business growth model

MacKenzie George & Company

Presents…

The Business Growth Model

A Comprehensive Business Plan Designed to Attain Financial

Independence Through Business Ownership

Mackenzie, George & Company – Certified General Accountants

Nicholas Kilpatrick, CGA

1. Business / Professional Practice Valuations

2. Bookkeeping and Year-end Accounting (Financial Statement Compilation)

3. Assurance (Review, Audit)

4. Tax Compliance

5. Tax Planning

6. Business Component Forecasting

Seminar Agenda

A. Model Goals and Objectives Achieved

B. The Business Growth Model Defined

C. Financial Statement Analytics

D. Growth Model Analytics

E. The Strategic Picture

F. Final Thoughts

A. Model Goals and Objectives Achieved

1. Financial Independence

2. Retirement and Estate Resources

3. Education

4. Business Growth

5. Business Succession – Leaving More Behind

Than What You Arrived With.

B. The Business Growth Model Defined

20% profit before taxes

5 years to satisfy loan obligation

500K in Revenues

Easy to run – can insert people to operate business.

Equity in first unit funds purchase of 2nd unit

Equity in second unit funds purchase of 3rd unit.

C. Financial Statement Analytics

1. Profitability

2. Solvency

3. Sustainability

4. Return on Investment

5. PALLR Sequence of Ratio analysis

D. Ratio Analysis

1. P – Profitability

2. A – Activity

3. L -- Liquidity

4. L – Leverage

5. R – Rate of Return

D. Ratio Analysis

Measure Ratio Measure Standard

Profitability

Operating Margin(Sales - Operating expenses)

40%Sales

Net Margin(Operating margin - Discretionary

expenses) 20%

Sales

Activity

Receivables Turnover

Revenues4-5 times

Avg. accounts receivable

Asset TurnoverSales

5-7 timesAverage Capital Assets

Leverage Debt RatioTotal Debt

30%Total Assets

Liquidity Current RatioCurrent Assets

2:1Current Liabilities

Rate of ReturnReturn on Equity

Net Income20%

Shareholders' Equity

Return on AssetsNet Income

20%Average Total Assets

A Ltd.Income Statement

For the year ended xxxx

Fees 568,887

Advertising 3,075Bank charges and interest 515Janitorial 5,496Credit card discounts 1,820Supplies 47,340Insurance 3,226Laboratory fees 24,615Legal and Accounting 6,481Licences, taxes and dues 5,805Utilities 2,151Parking 181Postage, stationary, and office 7,478Repairs and maintenance 2,847Telephone 1,032Wages and employee benefits 107,914Amortization 6,348

Total expenses 226,324

Operating income 342,563

Management salaries 58,500Income tax 37,201

Total management salaries and income tax 95,701

Net income for the year 246,862

B Ltd.Income Statement


2011 2010

Sales 247,639 344,169

Cost of SalesEmployee benefits 3,518 4,968 Purchases and supplies 89,581 127,981 Subcontracts 17,764 33,938

Total Cost of Sales 110,863 166,887

Gross Profit 136,776 177,282

ExpensesAdvertising 6,930 4,899 Automobile 9,281 8,721 Bad Debts 750- 750 Bank charges and interest 335 893 Consulting 3,386 - Accounting 1,600 2,095 Legal 1,426 - Licences, taxes and dues 166 116 Postage, stationary and office 1,230 3,475 Rent 5,134 4,284 Telephone 4,966 4,596 Travel 3,242 2,559 Amortization 1,659 2,340

Total expenses 38,605 34,728

Operating income 98,171 142,554

Management salaries 115,000 115,000 Income tax - 4,342

Total Management salaries and income tax 115,000 119,342

Net (loss) income for the year 16,829- 23,212

C Ltd.Income Statement


2011 2010

Sales 914,813$ 100.0 722,730$ 100.0

Cost of SalesFood purchases 343,372 37.5 252,695 35.0Royalties 35,906 3.9 27,918 3.9

