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PioneerOn investing into a middle sized company: What is a fair pricing?
Please find here a problem which is bugging me:
"A company generated net profit in the past as follows:
Year 1: 1 Mio USD
Year 2: 5 Mio USD
Year 3: 5 Mio USD
Year 4: 5 Mio USD
Assuming a total revenue of 50 Mio USD at constant overalll costs. Competitor are assumed to be non-existent.
It is further assumed that the revenues and earning for the next years to come remain constant, while assuming a prognosis timeframe of 5year as healthy and reasonable of both the company owner and prospect buyer/investor.
Question: What would be a fair pricing which should at least be claimed by the seller? The company is a sole propriertorship company and not publicly listed.
Any reasonable solution I understand will be rewarded.
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- Written by Patrizio on Tuesday, Mar 2, 2010 at 1:38:27 PM*Request a complete banking history of current profits/debts to the hotel.
*Request their accounts receivable book.
*Request their outgoing cost chart.
*Day to day operational costs.
*Taxes
*Refurbishment costs.
*Who owns the land the hotel is sitting on ?
Its a bit strange to see the hotel making a profit in the first, second and third year. I would think it would be more realistic if the hotel made $1M profit on the third or fourth year rather than the first.
If they really made profit on the first year, this would mean that after paying for the cost of the construction of the hotel, that same amount will return in just one year ? Either its a very low cost hotel/motel or the info you received has been cooked.
Either way, you need a company like Ernst & Young to check all these figures out, because something is doesn't make sense here.
Make sure you have confirmation from the local Gov that you have the rights to this land for a minimum of 20 years, request a tax incentive to invest in that region and make sure there are no debts or leans on the property.
- Written by Paul on Saturday, Feb 27, 2010 at 6:56:56 PMWhat are the borrowings of the company?
You also need to take into account the cost of borrowing of the buyer. You need to speak to an accountant/specialist valuer for these sorts of figures, but if the nuyer is looking for a 5% yield on the company (paid borrowings in 20 years) then he will be able to offer more than someone looking for a 10% yield.
Alternatively to aim for an exit strategy in 5 years, the potential buyer would be looking to make improvements and efficiencies, which may not be feasible on turnover/profit balances. You need to take professional advice on this. In the UK it would be Pinders, there may be a US version.
HTH.
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Are you still accepting more solution. I as this because although your question is still open, I see that there are 2 solutions that are still pending.
I have done my MBA in Finance, so I can provide some good points. Kindly let me know whether I can post an official solution.
Warm regards