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The SAVR Checklist for Analyzing a Business LET’S TRY TO “KILL” THE BUSINESS POPE@BRARIFUNDS.COM This
The SAVR Checklist for Analyzing a Business LET’S TRY TO “KILL” THE BUSINESS POPE@BRARIFUNDS.COM This
The SAVR Checklist for Analyzing a Business LET’S TRY TO “KILL” THE BUSINESS POPE@BRARIFUNDS.COM This

The SAVR Checklist for Analyzing a Business

LET’S TRY TO “KILL” THE BUSINESS

POPE@BRARIFUNDS.COM

This 90+ item checklist is based on mistakes of great investors such as Warren Buffett, Seth Klarman, Peter Lynch, and more. It attempts to stress test or “kill” the company’s business model. The checklist focuses on four pillars of our investment analysis: 1. Sustainability of the Business Model 2. Accountability of the management 3. Value of the investment 4. Risk factors (i.e. Business/Emotional Risk and Leverage). While no business will pass the checklist with a perfect mark, the goal is to show the pitfalls and potentially avoid permanent loss of capital.

Sustainability of the Business

Understandability

1. Do I understand the business? (Can I draw its product or service with a

1. Do I understand the business? (Can I draw its product or service with a pen?)

2. Have I tried the company's products? If so, do they add any personal or

2. Have I tried the company's products? If so, do they add any personal or societal value?

3. What is the industry structure? (i.e. Consolidated or numerous players)

3. What is the industry structure? (i.e. Consolidated or numerous players)

4. What are the two-four most important factors that drive the business? (e.g. Corn price

4. What are the two-four most important factors that drive the business? (e.g. Corn price for agriculture companies)

5. What are the operating metrics that I need to follow? (e.g. Loan quality and

5. What are the operating metrics that I need to follow? (e.g. Loan quality and management at banks, corn price for

fertilizers, etc.)

6. Have I checked for the progression of historic margins? (An alert, if the long

6.

Have I checked for the progression of historic margins? (An alert, if the long term trend is negative)

Niche

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7. What is its competitive advantage "niche"? (i.e. Low cost producer, network effect, innovation, distribution,

7.

What is its competitive advantage "niche"? (i.e. Low cost producer, network effect, innovation, distribution,

economies of scale, brands, patents, switching costs)

8. Have I monitored the market for entrance of new competitors?

8. Have I monitored the market for entrance of new competitors?

9. Is the company part of a cartel? Who is the low cost leader if

9. Is the company part of a cartel? Who is the low cost leader if the cartel breaks down? (e.g. Potash cartel

breakdown 2013)

10. Does the business reflect a fading trend? (e.g. Large mall based retailers)

10. Does the business reflect a fading trend? (e.g. Large mall based retailers)

11. Can the product be made more cheaply by a competitor in another country?

11. Can the product be made more cheaply by a competitor in another country?

Growth

12. Where will the company be in 10 years?

12. Where will the company be in 10 years?

13. What is the company's source of growth?

13. What is the company's source of growth?

14. What was the composition of earnings ’ growth over the past five years? (i.e.

14. What was the composition of earningsgrowth over the past five years? (i.e. Organic, buy-backs, M&A).

15. Is the leading profitability factor at a high without any fundamental reason or simply

15. Is the leading profitability factor at a high without any fundamental reason or simply due to speculation? (e.g.

This question is heavily applicable to commodity producers. Corn price at highs in 2008 was an alert to sell Ag stocks

before they plunged).

16. What headwinds do the earnings face?

16. What headwinds do the earnings face?

17. If the company is enjoying regional success, can it be extended nationally?

17. If the company is enjoying regional success, can it be extended nationally?

Macro

18. How will high unemployment rates and economic recession hurt the business?

18. How will high unemployment rates and economic recession hurt the business?

19. Have I considered the macro factors despite attractive micro characteristics of the company? (e.g.

19. Have I considered the macro factors despite attractive micro characteristics of the company? (e.g. do stocks in a

sector look inexpensivedespite upcoming troubles? Don’t be fooled, PE’s of cyclical companies are often lowest before the cycle and the earnings start to decline).

20. Does the business benefit or hurt society? (e.g. Cigarettes faced legal headwinds in the

20.

Does the business benefit or hurt society? (e.g. Cigarettes faced legal headwinds in the past since they do not

benefit society).

21. Have I considered potential overvaluation of underlying currency behind the stock?

21. Have I considered potential overvaluation of underlying currency behind the stock?

22. Are inventory levels of finished goods increasing in an abnormal manner vs. economic conditions?

22. Are inventory levels of finished goods increasing in an abnormal manner vs. economic conditions?

Is inventory

build-up occurring faster than sales? Watch for inventory write-downs!

