The displayed report is a close representation of what you will receive by email. It lists the data that the customer provides to us, states the assumptions used to generate projections, and provides one to four projections for each business analyzed. Then, we provide several separate forecasts where the price is reduced, usually using 10 percent increments. At the end of the report, we will provide summary comments.
In this example, the asking price is $2,200,000, and the report provides projections based on two different down payment parameters, 20% and 12%. Both include real estate. Once you study the report, you notice that with bank financing and a 20% down payment by you, your loan term is 16 years. During that period, it shows your forecasted annual earnings at $55,579, which is not a very good return on your investment when paying the asking price. You then notice our report valuation of the business is at $1,783,000 – a significantly lower price. If you think that you could possibly negotiate a sales price with the seller that is close to our report valuation and want to see what the forecasted earnings would be, you would look for the price on the report that was the closest to Profit Evaluator’s estimated value. You locate that price, which has a value of $1,760,000. With a lower price, and better loan terms, your forecasted earnings are now expected to be $98,296. Sounds much better, but there still could be another issue.
While the business may be valued correctly by Profit Evaluator, buying it at that price does not necessarily mean you can afford to operate it. One of the big advantages of our evaluation is that we recommend a maximum price that you could afford to offer the seller, based on your financial circumstances. In the report example, the answer to the question of affordability is highlighted, showing the maximum offering price to be approximately $1,760,000 if your down payment is 12%. Likewise, the maximum offering price could be higher if your down payment is larger. In this example, that offering price could be increased to $1,980,000. Assuming you have no further funds available to help your business during tougher times, these are the approximate threshold prices we estimate that could be paid for the business in their respective projections, and still expect you to operate it successfully after satisfying all company expenses, financing obligations, and reinvestment requirements. If the difference between the asking price and our recommended maximum offering price is large, the likelihood of the seller willing to negotiate down to your maximum offer is slim. At that point, you need to decide if the business is worth pursuing.
Interpreting the report generated from this example is a bit more complex than others. Many reports will simply show that Profit Evaluator’s maximum offering price matches the seller’s asking price. That means we feel confident that you could successfully operate the business of interest, even if you paid the asking price. Obviously, if the business is overpriced, you would want to negotiate a more favorable deal. With businesses priced fairly, and based on its history, you can determine a relative level of success.
Over the course of evaluating businesses of interest through Profit Evaluator, you will likely find several that are realistically priced, AND are affordable to you at the asking price. These are candidates to pursue. That means you are “zeroing in” on the right business. But to narrow the list down further, you need to know the answers to two questions.
For example, you have reviewed a report, and now feel comfortable that you can operate the business successfully (paying all of your bills, and still have positive real earnings), even if you paid the asking price. But the final forecasted real earnings at that price, as shown by the report, would only be $30,000 per year. Maybe you could negotiate the price down by 10%, which would then show forecasted earnings of approximately $40,000 per year. If owning and operating the company is your only source of income (this IS your job), is $40,000 per year enough to make a living? Is that a good return on your investment? You will have to make that determination.
If you are not happy with those results, get comparisons to other businesses. Can you make more money with a different business? The opportunity to compare multiple businesses in an “apples-to-apples” fashion is a core strength of Profit Evaluator. We have provided discounts for groups of reports to encourage you to take advantage of the comparison feature.
If a report shows that a business is a poor performer, but you still are highly interested, take the time to dig further. Ask for the detailed documentation from the broker or seller. Since the data provided to us from our clients is normally from the latest tax year, it is possible that the outlook on the business may change when considering earlier year’s performances (better or worse). We can help you with a deeper analysis, if desired. Contact us for further details.
