sufac.com

Warren Buffett is one of the worlds best investors, but he’s also a great role model for small business owners. He’s turned a $15 investment in 1965 into $120,600 ($150,000 if you look at the high on Dec. 11/07). But look at the first business he was in… textiles. In fact his first small business was one of his worst because any capital he put into the business was bound to have low returns. So he invested in other companies.

I think that’s so important, I’ll repeat it. He invested in other companies. So often entrepreneurs keep putting money back into their businesses because that’s where they think they can get the best return. But if you’re in an unattractive industry it may be better to put the funds into a different venture or investment.

For people looking at starting a small business this should be one of the areas you investigate in depth. For every dollar you put into your business what can you expect to take out? After all, your goal I assume is to take money out of the business, not endlessly toss money into it.

So what type of business did Buffett buy with the cash flow from the textile plant? Well, the perfect example would be See’s Candy. See’s makes boxed chocolates, an industry with a 2% growth rate, but does not require large investments and therefore has been extremely profitable. See’s has grown from $30 million in sales ($5 million in profits) to $383 million in sales ($82 million in profits) from 1972-2007, which is quite extraordinary. But then look at the cash taken out of the company. Buffett has taken $1.35 billion in cash out of See’s over the 35 years.

And to relate this to the entrepreneurs out there, imagine buying a business for $250,000, have profits grow from $50,000 to $800,000 over the 35 years and still managing to take $13.5 million out of the business over your lifetime. That’s the same economics as See’s Candy on a smaller scale. Simply amazing.

See’s performance is due to the fact that it required $8 million in capital in 1972 and only $40 million today. Everything else has been put into the bank (well actually other investments). So when you evaluate businesses look at what you can take out of the business, not just what it takes in.

For access to one of the greatest business minds of our generation check out Warren Buffett’s letters to the shareholders.

-Craig Sharkton