Payback Time in Investing | Phil Town

TL;DR

Finding the right price to pay for a business involves calculating a growth rate that can be sustained over the long term.

Transcript

so we finished that one i believe right we finished on i could really pocket the owner earnings and we talked a bunch about that and you decided to delete it and that was the last one right um yeah yeah that'd work that's it that'll work okay and let's go let's go on to the next method of valuation so to make a point here about 10 cap tincap doesn'... Read More

Key Insights

• 👨‍💼 The 10 cap method values a business based on its owner earnings and offers a safety cushion.
• 👨‍💼 Private businesses are typically purchased at a lower price-to-earnings ratio than public businesses.
• ☠️ Payback time valuation requires a reasonable projection of long-term growth rate.
• ❓ Confidence in a company's ability to sustain growth without limitation is crucial for accurate valuation.
• ☠️ The growth rate chosen should not exceed the industry's potential and the company's practical limitations.
• 😥 Selling a business at a later point requires confidence in sustained growth for a number of years after the sale.
• 👨‍💼 Investing decisions should consider simplicity and predictability of businesses.

Questions & Answers

Q: What is the purpose of the 10 cap method of valuation?

The 10 cap method helps determine if a business is worth purchasing by providing a safety cushion through a 10% yield on owner earnings.

Q: How do private businesses and public businesses compare in terms of valuation?

Private businesses are usually purchased at around 7.5 times earnings, while public businesses have an average price-to-earnings ratio of 15.

Q: What is payback time valuation?

Payback time valuation involves projecting a reasonable long-term growth rate for a business based on historical performance and industry trends.

Q: How do you determine a growth rate that can be sustained over the long term?

By assessing factors such as industry competition, market size, and the company's ability to expand, a reasonable and sustainable growth rate can be estimated.

Summary & Key Takeaways

• Using the 10 cap method for valuation helps determine if a business is worth more than the purchase price, even if it doesn't grow. The method provides a safety cushion.

• Private businesses are typically purchased at around 7.5 times their earnings, compared to public businesses which have an average price-to-earnings ratio of 15.

• Payback time valuation involves projecting a reasonable long-term growth rate for a business, considering historical performance and industry trends.