Go ‘Fund’ Yourself (Step 3)

Now that you have a lifestyle business that is making you money it is time do decide what’s next! Of course with any great lifestyle business you can always just keep doing that.

There is certainly no need to grow it. Like most, though, you adopt the notion that if you are not growing your dying. If this is the case with you, then you need to decide if you want to transition you lifestyle business into a legacy business or for an exit. I will explain how to pivot into an exit in the next chapter.

For this chapter, let’s assume you want to transition into a Legacy business. A legacy business is one of scale, and it is designed for profitability and longevity, not growth and exit. These, in my opinion, are very different strategies.

I will build entire content libraries on how to do this in the future as I know most reading this will be in the lifestyle startup phase. That being said, it’s important to have a decided heart on where to go.

The base formula is Legacy Formula = Revenue / Head Count Ratio, TE ratio,

Revenue/ Head Count Ratio.

So lets say you want to add one employee for every $200,000 in revenue. This number to headcount ratio will vary widely depending on the type of industry. Companies that have high employee count often have a lower cost per employee than a business that is leveraged.

Example, a local high-end boutique may have $50k in sales for every one employee but because they only have to pay that worker $10/hr on a 32 hour week the cost of the headcount is only $16k leaving a profit of $34k per head count. Whereas a SaaS company (software as a service) might have a whopping $300k in revenue per headcount but that employee commands a $150k cost. So while their profiting $150k per headcount on a scale of $5m in sales the boutique is making more money.

$5m / 50k = 100 person staff @ $34k profit = 3.4M in Gross Profit for the boutique.

$5m/ 300k = 16.6 person staff, even rounding that up to an even 17 @150k profit =2.55M in Gross for the SaaS company.

TE Ratio

TE stands for ‘Territory Expansion.’ This represents both organic growth (growing your core business) or inorganic growth (buying competing or strategically aligned businesses). I suggest a 20% TE ratio on gross revenue with an expected ROI of 1:10 @30x.

This means you should expect only $1 out of $10 to give you return but that $1 that does will yield you $30. This takes into account the cost of acquiring,

This is how you compound your growth over time to not only diversify your income but to create stability. As long as you build each person with the same formula in mind, and you expand with the same method in mind your company has a solid chance of lasting for generations.

Let’s take the example over ten years with the same boutique and with the same SaaS company.

Boutique:

100 employees were grossing $5m in sales annually on a 3.45m gross margin. The legacy formula would look for like this:

$50k — 20% ($10k) -$16k (Headcount) = $24k @ 100 headcount still generates a 2.4M gross profit (still higher than the SaaS business by the way).

Over the course of ten years of acquiring other boutiques, investing in fashion apps to who intern sell their clothing, and commissioning their line they have invested $10m.

Based on my formula $10m would result in $1m giving a significant return. But that $1m would generate $30m.

That’s a $30 million dollar high fashion empire. Assuming that the same ratio integrities stayed in place in another ten years, it would turn into a $180M company!

SaaS:

Our software friends were sitting on 16.6 headcounts that we rounded up to 17 because they had a few underpaid interns on staff (this is all made up folks, please no “oppressed intern hate mail). They followed the same formula:

$300k per employee -20% ($60k) -$150k (headcount) = 90k profit @ 17 people = 1.53M

Over ten years of TE would also create a $30M company. However, the world of SaaS is superior to the boutique business because of the law of attrition. By the sheer nature of staying relevant in your space, you will attract and increase growth curve. At a 20-year valuation, the company would be worth hundreds of millions.