Finding a company to buy might not
be as easy as it sounds, at least initially. The main consideration in buying a
company consists in knowing what type of business you think will be profitable
and then buying a company in that business.
A good place to start is by
contacting a broker that specializes in buying companies for others. On a large
scale, an investment banker would fill the needs of a large investor buying a
company; but on a smaller scale, brokers exist that can put you in touch with
the type of company you might want to buy.
Getting
a Broker
Finding a broker familiar with the
market requires that you demonstrate you are serious and that you have the
means to make the purchase. Because of the overwhelming ratio of unqualified
buyers, business brokers generally are hard to approach.
Nevertheless, if you show that you
really want to buy a company, the broker will most likely show you a number of
companies up for sale. The key is to know what kind of company you want,
have a specified amount budgeted for the transaction and ultimately commit to
making the purchase.
Cash
Flow and Valuation
The first thing you must determine
before laying down your cash is what the company you are interested is actually
worth. Once you have determined the value of the company’s assets, the
company’s cash flow should be evaluated.
As a rule of thumb, small companies
generally sell for 3 to 6 times their cash flow, so if a company has a cash
flow of $150,000, the price for the company would be $450,000 to $900,000.
Larger companies can pay up to 10 times cash flow in their acquisitions, while
stocks on the stock market are usually trading at 15 to 20 times cash flow.
Once you have determined the
company’s cash flow and the value of all their assets, you could write a letter
of intent stating your offer. The offer can then be addressed by the company’s
officers and your offer can be accepted or a counteroffer made.
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