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Maybe I dont understand enought but when I look to buy a business I look for something that will pay for itself in at least 1 year but im shooting to double my investment within a year. Not talking about sales I want to pay it off with the profits made, am I being unrealistic with my plan or is this what everyone is looking for.
HMMM at first glance I would say yes.
For you to realize a 100% or better rate of return you are going to realize huge amounts of risk. You have to realize the premise that risk equals higher returns.
Take junk bonds (very high risk bonds), they pay what??? 20-30% these are investment vehicles that have a very high perception of risk , the investment community says , based on the financial stability of the business "I might not get paid my money" and you want to make 4 times that amount. in a word WOW
Think of it this way, if you owned a business and it was profiting 100,000$ a year would you want to sell it for 100,000$. I wouldnt and I personally don`t know anybody that would.
I could pay someone 30-50,000 a year to operate it for me (assuming that the 100,000$ hadn`t already paid for such an employyee) and I would still make 50-70,000$ a year every year after that (assuming all other factors are equal, meaning that the business stay constant regards to profitability) Every year you get 50,000 to have someone operate the business for you, then why would you want to take a lump sum of 100,000$. So if you and I wouldn`t do it then why in the world would anyone else want to.
If someone offered you a deal that had that potential (unless you had something that would make the business grow exponentially from your efforts) I would think long and hard to figure out what the risk was, are the numbers inflated. are all the sales and profits going to leave the company when the owners leaves for what ever reason.
There is a formula to calculate the value of a business based on it profitability. paritally based on growth potential. Im only giving an educated guess and it dooesnt include other variables like assets. If a business is profiting 100,000$ I would expect to have to pay between 500,000 and a million dollars which is 5 to 10 times the amount that you are wishing to be able to purchase it for.
Only estimates, please to try barbecue me if I`m off 100,000$ or two LOL
mike
I would agree with IdeasandInnovations. A PE of 5-10 would seem reasonable. Every industry has a different PE that values the business. Low growth = low PE, high growth = high PE. Best to learn what is appropriate for the business you are looking at.
The goal is to pay a fair price and then add value by operating the business differently to increase the value of the business. New customers, products, operating processes etc. Even changing capitalization structure can alter the value of the business, although some will argue against that.
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