Listen to what Buffett has to say about franchise value.
“If you got the right kind of product, you may be paying for taste, you may be paying for a mental association that you have, or service availability. That’s franchise value, then the question is how durable and big is it? I’d say that franchise is basically like a moat around your economic castle.” – Warren Buffett
He also mentions that an economic franchise arises from a product or service that contains the following characteristics:
- It is needed or desired
- Thought by its customers to have no close substitute
- Not subject to price regulation
A franchise can price its products aggressively and still earn high rates of return on capital. More importantly, franchises can tolerate mis-management.
Buffett said the same thing.
I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.
The characteristics of a franchise act as links. If you look at the image below, each circle on its own is not important. Only when they are connected and feeding each other does it really strengthen up.
If one of the links weaken, the whole franchise starts to erode and eventually the competition will catch up.
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