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17 Jul 2013

5. How do I consider the purchase price?

The true price you should take into consideration is the "Enterprise Value", which includes the stock, and the working capital need to maintain the business.
This would depend on such things as payment terms between customers and suppliers, and any seasonal factors which can influence the cash flow.
There are no hard and fast rules, but your cash flow should enable you to pay off the interest and principal in a reasonable time, say 5-6 years.
Unless you really know what you are doing, it is probably safer to pay more for a solid business with a good track record and prospects, than to pay a bargain price for a shaky business.


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