One of the easiest mistakes in business acquisition is becoming overly focused on purchase price. It's tempting to believe that the lower the multiple, the better the investment. After all, paying one-and-a-half or two times earnings looks fantastic in a financial model. The debt service coverage ratio is stronger, projected returns are higher, and the acquisition appears to offer a significant margin of safety. In reality, we've found that low-priced businesses are often inexpensive for a reason.
Quality belongs in the equation
Warren Buffett summarized this idea perfectly when he said, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." That quote has become one of the guiding principles behind how we evaluate acquisitions. A business shouldn’t be judged solely by its valuation. The quality of the company, the strength of its leadership, the resilience of its operations, and its long-term prospects matter just as much.
Our Deal Score reinforces this philosophy. Valuation is only one of the criteria we evaluate, and intentionally so. A business may receive a poor score on valuation because buyers are willing to pay a premium for its strengths. It may have an experienced management team, a loyal customer base, healthy margins, predictable cash flow, and decades of operating history. Those characteristics create value that extends well beyond what appears in a discounted cash flow model.
What a low multiple often signals
On the other hand, businesses selling at unusually low multiples often come with challenges that aren't immediately obvious. They may lack organizational structure, operate with thin margins, require substantial working capital, or depend heavily on one customer or one individual. Those weaknesses don't disappear after closing. In many cases, they become the new owner's problem almost immediately.
We’ve seen buyers celebrate finding what appeared to be an incredible bargain, only to discover that the low purchase price was quickly consumed by operational issues. The financial model projected steady growth, but reality looked very different. Cash flow declined, unexpected expenses appeared, and management challenges demanded constant attention. Before long, the "cheap" acquisition became far more expensive than anyone anticipated.
By comparison, paying a fair price for an exceptional business often produces stronger long-term results. The initial returns may appear more modest because the purchase price is higher, but quality businesses tend to have better systems, stronger teams, healthier customer relationships, and more stable operations. Those advantages compound over time and frequently generate far greater value than the discount captured on a lower-quality acquisition.
Price matters, but quality matters more
Early in his career, Buffett followed Benjamin Graham’s value investing approach, searching for deeply discounted companies that were statistically cheap. His perspective changed after partnering with Charlie Munger, who encouraged him to focus on exceptional businesses with lasting competitive advantages. The same principle applies when buying small businesses: a great business with experienced leadership, strong operations, and a durable reputation usually creates far more value than a mediocre business purchased at a steep discount.
About the author
Mark Fleming, CFA, FRM
Mark Fleming is the co-founder of Owner Actions, where he partners with experienced operators to acquire and grow small businesses. He has participated in more than 40 business acquisitions and has evaluated thousands of businesses across dozens of industries. Drawing on a background in portfolio management, financial analysis, and business ownership, Mark helps entrepreneurs identify high-quality acquisition opportunities and build businesses for long-term success.