Buying a business/ecommerce site?

[olimits7]

Hi,

Using this as an example, if I was interested in buying a business/ecommerce site that had a yearly net income of $50,000 and let's say I purchased this at 5 times earnings; so I would end up paying $250,000 for the business/ecommerce site.

In theory, I wouldn't be profitable until after the 5th year until I pay off my initial investment of $250,000?

Or lets say I get a business loan for $250,000 and my yearly payments for a 20 year loan (not including interest) is $12,500. So in this example, I would be able to pay $12,500 a year and still receive a net income of $37,500 ($50,000-$12,500) after my 1st year in business?

My main question that I'm trying to figure out is people who buy franchises, businesses, ecommerce sites, etc...lets say the company is profitable after the 1st year; are they really actually making a profit since they still have to payback a loan or recoup their initial investment first before being profitable?

Thank you,

olimits7

[LifeinAsia]

The company is profitable. Whether or not the profits are eaten up by interest paid by the investor is irrelevant- that money comes out of the investor's pocket, not the business's. (Think about it this way- if the same business were bought by someone paying cash for the business, the business itself wouldn't be any more or less profitable.)

If, during the course of business, the company takes out a loan, then the interest would be deducted from the revenue to determine profitability (or lack thereof).

So you need to determine which picture you want to look at: if the business itself is profitable, or the overall investment in the business is profitable.

[LifeinAsia]

Also, earnings do not necessarily (and rarely ever) equal profits. So if you pay $250K for a business with annual revenues of $50K, but annual expenses of $40K, it's going to take you 25 years to break even. And when you factor in the 25 years of potential earnings from other investments (even leaving the money in a savings account paying .1% interest), you'd actually still be underwater on your investment.

[Rannos]

If you're interested.. Couple good books on buyouts and growth through acquisition:

"The making of a Blockbuster"
"Without fear of Failure" (hard to find)

Both involve what you are questioning above (different industries of course).

As far as an investment, if you are a Sub-S Corp... all income flows to your personal tax return in the end anyways. Your analysis is pretty basic but spot on. If you do buy a business, the read this book: "The Six Month Fix". The attitude you learn here will help you make up for the interest on your note.

[olimits7]

Thanks for the replies!

LifeinAsia: I meant yearly net income/profit/earnings regarding the $50K I used in my example, not annual revenues; so that $50K income/profit/earnings in my example already includes all my expenses.

if the business itself is profitable

Yes, I guess looking at the business's yearly profit number would show that the business is profitable, and not taking into account the $250K that I had to invest initially.

the overall investment in the business is profitable

However, if I look at the business as an "overall investment" including the $250K I had to invest initially; I guess my "overall investment" wouldn't be profitable until I recoup my initial $250K invetment.

Rannos: Thanks for the book recommendations, I'll be sure to take a look at them.

Thank you,

olimits7

[digitalv]

Do two years worth of revenue, not five. About 95% of ecommerce sites fail within five years. People only sell profitable businesses when they have a reason to, that reason is often inside knowledge on what the future holds for the business.

Also, consider what your time is worth - a company that's only doing $4,100 a month in profit can't afford to hire anyone to run the business.