The SAVR Checklist for Analyzing a

Business
LETS 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 companys 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 pen?)
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)
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 management at banks, corn price for
fertilizers, etc.)
6. Have I checked for the progression of historic margins? (An alert, if the long term trend is negative)

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

Growth
12. Where will the company be in 10 years?
13. What is the company's source of growth?
14. What was the composition of earnings growth 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 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?
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?
19. Have I considered the macro factors despite attractive micro characteristics of the company? (e.g. do stocks in a
sector look inexpensive despite upcoming troubles? Dont be fooled, PEs 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 past since they do not
benefit society).
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? 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 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.
26. Has the management fulfilled past promises? Check annual letters.
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 their capital allocation
strategy?
29. What is the tone of the management in corporate media? Do they appear to be over confident? If they cant
properly manage expectations, its likely they cant properly manage the business.
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?
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?
34. Has there been constant share dilution?
35. Are there irregularities in management turnover? Is upper management leaving at high rates?
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 management interests?

Value of the Investment

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 I personally spend my funds to
buy the entire company?
40. Does the current ROE justify a Price to Book value?
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?
43. Have I checked composition of long-term investments to find hidden value?
44. Can I buy cheaper investments of equivalent quality?
45. How has the tangible book value evolved? What is the TBV excluding goodwill?
46. What is my time horizon for the investment?
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 to potentially uncover "real profitability''?
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)
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)?

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 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. Tax benefits, high/low
interest rates, favorable ownership rules)
56. Is the company dependent on only a few customers?
57. Is an abnormal tax rate artificially boosting the earnings?
58. Is the company ''diworsifying'' into unrelated areas?
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 financially?
61. What is the companys 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 various brick and
mortar based companies).
63. Have I checked to see any changes to summary of significant accounting policies?
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?
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 interest rates suddenly
increase? The assumptions will change!
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"?
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 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 is living
beyond its means.
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)
75. Has the company changed auditors? Why, and how often?
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 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 to the stock?
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 name, industry, past performance,
share price seems too high").
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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 liquidity mismatch''? (e.g. is
value of the companys 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?
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 floating?
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?
For investors with access to information on corporate credit:
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 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 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 my research?

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