The Hidden Number Your Board Is Measuring You Against | EP22

Your host is Bill Canady. Let's make every day count.

There's a number that decides whether you keep this job, and you've probably never seen it. It isn't in your budget. It's not in your operating plan. It isn't anywhere in the building. It's sitting in a model somebody built during diligence months before you ever took the seat. And it is a number your board is actually measuring you against. Now, most CEOs never go looking for it. A few are afraid to ask what it'll say. Most just don't know it exists. So I'm not going to explain it to you. I'm going to find it for you right now on this screen. Five inputs, about nine minutes, and you're going to watch every keystroke. Then I'll show you what happens to that number when the market moves one turn against you. That's the part you should change how you run this quarter. Okay, one thing first. This is a tool I'm about to use, and it's yours. Run your own number at my website, BillCanady.com/LBOCalculator. It's free, takes about 9 minutes, and you'll walk away with your own 7-page report. If you got your sim in front of you, open it to another tab and follow along with your own figures. That's the best way to watch this. Here's why your budget can't do the job. The budget is a bottoms-up. Your team built it from what they think they can sell and what they think it'll cost. It answers one question: what do we think will happen? The number I'm about to build is the top-down, and it answers a completely different one. What has to happen for the people who wrote the check to make them a return that they promised to their own investors? In 30 years, I've never once seen those 2 documents agree, and you're the only person in the building who can reconcile them. Your board speaks MOIC, IRR, exit multiple, things like that. Your team speaks in headcount, roadmaps, what's on fire this week. You are the single point of translation between the money And the work. If you're fluent in the work and you're not fluent in the money, you will present activity to people who are listening for arithmetic. They'll nod politely, and what they'll hear is, he doesn't know how he gets there. 70% of PE-backed CEOs are replaced before their company exits, almost none for a bad quarter. They'll get replaced when the board stops believing the plan will work. Before we start, let me take something off the table. You don't need to be a finance guy. You need 5 numbers off a document you already have somewhere in your hard drive. You don't need clean data. 60% is enough to move. You don't need your board's permission to run this. It's arithmetic about your own company, and you don't need to be new in the seat. 15 years in, the day you pick up the plan is your day 1. This is not a transformation. It's 100 days and 4 documents. And the first one is the one I'm about to build. Let me put you somewhere first so you know why this matters. It's month 4. You're on a call with your operating partner, and it's a good call, friendly, no tension. And he asks you something casual. So where do you think we'll land at exit? And you answer him, the pricing work, the 2 accounts ramping, the cost program. You give him a genuinely good answer because you know your business. Here's the problem. He asked you a valuation question and you gave him an operating answer. He was asking about enterprise value at a multiple. You answered about initiatives. He doesn't correct you. Nobody ever corrects you. He writes one sentence in his own notes that you will never see, and it's some version of, he's running the company, he's not running the deal. And from that call forward, things change in ways you can feel but can't name. Requests take longer. He starts turning up at your ops reviews. The monthly calls become weekly. You get help you didn't ask for. You think you're being micromanaged? Well, you're not. You're being audited. I've been on both sides of that table and the difference has never once been capability. It's whether the person in that chair could speak the language the money was spoken in. So let's get to it. 5 inputs. Let me tell you where each one lives before I type anything, because people assume this part is hard and it isn't. First is the entry EBITDA, what the company was earning when the sponsor brought it in. It's in the SIM and the quality of their earnings report. Entry multiple, what they paid, dividend by the EBITDA. And if you know the purchase price, you have this. Debit close, your credit agreement, you signed it or your CFO did. Target MOIC, multiple on invested capital. The only one you may have to ask for. 2 to 4 times is the range. 