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.