBITDA. The EBITDA is just a really, really fancy accounting speak way of saying that it’s an indicator of how good your company is at doing what it does. EBITDA stands for Earnings Before Interest, Taxation, Depreciation and Amortization. It just means that you’re just looking at what are you producing and how much are you spending to sell it and how much is there left after that. So it’s just a straight revenue minus cost.
So typically an acquirer will pay between 3 to 10 X of that number. So if I’m telling myself that I want to come out with a $25 million exit, then in 5 years if my acquirers paying the minimum which is 3 X, then my EBITDA needs to be about $8.5 million. So I will say $8 million annually in EBITDA in revenue, let’s say to be able to — well it’s not revenue, it’s $8.5 million after your cost like what comes out, you come out with $8 million at the end of the year and they’ll pay 3 X of that which is $25 million.
So if I know this number, right, like this is a great benchmark for me to say okay, the goal at the end is this. Now I can reverse engineer what this year needs to look in order for me to be on pace for that event to happen in 5 years and if I know that I’m being purchased because I have great revenue, maybe I have good customers, maybe I have good technology, maybe my team is amazing, there’s probably a reason for this is that I am growing really fast, right? I’m a leader or becoming a leader in that category and the person or the company that wants to buy me is either interested in integrating my technology or they feel threatened by my increase in market share, what have you, the reason doesn’t really matter but what you know is that you’ll need that amount in 5 years and that you’re growing at a certain growth rate.
Now if we’re growing really fast and we set our objective to 100%, right, where every year we’re growing our EBITDA by 100%, so we’re doubling the value of the company, then I know what the next 4 years or 5 years looks like, right? I know that if my growth rate is 100%, then every year I’m doubling up. So your 4 was 4 million, your 3 was 2 million, your 2 was 1 million and this year I know I need to be generating about $500,000.
Now if we go back to the idea of Spoil, I know that on average, if we say that after promotions and discounts and whatnot, instead of $30 I get out about $25 per Spoil, I can theoretically say that I need about 20,000 spoils to be sold by the end of year 1 for me to be at 500K of revenue and for me to still be on track for my execution, for my strategy and for my vision and obviously for this event, for this successful event.
So at this point, what you’re doing is you have a goal which is 500K. You know why you have this goal is because not only will it allow you to realize the full potential of your vision but it will also provide you with a position to actually be able to sell your company for a good exit and you’ll know what to do because you know, you’ll have this 500K benchmark, this goal and you’ll be able to look at the strategy that you’ve built and say okay, well, my strategy relies on say PR, having good website, having a paid strategy and if I take a look at all of those efforts, do I have a realistic chance of hitting this goal and then on top of it, is there a chance that I won’t be able to make it happen and what are those reasons? And then you now have pieces of your business that have a chance at failing which gives you a perfect example of where you need to be focusing your time more so than in other places because those things that you would be focusing on are the things that are most prone to cause a failure in the business, so if you fix those and the other things are going to work anyways, then you already know that you’re going to have a descent, at least descent execution on this Spoil idea.