Saturday, May 21, 2011

Reasonable Expectation of Growth

Unless you buy your business at a ridiculously low price, which is usually only evident in retrospect, growth is where the money is made. Let's say you buy a business for one million dollars, borrowing 800 thou with 200 thou down. Suppose it is doing 1 million in sales for simplicity, and making 200 thou a year cash flow for simplicity. After you pay the principle and interest, you will have a livable salary, and after 10 years of payments, you will own a million dollar business assuming it isn't worn out by then, either in terms of physical capital or buzz or whatever. Nothing wrong with a million, but most people who work at a decent place for 30 years build up that with decent returns in their 401K, notwithstanding the recent losses of about a year ago. If you stay the same, that and your social security will get you by til you croak. However, if you double the size of the company, and double the profits, now you have an extra million in equity, and a pretty good salary. If you save that and invest it also, you could be in pretty good shape. So make sure there is room to grow!

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