3 is what I see most. It's in your contract that you signed when you took the job. So just go back and pull that if you don't have it. The hold period, 5 years is a standard underwriting assumption, even though average holds run closer to 7 and people would like 'em to run closer to 3 or even sooner if possible. There's 5 numbers, every one on the document you're entitled to. Nobody's hiding these from you. You don't have to read them the way the investor wrote the check. Uh, read them. Days 1 to 14, one deliverable, reconstruct the number and put it on one page. So let's build it together. All right. I've got my blank calculator here in front of me, and I've got my cursor in the first one. Hopefully you can see it. If you're listening to this on the podcast, go to YouTube. The video's on there. Now, this is a composite and it's exactly the shape of about 1,000 mid-market deals. If your company is a fifth this size, the arithmetic is identical. Just move the decimal. Entry EBITDA. In this case, we've got $50 million. You can see I put 50 in here. Entry multiple, 10 times. All right. Turns of EBITDA, which means the enterprise value at close is $500 million. Debt at close, $250 million. Now, how do we know that? Because I took the 10 times, I put 5 right here. That will show you the amount I'm putting in. So I'm taking half the turns in debt. That gives you $250 million. You can see right here, $500 million enterprise value. Debt at entry, $250 million. Equity at entry, $250 million. Now, 5 turns of leverage, completely normal for a business this size. And it means the equity in this deal, the actual money the fund put in and has to answer for, is $250 million. The target MOIC is 2.5 times that we've got on this. Whole period, 5 years. 2.5 times over 5 years is roughly 20% IRR. You can see to the right on the calculator here. Here's the 20%. So, uh, MOIC 2.5, IRR 20%. Now that's not somebody, uh, giving you a stretch goal. That's what the fund told its limited partners it would deliver in writing before they bought your company. There's 5 inputs. That's the whole entry. Now watch what happens and falls out. Hit my calculator button here. Now we're gonna take $250 million of equity and it has to become $625. That's 2.5 times here. So you can see targeted entry, uh, target exit equity, $625 million down on the right. That's what we're looking to grow it from, $250 to $625. Over 5 years, the business pays down debt, say $250 million at 125, roughly half. You can see here that we paid it down. I put it right here, 50%. My debt at exit is gonna be 125. My exit enterprise value is $750 million, which is normal in a healthy business generating cash. So the required enterprise value at exit is $625 million of equity plus $125 million of remaining debt. Enterprise value, $750 million. You can see it right here on the bottom. Divide that by the exit multiple, 10 times. You see we've got the exit multiple here. Enterprise value divided by EBITDA. $75 million of EBITDA is where we are. You can see it right here. They bought it at 50. Your number is 75, a $25 million bill, 50% growth in earnings, and every dollar of it has to come from somewhere specific. Nobody sent you an email about that. It was never in the board deck. It's the job description nobody handed you, and it existed before you did this. Now, here's the part that most CEOs never sat with. Everything I just built assumes you exit at the same multiple you entered at. 10 in, 10 out. You don't control that variable. Watch what it does. At 11 times, you need $68 million. Let's put in 11. $68.2 came in here. So if you get one turn on, uh, on your exit multiple, the amount to get the same return goes to—

68.2.

