Devoted to Managers and those that seek to improve their management skills

The Danger of Running an Acquired Business

Buffett has talked a number of times about his and Berkshire Hathaway's (BRK-A) strategy in buying businesses. The major consideration, after all is considered, is keeping the existing management in place. The question is why.

Here's how he put it in a letter to shareholders: “…the sellers go on running it just as the did before the sale; we adapt to their methods rather than vice versa.” He also added that “We buy to keep, but we don’t have, and don’t expect to have operating people in our parent organization.”

One of the most dangerous impulses for a company when buying a business, according to Buffett, is to put someone in place that they think can run the business better than the current management.

We need to remember that Buffett will only buy quality companies that others don't see the hidden value in. So to put new management in place, would not only be foolish, but a disaster.

I like what he says about adapting also. Because Berkshire doesn't seek to impose some type of arbitrary way of running all businesses under its corporate umbrella, it encourages leadership of companies to approach Buffett to buy them. They know that there will be no interference.

That's has been an extremely important advantage to Berkshire.

The one other thing that Buffett will usually do is to buy only about 80 percent of the company if it's possible. That way there's a motivating factor for management to maintain their excellence by continuing to grow their 20 percent share.

If we're acquiring a business to be part of our fold, the bottom line is that we need to leave it alone to be run by those already in it. If there is no confidence in the leadership why would we buy the business in the first place? It couldn't be performing well and it would be better to start from scratch than attempt to do the rebuilding thing.

Other Buffett Sources:

10 Secrets Hidden in Warren Buffett's Wallet

The Warren Buffett You Don't Know

Warren Buffet-Strategic Planning

Some practical advice from investment guru Warren Buffett

Wisdom of Warren Buffett

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