{"id":17279,"date":"2023-04-09T23:56:00","date_gmt":"2023-04-09T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=17279"},"modified":"2024-07-12T18:02:18","modified_gmt":"2024-07-12T10:02:18","slug":"buffetts-acquisition-criteria","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/","title":{"rendered":"Buffett&#8217;s Acquisition Criteria"},"content":{"rendered":"\n<p>Buffett&#8217;s acquisition criteria was disclosed many times through Buffett  annual shareholder letter and the company&#8217;s website over the past 40 years. This article will sort out four of the more important annual shareholder letters for readers one by one.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#1982_shareholders_letter\" >1982 shareholders letter<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#2014_shareholders_letter\" >2014 shareholders letter<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#2017_shareholders_letter\" >2017 shareholders letter<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#2019_shareholders_letter\" >2019 shareholders letter<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#Why_is_it_important\" >Why is it important?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1982_shareholders_letter\"><\/span><a href=\"https:\/\/berkshirehathaway.com\/letters\/1982.html\" target=\"_blank\" rel=\"noreferrer noopener\">1982 shareholders letter<\/a><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This annual report is read by a varied audience, and it is<br>possible that some members of that audience may be helpful to us<br>in our acquisition program.<\/p>\n\n\n\n<p>We prefer:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>(1) large purchases (at least $5 million of after-tax earnings),<\/li>\n\n\n\n<li>(2) demonstrated consistent earning power (future projections are<\/li>\n\n\n\n<li>of little interest to us, nor are &#8220;turn-around&#8221; situations),<\/li>\n\n\n\n<li>(3) businesses earning good returns on equity while employing little or no debt,<\/li>\n\n\n\n<li>(4) management in place (we can\u2019t supply it),<\/li>\n\n\n\n<li>(5) simple businesses (if there\u2019s lots of technology, we won&#8217;t<\/li>\n\n\n\n<li>understand it),<\/li>\n\n\n\n<li>(6) an offering price (we don\u2019t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).<\/li>\n<\/ul>\n\n\n\n<p>We will not engage in unfriendly transactions. We can promise complete confidentiality and a very fast answer as to possible interest &#8211; customarily within five minutes. Cash purchases are preferred, but we will consider the use of stock when it can be done on the basis described in the previous section.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2014_shareholders_letter\"><\/span><a href=\"https:\/\/berkshirehathaway.com\/letters\/2014ltr.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">2014 shareholders letter<\/a><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As an appendix, Buffett disclosed Berkshire Hathaway&#8217;s acquisition criteria publicly as below:<\/p>\n\n\n\n<p>BERKSHIRE HATHAWAY INC. ACQUISITION CRITERIA<br>We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),<\/li>\n\n\n\n<li>(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are \u201cturnaround\u201d situations),<\/li>\n\n\n\n<li>(3) Businesses earning good returns on equity while employing little or no debt,<\/li>\n\n\n\n<li>(4) Management in place (we can\u2019t supply it),<\/li>\n\n\n\n<li>(5) Simple businesses (if there\u2019s lots of technology, we won\u2019t understand it),<\/li>\n\n\n\n<li>(6) An offering price (we don\u2019t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).<\/li>\n<\/ul>\n\n\n\n<p>The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.<\/p>\n\n\n\n<p>We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer \u2013 customarily within five minutes \u2013 as to whether we\u2019re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don\u2019t participate in auctions.<\/p>\n\n\n\n<p>Charlie and I frequently get approached about acquisitions that don\u2019t come close to meeting our tests: We\u2019ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: \u201cWhen the phone don\u2019t ring, you\u2019ll know it\u2019s me.\u201d<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2017_shareholders_letter\"><\/span><a href=\"https:\/\/berkshirehathaway.com\/letters\/2017ltr.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">2017 shareholders letter<\/a><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are four building blocks that add value to Berkshire: <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>(1) sizable stand-alone acquisitions; <\/li>\n\n\n\n<li>(2) bolt-on acquisitions that fit with businesses we already own; <\/li>\n\n\n\n<li>(3) internal sales growth and margin improvement at our many and varied businesses; and <\/li>\n\n\n\n<li>(4) investment earnings from our huge portfolio of stocks and bonds. In this section, we will review 2017 acquisition activity.