You know the old joke, how do you make a small fortune in the wine industry?

You start with a large fortune….

However there is a proven method to make money over a 4 to 6 year term, provided you have some equity to start with. This is effectively what Private Equity companies do on a larger scale.

  • Identify an industry where you have excellent know how and can add value and show a track record.
  • Decide how much equity you are prepared to invest, either as cash or in your home.
  • Find-out how much the bank will lend you against the right business. This may be up to 50% of the value of the business.

This will depend on several factors

  1. Your experience in the sector you want to purchase in
  2. The sector you are purchasing in.
  3. The security of the cashflow in the business
  4. The asset base of the business
  5. Any capital in your home up to 80% of the home value, which the bank can use as security.
  • Find a business which you can buy which can be purchased on the sum of your equity and debt you can raise.
  • Try to buy on a multiple of returns to the owner of 3 or less.

So assuming you have $250,000 in capital and you can raise $250,000 in debt. Based on paying a 2.5 multiple you can buy a business that is currently returning $200,000 to the owner.

If you can grow this by 10% per annum, then you will be generating profit of $322,000 per annum.

If you pay yourself $130,000 per annum and then pay the residual amount after tax back against the loan the business will be debt free in 6 years.

The negative debt indicates you will have repaid your own investment of $250,000 all but $4,000.

As you have grown the business, added in systems, making it easier to manage or put under management and created a much more reliable revenue stream, you may now be able to sell this asset for a multiple of 3-4 times revenue, i.e. between $966,000 and $1,288,000. As you have repaid both your debt and your initial investment you will have made a million before tax.

If you want to have an idea of your current business value  use our free tool

BusinessValueCalculator

There are several ways to reduce the tax impact that you should talk to your accountant or financial adviser about, such as CGT allowance, roll-over provision and contribution to superannuation.