Owning your own business is not only an opportunity to provide value through products and services, but it’s arguably the best way for most people to build real wealth.
While considering acquisitions as an investment, keep three fundamentals in mind: return on investment, margin of safety, and upside potential.
You as an investor should be looking to identify the path to growth and the amount of upside potential. How big can this business be? Try to understand the drivers behind a company’s value and how to best scale it. How to accelerate it, and change it.
Where is the growth opportunity you are looking for. Is it a company that needs to build a sales team? Improved marketing? New distribution channels? Financial engineering? Operational improvement? Or a customer base in a certain market? The truth is, you already know. Identifying this clearly is the first part of what will become your target statement.
According to Harvard Business School lecturer, Shikhar Ghosh, even VC-funded startups— the ones that every MBA startup strives to attain— have a 75 percent failure rate.
Therefore, small investors, especially entrepreneurs, are better advised to invest in a small successful business, even though it may be little bit more expensive. Seller Discretionary Income SDE is most important fact about targeted business as we say “cheap investments may prove very expensive”. We truly believe in goal-oriented investment, we should carefully examine the investor profile, needs and wants, and identify best route to invest. However, it is a general rule, that established businesses with proven track record of profits are far less risky and more rewarding than new startups or cheap asset sale businesses, that are practically out of business. It is better to buy a 50% of profitable business than 100% of a liability business.
The profile of the investor is critical in planning and executing an investment roadmap. The following list shows the investment in small business that would be suitable for a foreign investor:
- Proven track record of sufficient SDE to support family and work permit
- Company has capable and welling management to support after sales operation
- Business offer solid income, even if it has lower equity ROI
- Company willing to take some sell finance or offer partial shares acquisition
- For highly specialized businesses, investor should have a reasonable experience
In short, for foreign investors, it is important to appreciate profitable business over initial higher valuation, management flexibility, over total management takeover, and flexible financing or partial/gradual acquisition over complete takeover.