Total Cost of Sales 379,278 41.5 280,613 38.8

Gross Profit 535,535 58.5 442,117 61.2

ExpensesAdvertising and promotion 70,809 7.7 64,867 9.0Amortization 24,549 2.7 25,627 3.5Customer service centre fees 47,034 5.1 38,109 5.3Equipment lease 2,254 0.2 2,253 0.3Insurance 2,715 0.3 3,147 0.4Interest and bank charges 4,796 0.5 4,655 0.6Janitorial and maintenance 1,517 0.2 924 0.1Management salaries 96,802 10.6 69,627 9.6Meals and entertainment 2,657 0.3 3,963 0.5Office 5,335 0.6 7,304 1.0Professional fees 3,385 0.4 3,030 0.4Rent 20,996 2.3 20,079 2.8Repairs and maintenance 9,253 1.0 1,731 0.2Telephone 8,038 0.9 8,253 1.1Uniforms - - 168 -Utilities 10,793 1.2 5,381 0.7Vehicle operating 23,115 2.5 18,490 2.6Wages and benefits 202,501 22.1 166,610 23.1WCB 1,729 0.2 1,163 0.2

538,278 58.8 445,381 61.6

2,743- -0.3 3,264- -0.5

Investment income 1,459 0.2 2,520 -0.3

Net (loss) income for the year 1,284-$ 0.1 744-$ -0.1

D. Growth Model Analytics

• Optimal business parameters for the model.-20% net income before taxes-500K revenue levels-Recession-proof industry-Location-Demographic of customers (margin vs. volume)

• Operational requirements. -Staffing levels -Ability to replicate management efficiencies

• Personal longevity, sustainability, and success.-Strategy-Intent of Business-Job replacement

The Business Growth ModelProgression Yr 1-5 - Business A

Assumptions: Parameters-10% growth per year Business #1 purchase price = $500,000-20% down payment on purchase price -Money down (20%) =$100,000-funding source =Owner's equity-Pay off loan in 5 years -Amount financed = $400,000- Business purchase price = $1 per $1 of sales

Business Loan RequirementsPrincipal = $400,000 -5% growth (yrs 1-15)Interest rate = 5% -Keep all expenses within the percentage parametersReduction period - 5 years -Solid brand

Question marks-Interest rates

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Revenues 500,000$ 525,000$ 551,250$ 578,813$ 607,753$

Cost of sales (36%) 180,000 189,000 198,450 208,373 218,791

Gross profit 320,000 336,000 352,800 370,440 388,962

M & A expenses (36% - 38.5%) 192,500 202,125 212,231 222,843 233,985

Management salaries 40,000 40,000 40,000 40,000 40,000

Operating income 87,500 93,875 100,569 107,597 114,977

Income tax (13.5%) 11,813 12,673 13,577 14,526 15,522

Net income after taxes 75,688$ 81,202$ 86,992$ 93,072$ 99,455$


Progression Yr 1-5 - Business A

Beginning cash -$ 11,593-$ 17,671-$ 17,960-$ 12,168-$

Add: Yearly cash inflow 75,688 81,202 86,992 93,072 99,455

75,688 69,609 69,321 75,112 87,287

Loan principal reduction 70,323 76,401 81,383 84,976 86,917

Interest on loan (fixed) 16,957 10,879 5,898 2,304 362

Operational ending cash 11,593- 17,671- 17,960- 12,168- 8

Capital replacements / improvements *** 20,000 20,000 20,000 20,000 20,000

Ending cash -$31,593 -$37,671 -$37,960 -$32,168 -$19,992

*** Updates to interior, capitalimprovements and/or replacements

The Business Growth ModelProgression Yr 6-10 - Business A + B

Loan #1 Loan #2$100,000 equity draw out on business A - 5% $400,000 for business B - 5%(5 year fixed) (5 year fixed)

