Investing in the right business means high and consistent returns.In a good business returns are higher than investing in real estate and socks at times.Buying a business that is already operational saves you time.
Advantages and disadvantages of buying a business
Buying an established business rather than setting up a new business has many advantages but is not without risk. You will need to know the advantages and disadvantages of buying an existing business and be clear about your ability to run a business.
Advantages of buying a business
Buying a business is generally considered less risky than starting your own business, especially if you can buy a well-managed, profitable business for the right price. Consider these advantages:
- The difficult start-up work has already been done. The business should have plans and procedures in place.
- Buying an established business means immediate cash flow.
- The business will have a financial history, which gives you an idea of what to expect and can make it easier to secure loans and attract investors.
- You will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and stock.
- A market for your product or service is already established.
- Existing employees and managers will have experience they can share.
Sourced from: https://www.business.qld.gov.au/starting-business/buying-business/buying-business-guide/deciding-buy-business
Investing in aggressive companies is better because,this companies diversify their products,thus spreading risk,to survive during hard times or when one product fails.
The Advantages Of Investing In Aggressive Companies
We often hear about the importance of picking a company by means of quantitative analysis, which attempts to value companies mathematically by examining their balance sheets and financial ratios. However, qualitative analysis, which involves looking at intangible elements of companies or their personalities, is also a good way to evaluate the superiority of an investment. Surprisingly, some of the traits of companies with an edge on survival mirror the dispositions of nature’s deadliest predators: the shark and the bear.
Trait One – Consume to Live, Live to Consume
Sharks have a tendency to go for the kill at every opportunity, which is advantageous to them over the long run. You want to find a company that has the same eternal willingness to hunt for sustenance – more specifically, revenues and profits. Whether attacking other companies’ profits with mergers and acquisitions or chewing out chunks of other markets to expand and grow, a company is attractive if it is tracking in on fresh areas of profit, just like Jaws hones in on unsuspecting teenagers.
Be cautious, however, of fake sharks or companies that exhibit false aggression and hunger. These companies were most prevalent during the 70s and 80s, when takeovers and mergers reigned supreme. When faced with floundering fortunes, the fake shark would collect zombies (insolvent companies) or firms that offered no competitive advantage. Therefore, even though these acquiring companies appeared to be growing, they were actually clinging onto the edges of an early grave.
Remember, real sharks follow the scent of fresh blood; they never scavenge for rotten meat. Thus, you should be looking at companies whose takeovers and mergers are strategic improvements.
Trait Two – Fierce Competition Among the Offspring
Some types of sharks have been known to reproduce by means of ‘uterine cannibalism.’ What happens is that when these female sharks give birth, their offspring must, before leaving the womb, fight and kill its unborn siblings. As a result, the emerging newborn sharks are undoubtedly tough and no longer need anything from their mothers.
When looking for investments, you may want to consider companies that procreate like these sharks. When deciding to go ahead on the creation of subsidiaries or capital projects, you want your company to foster projects that, like the cannibalistic newborn sharks, have passed stringent internal tests, proving the ability to thrive better in the short and long term.
Many companies test the viability of a project by means of the net present value (NPV) method, which looks at a project’s future cash flows and subtracts its costs. Although projects that have a positive NPV suggest profitability, you want to pick companies that look beyond a positive number by setting a target profitability. A company that tackles multiple “revolutionary” projects at once may look flashy and innovative, but it may not have the resources to devote enough commitment to any one project. The lack of new projects may be seen as stagnation, but a slower creative process can also mean that the company is extremely thorough when filtering ideas.
Trait Three – Eat Everything
A company that depends heavily on one product, is opening itself up for eventual starvation should the demand for the product drop or a famine strike the supply. It’s better for a company to be like a bear, which can eat and digest almost anything and diversify its diet to help lessen the impact of any one unforeseen disaster. This is also why the individual investor should diversify and rebalance his or her portfolio. A company that spreads its interests into different areas assures itself and its shareholders a fighting chance at surviving the hard times.
An example of a company that is like the real bear is General Electric, which honed in on an industry that rallied when GE’s industries suffered. Venturing into building plane engines when the energy crises and the cold war were eating into GE’s other revenue areas, GE successfully found new areas of profit.
Trait Four – Save up Fat for a Cold Winter
A bear will eat itself into a happy obesity (up to 800 pounds) during the good times, gaining an average of 4.5 pounds a day. These reserves will get the massive animal through the winter, when the bear can lose up to 30% of its body weight. While you don’t want a company that sleeps during the winters, you do want one that prepares for tough times. A company should have fat enough cash reserves to adjust to changes in the market climate without starving.
Some notable companies that are known for keeping large cash reserves include Microsoft and Berkshire Hathaway. If you see a great company without any kind of cash reserves, you don’t necessarily have to run from it, but remember that if its industry takes a hit, it’ll die off much quicker than a fat company.
The Bottom Line
Next time you analyze a company, you may want to observe its behaviors and survival tactics. A company sharing the traits of the shark and the bear will be at the top of its financial food chain.
Sourced from: http://www.investopedia.com/articles/basics/03/072503.asp