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Short answer is 5x the yearly profit. Also this has backfired on many business where the owner takes a wad of cash everyday home to not pay taxes.
Is you goal to diversify your investments or to have a hobby thing to play with while you piss away your retirement money?OK, thanks everyone for the advice. Some excellent points being made, and believe me, I am listening.
Now, to be more specific about why I am considering this, and what the parameters are:
I have not made up my mind yet about whether I will move forward, but many notes of caution have been sounded. Thanks again for all the advice.
- I can purchase the business cash, as part of my overall investment portfolio. I am thinking of it as a way to diversify my investments, and not having everything in stocks & bonds. I have a house on the market, and when it sells it would more or less pay for the purchase. I am hoping to get a return on investment in the order of 5-10% a year.
- I am not a businessman, but I believe that I have a reasonable understanding of finance. I am mostly retired, with sources of income that are sufficient to sustain my current lifestyle.
- I am in fact working part time as a divemaster, so I understand the "sweat and tears"" part of the business. Owning a dive shop would be primarily a hobby, as well as an investment. I would be looking for a full time manager, and be personally involved only in making business and HR decisions. I would also be helping with day to day operations as needed (e.g., taking customers out on trips, helping with courses, etc).
- I was indeed planning to engage a business consultant / CPA to gauge the solidity of the financials. The shop has been operating for 10 years now, has a solid reputation, a customer base, a good team of instructors, and an excellent set of internal SOPs and checklists for its daily operations. In other words, it would take spectacularly incompetent management to take it down in a year.
Is you goal to diversify your investments or to have a hobby thing to play with while you piss away your retirement money?
There are lots of investment "syndicates" out there that will make you a better return with zero effort on your behalf. You just need to look beyond the crap offered to the common person (stocks, bonds, mutual funds,...).
Find an investment firm that offers alternate investment vehicles. Things like: roads, bridges, hospitals, shopping malls, hydro electric plants, solar farms, commercial buildings, industrial warehouses,... You get to own a very very small slice of a lot of different things.
Not a REIT. A REIT is just like a mutual fund except they buy real estate. You buy shares of the REIT. You do not own any of the underlying assets.That sounds like a REIT. Several years ago they were considered a sound investment, a few years ago not so much. Are they back in favor? According to one site they were recently averaging 11.8% return.
I am thinking about buying a dive shop in the Caribbean, and trying to figure out what its fair market value would be. It is a well-established operation with a good reputation. Most of its business is from courses and guided dive trips, plus some equipment rentals and sales. I have access to its recent financial reports. I also know the asking price.
Does anyone have pointers on how to estimate the value of a dive shop, given its basic financials (profit and loss, balance sheet, etc)? Any advice would be much appreciated.