Purchase price of business B$500,000


BUSINESS B

Revenues 500,000$ 525,000$ 551,250$ 578,813$ 607,753$

Cost of sales (36%) 180,000 189,000 198,450 208,373 218,791

M & A expenses (36% - 38.5%) 192,500 202,125 212,231 222,843 233,985



Income tax (13.5%) 11,813 12,673 13,577 14,526 15,522


BUSINESS A

Revenues 638,141$ 670,048$ 703,550$ 738,728$ 775,664$

Cost of sales (36%) 229,731 241,217 253,278 265,942 279,239

M & A expenses (36% - 38.5%) 245,684 257,968 270,867 284,410 298,631



Income tax (13.5%) 16,568 17,666 18,820 20,031 21,302



Progression Yr 6-10 - Business A + B

CUMULATIVERevenues 1,138,141$ 1,195,048$ 1,254,800$ 1,317,540$ 1,383,417$

Cost of sales (36%) 409,731 430,217 451,728 474,314 498,030

M & A expenses (36% - 38.5%) 438,184 460,093 483,098 507,253 532,616



Income tax 28,380 30,340 32,396 34,556 36,824


Beginning Cash -$19,992 $53,813 $140,171 $239,708 $353,084

Add: Yearly cash inflow 181,845 194,398 207,578 221,416 235,947

161,853 248,211 347,749 461,124 589,031

Loan principal reduction - loan #1 16,499 17,983 19,213 20,121 26,184

Loan principal reduction - loan #2 70,323 76,401 81,383 84,976 86,917

Interest on loan #1 4,261 2,777 1,547 639 119 Interest on loan #2 16,957 10,879 5,898 2,304 362

Ending operational cash 53,813 140,171 239,708 353,084 475,449

Capital improvements - business A 20000 20000 20000 20000 20000Capital improvements - business B 20000 20000 20000 20000 20000

Asst. manager hire in year 6 - business A 50,000 50,000 50,000 50,000 50,000

Ending cash -$36,187 $50,171 $149,708 $263,084 $385,449

The Business Growth ModelProgression Yr 11-15 - Business A + B + C

Loan #1 Loan #2$100,000 equity draw out on business A - 5% $400,000 for business C - 5%(5 year fixed) (5 year fixed)

Purchase price of business C$500,000


BUSINESS CRevenues 500,000$ 525,000$ 551,250$ 578,813$ 607,753$

Cost of sales (36%) 180,000 189,000 198,450 208,373 218,791

M & A expenses (36% - 38.5%) 192,500 202,125 212,231 222,843 233,985



Income tax (13.5%) 11,813 12,673 13,577 14,526 15,522


BUSINESS BRevenues 638,141$ 670,048$ 703,550$ 738,728$ 775,664$

Cost of sales (36%) 229,731 241,217 253,278 265,942 279,239 M & A expenses (36% - 38.5%) 245,684 257,968 270,867 284,410 298,631


Operating income 122,726 130,862 139,405 148,376 157,794 Income tax (13.5%) 16,568 17,666 18,820 20,031 21,302


BUSINESS ARevenues 814,447$ 855,170$ 897,928$ 942,824$ 989,966$

Cost of sales (36%) 293,201 307,861 323,254 339,417 356,388 M & A expenses (36% - 38.5%) 313,562 329,240 345,702 362,987 381,137 Management salaries 40,000 40,000 40,000 40,000 40,000

Operating income 167,684 178,068 188,972 200,420 212,441 Income tax (13.5%) 22,637 24,039 25,511 27,057 28,680



Progression Yr 11-15 - Business A + B + C

CUMULATIVERevenues 1,952,588$ 2,050,217$ 2,152,728$ 2,260,365$ 2,373,383$

Cost of sales (36%) 702,932 738,078 774,982 813,731 854,418M & A expenses (36% - 38.5%) 751,746 789,334 828,800 870,240 913,752Management salaries 120,000 120,000 120,000 120,000 120,000

Operating income 377,910 402,805 428,946 456,393 485,213 Income tax 51,018 54,379 57,908 61,613 65,504


