Wilhelm Von Rosenberg > Ron Burgundy (Build A Moat, Don’t Jump Into One)
Acquisition Aces - Issue #7
Read Time - 3.5 minutes
Wilhelm Von Rosenberg > Ron Burgundy (Build A Moat, Don’t Jump Into One)
There is a very funny scene in the movie Anchorman where Ron Burgundy jumps into a bear pit at the zoo to save Veronica Corningstone. He then whispers the famous line: “I immediately regret this decision.”. This scene is hilarious because every person watching the movie would feel the exact same way. Who hasn’t made a bad call and realized it immediately? Okay, maybe not jump into a bear pit bad, but we have all gotten carried away at some point or another.
Before we get to the meat and potatoes of the week, I want to stay with the bear theme for a minute. Did you know that Český Krumlov Castle in the Czech Republic has a bear moat? While the rest of the world was just digging earthen pits around their castles, or filling their moats with water, Bohemian Count Wilhelm Von Rosenburg imported a couple of bears from Transylvania (of course) and had them in the moat as a deterrent. Even to this day, there is always a bear kept on the castle grounds to keep the tradition alive.
By takato marui from Osaka, Japan - from Zámek Český Krumlov, CC BY-SA 2.0,
Moats were incredibly important for castle defense back in the day. The water version helped to prevent sappers and all the other variations slowed attackers down. In battle, they bought valuable time to repel the hordes. Their utility is not limited only to classic battles. The term is used in business as well.
A Business Moat Is a Requirement, Not A Luxury
I am a big fan of Warren Buffet. The man is an American business icon. He talks a lot about the idea of a ‘business moat’. Instead of trying to ward off the barbarian hordes, the purpose of a business moat is to discourage competitors. The better the moat, the longer a company can enjoy wide margins and easy customer acquisition.
The more you understand the concept, the better you can evaluate deals when you look at them. Things like economies of scale, network effects, regulation, and intellectual property are examples of things that create moats for a business. These factors help to determine a company's competitive positioning in the marketplace. The wider the moat of a company, the more valuable it is.
If you have a solid moat, your business will thrive. If you don’t, your business life will be a constant struggle. So what is the best way to get one?
The Advantage Of Buying A Moat
Ever heard the term “Rome wasn’t built in a day?” Well, neither are castles and businesses. In medieval times, a castle took anywhere from two to ten years to build. The same is true for businesses. If you are looking to buy a business, a key benchmark is whether has it been in operation for over five years and profitable for the last three. People who purchase essential businesses with these benchmarks have a 90% plus success rate (insert a disclaimer here about every situation is different here and depends on your ability to put in the time and effort). Most, if not all, of these enterprises will have built some kind of moat. Even if it is a narrow one.
Which would you rather do:
- Build a business and moat from scratch, or
- Buy an existing boring business and work on making an existing moat wider?
I know which one I am picking because I have already done it six times in my portfolio (Hint: It’s the 2nd one). A moat is incredibly important. It is one of the key factors in evaluating a business when you are looking at a deal. It is not the only one, of course.
Step By Step Instructions For Your First Deal
If you have decided that you want to escape the 9 to 5 by acquiring a boring business, you may have some preconceived notions about the type of business you want to buy. The first thing I want you to think about is, well, your thinking. When I started my portfolio, I had very specific ideas about the type of deal I wanted. I wish I had someone like me telling me the following:
Try to be as agnostic as possible about your first acquisition.
Instead of picking the type of business, you are going to buy, work backward from how much cash flow you want. Look, if you were super passionate about (your preconceived notion here) you would already be running that type of business. We are in this game for the lifestyle, not the titles.
Instead, ask yourself how large of a deal you have to close to get the cash flow you want. Then start thinking about recession-proof businesses with moats that fit that bill. You may be surprised at what you will find.
Watch my video that breaks down this process for you step by step:
