The Excellent Business*

One of the great things about owning superior businesses is that they tend to generate cash flow primarily because of the enormous “goodwill” built up in the mind of the consumers regarding the company’s goods and/or services. This differs from the conventional “accounting goodwill”, and could be referred to as “consumer goodwill”.

The benefit of this is the fact that sine the profits of a superior business are largely tied up with “consumer goodwill” (or intangibles rather), the business is subject to federal taxation primarily on earnings. In other words, the taxes paid by such a business tend to vary with profits.

The inferior business, on the other hand, is usually committed to continual and large investments in such expense incurring plant and equipment which is frequently necessary to replace/update with the advancement of its industry, and in order to become the low-cost competitor. If the (inferior) business does not adapt to such change promptly it will lose customers and market share to the competition. Therefore, fixed charges and taxation with respect to companies of this nature are fairly large compared to that owed by the superior enterprise.

*Mary Buffett, "The New Buffettology"