Warren Buffett is famous for handshake deals.
His competitors will take 6-12 months to get a deal done.
Warren will get to a handshake in a week and close in 30 days.
And often writes the deal contracts himself.
Here is how he does it:
“I went to see Mrs. B (Rose Blumkin), carrying a 11/4-page purchase proposal for NFM that I had drafted. . . . Mrs. B accepted my offer without changing a word, and we completed the deal without the involvement of investment bankers or lawyers (an experience that can only be described as heavenly).”
— BERKSHIRE HATHAWAY INC., 2013 ANNUAL REPORT 15 (2014)
$55m deal in 1983 ($161m deal in 2022 dollars)
Warren bought National Indemnity for $8m in 1967 ($71 million in 2022 dollars) with this 1.5-page contract that he wrote himself.
So what actually matters in dilligence:
1. Do we trust them?
Do we have a good feel for the person? Are they honest?
The seller will always know things about the business that you don't so this is important to figure out early.
You can't do a good deal with a bad person.
2. Are the numbers roughly right?
Do the bank statements and credit card transactions support the revenue and costs stated in the financials?
Is the business roughy performing how they said it was? Fake revenue and hidden costs are the concern.
Small inaccuracies don't matter.
3. Are there any big risks?
Have they signed any crazy contracts?
Do they owe people money?
Are they being sued?
Are they secretly running drugs?
Warren pulls handshake deals off by focusing on what matters.
He has built a long reputation for fair offers, simple diligence, and straightforward contracts.
- High trust
- High speed
- Low cost
We strive to buy businesses similarly.