If you want a strong business – expect to pay a fair price for it

General Category on August 15th, 2013 Comments Off

One of Warren Buffet’s sayings is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

A good example of this is when you go to the supermarket to buy some steak.  The budget steak is $10/kg and the good steak is $35/kg.  You buy the budget steak, cook it up and it is hard to chew, has plenty of fat on it and you start to question was it really worth saving $25/kg.  However the big question is, did you actually save $25 or did you pay for what you received.  This is the same for businesses, from a seller’s and buyer’s perspective.

Good strong businesses will always sell for good prices.  These are businesses with strong financials for a number of years; a strong lease; well trained staff; fit out/assets in good condition and the business showing strong signs that it will continue to trade strong into the future.

Let’s use the example of two cafes for sale.  One cafe is run under management- consistent coffee sales each week, new strong lease, fit out in good condition and financials show excellent profits.  The second cafe is run by two owners- the fit out is tired and financials show losses.

Obviously the prices for each of these will differ significantly, but from a buyer’s perspective it makes sense you would pay a fair price for the strong cafe.  You know that after you buy it you will be making good money and you will have a strong asset if you were to sell in the future.  The second cafe will also sell but it needs to be to a buyer who has a strong business formula to insert and is confident it will work.

As a broker we receive good interest for the example of a strong cafe but buyers often expect it will come at a wonderful price instead of a fair price.  They are trying to pay $10/kg for a steak that is worth $35/kg.  Just as you would not go into your butcher and say you want to buy the $35/kg steak but will only pay $10/kg, it is the same with businesses.

If you are a buyer, these wonderful businesses are not as common as you may think.  If one comes up for sale, move quickly! And part of moving quickly is securing the sale of the business with a fair price.

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