A lot of people are posting that the 30% profit margin means that it will add $3.6 million to our bottom line. But profit margin is not the same as net profit. My company runs on a 30% profit margin, but last year we had a 5% net loss. We did not trim our operating expenses fast enough because we did not expect our EOY sales to be 25% down from the previous year. If the acquisition target is operating at small profit, or even a loss, this could be a great opportunity for us. There are innumerable ways to value a buyout, and a low net return can be used to leverage a lower purchase price. And if they are struggling on the bottom line, it almost always can be improved quickly by dissecting the overhead and cutting as needed. If they have been around awhile, they may be leery of cutting areas that adversely affect personnel. Despite what some government officials would have you believe, most employers (especially small businesses) would rather not cut personnel at a time when jobs are so scarce.
How to value this target is something that only Kuni can answer, having done the Due Diligence. And we either have to trust his judgment and hang on for the ride up, or sell and move on to a company that is more in line with our investment philosophies.
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