Thinking of Buying a Business
Second Step – Assessing Its Present Profit Level.
My view is that Financial Reports are a record of the previous trading history of the business. They relate to its past. They do not relate to its future. Financial reports can be used as an indicator of the future by assuming that the business will go on ‘unchanged’ into the future. But that can be a very big assumption.
But, ascertaining the present profit level is important. It reflects the trading performance of the business at present and is likely to indicate the trading outlook in the near term. What it has done in the past is less relevant. The trading performance of a business three years ago is not likely to indicate its trading prospects three years out.
But Which Profit Level?
There are a number of profit levels available that can be calculated from financial reports. These are generally described as:
- Gross Profit;
- Proprietor’s Profit Before Interest and Taxation (often referred to as PEBIT);
- Proprietor’s Profit Before Interest, Taxation, Depreciation and Amortisation (often referred to as
- PEBITDA);
- Earnings (Profit) Before Interest and Taxation (often referred to as EBIT)
- Earnings (Profit) Before Interest, Taxation, depreciation and Amortisation (often referred to as
- EBITDA);
- Profit Before Taxation;
- Profit After Taxation.
The answer is the best level with which to compare similar businesses. Proprietor operated businesses will generally use PEBITDA. Larger businesses with management in place usually opt for EBIT or EBITDA.
It is critical for you to decide which profit level you are going to use. Get it wrong and you can totally miss the opportunity present before you.
Finally; the assessment of the total funds you need to invest in the business to operate it normally. This will generally include stock, work in progress and working capital.
If you need more information, please 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
