What are the pros/cons of buying a company for <$1 million?

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January 21, 2020

by a searcher from State University of New York (SUNY) in Atlanta, GA, USA

What are the pros/cons of buying a company for <$1 million and using it as a platform?

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Reply by a searcher
from University of Virginia in St. Louis, MO, USA
I have found that the smaller companies do generally accept significantly lower multiples. So this might depend on the geographic location..

Here's the thing: A small company will likely not have scale in terms of an operation. You're likely going to be the only adult supervision. Some people thrive on that, others don't. Running a business when you have a competent manager who can keep things going when you take a vacation is a lot nicer than being the only manager. The type of business has a lot to do with this.

When companies scale up their multiple generally goes up. If, and it's a big if, you can scale a smaller company by using it as a platform I believe that the returns can be excellent. Not only will the company be larger, but it should trade in a higher multiple range that what you paid.

The downside? You have a small company that somebody else didn't make large. Maybe you can't either. The platform model relies on you stitching multiple companies together. Depending on what they do this might be harder than you think. If it doesn't get bigger, you will have spent a lot of time on something that won't have a large payoff.

When you buy a larger company with a longer history and use it to pay off the loan I think the return will be less risky. Of course you have to find that company and that's not exactly a piece of cake right now.

Finally, what makes a lot of these deals work is leverage. If the SBA determines that you have cash to buy the business they won't loan to you, at least that's what I've read, so you'll be looking outside. If you can't lever the business will the financials still work for you?
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Reply by a lender
from University of Missouri in St. Louis, MO, USA
Pro: experience. If this is the first acquisition your debt payments and subsequent risk will be a lot lower on a small deal than a larger one. This will allow you to learn the industry with lesser risk. Pro: as mentioned you can usually get these at a lower multiple. This could mean the amount of debt payments v. EBITDA could mean you actually make more money than if you had a higher EBITDA business but large debt Pro: you should have excess cash flow available for your debt service on the next acquisition(s)
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