How to Evaluate a Business Warren Buffett Style

Boston, MA March 19, 2014 – “I don’t know about you but when I evaluate a business I want to make sure that I can turn it into a cash cow,” Dorina Lanza, Managing Director of White Tiger Financial, LLC, begins.

“How do I do this? Well, a business must have a number of key traits to make it “interesting” – to me anyway. And – guess what – being in on the ground floor is not one of them.”

What Lanza does is follow Warren Buffett’s model.

There are four questions that Buffett considers when he is evaluating a business. If the answers are acceptable to him, he will invest. If not, he will pass. Lanza does no less of an analysis in evaluating a business she is considering, for herself or one of her clients. You can follow the same process.

1. Do you understand the business?

  • Do you understand how money is made?
  • Do you like the business?
  • Can you reasonably predict future earnings?
  • Does the business have excellent business economics and pay plan [cash cow candidate]?
  • Does the company have a franchise/consumer monopoly [good] or is it a commodity business [bad]?
  • Does the business have favorable long-term prospects?

2. Does the business have a durable competitive advantage, also known as an economic moat? What is it?

  • Product leadership
  • Brand name
  • Superior product
  • Intellectual property
  • High switching costs
  • Economies of scale
  • Human capital
  • High fixed costs

3. Is the management up to the task?

  • Are they hard working?
  • Are they intelligent?
  • Are they honest?
  • Do they do ordinary things exceptionally well?
  • Do they profitably deploy earnings?

Honesty is critical – if they are dishonest yet hard working and intelligent they will rob you blind.

4. Is the price of building the business is in line with the initial cost and the desired return?

  • Are the returns sufficiently high?
  • Can you leverage it?

Lanza adds, “It’s far better to get into a wonderful company at a fair price than a fair company at a wonderful price. Do your due diligence properly and you will be in great business shape.”

Dorina Lanza can be reached at 1-561-290-2180 or via her web site at DorinaLanza.com.