How do I determine what is a reasonable project acquisition cost?
We are a mid-sized military medical construction company and we are looking to focus our efforts on business growth. I want to be aggressive with growth, but I'm unsure how to determine what a reasonable project acquisition cost should be. Any suggestions?
How long have you been in business? Do you have past clients or is this a start-up? What is an average project worth in profits? What's your average project profit margin.
Depending on your cash flow, technically you can spend up to what you might profit on an average project to get a new client and still break even. But if you don't have a volume of projects in that field, that model might need some tightening up for your situation.
Using averages helps keep it simple. You'll never get anywhere trying to analyze it down based on considering each project. Sometimes you even have to disregard the highest and lowest past project(s) to make determinations.
Also, is it a one-time project or will there be opportunities to sell more to the client? Selling to an existing client more than once is much less expensive than marketing and obtaining another new client.
If there are additional potential sales to the same client you have more to consider. How are you acquiring a military client where it costs you money other than producing and sending one or more proposals and maybe traveling for a presentation?
You cannot make the argument that since it is your equity that is being used to fund the acquisition, you can use your cost of equity. Cost of capital = 20%(.5) + 4%(.5) = 12%