Thinking of Buying a Business
Fourth Step – Assessing The Return.
So many see the Return on Investment as a return on the profit level of the business. And yes, price being asked should reflect the answer to this question: ‘How much of the future profits of a business are being asked for now in return for gaining access to the future profits and ownership benefits vis a vis the risks associated in owning the business’.
The funds needed to operate a business in the normal course of its trading is the real issue to understand. The price of a business is often expressed in various terms; Price Walk in Walk Out (WIWO), Price + Stock At Value (SAV), Price Or Near Offer (ONO), Price + take Over Leases (TOL), Price + Equipment, Price + Working Capital etc and any combination of the above.
So, a simple profit divided by price equation isn’t going to really give an indication of the actual return. Many missed opportunities and many wasted valuable time and money simply sorting on Return. Buyers should investigate the total funds needed to be invested to operate a business at its normal trading level.
Invariably, the total funds needed to be invested may include tangible assets, goodwill, stock, working capital and work in progress. When added together and compared with the profit levels being achieved, the real return on investment (ROI) becomes apparent. It may or may not look as good as it did with a straight price/profit calculation.
Return on the total funds to be invested to operate the business normally is the key point a business buyer has to decide upon. The decision will reflect the tolerance for business risk of the business buyer. Some will pay more and move quickly to acquire a business opportunity at hand. Some will pay less, and may miss the opportunity. Some will still be analysing the business and never make the decision to buy it otherwise.
Need more information, talk to me.
Graham Long
Kevin Lovewell
M: 0401 308 385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers
Graham Long
M: 0428 649 791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers
