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Business Valuation · Wealth & Retirement · Succession & Exit

Aligning business goals with financial plans

The business performance needed to reach goal valuation

Business ValuationWealth & Retirement PlanningSuccession & Exit Planning

In Summary

Business owners need financial advisors to give them clarity on how reliant their personal financial plan is on liquidity from exiting their business.

This exercise of providing clients clarity on their liquidity goals and the goal valuation should be quickly followed with a benchmarking exercise that establishes the business performance metrics needed to achieve that goal valuation by the client's ideal exit timeline.

Equipping owners with these metrics helps them tangibly see how business performance contributes to their long-term life goals.

Making business owner financial plans actionable

Most business owners know how important their business is, but can't articulate exactly the role it will play in funding their life goals. Owners are also typically focused on growing their businesses and value practical benchmarks they can use to track progress towards larger goals.

Advisors can use liquidity goal setting and goal valuation estimates paired to show owners how the business could fund their life goals.

Two simple performance benchmarks make tracking progress tangible for business owners:

  • EBITDA needed to reach goal valuation: The earnings the business needs to generate to reach this goal valuation
  • Goal revenue growth: The revenue growth needed each year to meet that EBITDA goal

By focusing on simple top and bottom line metrics, advisors can avoid playing the role of a valuation optimizer or business consultant while still helping owners feel like their financial plans is actionable.

Goal EBITDA

Although business valuation is influence by many factors, with variations method to method, the relationship between earnings before interest, taxes, depreciation, and amortization (EBITDA) and valuation is strong.

Advisors can use the relationship between current valuation estimates and normalized EBITDA to generate rough estimates of the amount of earnings needed to reach the goal valuation.

Estimating Goal EBITDA

Goal EBITDA = Goal Value / Current Valuation Estimate / Normalized EBITDA

Since businesses may earn larger valuation multiples as their earnings go up, it's recommended advisors reference industry EBITDA multiples while estimating Goal EBITDA to see what earnings level the next best multiple requires.

Goal revenue growth

Once Goal EBITDA is estimated, establishing an estimate of the revenue growth needed to reach that earnings level is a great next step.

To do this, compare the most recent year of EBITDA to the Goal EBITDA and apply an annual growth rate calculation.

Estimating Goal Revenue Growth

Goal Revenue Growth Formula

Where:

  • Goal EBITDA = the earnings needed to reach goal value
  • EBITDA (t-1) = the most recent year of earnings
  • N = the years between today and ideal exit

This approach assumes EBITDA margin remains constant going forward. Although it is prudent for business owners to monitor margins and compare them to benchmarks, assuming a fixed margin allows advisors to discuss this metric in more simple terms with clients.

Frequently Asked Questions