4 ms·

The TL;DR: if you skip the admin and due diligence of a deal, you will close more deals. For example: "I couldn’t understand why buyers felt they needed to dig

by crdb 10y ago

The TL;DR: if you skip the admin and due diligence of a deal, you will close more deals. For example: "I couldn’t understand why buyers felt they needed to dig into accounting minutiae". However, to paraphrase something I read from a sailor, "every regulation in the Navy is written in the blood of your predecessors". If you do 10 deals, one might wipe out any upside from the other 9, even if you got more upside by negotiating a better valuation, and having a faster turnaround and lower cost of doing business. And of course, if a buyer got the reputation of not doing due diligence, it would attract all the problematic companies. There is a reason behind every "annoying" stage, and those reasons collectively explain why the entire industry is made of buyers that follow those stages. Since he runs 10 businesses, it is probable that the author has other ways of doing the work. He will keep track of most of the promising names in his industry, he will have a network of insiders to keep him appraised of the real story in those companies (although never officially), and he will know when the timing is ripe. His good relationship with his existing bankers means financing will be quick and standardised already, his back office experienced and streamlined. His experience tells him how you can play with what numbers to present a rosier picture than the reality, as well as how much to offer to get a founder to come to a quick decision. Unless he decides to go buy palm oil crushing plants in Indonesia, it might work out quite well.

dchest 10y ago
As far as I understood the linked post, that's an incomplete tl;dr. You missed these important parts: 1) In the words of Buffet, "there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed)" [https://news.ycombinator.com/item?id=13906176 https://news.ycombinator.com/item?id=13906176]. Most of such re-negotiations can only be explained by screw ups in the decision making process or dishonesty of the acquirer trying to squeeze more from the tired owners. 2) Not screwing with the acquired businesses: they buy companies because they know their owner-managers are what made these companies successful, so it would be a stupid decision to replace them or change their operations.
- nikanj 10y ago
  Selling your company definitely has a certain Darth Vader feel to it. The buyer usually alters the deal, and the only thing you can pray for is them not altering it any further.
  - valuearb 10y ago
    Get a second buyer on the hook. Then they both will pray you don't alter the deal any further.
- deleted 10y ago
  [deleted]
- crdb 10y ago
  You're right on 1). Certainly reputation can get you much better terms, but it takes a really long time to build. I remember a famous fund launch recently and I was about to pitch them but then read up the main partner's comment history and realised his demonstrated character and worldview did not match the (excellent) marketing. That was enough to put me off even just getting in touch. Being upfront that you play like everybody else might be a better strategy (prisoner's dilemma version: "like all the other funds, we assume defect-defect; we won't try and get you to cooperate so we can defect quietly"). In other words a standard negotiation with both sides having written in guarantees to protect themselves from worst case scenarios. On 2), every investor claims they will be hands off and trust owner-operators. However, not only is this rarely the case in practice (why else are board seats so important?), many funds explicitly argue synergy as a competitive advantage with their limited partners and the community. E.g. they get you the C-levels you're missing, an experienced marketing and finance team from their network, help you find clients, investors... and if things go badly, they eject you and put in one of their turnaround names. How can you know ahead of time? You can't, so you assume a defector. As for Buffett, he did step in to run Salomon Brothers when things went south.
jawns 10y ago
> However, to paraphrase something I read from a sailor, "every regulation in the Navy is written in the blood of your predecessors". If you do 10 deals, one might wipe out any upside from the other 9, even if you got more upside by negotiating a better valuation, and having a faster turnaround and lower cost of doing business. And of course, if a buyer got the reputation of not doing due diligence, it would attract all the problematic companies. I think you're right here, and the reason Berkshire Hathaway can get away with this type of strategy at this point is because it's large enough and diversified enough that it can assume that risk. A tiny company, I would think, would be in much less a position to do so.
Tarq0n 10y ago
Buffet's tactic of having the original owner keep 20% equity is very smart in this regard I think. Not only do you share risk, you're also keeping them nearby in case the need for litigation ever arises.
valuearb 10y ago
I agree with the idea that focusing on accounting minutia is over-rated. The reasoning behind it is three-fold 1) Sometimes a small error can actually turn into a huge red flag because it exposes a pattern of fraud. But this is extremely rare. It's hard to fake more than a fraction of your cash flows. Real risks of acquisitions aren't the cash flows, it's the former partner who sues (and wins) because of an undisclosed agreement, or the undisclosed IP lawsuit, or bad contract provisions with their key landlord/distributor/etc. 2) It's ass-covering. Acquisitions are done by teams, with consultants, etc, and no-one wants to have a finger pointed at them if it goes wrong. So they do due diligence to ridiculous levels. 3) It's billable hours. Same reason as 2), consultants are happy to ring up more hours for the dumbest of reasons if you will pay them for it. For acquisitions I think two key skills are needed. 1) Ability to recognize what businesses have a significant moat. 2) Ability to weed out the honest/ethical owners from the bullshit artists. These are two skills Warren seems to have in spades. But even he makes mistakes. Dexter Shoes went out of business after he paid BRK stock that would be worth $14B in todays price. You and I both can scratch our heads and ask what "moat" did he ever see there. When you can be really confident in the moat, the ethics of the owner becomes more of a redundancy. Once you own the business and find the moat not as strong as you thought, you then sure don't want to find that the owner hid other big problems from you. Whether a business made $1M or $950K shouldn't make a big difference in your decision. Whether that $950k-$1M is repeatable and will grow is a hundred times more important.
tim333 10y ago
In Buffett's case he doesn't dig into accounting minutiae much because he if trying to buy businesses worth several times what he pays on a discounted cash flow basis and the accounting minutiae don't affect that much. Where he has screwed up it's been because the basic economics didn't work such as at Dexter shoes where they couldn't keep up with Chinese competition. Likewise with internet stuff what counts is whether you bought facebook or friendster. The accounting minutiae not so much.

