Lesson 3 · Do & interpret
Twenty minutes and six inputs produce the number your whole plan is measured against. Most leadership teams have never seen it written down.
11 minutes · Deal-math calculator · Artifact: target earnings
From what the owners paid and what they expect to get back, to the earnings this business has to reach and by when.
It is not complicated arithmetic. It is arithmetic nobody has shown you.
Whatever your ownership looks like, there is a level of earnings this business has to reach. It arrives from one of three directions, and the arithmetic is identical in all three.
Purchase earnings, price paid, the borrowed portion, years remaining, the return expected, and your view of what the business will be worth at the end.
Write down the target earnings and the year it lands.
Same inputs, one change. Write down the second answer next to the first.
The tool
On the site it is listed as the LBO Calculator — LBO just means the deal math, how the purchase of your business was paid for. Free, no account needed, and your figures stay in your browser while you work.
The target itself is not the useful number. A $40M business and a $400M business cannot be compared on dollars. The comparison that works is the target divided by what you earn today.
Target earnings ÷ what the business earns today
That figure — how many times your current earnings you have to become — is the one to write on the scorecard.
| Your multiple | Reading | What it means for you |
|---|---|---|
| Below 1.3× | Within reach | Rare. Your risk is not the plan, it is complacency. An easy number tends to get raised, or the business gets sold sooner than anyone told you. Check that an optimistic view of what the business will be worth is not quietly doing the work. |
| 1.3× – 1.8× | Achievable | The common case. Price, product mix and removing complexity can carry this — but only if each piece is named, owned by a person, and reviewed on a rhythm. Working harder will not do it. |
| 1.8× – 2.5× | Requires real change | Running the business better rarely closes this on its own. It requires decisions about what you stop selling, who you stop serving, and where you stop investing. |
| Above 2.5× | Needs a reset | Either you have a proven ability to buy other businesses and integrate them, or the expectation itself needs renegotiating with whoever set it. Pretending otherwise burns two years you cannot get back. |
Second read
Compare your two answers. If the required earnings moved more than 15% when you dropped the end multiple by a single turn, a meaningful part of your plan is a bet on market conditions rather than on your own performance.
Say that out loud to whoever set the number. Most plans hide it, and the ones that hide it are the ones that get discovered late.
Earning $6.0M when the current owners took it on, an 8.3% margin. They paid $48M, borrowed half of it, expect 2.5 times their money back, and have five years left. The leadership team had a budget and a revenue plan, and had never seen any of these figures.
$11.0M by year five, against $6.0M today. That is 1.83× — just inside requires real change, and comfortably past the point where a normal annual plan closes it.
Then the second read. Dropping the end multiple from 8.0× to 7.0× moved the target from $11.0M to $12.9M, a 17% swing. That is well past 15%, which means a meaningful part of their plan was a bet on what the market would pay in five years, and nobody had said so out loud.
The useful outcome was not the number. It was that the chief executive walked into the next board meeting with two figures and one question about which of them he was being measured on.
A composite drawn from real engagements and 30+ years of operating experience; company details are disguised and figures are representative, not audited results of a single client.
Enter your email and I will send your target earnings, your multiple, and the same figures one turn lower — as a one-page PDF you can put in front of your board or your banker.
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Three figures. Lesson 5 uses all of them.
Next — lesson 4
