Buying a 150-Chain of Bakeshops.

I spent my afternoon reading Annual Reports and looking for a SEC filing that might give me an idea how much would an industrial buyer pay for a chain of restaurants. To my disappointment, the search seems to be leading me to nowhere. (Well, search engines are like that, when you type tags/keywords, chances are the matches would most likely not the ones you were looking for.)

So, I scanned my Yahoo Messenger, (Please do not try this at workplace.) hoping to catch a friend online. I have a couple of active friends there, so I IM’ed someone who might help me find the information I needed. We talked about the stock market, and yes, like most of the time, I do not have an opinion of.  So we did not bother to deal into an uncharted territory like forecasting the next move of the market. Rather, we discussed about the stocks that we like at the moment and whether the stock really deserve the current pricing of the crowd. 

We had a lengthy discussion and we bumped into valuations. My point was clear, valuations and analysis should be made simple as possible. And yes, without the aid of a spreadsheet, economic data and a lot of time on financial statements. I believe that there are at least two or three variables that you need to come up with a buy/sell decision, and the rest would be noise.

Since my friend runs a 150 Chains of Bakeshops, I was curious what his response. Yes, my friend is a serial enterpreneur and he knows business. (Disclosure: The guy is a corporate hotshot.)

I asked him, “How much would be the start-up cost of a single bakeshop?” Without an inch of hesitant, his reply was, “Ballpark figure is P1 million.”

“How many bakeshops do you own?,” I mused.

“one hundred fifty,” he said.  A quick mental calculation would lead us to a P150 million worth of bakeshop chains. 

I made a theoretical deal, “Suppose, I am sitting on huge pile of cash and I offered you, P120 million, for all of your bakeshops, will you make the deal?”

“Of course not,”  with an air of conviction he replied.

The whole point was emphasized about Value Investing though. I was the Market and I was quoting that his 150 chain of bakeshops was only worth P120 million, when in fact the real value would be P150 million.

Do you think my friend will sell just because I think that it’s only worth P120 million to me?

I would like to believe that the answer would be a resounding No.

Everyday the market quotes your businesses at a higher or lower price than today. It is up to you, whether you think it’s clever to sell a P150-million worth of business for P120-million.

Either Mr. Market or you maybe right.