Buying a Business? Know What You Are Getting!

When buying or investing in a business you need to evaluate that business carefully. One tool is the Investment Analysis.

The Investment Analysis table gives you discounted cash flow analysis including Net Present Value (NPV) and Internal Rate of Return (IRR). Both of these are important financial analysis tools that will help a business present itself via its plan in the terms used by the more sophisticated investment analysts.

Investment analysis

The estimated cash stream
The Investment Analysis starts with the Cash Flow stated in investment terms. That means that an investment is a negative number, and the return is a positive number. This example is typical of formal investment analysis. Sales, Profits, Expenses, Assets, and Liabilities are not included in the analysis. The analysis even ignores Cash Flow in this case, because Cash Flow is irrelevant unless it becomes a Dividend.

The example treats the company from the investor’s point of view. Namely, there is only one flow into the company that matters, the investment. There are only two flows back out as returns, Dividends and Equity Valuation. Equity Valuation really matters only when the investor cashes out. Until equity is sold, valuation is just paper money only, not real.