How do I go about finding the right business and determining how much it's worth?

Purchasing a profitable going concern has advantages over starting from scratch. Having an existing customer base and predictable cash flow gives you a strong advantage. Start by defining your target business. Assess your skills, financial resources and form a picture of the ideal target to acquire. Make a list of all the businesses that meet the profile even if they're not advertised for sale. Contact every owner on your list to let them know that you may be interested in buying and have the financial resources to close the deal.

If you decide to use the services of a business broker be sure he or she represents you as a buyer's agent -- not the seller. The broker's track record negotiating sales of businesses that fit your target's profile should also be investigated.

Valuing a business is not easy. Even professional business appraisers often disagree. Market value is the most probable price that a typical knowledgeable buyer and typical knowledgeable seller would use to transact a sale if neither are under undue pressure to sell or buy. Of course, it takes only one buyer and one seller and it's unlikely that either will be typical. Additionally, it's unlikely you'll find exact, comparable, recent sales.

Value is determined by historic cash flow (revenues less operating expenses) and potential for increased revenue. Sellers want to price the business based on the future but buyers want to buy based upon the past. If they can compromise, a sale takes place. Rather than getting too hung up on the value, I recommend that you dwell on the process for gathering documentation that will tell you if the business is profitable enough to justify your investment.

1. Hire an experienced business acquisition lawyer. Ask for a checklist of all the documents you'll need to get from the seller. Your lawyer will draft the definitive purchase agreement and structure the transaction.

2. Retain a competent accountant. Your accountant will perform due diligence - the process of determining if the documentation provided by the seller is accurate.

3. Review the financial documents. Determine how much cash flow you can expect in the near term after giving yourself a modest salary. Divide the cash flow by your cash investment to get your return on investment. Is the ROI acceptable for your perceived risk? If it is, make an offer.