Buying A Business -- Make Your Acquisition A Good Investment

Future profit potential – and how much you can impact that future – is the most important information you can have when purchasing a business and will ultimately be the measurement of the merits of the investment.

One the most serious shortcomings when evaluating an enterprise is to focus only on historical performance without considering what the business might be capable of under new management. While its history provides some insight, it is what will happen to the company in the future that is key.

In any conventional evaluation process, the buyer will pay for what has been achieved but will buy for upside potential. Successful acquisitions are all about generating a premium on the investment. The major "determinator" in considering an acquisition should be how a new owner can improve the business. Probing for underlying growth opportunities that are ripe for exploitation will help achieve that goal.

Factors to consider in order to adequately gauge the company's future outlook include industry trends, overall market and economic conditions, regulations, societal changes, technical trends, competition -- in addition to your ability to grow the business through better sales techniques, innovative marketing programs, adding more products or services, refined operational processes, wider distribution, and an increased capital base. Each of these enhancements can dramatically expand the bottom line.

Most business pricing models have two major components: a base, usually revenue or profit, and a multiplier. To get the base you need a clear view of the revenue picture from previous years, the historical performance. The multiplier is derived from industry-specific ranges. That multiplier is actually the number of years it will take to recoup the price you just paid for the business, assuming it doesn’t grow (or shrink.) Having a clear view of the future – and how much you can impact that future – is the most powerful intelligence you can have when determining the soundness of a business investment.

For example, if you have to pay 3x earnings, and believe you can double the business in twelve months, that is a good deal. If you have to pay 10x earnings, and you expect 10% growth – it’s going to take a very long time to see a return on your investment.

Using these principles as a guide in making an acquisition decision may markedly increase the chances that your journey to profits and success will end with positive results.