Carl Allen introduces a forecasting model for investors, detailing its structure and application for potential business deals. This video, part one of two, focuses on a single generic business deal, excluding bolt-on acquisitions, which he plans to cover in the next video. Using a real example called “Project Beef,” he explains how to input key financial data—revenues, gross profits, and adjusted EBITDA—and forecasts how to scale the business. The model estimates growth, margin improvements, and SG&A reductions over a five-year period, highlighting the impact of economies of scale on profitability.

Carl then discusses valuation, calculating an enterprise value based on a three-year EBITDA average and applying a multiple. He incorporates real estate, working capital, and financing elements, resulting in a total deal cost of approximately $4.8 million. To make the acquisition, Carl explores the required investor partnership, emphasizing that investors need assurance of their returns.

He illustrates how the model calculates potential investor returns, including a high internal rate of return (IRR) and cash-on-cash ROI, making the deal attractive. The investor can see the potential for 13.7x return on investment and a compounded annual growth rate of 69%. Carl underscores that explaining the growth plan and investment return forecast is essential to secure investor interest.

In part two, he will show how adding a bolt-on acquisition could further amplify investor returns. He closes by inviting viewers to download the model and stay tuned for future videos on optimizing deal structure and investor presentations.

Full Transcript:

.Hey, guys. Carl Allen. Want to show you what a forecasting model looks like for investors. So I’m actually gonna split this video into two parts.

So this is video one of two. We’re not gonna worry about bolt on acquisitions in this video. I’m gonna do that in the second video, but it’s the same model that you can download if you want to use this on your deals. So what I’m gonna do first is just focus on one generic deal.

You buy the business, you raise a bit of equity capital to allow you to buy it, and then you’re forecasting what the value of the equity is gonna be for your equity investor, for your equity partner. So we’ll do that for forecast a in this video. And then in another video that I’ll do next, we’ll look at how the forecast changes if you do a bolt on acquisition. So first of all, let me apologize.

I’m a little bit lispy today. I’m wearing my new set of Invisalign retainers trying to straighten my my teeth. I’m going on a on a TV show later this year, and, I wanna have nice, clean, and straight teeth for that. So, fifty three.

You know, I have teeth, fifty three years old. So, trying to get that, squared away. Hence why I gotta wear my aligners, and I’m a little bit lispy. So, I’d have taken them out to talk, but they’re really tight and they hurt.

So, I’m not gonna do that. Alright. Let’s get to it. So the first thing you wanna do before you start a forecast is you basically you wanna put in the existing deal numbers.

So let’s say, we’re early twenty twenty four. You’re looking at a business, and you have the last three years of financials. So all the blue cells are the cells that you’re gonna populate. Right?

Everything else don’t touch. Only play with the blue cells when you download this model later and you play with it. So let’s look at this business. Let’s call it Project Beef.

This, this business is a real company, actually. This was a, a food, processing company and kind of like a farm shop, in the United States. It was a really good deal that we reviewed on one of our deal review calls, and I kinda wanted to share it with you. So we put the revenue in. So twenty twenty one, three point three million and change. Twenty twenty two, three point nine million and change.

Twenty twenty three, about the same. So the model calculates the growth on the year to year trajectory.

You then put in what the gross profit’s gonna be. That’s gonna be in the accounts that you get from the seller or the broker. That automatically calculates your cost of goods sold and your gross profit margin, which is really important. And then the overheads, which we call SG and A, sales, general, and admin, those you don’t need to calculate because what you’re looking for is the number, the adjusted EBITDA number.

So EBITDA is the profit measure that we use when we’re valuing deals. We don’t use SDE. I explained that in a different video. If you’ve not watched that video, go watch it.

I explained the difference between EBITDA and SDE and why we always use EBITDA.

And then when we talk about adjusted EBITDA, we’re talking about, reflecting the add backs and the take backs to normalize that profitability for us as the owner. Again, if you don’t know what that means, I did a video on that. Go watch that, and I’ll show you, what take backs and add backs are and how to spot for them. So assuming you know what adjusted EBITDA is, that’s the normalized profit, the recasted profit you’re gonna see, if you were the owner of the business in those three years. So you plug that in. So you’re looking for three numbers, really, revenues, gross profits, adjusted EBITDA, and then the model calculates all the rest, including the free cash flow.

Then what you do is you then need to build a forecast. So the first thing that you’re gonna do is you’re gonna look at growth. So it’s not just okay to tell the investor what your growth’s gonna be. In this example, we just put twenty percent annual revenue growth in this business.

You need to justify it. You need to explain what are you gonna do to grow the business. Are you gonna spend more money on marketing? Are you gonna go into new, areas of the market?

Are you gonna introduce new products or services? Doesn’t matter what the business is. You can’t just put growth numbers down. You need to justify them with what you’re actually going to do and how you’re gonna measure that performance.

It’s really, really important. So in this example, we’ve put twenty percent growth. Always do a five year forecast. It’s really, really important.

