"How many millionaires do you know who have
become wealthy by investing in savings accounts?
I rest my case."
........Robert G Allen
(Author of Creating Wealth)
Interesting question! Most self-made millionaires have become so via the ownership of a business.
Generally, well run businesses have the greatest return on investment of all the investment types. Let's think about it. The sale price for most businesses is derived as a multiple of the businesses net or bottom line profit. A typical business where the owner has day to day involvement in the running of the business attracts perhaps 2 or 3 times multiple of the bottom line profit.
"Generally, well run businesses have the greatest return on investment of all the investment types
Therefore, if the business had a bottom-line profit of say $100K, then the business could sell for say $200K or $300K. So the purchaser pays the owner $200K for the purchase of the business and expects to have their capital returned over 2 years which is a 50% return on investment. Try getting that return from bank or mutual fund. If it was $300K then there is a 33% return on investment.
Now imagine that the business runs under management. It would now be more likely to attract a 5 time multiple or $500K. The return on investment is now reduced to 20% (still far greater than the bank or mutual fund returns).
"It would now be more likely to attract a 5-time multiple or $500K"
Why the difference you might ask? It is because there is less risk involved. In the first example the business owner was critically involved in the day to day running (in the business) and therefore when the business is sold and the owner moves on to other things, there is risk that the profits might reduce due to the original business owner not being involved any more.
In the second example the business owner is no longer involved in the day to day running of the business and therefore the confidence of the purchaser in continuing to receive the $100K bottom line profit is enhanced as the business can continue as normal and therefore the purchaser perceives less risk. Accordingly, they are prepared to accept a lower return on investment.
Isn't is worth working on a strategy to remove yourself from the day to running of the business? Planning for when you sell the business is critical. It's never too early to start.
Talk to Ross Wadeson Accountants about your business, tax and financial needs.
Call us on 9580 9866 for a confidential discussion.