Home' Trinidad and Tobago Guardian : June 22nd 2017 Contents JUNE 22 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG17
Evaluating, pricing the business
Now if Sydney were willing to
accept the risk then the next ques-
tion is: how would she want to be
compensated for said risk?
We have been provided with
two parameters: recover the cost
of the entire investment in three
years. The second is if she sacri-
fices a sizeable portion of her cash
reserves she would expect at least
a monthly cash inflow of $5,000.
Payback Period: If she were
able to generate $5,000 monthly
in profits over a payback period of
three years, she would be willing
to put out only $180,000 ($5,000
x 36 months).
Unfortunately this is not the
monthly profit. At $2,000 month-
ly over three years the price she
would be willing to pay is $72,000
($2,000 x 36 months). Certainly
Susan would not be willing to go
this low unless, of course, she was
Now Sydney does have the op-
tion to hire herself as the sales clerk
and collect $6,500 in monthly
income ($4,500 + $2,000), over
36 months the possible price tag
jumps to $234,000. Of course this
income is not passive, as she would
have to go out and mind her own
business. If all goes well she could
probably rehire an employee.
Alternatively Sydney could divvy
up the workweek or workday with
the sales clerk so she gets her requisite
$5,000 monthly but this means that
the employee's salary would be reduced
to $1,500. Whether or not this person
would be willing to accept a 33 per cent
slice ($1,500 / $4,500) of her paycheck
would be something up for discussion.
Capitalisation of earnings: If
Sydney wanted she could evaluate the
present value of the business using the
monthly profit figures. She would have
to assume an earnings capitalisation
rate that is representative of the risk
that she has to assume; a higher rate for
a higher perceived risk and vice versa.
If we used the annualised interest
rate quoted by Susan then the present
value of the business would be $68,571:
($2,000 x 12 months = $24,000 / 35%).
If Sydney perceived that the risk is low-
er then a lower rate would translate into
a higher price tag -- if that rate were say
half then the value would be: $137,142
($24,000 / 17.5%).
Now if Sydney were to illustrate the
effect of these rates on price then maybe
she could negotiate a much lower cost
of funds should she decide to take up
the offer of a 75 per cent down payment
of the agreed price and the balance paid
over 24 months. Of course, this pay-
ment arrangement must be considered
in the context of the business' current
Making the offer
After considering the range of price
points calculated above, Sydney could
start the bidding process at the lowest
rung of the ladder, explaining her logic
behind each number.
During these negotiations Sydney
should pay special attention to Susan's
response to each progressive valuation
so as to gauge Susan's relative eagerness
or reluctance to let the business go. This
is something that even Susan may not
have as yet articulated.
In the real world, people getting into
business always expect they could lose
not only what they invested but also
more depending on how much debt
was incurred in the process.
In her posturing, Sydney should
not---as a knee-jerk response to stick-
er prices---anchor the negotiations at
Susan's asking price even if that figure
represented simply the initial capital
Susan may not have been judicious in
her spend to set up the business. Sydney
might be pleasantly surprised find out
that Susan may be willing to accept part
of a loaf versus no loaf at all.
Nicholas Dean (CertFa) is a certified
independent financial adviser and is
the managing director of The Financial
Coaching Centre Ltd. If you have any
questions or need advice on today's
subject please email: nickadvice@
gmail.com or visit website: www.
On June 23, 1885 Andrew Carnegie addressed the students of Curry
Commercial College of Pittsburgh..."I tell you "put all your eggs in one
basket, and then watch that basket. Look round you and take notice; men
who do that do not often fail. It is easy to watch and carry the one basket.
It is trying to carry too many baskets that break most eggs in this country.
He who carries three baskets must put one on his head, which is apt to
tumble and trip him up."
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