6

CHAPTER

Effective Business Valuation

THE THIRD ELEMENT

If you have to go through too much investigation, something

is wrong.

— Warren Buffett

I don ’ t think investment is that hard. It ’ s doing the simple things

on a regular basis.

— Paul Clitheroe,

Australian financial writer

You might fi nd it silly to title a chapter “ Effective Business

Valuation, ” implying that one chapter can do what Ben Graham and

David Dodd did in 700 - plus pages of Security Analysis. Just as there is

no one way to value all businesses, no one chapter will ever give you

every detail on how to value all businesses. However, if you recall from

my example in Chapter 1 about our bicycle shop, the ultimate consid-

erations were based on a few variables: operating history, future cash

fl ow generation, competitive threats, and the price of the business.

Any sensible business valuation hinges on a few critical points.

For instance, when looking at oil companies, two variables dominate

the analysis: the company ’ s production level and the price of oil over

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