So, yes, if the plan was to shut off the growth at $15MM, and milk the $3MM of profits out of the business in perpetuity, that would appeal to certain buyers. But if the plan, was to grow a $15MM business into a $50MM business, all while distributing a portion of profits to the shareholders or the lenders along the way, this business wouldn't attract anyone. Until, we looked at the cash flow statement in more detail. And, we learned, they needed to invest the full $3MM of profit into their future inventory investment required to support the next year's expected revenues of $20MM. With a 50% cost of sales ($10MM) and a 3x inventory turnover ratio ($3.3MM of inventory needed for next four months), they needed every penny of the prior year profits, and more, to fund their growth. We were studying the potential acquisition of an ecommerce seller of branded shoes. They were showing very impressive revenue growth from $5MM to $10MM to $15MM over a three year period, and net profits were growing right along with it, from $1MM to $2MM to $3MM. That would attract the excitement of most any investor or buyer. Amazon is a great example of a company that has had major success with a strategy like this, although it ruffled the feather of many of their early investors as a public company, since it was counter to the norm of maximizing near term profits. Obviously, if you are not trying to sell your business, making potential investors or acquirers happy doesn't matter. You can do what you like in those cases. And, the reason most businesses don't care about not driving huge positive cash flow, is because they are more focused on re-investing all cash flow into the company, to help propel the business to new heights in future years (not caring about the impact to profits or cash flow in the current year).
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