🔑 500 Year Old Businesses
Welcome to The Business Academy. Here's what we have in store for you today:
- How do businesses survive for 500+ years?
- Buy a business no one else wants
- Make millions with meat
🔑 From Homeless To Owner Of 20+ Businesses
How would you define "long-term" in business?
10 years? 20 years? Maybe 50 years?
You're thinking too short-term.
Japan has 140 businesses that have been operating for more than 500 years.
I recently read a fascinating piece about Japan's ultra-durable businesses.
It's hard for us to conceive of such longevity in a country that's only 248 years old.
Most executives have a hard time looking past the next quarterly report.
Look at the most valuable companies in the S&P 500 and you'll see a group of businesses that were started only 30 to 50 years ago.
So how does a business stick around for more than 500 years?
Finance writer Morgan Housel broke it down for us.
From a financial standpoint, all of those longstanding businesses in Japan have two things in common:
- Lots of Cash
- No Debt
This kind of financial structure gives you a margin of safety.
Warren Buffett said that "the three most important words in investing are: margin of safety."
Your margin of safety is the buffer you give yourself to account for downturns, unexpected expenses, bad luck, and anything else that will negatively impact your business.
Buffett says he won’t touch a stock unless the margin of safety is around 30%.
In other words, even if the stock price drops by 30% today, he still wouldn’t lose money if he held on to the stock long term.
Look at it another way, the MOS is the amount of buffer a company has built through its future revenues versus its stock price today.
If today’s stock price undervalues future revenues, then the margin of safety will be higher for the investor.
If you're buying a business, ask yourself the following:
Am I being too optimistic with my expectations?
I've talked with hundreds of business buyers (and I've bought many businesses myself).
As a group, we're optimistic, confident, and ambitious. We expect everything to go our way.
That's a great attitude to have for running a business.
But, we should be a bit more pessimistic when analyzing the financial structure of our business acquisitions.
Especially when we take on debt (eg: SBA or SBIC loans) to finance the purchase of a business.
Debt payments will be a cash flow burden to the business.
Here are a few questions to ask yourself:
- If revenue dips 20% next year, will the business survive? (Keep in mind if revenue drops by 20% most companies will lose 50%+ of their profits)
- Is there still plenty of cash flow left after making debt payments?
- What steps would I take to ensure this business can survive the next 100 years?
I like Morgan's graphics that explain the risk of leverage:
Simply put, some negative events are survivable, while others are fatal. Increasing your leverage makes more of the survivable events fatal.
This is why we never put debt on the Enduring Ventures parent company.
🔑 One interesting read: Buy a Business No One Else Wants
Is buying a business worth it?
This piece argues that it rarely is.
While I love buying businesses, I also like to share the opposite view.
This post explains how most of the time, buyers of businesses don't capture the value they expect when buying a business.
While it mostly talks about corporations buying other large corporations, it mentions a lot of common pitfalls of any acquisition that all SMB buyers should be aware of.
🔑 One interesting deal: Making Millions with Meat
This meat processing business in Montana does $4.1m in annual revenue and $1m in annual cash flow. The business itself is listed for $3.5m, plus there's $2m worth of real estate that you'd also have to acquire.
Let's take a look.
What I like
The valuation of 3.5x cash flow seems reasonable. Of course, I'd have to look into the real estate and determine if it's really worth $2m. I love the age of this business. It's been in business for 55 years, which means it likely has a loyal customer base, long-tenured employees, and systems that have stood the test of time.
What I don't like
I don't know anything about the meat processing business, and I don't think it's a business I'd be excited to be in...
It feels like an old-school competitive industry, where most of the weaker competitors have been wiped out. It also seems like a commodity business. I'm not sure how you stand-out compared to competitors and protect your price margin. These are all questions to explore with the owner/broker.
The listing emphasizes that the business can be completely run on autopilot with an absentee owner. While that sounds great, running a business is rarely a task that could be put on autopilot. I'd want to dig into this and evaluate why the current owner wouldn't want to just keep running the business on autopilot.
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. Take a look and please subscribe on YouTube if you haven't already.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
