Lesson Two: Valuing a Business: The Owner’s Perspective for “Il Dolce Far Niente”

Lesson Two: Valuing a Business: The Owner’s Perspective for “Il Dolce Far Niente”

by Michael Lamonaca 12 July 2025

In the “il dolce far niente” philosophy, our goal is to achieve financial freedom and build long-term wealth by becoming true owners of businesses, not merely speculating on stock prices. As a stockholder, you acquire fractional ownership in a business, and the most compelling aspect of this is that you are entitled to a share of its profits without having to engage in its day-to-day operations. This is the essence of generating passive income through disciplined investing.

Let’s trace the fundamental money flow within any company, large or small. A business generates its initial capital by selling its products and services. This incoming revenue is then meticulously used to cover various operational expenses – everything from employee salaries and rent to the direct costs associated with manufacturing its offerings.

Once all legitimate expenses have been paid, what remains is the company’s net income, often referred to as its earnings. This crucial figure truly belongs to the owners, the shareholders. The management, acting on behalf of these owners, then faces a choice: they can distribute a portion of this profit directly to shareholders as dividends, providing a tangible return, or they can retain these earnings and reinvest them back into the business for future growth and expansion. Both strategies, when executed intelligently, contribute to compounding your wealth over time.

It’s vital to understand that the underlying structure and money-making mechanism are remarkably consistent across businesses of all sizes. Whether we’re looking at a small, local enterprise or a vast multinational corporation, the core principles of revenue, expenses, and net income remain universal. This means the powerful valuation principles we’re discussing apply equally, allowing us to find intrinsic value wherever it may lie.

So, how do we, as owners, precisely value a business? One powerful method involves determining a ‘desired multiple’ based on the business’s net income and your desired return on investment. For instance, if a business consistently generates $50,000 in net income, and your goal is a 5% annual return from your investment, you would simply divide that net income by your desired return (0.05). In this scenario, the business’s valuation would be $1,000,000 ($50,000 / 0.05). However, if you aimed for a higher 10% return, the same $50,000 net income would mean you shouldn’t be willing to pay more than $500,000 for that business ($50,000 / 0.10).

This illustrates a critical principle for the value investor: the less you pay for a company’s net income (or earnings), the higher your potential future returns will be. This relationship means the price paid is inversely proportional to your return. This is precisely why, in my “il dolce far niente” approach, a cornerstone of disciplined investing is to prioritize paying a low multiple of a company’s earnings. This strategy fundamentally enhances potential long-term returns and provides a significant margin of safety, ensuring your capital works harder for you from day one in your strategic holdings.

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