Wonderful Company at a Fair Price

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By. Scott Bushkie

Warren Buffet once said, “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” I certainly think he’s right.

Working with our buy-side division, of course we understand that everyone wants to get a great deal. They want to find that perfect company and get it at a four-multiple when the market is running closer to six. We’ve seen clients walk away from perfect deals that hit all of their requirements, only because they wanted to buy below market.

To be honest, I’ve been inclined to wait for a deal. I was working with a highly successful serial entrepreneur here in Green Bay who has bought and sold multiple businesses over the years. As we contemplated starting our own private equity group, I suggested we wait until the market crashes when EBITDAs and multiples will be down.

He agreed at first, but after consideration he came back and said, “Why wait? So what if you pay an extra 20 percent, if you get a good company you can start building now, rather than later?” I had to agree. This guy has done extremely well for himself, and clearly his instincts are paying off.

He’s not out there to get the last penny out of people or put the screws to anyone. He recognizes value and opportunity and believes in paying the seller a fair price. There’s value, as well, in having a seller who feels good about what he or she got out of a sale. A friendly, cooperative relationship with a former owner can be instrumental in future success.

It’s sort of like the advice you hear to invest in quality goods because they’ll last longer. I’d say, invest in a “wonderful company” because you’ll get your investment back sooner. If you acquire a business with a strong management team, a nice niche, and good margins, you’ll probably earn your investment back faster than if you bought a business with a notable weakness.

We had buy-side clients looking for an acquisition, and they told us they were willing to pay multiples of five to seven times EBITDA, which was normal market value for their target industry. And we found exactly what they were looking for. The business has good margins and a recognized brand—everything that would jump start this new division they were planning.

But when it came time to put in an offer, they said, “I know we told you five to seven, but we think the seller is burned out. Let’s try to get it for four.” That’s what we did, and I think the seller was offended by the low offer. We never did put the deal together.

The clients continued forward with their new division, and they’re doing okay on their own, but it’s not where they could be. They have to work organically to get into all those channels that they could have been in overnight.

The reality is that they’re essentially spending the same money. But instead of spending it upfront to acquire a proven operation, they’re spending it over the next several years with the extra effort it takes to start something new. That translates into lost opportunity costs too. These partners have to spend years getting their plans off the ground, which means it will be that much longer before they’re ready to grow again.

When you really have a good strategy and you find a good company that hits all your goals, it’s not the end of the world if you pay fair market value. You have to take a look at the big picture of what you can do now with an acquisition, versus what happens while you wait for that bargain.

And if you’re thinking of passing up a “wonderful company at a fair price,” ask yourself what will happen to your growth strategy if your competitor decides to snap up that business instead.

By Scott Bushkie

With more than 20 years in the Mergers and Acquisitions (M&A) industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers.

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