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How does the value of your business change if investment is needed?

What do potential buyers think when investment is needed?

Investment Needed

Posted by Jeff Muir on 4 August 2016 | Comments

Business owners are constantly weighing the need to upgrade equipment and technology.  On the one hand, they want to be as efficient and cutting edge as possible, on the other hand constant upgrades may have a negative effect on profitability and can be disruptive to bring online.

Many businesses run efficiently with older equipment and often incorporate used equipment at discounted prices to increase capacity without negatively affecting margins.  Some companies have employees with an amazing capability for retrofitting used equipment into the operation and maintaining older equipment to remain effective beyond its appreciable life.    We were recently in a company where there was only one employee, 70 years old, who knew how to operate and repair a critical piece of equipment.

Long time business owners often become complacent about the need to invest in long term assets.  Many view it as “the next guy’s problem”.  As the buyer, the next guy or girl may take a very different view when it comes to such an investment.  Many will walk away from a business with a critical piece of equipment that nobody else knows how to fix, feeling that it will take too much time and resources to modernize the facility.  An interested buyer will typically mark up the cost of capital investment to incorporate a cost for the unknown and potential downtime involved in modernization process and deduct the amount from an offer.  Thus in effect, the seller is still paying for the equipment; only he is not getting the benefits from modernizing. 

Deferring investment can reduce the number of interested buyers and cause others to reduce their offer by an amount greater than the cost of the equipment.

 

If you are interested in learning other ways to increase the value of your business, The Art Of Business Value Enhancement is a Must-Read!  Click here for more information.