Below are the Berkshire Hathaway Inc’s acquisition criteria quoted from their 1982 annual report. The criteria, other than dimension changes, were published annually for the following 35 years in Warren Buffett’s Chairman’s Letter to shareholders.
In the 1983 annual report Warren wrote “Last year in this section I ran a small ad to encourage acquisition candidates. In our communications businesses we tell our advertisers that repetition is a key to results (which it is), so we will again repeat our acquisition criteria”.
This annual report is read by a varied audience, and it is possible that some members of that audience may be helpful to us in our acquisition program.
- large purchases (at least $5 million of after-tax earnings),
- demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations),
- businesses earning good returns on equity while employing little or no debt,
- management in place (we can’t supply it),
- simple businesses (if there’s lots of technology, we won’t understand it),
- an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
We will not engage in unfriendly transactions. We can promise complete confidentiality and a very fast answer as to possible interest – customarily within five minutes. Cash purchases are preferred, but we will consider the use of stock when it can be done on the basis described in the previous section. (more)
In 1990 Warren wrote:
Regular readers know that I shamelessly utilize the annual letter in an attempt to acquire businesses for Berkshire. And, as we constantly preach at the Buffalo News, advertising does work: Several businesses have knocked on our door because someone has read in these pages of our interest in making acquisitions. (Any good ad salesman will tell you that trying to sell something without advertising is like winking at a girl in the dark.)
From 1985, he started adding “On the other hand, we frequently get approached about acquisitions that don’t come close to meeting our tests: new ventures, turnarounds, auction-like sales, and the ever-popular (among brokers) “I’m-sure-something-will-work-out-if-you-people- get-to-know-each-other”. None of these attracts us in the least.”
The dimensions of the advert has changed from $5m in after tax earnings, to $10m in 1985, $25m in 1995, $50m in 1999, $75m in 2004. In later years he added that “The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20billion range!”
Why Buffett repeats year after year…
Advisors and companies that are active in the business of buying and selling good companies, can get to a decision very quickly. They understand the industries that they are buying into, they understand the financials of these businesses and can therefore make quick decisions. A sale of a mid-size business is to a defined market. The opportunity has to be properly communicated to potential targets. To ensure a successful process:
- Have a fair price in mind, it is not necessary to hold out for some hopeful high offer. Most sales are completed within market expected price ranges – keep the process rolling.
- Ensure your management team is in place – you know your business better than the buyer
- Business model must be easy to understand, ensure that your representative/advisor understands it and can clearly articulate and communicate the opportunity
- Size of acquisition is important, too small or too big wastes time – know the market
Most importantly, the opportunity needs to be communicated to the right people. No matter what the size of your business, a phone call is all that is needed to get the process started!