Future profit potential, and how much you can impact that future, is the most important intel you can have when purchasing a business. Future growth will ultimately be the measurement of the merits of the investment and is key to your achieving a good return.

One the most serious shortcomings when evaluating an enterprise is to focus only on historical performance without considering what the business might be capable of under new management. While its history provides some insight, it is what will happen to the company in the future that is key.

In any conventional evaluation process, the buyer will pay for what has been achieved but will buy for upside potential. Successful acquisitions are all about generating a premium on the investment. The major "determinator" in considering an acquisition should be how a new owner can improve the business. Probing for underlying growth opportunities that are ripe for exploitation will help achieve that goal.

Some factors to consider in gauging the company's future under your ownership that could enhance and expand the bottom line could be:
  • Is there is a skill set that the current owner is lacking, that you possess. For example, a stronger marketing background or more technologically inclined.
  • Are there additional markets that a new owner should pursue?
  • What additional products could be delivered to existing customers?
  • Where are the best profit margins realized and can they be expanded?
  • Can the technology be licensed?
  • Will demand for the product or service increase as population grows?
  • How will enhanced marketing campaigns and sales efforts affect growth?
  • Are there opportunities to grow through acquisition?
  • Can growth be achieved by expanding geographically, increasing manufacturing capacity, or adding multiple locations?
  • Would additional hires impact growth?
  • Or, would streamlining the workforce be more beneficial?
  • Is franchising feasible?
  • Are there online strategies ripe for growth?
  • Are there areas to explore that could decrease operating costs?
  • Would the company benefit through additional workforce training and education?.

Most business pricing models have two major components: a base, usually revenue or profit, and a multiplier. To get the base you need a clear view of the revenue picture from previous years, the historical performance. The multiplier is derived from industry-specific ranges. That multiplier is actually the number of years it will take to recoup the price you just paid for the business, assuming it doesn’t grow (or shrink.) Having a clear view of the future – and how much you can impact that future – is the most powerful intelligence you can have when determining the soundness of a business investment.

For example, if you pay 3x earnings, and believe you can double the business in twelve months, that is a good deal. If you pay 10x earnings, and you expect 10% growth – it’s going to take a very long time to see a return on your investment. While 10x earnings is an exaggeration, it illustrates the point of return on investment.

Using these principles as a guide in making an acquisition decision may markedly increase the chances that your journey to profits and success will end with positive results.