@ Brandon – Who’s the old guy standing next to you?

[I love the even funnier link in your About Page: http://cuteoverload.com/

http://brandonlaughridge.com/about

I don’t have the capital to buy a decent business on my own right now but what you’ve spelled out is exactly what I plan on doing in the future.

I will find a small business that’s positioned decently in a growing industry but still available for sale at 6x earnings or less. Then I’ll build it through other acquisitions and organic growth to a slightly larger player in whatever field it happens to be and pass the new, larger business off to a private equity firm at 10x.

I think it sounds like a feasible plan, at least in theory.

You can calculate the value of a perpetual annuity stream via the formula of PV = Annuity / (interest rate – growth rate of annuity)

What this means is that the value of a stock with fast growing earnings is worth more than one with stagnant or slow growing earnings. It also means that the a higher interest rate lowers the value of the stock. The interest rate is determined by the earnings risk of a stock. The higher the risk, the lower the present value of a stock.

In English, the price to earnings multiple value of a stock is determined by the expected growth of earnings and the risk of realizing future earnings. Growth good, risk bad.

Whether public or private, always consider those two factors in deciding whether the PE is right. Warren Buffet would also buy a company with a PE of 30 if he thought the growth/risk profile warranted it. This also means that there is no hard and fast rule for what a good PE factor is at which to invest.

One last comment: a.) IPOs are very expensive. b.) And if all it takes to increase your PE from 5 to 15 is going public, the greed of private equity firms would have gobbled up every such opportunity.