68 million. At 10 times, it was 75. Go back and make sure you can see this. 75 to get it, to get your 2.5 times. At 11, it is 68. At 12, it's 62. Multiples are powerful tools. Now, let's say you go the opposite direction and you go with 9. Now you need 83. We didn't like the direction that went. So I want to be careful here at 9 times because it's not a disaster. 9 is a normal Tuesday in a soft market, and you need $83 million. At 8 times, you're gonna need $94 million. Each one of these turns going out makes it harder. The full table's on the screen here for you to see. Same company, same team, same 5-year hold. The difference between exiting at a 10 and exiting at an 8 is $19 million. That has to come from somewhere. And not one thing about your business changed. Rates move, a comparable traded, it's all, that's it. So which column do you build to? Well, you build to the pessimistic one. You build to 83. And if that market cooperates, you're early and you're a hero. Almost no one does though. Almost everyone builds to the optimistic case. And I understand why. It's the version that makes the plan look achievable in a board deck. It's the version where you don't have to have 4 hard conversations in your first 90 days. That's how a plan quietly becomes fiction, not through dishonesty, but through picking a friendlier column. I've watched this run both ways more times than I can count. Let me give you both. First version, a CEO builds his plan at the entry multiple, 10 in, 10 out. It's a good plan and he's a good operator. 2 years later, the market hands him a 9. And now he's staring at $8 million of EBITDA nobody planned for, and there's no time left to build it. He didn't do anything wrong. He picked the friendlier column. Second version, same seat, same market, different man. He does what I just did on this screen. 5 inputs, a Saturday morning, his own sim open on the desk next to him. He comes back with 75 at 10, 83 at 9, and at his next board meeting, he doesn't present a plan. He puts both numbers up and he says he's building the 83. Now watch what that happens when that costs him. It costs him nothing. He gave up nothing. And watch what it buys him. The 3 people across that table stop testing whether he understands his own deal and start arguing with him about how to close it. Same company, same market. One of them went and found out the number himself. You run your own number at my website, billcanady.com/lbomodel. You can see the link down below. It's free and it takes about 9 minutes. And you walk away with your own 7-page report. One more thing. This model tells you something that few people look at. Roughly 2/3 of the return comes from you growing earnings. Roughly 1/3 comes from the debt schedule. And a lot of CEOs look at that split and get comfortable. Fine. A third of the work happens while I sleep. That's the most dangerous thing you can believe about your own deal because the debt only pays down if you generate the cash. That's not automatic. That cash conversion, receivables, payables, inventory, and it is entirely yours. Miss on cash and you don't just lose a third from the debt paydown, you lose the ability to fund the two-thirds that comes from growth. No cash, no pricing investment, no tuck-in, no capacity. These buckets aren't independent, they're coupled, which is why working capital is one of the 5 levers That everybody underplays because it doesn't feel like leadership. It feels like accounting, and it's the cheapest money in your company. Now, let me bring this down to your desk because 50 and 75 are probably not your numbers. Say you're doing $8 million of EBITDA today. You run this and your board numbers come back at 14. Your gap is $6 million of EBITDA. The same multiple, $6 million of EBITDA is about $60 million of enterprise value. Now, this is what your board is measuring. Not your effort, not how hard your team is working, not the 11 initiatives on slide 14. $60 million of enterprise value and a plan that credibly produces it. And watch what happens to the job the moment you know the gap is $6 million. You're no longer growing the business. That phrase is meaningless, and it's most of the reason plans drift. You are closing $6 million of EBITDA across 5 levers: price and mix, cost, organic growth, M&A, and working capital. There is no 6th. Each one is sized, sequenced, and carrying exactly one human being's name. That's a plan. Everything— before you know, the gap is a wish list. And before you decide $6 million is impossible, let me tell you what happened the last time I went looking for growth inside a company I already ran. I got the sales leaders in a room and asked for our top 10 accounts. The number one was doing about $40 million a year with us, big customer, and they hadn't been growing. So I asked one question, in just the geography we already serve, no new territories, no new countries, with just the products we already sell, no new lines, how much is available with that one customer if we got all of it? They went back and did the work, came back a few weeks later, $250 million. My, we were doing $40. And the whole company needed to grow only $200 million. More opportunity than the entire business needed sitting inside of one customer we already had in territories we already covered with products we already had in the truck. So start in your