You want to buy a business.
It doesn't matter which one is small, such as a coffee shop, a large industrial enterprise, or some online business.
And so businessman Vasya put up, for example, his coffee shop for sale.
The price is 1 million rubles.
Good. But why 1 million?
Vasya does not have a book value (he did not keep a balance sheet) to at least start from it.
He did not issue shares of his business and they are not traded on the stock market, so it is impossible to determine its market capitalization in this way.
So how do you know how much this business is really worth to you?
Right.
It is necessary to evaluate the effectiveness of its work over a certain period of time - the calculation horizon.
The calculation horizon is the time period for which we estimate how much money the acquired business will bring us and whether they will be in time for this period will pay off the money invested in it.
If a business is bought at its own expense, the calculation horizon is mainly determined by the period of its effective operation - the physical and moral life of the facility.
If a business is acquired with loan money, then the time period during which it is necessary to repay the loan becomes an important guideline.
It is within this horizon that we estimate the future revenues and expenses of the project.
We forecast sales volumes, prices, current cost, expenses, profits and, most importantly, how much money this business will bring us in the future in the future.
Then we take into account inflation, risks, and the fact that money today and money in a few years are not the same. Therefore, we bring future money to its current value and discount it.
And as a result, we get the main thing - in what real time can the invested money be returned.
Let's say Vasya wants 1 million rubles for a coffee shop, but calculations show that, given the current figures, the invested million will return only after 7 years.
This may be too long for you. Especially if you also took out a loan to buy it for 5 years.
Therefore, it is quite normal to come to the seller not just with the words «expensive», but with your own economic justification: show calculations, arguments and try to reduce the price of the business to a level at which the project will have a payback period acceptable to you.
But if, at the new price, the money is already being returned in 3 years, the attractiveness of the project is completely different. You will pay off the loan with interest, and, simply put, you will earn money from above.
Therefore, the payback period of the project is the fundamental criterion for evaluating the acceptable business price for you and making a decision on its purchase.
The shorter the payback period, the more attractive the business is.
Of course, other integral indicators of project effectiveness are also taken into account when making a decision. NPV (net present value), IRR (internal rate of return) and others. But for a business buyer, the fundamental criterion still remains the real payback period - in professional terminology the dynamic payback period.
In practice, especially in a small private business, it is not always someone who performs such a calculation.
People often buy "by sight" based on intuition, according to the seller, or simply because the business seems to be working.
And then it turns out that the purchase price was overstated and the business at this price simply does not provide an acceptable return on investment.
Therefore, the seller can put any price on his business.
But how much it costs to pay for it - each buyer must determine for himself. And the most correct way is the one I wrote about above: calculate the economics of the project and determine an acceptable price based on its payback.
