“We don't do due diligence; we just look into your eyes” – the simple M&A.
Updated: Jul 30, 2020
If you are a technology founder and looking to sell your business, I have good news for you at the end. However for now let’s focus on the above famous words used by Warren Buffett to describe his $37 billion acquisition of Precision Castparts in 2015. This is how the deal was completed:
Buffett met with CEO Mark Donegan for 10 minutes and asked if he’d listen to a takeover from Berkshire.
After talking to his Board, Donegan agreed to listen to an offer.
Buffett made an offer, they talked about it and completed the deal, having spoken for just 25 minutes in total.
Ahead of making an offer for Precision, Berkshire has no financial figures beyond those that were publicly available.
Buffett's main concern was whether or not Donegan thought he’d retire at 65 as Berkshire likes its CEO’s to continue as long as they can.
That’s how simple Buffett likes to keep his deal making. In another famous instance in 1967 Berkshire acquired National Indemnity and its sister company National Fire & Marine for $8.6 million. Though that purchase had monumental consequences for Berkshire, its execution was simplicity itself. He made a deal in 15 minutes with Jack Ringwalt, who was the controlling shareholder of both companies. Neither of Jack’s companies had ever had an audit by a public accounting firm, and Buffett didn’t ask for one. His reasoning: (1) Jack was honest and (2) He was also a bit quirky and likely to walk away if the deal became at all complicated. Below is the iconic two page purchase agreement that used to finalize the transaction. That contract was homemade, neither side used a lawyer.
Contrast the above with how M&A is conducted today by investment bankers which is usually a long and frustrating experience, full of stops and starts, hard-nosed negotiation, and emotional flareups. I’ve had my fair share of experiences working with the Big 4 over the last few years and this is how it typically goes:
Hire an investment banker (1 month) - investment bankers are like realtors for businesses. They help you polish up your business to make it attractive to potential buyers, then seek out buyers, entice them to make a bid, and run the negotiation process.
Build a data room (1 month) - a data room is a big folder of every conceivable thing that a buyer would want to know about your business. Financial statements, cap table, Important contracts and obligations, legal disclosures etc.
Buyer outreach (1–2 months) - your investment banker makes a list of potential buyers and contacts each of them, one by one, to see if they’re interested in your business.
The fashion parade (1–2 month) - the list of buyers gets narrowed down to a handful who have now dug into your data room. You start doing phone calls with them, telling your story, and if it goes well, then they typically will fly in for a day to visit you and dig into the business further. Endless phone calls, meetings, presentations, and dinners.
Term sheets + Negotiation (1 month) - most serious buyers send over their offers, typically in the form of a non-binding letter that lays out the proposed deal structure, valuation, etc. Your investment banker then pits them against one another and negotiates to get you the best offer.
Due diligence (1-2 months) - you choose the buyer and agree to go exclusive, meaning you agree not to speak to any of the other buyers. You’re given a massive list of financials reports, KPI’s, legal checklists, org chart diagrams, process documentation, and everything else the buyer wants to see. Your entire team will be distracted from the core business producing books full of documents for the buyers. During this time, the buyer will likely want to make multiple visits to meet your executive team and freak them out.
Renegotiation (1 month) - now that the buyer has dug into your company and learned all your weak spots, they will often try to negotiate the terms you had previously agreed to. You’re 8–10 months in at this point. You’re exhausted and have deal fatigue. You give up on a bunch of stuff, just to get it done, or the buyer decides to walk, effectively burning the last year of your life.
Closing (1–2 months) - if you’re lucky, you and the buyer come to terms and shake hands on a deal. Industry estimates peg deal closures typically at 25%. So, for most people who go through this 8–12-month process, only 25% of them will get anything out of it. Insanely frustrating, if you’re in the 75%.
I’ve had the unique distinction of experiencing a deal not going through even after closing because between the time after we had signed the deal and the India CEO went to Paris to get it ratified by his global Board, a severe hurricane occurred which damaged the acquiring company’s business prospects, and battered their stock price. They rescinded on the deal. Can anything be more frustrating?
A new generation of VC's are looking to acquire profitable internet businesses using the Warren Buffett methodology.
So, do all acquisitions have to go through the above process? Left to investment bankers, yes. Fortunately, there are a new breed of VC firms that are using Buffett's methodology to acquire profitable internet companies. While they haven’t reached Buffettesque levels of ‘no due diligence’ as yet, they promise a term sheet in a week and a deal closure in a month. No renegotiation and grinding you on terms. These aren't your typical VC's that acquire and try to flip businesses in 3 years, they hold it for the long term..While Berkshire focused on railroads and fast food chains, these VC’s want to buy simple, profitable internet businesses.
The ideal target company should have a 3-5+ years of operating history, a minimum $500k/year in annual profit and a high-quality team in place. They look for simple internet businesses that have high margins, don't require tons of people or complex technology, and have a competitive moat. They run a quick 30 days process, simple structure with full or partial cash out, founders can stay or go, post which the VC's will hold and run the company for the long term.
If you are a technology founder with a minimum $500k/year in annual profit and haven’t achieved venture scale yet, you may identify with the below situations:
Bootstrapped the business and scaled it with real customers and revenue and looking at handing the reins to someone else or partnering for the next phase.
Raised money and built a good business but haven't been able to achieve venture scale and investors need a soft landing.
Have early employees, investors or a co-founder who wants to leave/ cash out and you want to swap them for a friendly new face who can add value.
If the above rings a bell, do reach out to me and I’ll let you know if it's a fit. There are thousands of phenomenal entrepreneurs out there who want to sell their business but don’t want to deal with the brain damage. I’ll help you get the 'simple M&A' done.
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Benjamin Franklin picture credit: Abhipol Suruwatari | Dreamstime.com