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23. Is the company operating in a dangerous geographic area with corporate governance and/or political

23.

Is the company operating in a dangerous geographic area with corporate governance and/or political issues?

(Country exposure: check for credit growth, 90-day non-performing loans; watch real estate prices vs. historically

normalized levels).

Accountability of the Management

Check proxy statements for details on insider engagement

25. Does the CEO have a good track record (M&A and operational)? Check past history.

25. Does the CEO have a good track record (M&A and operational)? Check past history.

26. Has the management fulfilled past promises? Check annual letters.

26. Has the management fulfilled past promises? Check annual letters.

27. Do the insiders own a significant portion of shares in the business?

27. Do the insiders own a significant portion of shares in the business?

28. How has the management allocated capital in the past? Have they announced changes to

28. How has the management allocated capital in the past? Have they announced changes to their capital allocation

 

strategy?

29. What is the tone of the management in corporate media? Do they appear to

29. What is the tone of the management in corporate media? Do they appear to be over confident? If they can’t properly manage expectations, it’s likely they can’t properly manage the business.

30. Are there frequent write-downs? If not, have I added back one time charges?

30. Are there frequent write-downs? If not, have I added back one time charges?

31. Is the management overcompensated vs. their employees? Is compensation in-line with earnings growth?

31. Is the management overcompensated vs. their employees? Is compensation in-line with earnings growth?

32. Have I checked for 'related party transactions' to see if management self-rewards?

32. Have I checked for 'related party transactions' to see if management self-rewards?

33. Is there excessive options rewarding of more than 2-3% of the business’ net income?

33. Is there excessive options rewarding of more than 2-3% of the business’ net income?

34. Has there been constant share dilution?

34. Has there been constant share dilution?

35. Are there irregularities in management turnover? Is upper management leaving at high rates?

35. Are there irregularities in management turnover? Is upper management leaving at high rates?

36. Were past share buy-backs executed at attractive levels?

36. Were past share buy-backs executed at attractive levels?

37. Is there a special share class to prevent a takeover or to promote special

37. Is there a special share class to prevent a takeover or to promote special management interests?

Value of the Investment

38. Is the business priced at a discount to its intrinsic value two to three

38.

Is the business priced at a discount to its intrinsic value two to three years from now? Am I buying a dollar for 50

cents or less? Are other investment opportunities more attractive?

39. Am I thinking with an owner's hat? Given the business quality and value, would

39.

Am I thinking with an owner's hat? Given the business quality and value, would I personally spend my funds to

buy the entire company?

40. Does the current ROE justify a Price to Book value?

40. Does the current ROE justify a Price to Book value?

41. Are current earnings at a trough, mid-cycle, or peak?

41. Are current earnings at a trough, mid-cycle, or peak?

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42. Have I checked for hidden value in properties? If so, when were they booked?

42. Have I checked for hidden value in properties? If so, when were they booked?

43. Have I checked composition of long-term investments to find hidden value?

43. Have I checked composition of long-term investments to find hidden value?

44. Can I buy cheaper investments of equivalent quality?

44. Can I buy cheaper investments of equivalent quality?

45. How has the tangible book value evolved? What is the TBV excluding goodwill?

45. How has the tangible book value evolved? What is the TBV excluding goodwill?

46. What is my time horizon for the investment?

46. What is my time horizon for the investment?

47. Have I checked historic valuation metrics vs current? (i.e. PB, PS, PE)

47. Have I checked historic valuation metrics vs current? (i.e. PB, PS, PE)

48. Have I done a sum of all parts? Have I excluded loss making divisions

48. Have I done a sum of all parts? Have I excluded loss making divisions to potentially uncover "real profitability''?

49. What expectations are priced into the company's shares? (This question is useful to think

49. What expectations are priced into the company's shares? (This question is useful to think of when shares are at

highs and at lows.)

50. Have I checked for equity in affiliates? (An area of hidden value)

50. Have I checked for equity in affiliates? (An area of hidden value)

51. Am I trying to call a bottom in the share price despite substantial value?

51. Am I trying to call a bottom in the share price despite substantial value?

Risks Factors

 

Business Risk

52. Is the company involved in any significant lawsuit(s)?

52. Is the company involved in any significant lawsuit(s)?

53. Does one party hold majority of the shares? (Danger that I can be squeezed

53. Does one party hold majority of the shares? (Danger that I can be squeezed out).

54. Is the business becoming unregulated? This may cause the niche to evaporate quickly –

54. Is the business becoming unregulated? This may cause the niche to evaporate quicklyregulated businesses have

high cost structures which are disastrous if competing with peers in an unregulated landscape.