Beginning Cash $385,449 $604,301 $844,688 $1,107,685 $1,394,425

Add: Yearly cash inflow 326,892 348,427 371,038 394,780 419,709712,341 952,728 1,215,726 1,502,465 1,814,134

Loan principal reduction - loan #1 16,499 17,983 19,213 20,121 26,184 Loan principal reduction - loan #2 70,323 76,401 81,383 84,976 86,917

Interest on loan #1 4,261 2,777 1,547 639 119 Interest on loan #2 16,957 10,879 5,898 2,304 362

Ending operational cash 604,301 844,688 1,107,685 1,394,425 1,700,552

Capital improvements - business A 20,000 20,000 20,000 20,000 20,000Capital improvements - business B 20,000 20,000 20,000 20,000 20,000Capital improvements - business C 20,000 20,000 20,000 20,000 20,000

Asst. manager - business A 50,000 50,000 50,000 50,000 50,000Asst. manager in year 10 - business B 50,000 50,000 50,000 50,000 50,000Asst. manager in year 10 - business C 50,000 50,000 50,000 50,000 50,000

Ending cash $394,301 $634,688 $897,685 $1,184,425 $1,490,552

Business Growth Model

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15

Year

$

Revenues Net income after taxes Ending cash

Business Growth Model

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000


Year

$

Revenues Owner compensation Loan servicing Capital imrpove. & asst. mgmt/ Ending cash

D. Growth Model AnalyticsWhat Do We Have At year 15?

1. $1.49 Million in the bank.2. Annual salary of $120,000.3. Asst. mgmt secured at each location.4. Assuming market value = revenues, $2,373 Million in asset value to

facilitate retirement objectives.5. All net income within the $500K Small Business Deduction Limit.

6. Ownership concentrating on: Management Marketing Strategy

7. Financial resources to extend business network.

Business growth Model - Return on Equity Invested - by % - Year 1-15

-100.00%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%


Year

% Return

Percentage return

Business Growth Model - Return for Every Dollar Invested

-1

0

1

2

3

4

5

6


Year

$ Return

Return on Equity ($)


1. Marketing requirements

2. Personnel requirements

3. Operational requirements


1. Marketing requirements

Execution of Head Office / Franchisor marketing strategy.

Market demographics

Profile


2. Personnel requirements

Quality staff don’t’ always come along, but they are there.

Good personnel needed to facilitate the plan.

Asset vs. Liability


1. Operational requirements

Operational guidelines for every task in the business to cut costs and maximize efficiencies.

Total Quality Management (TQM)

Business Audit Proof Seminar – Navigator Series.

Your responsibility is:• Management • Marketing • Strategy


Summary of Growth Model Requirements

• Ability to pay off loan in 5 years

• Net income at 20% after taxes

• Active market – ability to grow business by 5%/year

• System to continuously track expenses – keep within established model parameters.

• Quality staff – will facilitate operational efficiencies and help you stay within your percentages.


Question marks

• Interest rates.

• Vendors – continuously check pricing – use multiple vendors.

• Market demographics & other characteristics.

• Economy

• Location

F. Final Thoughts

• Businesses with the required parameters to make the

Business Growth Model work are not available every day.

• Finding them requires diligence by analyzing financial and business information, and speaking with mead office personnel to acquire and understanding of their vision and intent of the Business.

• 5% growth per year used in this model is conservative – execution of a well planned marketing strategy can result in more growth.

F. Final ThoughtsFuture seminars in the NAVIGATOR series to assist in finding and operating the right businesses:

•BUSINESS AUDIT PROOF – securing your business against theft and maximizing the effectiveness and efficient operation of your business

BUSINESS VALUATION – Determining The Proper Price To Pay For Value.

FINANCIAL STATEMENT ANALYSIS – The Key To Finding Your Profitable Businesses.

CORPORATE TAX PLANNING – How To Legally Keep As Much Money as You Own.

PERSONAL AND ESTATE TAX PLANNING – Making All The Work Pay Off; How To Fully Enjoy The Fruits of Your Labour

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