HOW DO YOU WEIGHT BUSINESS QUALITY VS PURCHASE PRICE?

In my experience working in mid-cap private equity, we think of a good purchase price as providing margin of safety, whereas in small business investing, I've heard the opinion that small business are so high risk and multiples are always fairly low (3-5x), so the only way to create margin of safety is buying the highest quality business you can find.

For me, I'm seeing some COVID-impacted companies in tough, mature industries that are being offered <2x cash flow due to some kind of forced seller. In my mind, eking out a few more years on these businesses seems likely, which means your risk of losing money is negligible even if the business is a zero after 3-4 years.

Curious to hear folks' thoughts on this?



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