Of course everyone knows Warren Buffett. He has earned billions of dollars by just being at the right place at the right time. All of us are seduced by the simplicity of his principles. He is definitely not an ordinary man considering the wealth he has built over years.
Buffet’s way of measuring the success of business are simple to understand but difficult to apply. As an entrepreneur we need to apply certain sets of criteria to our business to make it attractive to Warren Buffett. Why only Warren Buffett? Because if he says yes, then you can be assured that your business is worth it.
Jokes apart, even if you cannot contact him, you can use this ‘test of fire’ as I call it to find out if will ever buy your business.
- Does your business have a strong moat?
- Is your business model simple to understand?
- Is your valuation realistic?
- Do you have a competent team?
- Can he understand your business?
Is your idea difficult to copy? Do you hold any patents? How long it will take for a competitor to get in and create a similar product? Answer to these questions is important before Buffet takes a peek into your business.
Business ideas that are complicated confuse both employees and customers. The simpler the business is, the more easily it can be explained to customers. If you are a product company , your product clearly spells out what it does and if you are into service, your warranty conditions are simple. Buffett definitely looks into such businesses.
Do the simple math. Project the revenue for five years, subtract the cost and find out the profits each year. Discount each years profit to today using simple compound interest formula. Use a slightly higher rate to discount than the government bond. If it is higher than the price you are asking Buffett, he will buy your business.
Buffett looks at the quality of the management team. He gives a huge emphasis on having managers that keep the profit growing. So hire good people now or inspire them to join you.
He does not like complex technologies that he does not understand. He loves simple revenue models that are easy to understand and are scalable.
If you have all these things going for your business, there must be a knock on your door. Just check who is it?