Who Else Wants To Learn More About The Great Contrarian Business Buying Opportunity Created By Adversity?
Adversity has created a unique business buying opportunity if you are prepared to think like a contrarian. Warren Buffet claims that he likes to buy when others are selling, because popular opinion is almost always wrong. Being a contrarian, and taking advantage of the opportunities created by an unusually weak economy will seem unnatural to you at first. It may have also seemed unnatural to Mr. Buffet initially.
If it seems so unnatural, why should you consider adversity as a great business buying opportunity? There are actually a couple of very good reasons. First of all there will be businesses available for sale where the owners have become so tired of their many difficulties that they just want out. And they want out at any price. However, you will not likely find very many good businesses where the owners will want out at any price. So deals where you can almost name your own price will be quite rare. Owners may be tired but not to the point of being irrational. But in real estate parlance many will be highly motivated to try to make some kind of deal.
The other reason that you should consider adversity has created a great business buying opportunity relates to timing. When revenue and profit are down considerably from what is considered normal, most of the shortcomings of the business and its method of operating become exposed. And they will be easy to identify. You will learn what the worst is, without having to work very had to discover it. Things that good times, and reasonable results may tend to obscure, will become glaringly apparent under the bright light of adversity. You will be able to easily identify the shortcomings and determine which if any you can easily and inexpensively remedy, and those that will be more challenging and more costly
After identifying all the shortcomings. And you have rated them according to ease and cost of remedying, you will be in a good position to really determine how good a business buying opportunity you are evaluating. You can then conduct your own valuation to determine how it compares with the asking price. You may find that they are very close, although owners are frequently a bit short sighted about the various shortcomings of their businesses. The list of shortcomings that you have compiled and rated will give you objective arguments for use in price negotiations. And in concept it comes down to this. If you can buy for a price that is less than your adjusted valuation, you will likely do well. But there is a proviso.
The proviso again relates to timing. You need to examine the extent of the risk that buying at this time will expose you to. And that mostly depends on your assessment of the timing of the return to more normal market conditions. If you had to bet, would you bet that circumstances are more likely to get better or get worse. You need to be very realistic, and try to base you bet on objective measurements. Because it is your money. If you bet that things will get better, and they get worse, what will being a contrarian cost you? And can you afford it? Remember that despite the importance of great systems and processes, they are not a cure all. They are unable to put money in customers' pockets so they can buy from you. They will enable you to perform relatively better than other businesses, but will that be enough.
Most of you will remember a public company called Nortel. At one time it was the darling of the telecommunications fans. After its price started falling, many people bought it because it looked cheap, because the price was down. They focused solely on price, and did not examine the cracks in the foundation of the underlying business. They found that what looked cheap, could get an awful lot cheaper. Those that understood that, and examined the underlying fundamentals objectively, avoided the stock.
So adversity can create great business buying opportunities for those that know what they are doing. Competition for business will be way down. And competition is a reflection of demand. So facing reduced demand, with no corresponding reduction in supply, basic economics tell us that prices will fall. And that is independent of any other fundamentals.
If you are familiar with the industry, and can properly assess the downside risk, you should adopt a contrarian point of view. You should look for a business buying opportunity. If the economy is at the low point in the business cycle, things will only get better, and with them, the prospects for the business you are evaluating. The trick is identifying that exact time. And being able to hold on if you are wrong.
When you decide to take advantage of the great business buying opportunity provided by any adversity, try to wear a belt and suspenders. Don't knowingly step in front of a freight train by buying when you think conditions are due to decline again. And when you make your offer, try very hard to include some kind of contingent pay out as part of the price. You may have to give up a bit of future earnings, in exchange for obtaining the needed downside protection. That's OK. Remember that downside risk involves real money, whereas future earnings are what is called in the movie the Maltese Falcon, talking money rather than coin of the realm. I would much rather lose talking money than coin of the realm. Wouldn't you?
You are right. This business of trying to estimate your downside is definitely something that is easier said than done. At least with any degree of precision. That your estimate will lack precision should not be a deterrent to doing it. There is great value in doing the thinking associated with estimating your downside and dealing with it to some degree. And knowing that you will never be completely accurate or precise should keep you from obsessing over it.
Remember, trying to get that type of downside protection should not be restricted to buying under adverse circumstances. For most prospective business owners giving up a little of the upside in exchange for downside protection should be as normal as getting insurance. Consider the bit of upside you forgo as the premium you pay for the downside protection. Just like an insurance premium.
For more actionable information that will help you in assessing a business buying opportunity go to
. Although it is written to help sellers of businesses, it will work well for you. It is written from the perspective of what buyers should look for in a business, and accordingly what business owners should provide.
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