What are the pros/cons of buying a company for <$1 million?
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?
from University of Virginia in St. Louis, MO, USA
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?
from University of Missouri in St. Louis, MO, USA