Are you able to understand the Business Thoroughly? Is it a Simple Business?
What are the company products? How does the company generate revenue? How is the company market its goods and services? What is the competitive landscape of the business? Do you understand the business life cycle?
Companies that are involved in simple type of business tend to perform better in the long run. Business in the high tech industries where product life cycles are short, if they do not innovate the next product before end of its current cycle, it risk compromising its revenue and earnings.
We mentioned previously about business moat, there are two different types of businesses, one is difficult to replicate and other is a commodity type business. Hard to replicate business will have strong brand name, patents, and asset intensive which gives a competitive advantage. Commodity type business produce products with no difference from competitors’s products. Commodity type business needs to be the lowest cost producer to fight the price war and it needs to be the largest size to demand best rates from its suppliers and distributors to compete on prices.
A non exciting industry can enjoy higher margin as lesser competition enters the arena and the company is able to build its market share over time, creating a moat to fend off later entrants. Not many entrepreneurs will like to enter non exciting industry. Young people like to run tech start ups rather than engage on a lumber business which can enjoy high margin.
Dirty type of business will not have new competitors entering the market will enjoy strong margin. For instance, waste management, cleaning services, and funeral business.
If the business has a chain of companies, is it successful in multiple locations before expanding nationally? IF you get into any of the successful chains in an initial period and hold the shares until they open for business across the nation, you can make tremendous amount of money. These types of national chain companies are available in retail companies.