When do you make money on anything that you buy with the idea of ever selling again? Most people automatically say: when you sell. But it is not true!
I was one day sitting in a coffee shop explaining to a prospective business plan client that I think he will overpay for a business. I said: “if you overpay for the business, you start behind and you will battle and never make your money back.” The owner of the coffee shop overheard me and replied: “It is so true. I overpaid here and I suffer every day because of it. I wish somebody gave me that advise.”
Roman law had a principle: caveat emptor (let the BUYER beware). The reason is simple: the buyer has some options that the seller does not have (and therefore sellers sometimes take shortcuts!). Let’s examine.
- The buyer has the option to buy or not to buy. The seller does not have such an option. If the prospective buyer does not buy, the seller still has his for sale item. The buyer can walk away, the seller can’t.
- The buyer mostly has a number of options to choose from. Very seldom does the seller have so many buyers that he can pick and choose.
- The buyer can mostly decide what price he is prepared to pay for an item. In most cases the buyer has to accept the best offer.
You buy a share, or property, or a car or a business, whatever, and you don’t do proper homework and you pay too much. In other words, you buy something that is really worth R200 for R300. If you want to sell it immediately, even without a profit, you need to find somebody else who is prepared to pay R300 for something that is worth only R200. You have overpaid and need to find somebody else willing to overpay! I have done it (overpaid) many times, that is why I always say: “I always find it easy to find the first fool. The problem is finding the second fool.”
But even if you don’t want or have to sell immediately, what happens when you sell in future? Let’s assume it is a business and you have really built it up. After all your hard work, it might now be only R300 (based on a net profit factor). And you will battle to do better.
I know a lady (in her 70’s) who is one of the best business people I know. She has an antique shop and since I am interested in wooden furniture, she once took me on a tour of her warehouse. While walking through the warehouse she told me the history of various pieces and where she bought it and what she paid, with the selling prices already marked on the items. Then she smiled and said: “As you can see, I buy at a low price, but I sell at a very high price.” When do you make your money? When you buy!
Consider this lady’s remark. Because she bought at a low price, a potential buyer can negotiate down to a “low price”, where he believes he is buying a bargain, and she would still make money! If her cash flow is under pressure, she can have a “fire sale” and still make a profit. She can offer free delivery to get a deal, and still make a lot of money!
For the moment that is enough. I will touch on this topic again. Just remember: you make your money when you buy. And the challenge is finding the second fool …
Tags: Buy, Make money, Profit, Sell
Nice writing style. Looking forward to reading more from you.
Chris Moran