Investing In Process Not Profits

Warren Buffett is notorious for buying a business, then leaving them alone for years.  This is not very typical in the investing world but it proves he is making sound investments.

I’ve seen many companies acquired in long drawn out legal jousting matches.  Pricing negotiations, conference calls, redlines, and hard nosed tactics are often the what goes into an acquisition.  But it shouldn’t be.

I saw this first hand in the gas treating business.  A large company would make a purchase based on financials.  Mainly, they were looking at impact on their own balance sheet.  For example, if we buy company A, we can get their products at cost, which in turn, saves us X.  We can then sell the rest of their production capacity at market prices netting their company Y in dividends to us, for a total increase of Z. The whole deal looks like a win-win.

That is until the people running the acquired company eventually leave.  Just as important as financials in a deal is leadership.  Are you buying leaders who can continue to run the company?  More importantly, are you buying a company an idiot can run?  Because odds are, eventually, one will.

In Warren Buffett’s purchase of the Nebraska Furniture Mart, he spent $1,400 in legal fees and did the entire deal with a one page term sheet.  They didn’t even audit the inventory.

There was no need to dive into financial what if scenarios.  What Warren saw was a profitable business that could be run by anyone.  In fact, not long after the purchase of the company, Rose Blumkin, the founder and CEO, was ousted.  The Nebraska Furniture Mart continued to grow.

The best deals I’ve seen are the ones where the business is easy to run and profitable.  The only difficult thing in a deal should be coming up with an appropriate purchase price.

These are the types of investments we look for.  We like a business that is easy to run, has great leadership in place, and is profitable (or will be soon). If you have to look at your own balance sheet to validate the deal, then you shouldn’t do it.

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