The Berkshire Hathaway of The Internet
Warren Buffett is famous for handshake deals and one-page contracts. He often buys multi-billion-dollar companies after a few phone calls, usually without ever meeting the management team in person or visiting their facilities. Not only that, but he typically pays below market prices and avoids dealing with investment bankers. Despite all this, he has amassed a collection of over 65 wholly owned companies, ranging from See’s Candies, to Dairy Queen, to Fruit of The Loom.
Today, his holding company, Berkshire Hathaway, is worth almost $500 billion.
So, if he pays below market, refuses to negotiate, and won’t even visit them in person, why do wealthy entrepreneurs and families sell to him? Because he makes it easy.
Warren Buffett vs. Traditional Buyers
Selling your business is usually a long and frustrating experience, full of stops and starts, hard-nosed negotiation, and emotional flareups.
It typically takes 6–12 months and the process looks something like this:
- 😁 Hire an investment banker or broker (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. All that fun stuff.
- 😀 Buyer Outreach (1–2 months)
Your investment banker makes a huge list of sometimes hundreds of potential buyers and contacts each of them, one by one, to see if they’re interested in your business.
- 🙂 The Dog and Pony Show (1–2 month)
The list of buyers gets winnowed down to a handful who have 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. Almost done? Think again. Now the proctology exam begins. 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. Didn’t the data room cover this? No dice. Your entire team will be distracted from the core business producing phone 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 grill them like grilled cheese, freaking them the hell out in the process.
- 😒 Haggling + 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. But fuck, 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.
- 😭 (80%) or 😁 (20%) Closing? (1–2 months)
If you’re lucky, you and the buyer come to terms and shake on a deal. I spoke to a friend of mine who is a successful investment banker and he said that typically only 20% of deals close. So, for most people who go through this 8–12 month process, only 20% of them will get anything out of it. Insanely frustrating, if you’re in the 80%.
Now let’s look at Warren Buffett’s process for buying a business:
- 😀 The Letter (1 day)
He asks the seller to send him a simple letter explaining why he should buy their company, sharing some key financials and their asking price.
- 😁 Analysis (2–5 days)
If he likes the business, the management, and the price, he digs in.
- 😆 The Offer (1 day)
He calls or writes the owner and makes a fair offer.
- 😊 The Handshake (2–3 days)
If the buyer agrees to the price, they agree to the details, and he sends over as short contract devoid of legal jargon.
- 😎 Closing (4–8 weeks)
They work through all the usual legal stuff and get the deal done. If the owner is stuck on any minor details like working capital or sentimental items, he lets them win because he knows that, in the big picture, they aren’t worth haggling over.
Starting to understand why people like selling companies to Warren Buffett, even if it costs them a little? In addition to making the process painless, he also commits not to meddle with the core business, to keep existing management in place, and to hold the business forever.
My Five Year Process
I now own almost ten operating businesses, so there’s usually somebody trying to buy one of them. In the past, I’ve gone by the “I’ll always pick up the phone” policy, so whenever a potential buyer has been interested in one of my businesses, I’d always talk to them to see if their number made sense. Everything has a price, or so I thought…
Over the years, I’ve heard the right price many times. I’ve gotten excited and mentally decided to sell various businesses over the years, but in reality, I’ve only sold one. Instead of rolling around in my solid gold lambo making it rain, I’ve instead experienced the frustrating, distracting process that I mentioned above. In the past five years, we’ve been through five sale processes for different businesses and only had one deal go through, and on average, I’ve spent 6 to 8 months per year in a process.
In short, my life has sucked for the past five years. Collectively, I’ve spent months on the phone doing pointless calls with potential buyers. Talking to investment bankers. Negotiating deals that will never close. Forcing my accounting team to do endless diligence. All time that could have been spent growing my businesses or enjoying life. It’s been a huge waste of time and a massive distraction from running my companies.
