One of the characteristics we consistently look for when evaluating a business is longevity. A company that has served its customers for decades has already answered many of the questions a buyer should be asking. It has survived recessions, changing consumer preferences, competitive pressures, and shifts in the local economy. That kind of history provides a level of confidence that simply can't be found in a newer business.
Why our restaurants work
Restaurants are a good example. They often receive a bad reputation in the acquisition world because so many new restaurants fail. Banks can be hesitant to lend on them, and many buyers avoid the industry altogether. Yet some of our strongest-performing businesses are restaurants.
The restaurants we own have been operating for an average of about forty-five years. They've become part of their communities. Customers have celebrated birthdays there, gathered after ball games, and made them part of their family traditions. That kind of loyalty isn't built overnight, and it creates a competitive advantage that's difficult for a new restaurant to replicate.
One story illustrates this perfectly. The general manager of one of our restaurants lost her home in a fire. Without being asked, members of the community organized a GoFundMe campaign and raised approximately $40,000 to help her family. That wasn’t simply support for an employee. It reflected the relationship the business had built with its community over decades.
Compare that to many newer restaurants in rapidly growing downtown areas, where concepts frequently open and close every few years. Customers are constantly chasing the newest experience, making it much harder for any one restaurant to establish lasting loyalty. A business that has remained successful for forty or fifty years has already proven that it can withstand those changing trends.
We've seen the same pattern in other industries. One of our most successful acquisitions is a water well drilling company that has served its community for nearly a century. When someone in the area has a problem with their well, they already know who to call. That reputation has been built over generations, creating trust that no amount of advertising could quickly replace.
Be careful with very young businesses
By comparison, we're often skeptical of businesses that are only two or three years old and already being offered for sale. There can certainly be legitimate reasons someone wants to exit a newer business, but we always want to understand why. A short operating history means the company hasn't yet demonstrated that it can survive economic cycles or changing market conditions. It also hasn't had enough time to build the kind of brand recognition and customer loyalty that often make acquisitions successful over the long term.
Longevity is underpriced
A business that's been serving customers for one hundred years may sell for a similar multiple as a business that's only been operating for three. Buyers who recognize the value of an established reputation can often acquire decades of goodwill without paying a significant premium. When evaluating a business, don't just ask how profitable it is today. Ask whether it has demonstrated the ability to remain relevant over time.
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.