own backyard. You'll be amazed at how much is already there. When this model hands you a $6 million gap and your first instinct is that it's impossible, hold that instinct until you are gone and you've looked. Now the question is, I get every single time I do this, if that number's so important, why doesn't the fund just tell me? Well, there's 3 reasons and none of them are malicious. Nobody's withholding this to hurt you. One, they assume you already know. They've been living inside this model for months, and to them, it's water they're already swimming in. It genuinely doesn't occur to them that the CEO hasn't reconstructed it. 2, the number moves and they don't want to be quoted on it. If the operating partner says 75 in month 2 and the markets shift, he's negotiating against his own quote for the rest of the hold. So he speaks in directions instead of numbers. We need to see meaningful margin expansion. Now that's the weather. You need coordinates. And 3, and this is the one that matters. A CEO who arrives at the number himself is a different kind of CEO than the one who was handed it. That's not a motivational line. It's a specific thing that happens in a specific room. Here's what I mean. Right now, the number lives on their side of the table. They know it, you don't. And every conversation you have is in some version of them checking whether you're tracking towards a target you can't see. Now imagine you walking in that room and saying this, I've reconstructed the underwriting. I've got you at 75 and at 10, 83 times at 9. I'm building to 83. Here's my bridge to 83. 5 levers, each size sequence. And one name on each. Tell me where I'm wrong. Sit with what just happened in that room. You didn't ask for anything. You didn't defend anything. You put the arithmetic on the table before anybody asked. You chose the conservative case out, and then you invited 3 professional investors to correct you, which is the single most confident thing a person in your role can do while sitting in that chair. Now you just moved from someone being measured to someone doing the measuring. That's where you want to be. And it's permanent. That room does not go back. From then on, it's 2 parties working the same problem, and the help you didn't ask for stops arriving. The micromanagement was never control. It was an information deficit. 9 minutes and 5 inputs. That's the entry fee. Now, 2 honest things before I let you go. First, this is gate 1, and gate 1 is necessary, and it is not sufficient. Knowing you need 83 doesn't tell You where the 83 comes from. Day 15 to 45 is the bridge. And before that bridge, one ratio tells you whether you've earned it right to grow at all. Days 46 to 70 is structure. One name on every lever and a comp plan that pays for the mandate. Because if your incentive plan doesn't pay for the mandate, you don't have a team. You have an audience. Days 71 to 100 is at the cadence. And monthly business reviews run against the bridge instead of a narrative. Second, and it matters more, nothing I built today is worth anything if it lives in a browser tab. It goes on one page. The target, the timeline dated to the sponsor's clock, theirs, not your fiscal year. 5 assumptions named and owned, 3 unknowns declared up front. You sign it, your chair acknowledge it. An unsigned number is just a conversation. A signed number is a contract, and you want to be the one who wrote it. So back where we started. There's a number that decides whether you keep this job, and it was calculated before you ever took the seat. It's the one you actually measured against, and it took 9 minutes and 5 inputs to find. I wanna be straight about what that does and doesn't do for you. I'm not telling you the number gets easier. It doesn't. 75 is still 75 million tomorrow morning. 83 is still 83. What changes is that you can defend it. You can walk into a room full of people who do the math. For a living and put arithmetic on a table instead of a story, and most people in that chair never can. And here's who it isn't for: If you handed this to your CFO, don't. Your CFO can build the model. Heck, he probably did build the model. He can't sign the number. That's the seat you're in, and it doesn't delegate. So that's the hundred days, and today was the first fourteen. Day one to fourteen, reconstruct the number, get it signed. Days fifteen to forty-five. Earn the right to grow, then build the bridge. Day 46 to 70, one name on every lever and pay them for it. Day 71 to 100, install the cadence and run the first review. 4 gates, 4 documents. That's the roadmap. So let's go do the first one. Run it at your— run your own number at my website, billcanady.com/lbocalculator, or use the link below. It's free, takes about 9 minutes. And you'll walk away with your own 7-page report required to, for your exit EBITDA, your gap today, and the full sensitivity table. Fair warning, a lot of people don't like what comes back. That's the point. Better you find your number today than your board finds it in March. It's all about progress, not perfection. So go run that number. And watch this next one because about half the CEOs who run this model should not be growing yet. And there's one ratio That tells you which half you're in. That's the next episode. Thanks everyone. Have a great day.

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