How much is that business you want to purchase worth? Steve Pilgrim explains:
Let’s say you are given the opportunity to buy a great business. It’s a business you like. You’ve used the products and services of this business for years. You like it. You like it a lot, and now you have this opportunity to buy the business.
Realizing that you love and admiration for the company isn’t sufficient to lay out your hard-earned cash, you decide to do some very basic homework. You want to know what price you should pay for this business.
We’ll keep this (overly) simple. The business sells $1000 worth of goods and services every year. After paying all of its expenses, it earns $100. That’s the profit. As the potential investor, you are being asked to buy all of the 100 shares of stock that this company has issued. What should you pay for 1 share? At what price for a share of stock are you content earning $1.00 of profit per share? At what price for 100 shares of stock are you content earning $100 in profit each year?