Does any one have experience in buying a company?

April 07, 2021

by a searcher from Universidad Carlos III de Madrid in London, UK

I have been approached from a couple of sellers, I need feedback from the community which is the criteria of buying a healthy company? I mean in terms of cash flow, revenue, total liabilities of the company, debt ratio.

Cheers.

0 Likes

4 Replies

164 Views

Replies

Reply by a searcher
from Webster University in Westchester, Los Angeles, CA, USA

My knowledge is theoretical, but here goes: the core of the value of the business is how much can it afford to pay for its own acquisition. Generally businesses are so big that someone isn't getting paid off all at once, which means a significant amount of money has to be secured by reliable cashflows and/or valuable assets. A business with unreliable cashflow and no assets isn't worth much, and the reverse is of course true. This math can change if the acquiring party values something other than cash/assets, like a particularly good technical team. Then the business is worth up to what it would have cost them to assemble that team themselves. An important point is that the financials for sale are different from the financials for taxes. You can "add back" a lot of expenses that you didn't actually have to spend to run the business to show the buyer that when they run the business they can keep the cash if they want. Then the simplest way to value the business is a multiple of annual discretionary cash, or phrased another way, how many years would it take for the business to pay off its own sale. A buyer probably isn't going to put any value on the potential of the business to make more cash in the future; just on historically how much cash it's made in the recent past. Then the multiple goes up when the business is easier to run and less likely to lose its cashflow in the future. So a store that sells one product from one vendor in one listing on Amazon can have a lot of cashflow, but it would have a low multiple (0-2x), because that's fragile. But a global conglomerate with thousands of products and trading publicly goes for a high multiple (20x) because it's not fragile. Normally the multiple of discretionary annual cashflow is like 2-4x. I'm new to this site but I think it has a list of standard multiples for different industries. After you're in the ballpark on how to value the business the actual deal terms can change things again. The cliche is "my price your terms, or your terms my price". But maybe there's something weird like the buyer needs a loan and the price of the business is just high enough that underwriting will be 5x harder so you agree to get value elsewhere so the loan amount can come down.

Reply by a searcher
from Massachusetts Institute of Technology in Miami Beach, FL, USA

There are tons of people who’ve bought a company here! I’m not (yet) one of them, but you can use the search fund directory to find people who are. Just looks for funds that have closed a deal.

Also, buying a company can’t be distilled into pure financials. Even if it could, you still have to adjust financials yourself to (1) represent true economic earning power rather than using what the broker/seller gives you and (2) include an estimate of future financials (doesn’t matter if the company made $1mm last year and it’s selling for $1mm today if, next year, profits go to zero).

I say this a lot, but check out the free Stanford Search Fund Primer or HBR’s Guide to Buying a Small Business. It will probably make any conversations you have with successful buyers more productive for you.

+2 more replies.

Join the discussion