How to get rich selling CBD, by the numbers

If we’re talking about starting a CBD store or brand — which we are — then there are two ways to become a Millionaire.

1. Earn one million dollars profit selling CBD and put that in your pocket.
2. Or build up a CBD company until is worth 1 million dollars and sell it.

So which one of these options is the easiest to achieve?

If you said Number 1, then you are way wrong. 

Here’s the thing. If your company is making a million dollars a year in profit, it is already way, way past being worth 1 million dollars. In fact, it’s probably worth five times that much.

How is that even possible? Let’s do some math.

When an entrepreneur invests money into buying an existing business, their intention is to make a good return on their investment. 

Can you imagine buying a business for 1 million dollars, then making a million dollars in profit the first year… and still owning that million-dollar business? 

Invest 1 million, make 1 million in 1 year, and then sell for 1 million. That’s one-hundred percent return on investment in only one year. That would be insane! In a good way, of course. 

Most investors are happy if they make one-tenth of that, or just 10 percent return in one year.

Before we get deeper into the math, let define a few of the terms we’ll be using here.

Revenue = the total amount of money a business makes in one year.

Profit = the money left over from sales after all expenses are covered.

Valuation = the assumed value of a company, or its selling price.

Multiple = the number of times more a company is worth than it brings in in revenue or profit.

So now the question becomes, how much profit do businesses make typically. Once you know that number, you can determine what the company would be worth to an investor. 

Actually, a 10 percent profit margin is considered average. The average annual return for stocks over the past 100 years has also been about 10 percent. 

So let’s use that as our figure and assume that an investor would like to make at least 10 percent profit on the purchase of a business.

At 10 percent profit, how much revenue does a company have to earn in one year to make a $1 million investment bring in $100,000? The answer is easy: $1 million dollars a year. 

One million dollars is a lot of revenue. But is that kind of cash flow really necessary?

Consider this: Entrepreneurs and corporations don’t buy businesses expecting them to just putter along bringing in the same revenue year after year. They buy businesses to grow them and sell them again at a profit. 

They don’t stick the annual profits in their pocket. They reinvest them into growing the company. 

According to BareMertrics.com:

As a general benchmark, companies should have on average between 15% and 45% of year-over-year growth. According to a SaaS survey, companies with less than $2 million annually tend to have higher growth rates.

The average growth rate is between 15 and 45 percent. Let’s be really conservative and calculate the growth rate at 20 percent per year. 

• Year 0 – let’s say the day you buy a company it is generating one million in sales
• Year 1 – After one year at a growth rate of 20 percent the company is now bringing in $1,200,000.
• Year 2 – Compound another 20 percent for Year 2 and the company will be bringing in $1,440,000.
• Year 3 – Revenue grows to $1,728,000.
• Year 4 – Revenues will come in at over $2 million
• Year 5 – Revenue will surpass $2.4 million annually.

Now, let’s add up all the profits given those sales figures and a 10 percent profit margin:

• Year 1 – $120,000
• Year 2 – $140,000
• Year 3 – $170,000
• Year 4 – $200,000
• Year 5 – $240,000

Total profit over five years = $870,000. 

That’s $174,000 per year on average over the five years — well above 10 percent return per year. But we’re not done yet. 

The business itself is now worth a lot more money. 

What used to be a million-dollar business five years prior is now worth at the very least $2.4 million. (It’s actually far more than that as we’ll see below.)

That’s an additional $1.4 million in valuation over the initial $1 million investment. 

Add the $870,000 in profit to the $1,400,000 in added value and you get $2,270,00 in total return on investment over five years. That’s a five-year return on investment of 220 percent, or an average of more than 40 percent per year! And that’s being uber-conservative.

As you can see, that’s over 4 times the ten percent return on investment that is expected. So a company that does $1 million a year in sales is actually still a total steal at a valuation of one million dollars. 

That means we can lower our sights — quite a bit, in fact. 

So how much revenue does a company need to bring in each year in order to be worth $1 million?

When bean counters crunch all the numbers down, what they come up with is that the average business is worth somewhere in the neighborhood of five times its annual revenue — give or take.

That math is a whole lot simpler! 

And that means that a business that is bringing in a mere $200,000 a year in revenue will be worth $1,000,000. Now that sounds a lot more doable!

So the question now becomes, what’s it going to take for you to sell $200,000 of CBD products in a year? 

Let’s do some more number crunching.