So five years at twenty percent growth. And then what we’re doing is we’re forecasting what the gross margin’s gonna be. So when you own a business and you scale it, you’re gonna get economies of scale, right, both at the gross margin level and at the EBITDA margin level. Why is that?

So let’s say, you’re a plumbing company and you go out and you’re fixing bathrooms and doing all those things for customers. Right? The more you spend with your suppliers for tiles and faucets and taps and pipes and all those different things, the more you’re spending with a supplier, the cheaper that the costs are gonna be. They’re gonna give you better deals because you’re spending more.

It’s a higher volume for them. Right? So as you scale any business, your cost of sales, your cost of goods sold is gonna come down as a percentage of the top line revenue. So that means your gross margin can go up.

So what we’re doing in this example is just every year, we’re just gonna nudge the gross profit margin up by one percent. It’s currently at around sixty eight percent. We’re gonna nudge it up a bit close to what it was a few years ago. So it’s a sixty eight, then we’ll nudge it up to sixty nine in twenty twenty five, seventy percent in twenty twenty six, seventy one percent in twenty twenty seven, and seventy two percent in twenty twenty eight.

And then we’re also gonna do the same with overheads. Right? The overheads are obviously gonna go up as the business scales, but the but the size of the overhead as a percent of revenue is gonna come down. Because, for example, let’s assume you have a an office lease.

Right?

That office lease is the same cost to you if you don’t move or expand it, whether you’re a three million dollar business or you’re a ten million dollar business. Right? You’re sweating that overhead. So what that means is as you scale the business’s revenues, your overheads as a percentage of sales come down.

So in in the current year, we’re at thirty three percent. So, what we’re gonna do sorry. That’s the margin. Thirty four point three percent is the SG and A percentage of revenue in twenty twenty three.

So for twenty twenty four, let’s nudge that down to thirty three percent, then to thirty two percent, then to thirty one percent, then to thirty percent, then to twenty nine percent. So by shaving a point a year off the cost of sales and by shaving a point a year off the s g and a, that’s kind of like got a double impact on the EBITDA margin. So and the model calculates all this for you. So the EBITDA gets calculated.

This business was doing one point three million dollars of EBITDA in the current year. That’s gonna go up to one point six and change, then two point one and change, then two point seven almost, then almost three point four, then four point two million dollars and change. Right? So so that’s the full forecast.

So we’ve got all the numbers for the current, and then we’ve got all the numbers for the forecast. The next thing that the model does is it calculates the valuation. So what’s the business worth today for us to buy? So we take a three year average.

If you don’t understand that, there’s a video on that. Go watch, the the valuation videos that I’ve done on YouTube. But, basically, we take a three year average. If the EBITDA is going up, we take a three year average.

If the EBITDA is coming down, we only take the current number, but be careful that you you understand why it’s declining and you have a plan to turn it around. Otherwise, don’t buy it. But, normally, you wanna see a nice increase in that EBITDA. It shows the business is prospering, it’s growing, and it’s becoming more profitable.

So the three year average, the model calculates that at one point one six nine million. We’re gonna apply a three point five times multiple to buy this business. It’s an average business, I would say. As you know, there’s a range of multiples in any industry, by size of profit.

So I looked at the deal stats database or or pitch pitch room if you have that or pitch book, and you can see, about three and a half is the type of multiple you would pay for this business. So the enterprise value value of the company, the business, not the equity, we’ll get to that in a minute, The value of the, of the business is, just over four million bucks. And then, we’re gonna add the real estate. So the real estate is a separate purchase.

That’s been appraised at just over nine hundred thousand. So we add that in. And then we’re gonna make some adjustments for, debt free cash free and net working capital. Right?

So there’s about half a million dollars, shortfall in, really, the working capital in this deal. It’s not got a lot of working capital in the business. It’s kinda one of the only things about the deal I don’t like. So we’re gonna make an adjustment for that.

So the model adds all that up. This business, including the real estate, is gonna cost you four point five million dollars almost to do it. And then what we’re gonna let’s look at how much capital we need. So four point four four four point four nine four is the value of the deal.

Then we’re gonna add in a quarter of a million dollars, of additional working capital to top it up. We don’t need half a mil. Two fifty will be fine. We’re taking the half a mill to reduce the price, obviously, but we can get away with with two fifty.

And we’re gonna do an SBA deal to to buy this company.

So with the SBA fees and the closing cost return is and DD and all that stuff, probably about a hundred grand on this deal, and then you can add it into the financing. So the total deal is gonna cost about four point eight million dollars.

It’ll be a thirteen year SBA deal because there’s real estate involved. If it was purely a business acquisition, it would be ten years. If it was primarily real estate and and a small business, will be twenty five years. So the SBA blends the kind of term. So this is about thirteen years.

