Building a Small Business That Warren Buffett Would Love - Available at Amazon.com and most major bookstores.
Circling back to our first Buffett concept, it is also important to examine the business in terms of a consumer monopoly. If your business is the twelfth pizza shop in town and has no distinguishing features, (Elvis, tomato sauce spewing volcanoes, Liza Minnelli on a raft in a pool, surrounded by dolphins) the deck is stacked against you and you are swimming against the tide and someone is about to hurl flaming banana boats at you.
Can This Be Fixed?
If the ROE in the business is “flailing” at best, (or flatlined at worse …. beeeeeeep!) as the owner you must ask “can this be fixed?” Is it possible to increase earnings on top of the existing equity base? Can new revenue generating assets be purchased without using titanic amounts of equity? If not, you should be willing to shift investments in the same manner that Warren Buffett shifted the capital of the original Berkshire Hathaway the textile manufacturer, into consumer monopoly insurance companies. (GEICO anyone?)
If a shift is necessary, start with earnings and use the income from the sale of assets to purchase businesses fitting the entire Buffett fundamental mold; a consumer monopoly, with a strong track record of earnings, a healthy return on equity and the ability to retain earnings, with little debt on the balance sheet, possessing the ability to increase prices with inflation, and containing healthy margins relative to other industries. (Yes, the rest will be covered in subsequent chapters, hold your horses – this is just a preview folks.)
The lesson here is to not get married to your business if it is in fact a bad business, with flailing, underlying economics. You will always be slamming your head against a brick wall of economic reality if you do not heed this advice. This ground-zero of truth truly represents the shift from a small business owner as a pawn to a small business owner as investor and although it easier said than done, is one more step along the path to building a small business Warren Buffett would love, and preserving your head.
If the business is new and the “honest,” realistic projections do not show the potential for high returns on equity, then look elsewhere. Remember, a business with component pieces that do not fit the Warren Buffett mold is a business that will operate like a bladeless lawn mower.
As always, if you are using projections, keep in mind, projections at best are an accurate forecast and at worst a good guess. If you are thinking of starting a business from scratch, I highly recommend taking a look at an existing business or a franchise business since the franchisor can provide existing franchise financial data from comparable locations that can be used to paint the financial picture of your franchise start. In other words, the analysis will be ground in real life numbers, not a high stakes forecast.
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