This article are provided for information purposes only, and are not intended as legal advice.


Should you buy a business which is generating sales from the infrastructure stimulus?

April 22nd, 2010

The governments of many countries are trying to improve the fortunes of their domestic economy by implementing a stimulus program.  This is a program aimed at local spending of many different items including, roads, transportation services and other infrastructure projects.  This generates a huge amount of government spending in a relatively short period of time.  If the business which you want to buy is affected positively by the stimulus package, how do you value the business?

 

The sales of the business and probably the profits are unusually high  for a short period of time but the profits will not be sustainable after the infrastructure spending ceases.  If you wait for another two years and you buy a company which huge profits and you base your purchase price on historic profits, will you over pay because the future profits will not be sustainable?

 

When you buy a business you look at the historical sales, the current sales and the projected sales.  Many people forget to look at the projected sales.  If there is a slip in the sales, that is not normally included in normalized earnings.  How do you know if this is unusual revenue?  The seller of the business will tell you that this is a  normal level of sales.  Buyer beware.  You need to do your research to determine if the sales are unusual or sustainable and your offer to buy the business and the price that you offer should be based on those decisions.

 

My prediction is that many investors will not consider this stimulus spending when buying a business and when the stimulus runs out, they will realize that they over paid for a business because they did not research the industry well before buying the business.


Filed under: Buying a business — Gary Landa @ 8:30 am


No Comments »


No comments yet.


RSS feed for comments on this post. TrackBack URL


Leave a comment


You must be logged in to post a comment.