55. Is the company benefiting from exceptional items that may vanish in the future? (i.e.

55.

Is the company benefiting from exceptional items that may vanish in the future? (i.e. Tax benefits, high/low

interest rates, favorable ownership rules)

56. Is the company dependent on only a few customers?

56. Is the company dependent on only a few customers?

57. Is an abnormal tax rate artificially boosting the earnings?

57. Is an abnormal tax rate artificially boosting the earnings?

58. Is the company ''diworsifying'' into unrelated areas?

58. Is the company ''diworsifying'' into unrelated areas?

59. Does the company have unions? Have I checked for union issues?

59. Does the company have unions? Have I checked for union issues?

60. Does the company have an abnormal amount of operating leases that may endanger it

60. Does the company have an abnormal amount of operating leases that may endanger it financially?

61. What is the company’s e xposure to possible macro-economic shock? (indirect or direct, e.g.

61. What is the company’s exposure to possible macro-economic shock? (indirect or direct, e.g. US housing)

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62. Can another retail channel endanger the business model? (e.g. the internet business model hurt

62.

Can another retail channel endanger the business model? (e.g. the internet business model hurt various brick and

mortar based companies).

63. Have I checked to see any changes to “ summary of significant accounting ”

63. Have I checked to see any changes to summary of significant accountingpolicies?

64. Is accounts receivable increasing faster than sales? (company may have trouble collecting from customers)

64. Is accounts receivable increasing faster than sales? (company may have trouble collecting from customers)

65. Is the cash flow from operations increasing in line with net income?

65. Is the cash flow from operations increasing in line with net income?

66. Are doubtful account receivables rising in line with total accounts receivable? (If not, the

66. Are doubtful account receivables rising in line with total accounts receivable? (If not, the company is not making

realistic loss assumptions).

67. Have I checked the discount rates currently in use for pension assumptions? What if

67.

Have I checked the discount rates currently in use for pension assumptions? What if interest rates suddenly

increase? The assumptions will change!

68. Have I checked for significant pension obligations? Are pension plans over or underfunded?

68. Have I checked for significant pension obligations? Are pension plans over or underfunded?

69. What are the "pension and other postretirement benefits" and the "employee retirement benefits"?

69. What are the "pension and other postretirement benefits" and the "employee retirement benefits"?

70. Compare the "projected benefit obligation" (how much will be owed over the lifetime) vs.

70. Compare the "projected benefit obligation" (how much will be owed over the lifetime) vs. "fair value of plan

assets at year end." If the former exceeds the latter, plan is underfunded, and the company will have to contribute money in the future, thus reducing net income. (e.g. Company X recently had pension obligations of $50bn vs. pension assets of $30bn, and consequently will need to make up the $20bn difference!)

71. Is there a significant tax benefit from exercising employee options? This may disappear if

71.

Is there a significant tax benefit from exercising employee options? This may disappear if markets drop and

employees stop exercising the options! Check cash flow statement: "tax benefits from employee stock plans" vs. "tax benefit of stock options exercised."

72. CFO-Capex-(Dividend + Buybacks) should not be negative on a regular basis otherwise the company

72.

CFO-Capex-(Dividend + Buybacks) should not be negative on a regular basis otherwise the company is living

beyond its means.

73. Are gains from investments and/or pension related items boosting net income? Check historic trends.

73.

Are gains from investments and/or pension related items boosting net income? Check historic trends. Watch "Net

pension/postretirement expense," "net pension credit/loss," and "net periodic pension costs."

74. Has the company regularly incurred environmental fines? (i.e. bad risk management and subsequent disasters)

74. Has the company regularly incurred environmental fines? (i.e. bad risk management and subsequent disasters)

75. Has the company changed auditors? Why, and how often?

75. Has the company changed auditors? Why, and how often?

76. If available, have I checked consensus earnings revisions against my own estimates?

76. If available, have I checked consensus earnings revisions against my own estimates?

77. Are there significant future purchasing obligations? (e.g. Company X is forced to purchase large

77. Are there significant future purchasing obligations? (e.g. Company X is forced to purchase large quantities of

materials/services in the future due to a unfavorable agreement).