by crdb 10y ago

dchest 10y ago

As far as I understood the linked post, that's an incomplete tl;dr. You missed these important parts: 1) In the words of Buffet, "there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed)" [https://news.ycombinator.com/item?id=13906176 https://news.ycombinator.com/item?id=13906176]. Most of such re-negotiations can only be explained by screw ups in the decision making process or dishonesty of the acquirer trying to squeeze more from the tired owners. 2) Not screwing with the acquired businesses: they buy companies because they know their owner-managers are what made these companies successful, so it would be a stupid decision to replace them or change their operations.

nikanj 10y ago
Selling your company definitely has a certain Darth Vader feel to it. The buyer usually alters the deal, and the only thing you can pray for is them not altering it any further.
- valuearb 10y ago
  Get a second buyer on the hook. Then they both will pray you don't alter the deal any further.
deleted 10y ago
[deleted]
crdb 10y ago
You're right on 1). Certainly reputation can get you much better terms, but it takes a really long time to build. I remember a famous fund launch recently and I was about to pitch them but then read up the main partner's comment history and realised his demonstrated character and worldview did not match the (excellent) marketing. That was enough to put me off even just getting in touch. Being upfront that you play like everybody else might be a better strategy (prisoner's dilemma version: "like all the other funds, we assume defect-defect; we won't try and get you to cooperate so we can defect quietly"). In other words a standard negotiation with both sides having written in guarantees to protect themselves from worst case scenarios. On 2), every investor claims they will be hands off and trust owner-operators. However, not only is this rarely the case in practice (why else are board seats so important?), many funds explicitly argue synergy as a competitive advantage with their limited partners and the community. E.g. they get you the C-levels you're missing, an experienced marketing and finance team from their network, help you find clients, investors... and if things go badly, they eject you and put in one of their turnaround names. How can you know ahead of time? You can't, so you assume a defector. As for Buffett, he did step in to run Salomon Brothers when things went south.

jawns 10y ago

> However, to paraphrase something I read from a sailor, "every regulation in the Navy is written in the blood of your predecessors". If you do 10 deals, one might wipe out any upside from the other 9, even if you got more upside by negotiating a better valuation, and having a faster turnaround and lower cost of doing business. And of course, if a buyer got the reputation of not doing due diligence, it would attract all the problematic companies. I think you're right here, and the reason Berkshire Hathaway can get away with this type of strategy at this point is because it's large enough and diversified enough that it can assume that risk. A tiny company, I would think, would be in much less a position to do so.

Tarq0n 10y ago

Buffet's tactic of having the original owner keep 20% equity is very smart in this regard I think. Not only do you share risk, you're also keeping them nearby in case the need for litigation ever arises.

valuearb 10y ago

I agree with the idea that focusing on accounting minutia is over-rated. The reasoning behind it is three-fold 1) Sometimes a small error can actually turn into a huge red flag because it exposes a pattern of fraud. But this is extremely rare. It's hard to fake more than a fraction of your cash flows. Real risks of acquisitions aren't the cash flows, it's the former partner who sues (and wins) because of an undisclosed agreement, or the undisclosed IP lawsuit, or bad contract provisions with their key landlord/distributor/etc. 2) It's ass-covering. Acquisitions are done by teams, with consultants, etc, and no-one wants to have a finger pointed at them if it goes wrong. So they do due diligence to ridiculous levels. 3) It's billable hours. Same reason as 2), consultants are happy to ring up more hours for the dumbest of reasons if you will pay them for it. For acquisitions I think two key skills are needed. 1) Ability to recognize what businesses have a significant moat. 2) Ability to weed out the honest/ethical owners from the bullshit artists. These are two skills Warren seems to have in spades. But even he makes mistakes. Dexter Shoes went out of business after he paid BRK stock that would be worth $14B in todays price. You and I both can scratch our heads and ask what "moat" did he ever see there. When you can be really confident in the moat, the ethics of the owner becomes more of a redundancy. Once you own the business and find the moat not as strong as you thought, you then sure don't want to find that the owner hid other big problems from you. Whether a business made $1M or $950K shouldn't make a big difference in your decision. Whether that $950k-$1M is repeatable and will grow is a hundred times more important.

tim333 10y ago

In Buffett's case he doesn't dig into accounting minutiae much because he if trying to buy businesses worth several times what he pays on a discounted cash flow basis and the accounting minutiae don't affect that much. Where he has screwed up it's been because the basic economics didn't work such as at Dexter shoes where they couldn't keep up with Chinese competition. Likewise with internet stuff what counts is whether you bought facebook or friendster. The accounting minutiae not so much.