<\/li>\n<\/ul>\n\n\n\n<p>In our search for new stand-alone businesses, the key qualities we seek are:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>durable competitive strengths; <\/li>\n\n\n\n<li>able and high-grade management; <\/li>\n\n\n\n<li>good returns on the net tangible assets required to operate the business; <\/li>\n\n\n\n<li>opportunities for internal growth at attractive returns; and, <\/li>\n\n\n\n<li>finally, a sensible purchase price.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2019_shareholders_letter\"><\/span><a href=\"https:\/\/berkshirehathaway.com\/letters\/2019ltr.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">2019 shareholders letter<\/a><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>We constantly seek to buy new businesses that meet three criteria.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>First, they must earn good returns on the net tangible capital required in their operation. <\/li>\n\n\n\n<li>Second, they must be run by able and honest managers.<\/li>\n\n\n\n<li>Finally, they must be available at a sensible price.<\/li>\n<\/ul>\n\n\n\n<p>When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly-traded companies that meet our standards.<\/p>\n\n\n\n<p>Whichever way we go \u2013 controlled companies or only a major stake by way of the stock market \u2013 Berkshire\u2019s financial results from the commitment will in large part be determined by the future earnings of the business we have<br>purchased. Nonetheless, there is between the two investment approaches a hugely important accounting difference, essential for you to understand.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_is_it_important\"><\/span>Why is it important?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>These standard rooms announced by Buffett may be slightly different, but the main focus and spirit are almost the same. Among them, the standards published in the 2014 shareholder letter and the 1982 shareholder letter l are even exactly the same. The only difference between the two is the annual pre-tax and after-tax earnings. Readers can carefully study these four shareholder letters and gain a deeper understanding of Buffett&#8217;s investment principles.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"150\" height=\"98\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/07\/b-1.jpg\" alt=\"Buffett's Acquisition Criteria\" class=\"wp-image-11814\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"block-9d402b81-75c9-41fa-9a2d-6be1252e074e\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/27\/buffett-portfolio\/\" target=\"_blank\" rel=\"noreferrer noopener\">The commonalities of Buffett portfolio \u2013 cheap, fixed income, repurchase<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/08\/17\/possibility-of-long-term\/\">Possibility of long-term holdings, Deep dive on Buffett&#8217;s case<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/27\/survivorship-bias\/\" target=\"_blank\" rel=\"noreferrer noopener\">People believe successful investors are survivorship bias cannot succeed<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/07\/buffett-deserves-study\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why Buffett deserves further study?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/12\/07\/buffett-investment-idea\/\">What helps Buffett to get his investment idea?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/12\/30\/mergers-and-acquisitions\/\">Why most mergers and acquisitions end in failure?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/02\/04\/minority-stake\/\">Why Buffett prefers minority stake to entire company?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/01\/18\/institutional-imperative\/\">Institutional imperative \u2013 the good, bad, and ugly<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/\">Buffett&#8217;s Acquisition Criteria<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/06\/10\/berkshires-acquisition\/\">Berkshire&#8217;s acquisition model<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/10\/30\/controlled-business\/\" target=\"_blank\" rel=\"noreferrer noopener\">Advantages of controlled business<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Over the past 40 years, Buffett has disclosed Buffett&#8217;s Acquisition Criteriamany times through the annual shareholder letter and the company&#8217;s website. <\/p>\n","protected":false},"author":1,"featured_media":11814,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11,15,88],"tags":[48,49],"class_list":["post-17279","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buffett","category-charlie-munger","category-acquisition","tag-brk-a","tag-brk-b"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17279","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=17279"}],"version-history":[{"count":31,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17279\/revisions"}],"predecessor-version":[{"id":22133,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17279\/revisions\/22133"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/11814"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=17279"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=17279"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=17279"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}