And the interest rate, let’s say, it’s ten percent. You can get it down probably to about eight point five these days, but let’s use ten to be conservative. And then this deal under the SBA, we had it underwritten as five percent by our equity, which is two hundred and forty two thousand, ninety percent SBA loan, which is, four point four almost, and then five percent seller notes. The seller will carry, five percent of this deal.

So what the model then does is it also factors in capital expenditure. That’s the CapEx that was put into the business, and then we’re forecasting how much CapEx we’re gonna need to continue, to trade this business. So seven, eight, nine, ten, and then drop to five percent in twenty twenty eight. So that calculates all the debt service, calculates all the free cash flows for us, which is absolutely brilliant.

So then what happens, and this is a real skill, is so you need an investor.

So let’s say you approach me and say, hey, Carl. I’ve got this great deal. Here are all the numbers. Absolutely fantastic business.

I’ve qualified for an SBA loan, but I need a five percent equity investor. I need somebody to come in and and and give me the five percent of the total deal. I need two hundred and forty two thousand dollars, please, Carl. You can be my partner in this deal.

Now, obviously, I’m not just gonna buy five percent. If I’m putting the money in and you’re not, then I’m gonna want a higher piece of equity. And let’s say we negotiate that I’m gonna take fifty percent of the business. So I’m providing you the equity capital, which allows you to get the SBA loan.

You’re putting absolutely no cash into this deal whatsoever. So you’ll earn eighty five percent of the business, and I’ll earn fifty percent of the business. Now what I wanna know is what’s my equity gonna be worth in five years’ time? Let’s say the plan is we’re gonna buy it, we’re gonna scale it, and then by twenty twenty eight, we’re gonna sell this business, and I’m gonna get my money back, my two forty two, plus my shareholder premium to reflect the increased value of my shares.

What does that look like? And if you pitch an investor without this information, they’re gonna say no. Watch my other video about the five killer questions an investor is always gonna ask you. This is question number five.

What’s my risk adjusted return on investment? How much money am I gonna make by investing in this deal? If you can’t forecast that and you can’t tell them that, they’re not gonna invest. Right?

So definitely download this, add this video, and you will be able to, to look at it. So let’s see how this works. So what we’re doing is on an exit, let’s take the same three year average. So the three year average of EBITDA exit is, is three point four four six million.

And then at that level, at that size of profitability, we’re gonna be worth around an eight times multiple. As you know, the bigger the profit, the bigger the multiple. Right? So we’re gonna sell for eight times multiple.

So that’s gonna give us a valuation of around twenty seven point five million dollars on exit. Let’s say the real estate’s appraised to about a million bucks during that time. It’s interesting. Right?

A lot of real estate investors don’t understand this. Real estate might, you know, might appraise a little bit over five years. A business, you can massively increase the value. Right?

It’s a lot easier to grow the value of a business than it is the value of real estate. So in this example, twenty seven point five is the value of the business. Let’s have the real estate. And then at the time in five years, we’ve probably paid around half of the SBA money, probably a little bit less, just a thirteen year loan.

So we’re gonna have just under three million dollars of debt still sat on that balance sheet, that needs to be paid off at closing.

And and we’ve got other additional debt as well to spectrum this model. So the debt free cash free, the one hundred percent equity valuation of this business is gonna be about twenty two point one six million dollars. And if I own my fifteen percent, which I do, I’m getting three point three million dollars back from the two hundred and forty two thousand dollars that I’ve invested. So what the model does, it calculates two very important numbers for me.

First one is my return on investment, my cash on cash return on investment, which is how much cash am I getting out, three point three million and change, divided by how much cash did I put in, two hundred and forty two thousand dollars. So three point three two four divided by two four two is thirteen point seven three times. So I’m I’m making almost fourteen times my money by partnering with you in this deal. Right?

So, obviously, I’m gonna invest. But then what I’m also calculating is what’s called the internal rate of return, the IRR, or sometimes called the CAGR, the compounded annual growth rate. And what that does is it works on, yeah, I’m gonna make nearly fourteen times my money, but how does that compound as an annual percentage interest increase in that money? The model works it out over five years.

It’s almost sixty nine percent annual growth. So for me, if I leave my money in the bank, I might get one percent. If I’m lucky, I have a private, banking relationship. I get about one percent a year on my on my liquid cash, which is terrible.

I’m gonna get sixty nine percent a year if I invest in this deal. So this is your deal, and you can quantify and explain exactly how you’re gonna grow it. I’m gonna be doing this deal with you. So that’s, that’s kind of forecast, training number one.

What we’re gonna do next is we’re gonna show how the returns go absolutely crazy, how they go a lot higher by doing a bolt on acquisition.

So I will show you that in another video. So definitely hit like and subscribe if you wanna get access to all these other trainings going forward, and then definitely click the link around the video to get access to, the download of this model so that you can play with it on your deals and you can forecast the investor returns on your deals so you can get your deals closed. Alright, guys. Hope you enjoyed that. I will see you soon. Until then, bye for now.