Warren Buffett is one of the best investors of all time, and his Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) has passed on the rewards of his prowess to shareholders for decades. But Buffett has a big problem: He has more money than he knows what to do with right now.
Berkshire Hathaway just reported that it holds a whopping $116 billion in cash, making up almost a quarter of the company's market capitalization. Buffett isn't happy about it, and as he said in his letter to shareholders, he'll feel a lot better once he's put that cash to work. In fact, Buffett laid out exactly what acquisition criteria he's looking for in a prospective purchase, and if your business meets the following six tests, then the Oracle of Omaha wants to hear from you.
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1. Size
With such a huge amount of excess cash on hand, Buffett's in a mood to spend big. Ideally, he'd like to purchase private companies for somewhere between $5 billion and $20 billion.
However, Buffett is willing to consider smaller purchases if the fit is good. At a minimum, Buffett says that a business should have at least $75 million in pre-tax income unless it can fit within one of the wholly owned business units that Berkshire already has under its corporate umbrella. Still, with so many different types of businesses already represented within the Berkshire organization, even many smaller businesses can at least make a reasonable pitch.
2. Consistency
Buffett has no interest in beaten-down companies in need of huge transformations, with no certainty of success. Instead, the ideal acquisition involves a business with a demonstrated track record of solid earnings on a consistent basis.
It's not enough for Buffett to see hopes for future success from not-yet-established start-ups. He also doesn't want to get involved in turnaround situations. But if your business has brought in profits and looks poised to keep doing so, Buffett could be interested.
3. Good unleveraged performance
Buffett knows that it's easy to produce attractive financials if you use a lot of debt to generate them. What's more difficult is to produce impressive returns on equity while using little or no leverage in the form of debt.
A lack of debt also makes acquisitions simpler. Rather than dealing with assumption of existing obligations, Buffett can just send cash to shareholders and be done with a transaction once and for all.
4. Strong management
Buffett isn't interested in personally running all of the businesses that Berkshire owns. One of Berkshire's hallmarks is that the conglomerate typically leaves management in place even among its largest holdings.
Therefore, business owners need to understand that selling out to Berkshire Hathaway isn't an exit strategy. They'll need to stay on as managers well into the future to prove to Buffett that his investment in them makes sense.
5. Simplicity
Buffett is a sophisticated investor, but he doesn't want to invest in things that he can't understand. For years, Berkshire refused to make major investments even in well-known technology companies, as Buffett simply said that technology was outside of his wheelhouse as an investor.
Sticking with what's simple is also a safer way to invest. All too often, companies that come up with complicated ways to make money prove to be too good to be true, when the foundation of their strategic vision proves to be flawed. The simpler it is to understand why a company makes money, the more confidence you can have that it'll continue to do so.
6. A set price
Finally, if you want to sell to Buffett, you should have a fair price in mind. The Oracle of Omaha isn't interested in speculating about whether purchasing a business makes sense without knowing what it'll cost him, and he's especially averse to getting involved in bidding wars or auctions with other potential buyers.
Also, business owners should keep in mind that Buffett prefers to pay cash. Occasionally, Berkshire has done deals involving stock, which can have favorable tax impacts for sellers. With so much cash available, though, it's obviously more helpful right now to be willing to take it off his hands.
Doing a deal with Warren Buffett isn't easy. But if you have what Berkshire Hathaway's looking for, then you might be able to persuade the famous billionaire to take your business under his wing -- for the right price.
