If you want to know how to perform these steps using an Excel spreadsheet go to

If you want to know how to perform these steps using

This preview shows page 115 - 118 out of 263 pages.

If you want to know how to perform these steps using an Excel spreadsheet, go to my website and I’ll show you how to do that, too. I encourage you, however, to learn how to apply this method as we just did above before you rely on a preprogrammed spreadsheet. In addition to spreadsheets on my website, there are powerful automated tool sets available for you to use that save a great deal of time when making these sorts of calculations. For details, go to my website as well. THE MOS
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A Margin of Safety price is 50 percent off the Sticker Price, the retail price you calculate. For all you newbies out there getting used to this analysis, stick with 50 percent as your MOS. Only if you’ve been doing this for a while (i.e., have learned about MOS in the past and have bought into companies using this strategy), and you feel very confident about a particular business, can you let that MOS threshold go as high as 80 percent. This means that you’ve really nailed all four Ms down and are confident in your ability to find the correct Sticker Price. Remember that the MOS is your safety net. The more wiggle room you sacrifice by upping that MOS threshold, the more certain you need to be of the Sticker Price. PAYBACK TIME—PLAYING WITH HOUSE MONEY Stockpiling means we’re buying a company for the long term. We’re not going to sell it as the Big Guys get out. In fact, as you’ll see, we’re going to buy it as the Big Guys get out. So we better have a good grip on the MOS. When it’s that important to get the MOS right, I want a second opinion. A second powerful way to arrive at the Margin of Safety Price is the “How Long Before I Get My Money Back” method, aka Payback Time. If you buy the whole business and pocket all the earnings, Payback Time is just the time it would take you to get your investment back. Once you get all your money out of the business, you have no risk. From that point on, you’re playing the game with house money. This is often the way private business buyers determine what they are willing to pay because there is no liquid market to sell the business into. Once they have their money out, they don’t need to worry about an exit strategy. Let’s take an easy example: A friend of mine bought a white-water river-guiding business that was earning $1 million a year. It can’t grow, because the National Park concession rules won’t let it. But it’s also going to produce $1 million a year probably forever. So what’s this sort of infinite $1 million worth to someone? Well, he got it for $5 million,
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and both parties thought it was a good deal. Why? Because he was laying out $5 million and he wanted his money back in some reasonable time. His “Payback Time” on this investment is five years. For my friend, five years seemed to be a long time to wait to begin making any money on the deal. If he’d put his $5 million into a risk-free bond, he’d have been making around 3 percent a year—about $150,000. Five years of that is serious money: $750,000. So he was giving up that interest income, plus putting the $5 million at risk. If he had to wait longer than
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  • Spring '20
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