The funny thing is, had somebody just pulled a Buffett and made it easy, I would have sold every time. I was mentally and emotionally ready to do a deal, but I’m an entrepreneur. I’m high paced. I make a decision, and I want it to happen. I couldn’t understand why buyers felt they needed to dig into accounting minutae. In one deal, we spent a month doing an audit over a .5% revenue fluctuation between two months. It didn’t need to be this complicated: all our businesses are easy to understand, asset-light, and easy to verify revenues for.
After five years of it, I’m done. The process is broken. We’re rolling up our sleeves, flipping sides, and becoming the buyer we’ve always wanted. We’re building the Berkshire Hathaway of the internet. We call it Tiny.
The New Process
When we started Tiny earlier this year, we set out to mirror Buffett and make it enjoyable and easy for owners to sell us their business. Our first acquisition was Dribbble, in January, and it took a little more than two months in total.
The owners, Dan and Rich, had been peppered with acquisition interest for years. When they decided to consider a sale, we were able to offer them a quick, straightforward conversation about what they wanted and how we could could make it happen. In weeks, we knew we had a deal and shook hands on the terms. There was no complex diligence process, no earnouts to haggle over, and no renegotiation once we’d shook hands. In short, we made it painless and did whatever was needed make them comfortable. We took the Buffett road.
Our process? Simple. We focused on three key things:
- Do we trust them?
Dan and Rich have a sterling reputation in the design community, and we have tons of mutual friends. We knew that if they made a statement about the business, we could rely on it.
- Are the numbers roughly right?
Instead of spending months digging into accounting minutiae, we focused on the macro picture. We looked at bank statements and credit card transactions to quickly verify that the business was doing roughly the revenue and profit stated in their financials. It was, even if it there were a couple inaccuracies here and there. The important thing was that the business was performing roughly as they said it was.
- Are there any big risks?
Had they signed any crazy contracts? Did they owe anybody money? Had anyone incubated an illegal cock-fighting ring within the company? (No. No. And no.)
- Can we explain the business and investment case on a napkin?
Is this a no brainer? Can we see our money back in a reasonable amount of time? Is this a simple business? Can we grow it? The answer to all of the above was a resounding yes.
We spent about a week coming to terms on a fair price and key terms, shook hands on a deal, and closed in a little over two months. No fuss, no muss.
Sure, we could have spent another 3 months in diligence. We could have tried to renegotiate the terms and ground them down. We could have spent weeks picking apart their management team. But we would have lost the deal, and if we didn’t lose it, they would have been miserable and our relationship would have started off on the wrong foot.
Like Berkshire, we also agreed to leave the existing team in place and stay the hell out of their way. We’re always available to help with important hires (if the seller wants to step back, replacing them), and anything else they need (accounting, legal issues, strategy, etc), but they get as much or as little attention as they ask for. Unlike more traditional buyer we plan to leave the companies we buy to keep doing what they’re doing for the longterm. We bought them because they are awesome, and we want them to stay that way.
Since we closed the Dribbble deal in January, I’m happy to report that we’ve bought another 3 companies, with each deal taking less than a month to close.
Building Berkshire 2.0
Let’s be real, we’re a long way from being Berkshire Hathaway. We’re Tiny, both literally and figuratively. We’re just wannabes at this point. Our market cap is many billions of times smaller than Berkshire’s, but we want to use Buffett’s methodology to keep buying more and more wonderful internet businesses. While he focuses on railroads and fast food chains, we want to buy simple, profitable internet businesses with great teams.
We know that there are thousands of phenomenal entrepreneurs out there who want to sell their business but don’t want to deal with the brain damage. They don’t want to freak out their staff. They don’t want their business to be put at risk by a short-term oriented buyer who will try to pump and dump. They don’t want to answer to a micro-managey board. I know that, because I was one of them, and I talk to more and more people like me every day.
Spread the word. There’s a better way to sell your business :-)
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PS: I get why private equity firms and other traditional buyers are the way they are. They are fiduciaries managing money for huge institutional investors. When a deal goes south, the last thing they want to tell their investors is “I had a good feeling about it”. I get why they feel the need to do this sort of diligence, but I think it gives us a special advantage over the establishment.