Emotional Risk

78. Have I made public announcements regarding the company that may result in emotional attachment

78. Have I made public announcements regarding the company that may result in emotional attachment to the stock?

79. Am I emotionally attached to the company due to past success(es)?

79. Am I emotionally attached to the company due to past success(es)?

80. Am I holding a bias against a company due to past experience(s)? (i.e. Similar

80. Am I holding a bias against a company due to past experience(s)? (i.e. Similar name, industry, past performance,

share price “seems too high").

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81. Are my investments too concentrated on one industry?

81.

Are my investments too concentrated on one industry?

 

Leverage

82. Does the company have enough liquid assets after liabilities to qualify for a potential

82.

Does the company have enough liquid assets after liabilities to qualify for a potential liquidity mismatch''? (e.g. is

value of the company’s assets listed at cost? Important to check as some assets may have appreciated over time).

83. Can the EBIT cover interest expense for the next two years?

83. Can the EBIT cover interest expense for the next two years?

84. Have I checked key debt metrics such as EBITDA/Interest and Net Debt/Equity?

84. Have I checked key debt metrics such as EBITDA/Interest and Net Debt/Equity?

85. Have I check for the date of loan maturities? Is the interest fixed or

85. Have I check for the date of loan maturities? Is the interest fixed or floating?

86. Have I checked the covenant levels of the debt? How much cushion does the

86. Have I checked the covenant levels of the debt? How much cushion does the company have under its

maintenance covenants in the largest agreements? (e.g. The max covenant Net Debt to EBITDA 4.0x vs. the current

3.9x is very tight).

87. Is the debt recourse (the bank can come after your assets) or non-recourse?

87.

Is the debt recourse (the bank can come after your assets) or non-recourse?

For investors with access to information on corporate credit:

88. Is the company's long-term capital structure different from the industry average?

88. Is the company's long-term capital structure different from the industry average?

89. What is the Forex profile of debt? (This is more relevant to corporate emerging

89. What is the Forex profile of debt? (This is more relevant to corporate emerging markets because they have to

raise debt in hard currency like USD/Euro and the revenue base might be an emerging market currency).

90. Have I checked the ratings pressure, especially for firms rated BBB/BBB- with a large

90.

Have I checked the ratings pressure, especially for firms rated BBB/BBB- with a large Gross Debt who cannot

afford a downgrade to High Yield?

Am I ignoring things on this checklist because I feel too complacent or attached to

Am I ignoring things on this checklist because I feel too complacent or attached to my research?

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Disclaimer

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Brar Investment Fund, LP is non‐diversified, which means that it invests in a smaller number of securities when compared to more diversified funds. Brar Investment Fund, LP tracks its performance against the S&P 500 Index. Brar Investment Fund, LP is exposed to greater individual security volatility than the S&P 500 Index and diversified funds. Brar Investment Fund, LP can invest in foreign securities which may involve greater volatility and political, economic, and currency risks and differences in accounting methods. Brar Investment Fund, LP may also invest in “special situations” to achieve its objectives. These strategies may involve greater risks than other fund strategies. Information provided reflects Brar Investment Fund, LP’s views as of the date of this commentary. Such views are subject to change at any point without notice. Brar Investment Fund, LP obtained the information provided herein from third party sources believed to be reliable but it is not guaranteed. Brar Investment Fund, LP is not responsible for the consequences of any decisions or actions taken as a result of information provided herein and no investment decision should be made solely on the information provided. Brar Investment Fund, LP’s investment objectives, risks, charges, and expenses should be considered carefully before investing.

Nothing in this presentation should be taken as a recommendation to buy, hold, or sell certain securities or any other investment mentioned herein. Our opinion of a company’s prospects should not be considered a guarantee of future events. Investors are reminded that there can be no assurance that past performance will continue, and that a private fund’s current and future portfolio holdings always are subject to risk. As with all private funds, investing in Brar Investment Fund, LP involves risk including potential loss of principal.

This document does not constitute an offer to sell, or a solicitation of an offer to buy membership interests in Brar Investment Fund, LP. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to the fund, we advise potential investors to carefully read the offering memorandum, the operating agreement, the related subscription documents, and to consult with their tax, legal and financial advisors. The fund is offered to accredited and qualified investors. The securities are being offered in reliance on an exemption from investment company registration.

Past performance is not necessarily indicative of future results. There should be no assumption that any specific portfolio securities identified and described herein were or will be profitable. Brar Investment Fund, LP may, at any time, reevaluate its holdings in any such positions. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This document may not be redistributed without the written consent of Brar Investment Capital, LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product.

Please contact us if you would like any materials such as our investment presentations or legal documents. We have compiled all information herein from sources we believe to be reliable but cannot guarantee its accuracy.

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