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Suppose that I'm either an owner or part owner (through shares) of Example Corporation. One day I get a phone call from Warren Buffett. He says that Berkshire Hathaway is interested in buying ExampleCorp.

I'm no dummy and I know that past performance is not a guarantee of future performance, and Warren has made mistakes in the past, but it seems to me that an offer from him indicates that he thinks my company is

  • profitable
  • well-run
  • likely to stick around for the long term

For the purposes of this question, assume he's right and ExampleCorp is all of those things. In that case, why would any owner want to sell a profitable, well-run business that's likely to be around to give returns well into the foreseeable future? Or, to phrase the question another way, why is it rational for Warren Buffet to continue to make offers to purchase companies when an offer from him is an indication that the company would be just fine without him?

7

You are assuming too many things.

Quite a few well run companies due to various factors are in liquidity crisis. If not resolved, they would go bankrupt. So they approach Warren and quite a few Private equity firms. A deal is made.

Most of Warren investment are also through regular purchase on stock market via block deals.

In the example you have quoted, if the company doesn't need additional capital, it will not sell. If it needs additional capital it will consider the offer.

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    Or, they may not be in crisis, and about to go bankrupt, but – although they've got a good model/market and are well run – they aren't going to become "big time" without a significant injection of cash. Buffet / private equity is one source of such capital. – TripeHound Aug 20 '18 at 7:14
  • @TripeHound Agree. I implied it in last paragraph. Thanks for putting it explicit – Dheer Aug 20 '18 at 16:35
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Let's say you are offered ten million dollars.

You have the choice between taking ten million dollars, and spend the rest of your life on some lovely beach.

Or you can keep working hard until your company is worth twenty million dollars. You could still go to a lovely beach, but you missed many years of beach life, and you are now old and exhausted.

Which one do you choose?

(I know a young man who lives in Malta now with his lovely wife, and who has about £60 million to spend. He's a lovely guy, quite normal except that he has lot of cash. Why would he go on working? )

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    Because he enjoys it? Personally, I can handle a week (maybe two if there's good surfing or snorkling), laying around on a beach before the boredom gets to me. – jamesqf Aug 19 '18 at 17:10
  • Down vote. When BH purchased a privately owned business, they did so leaving existing management in place. No time to rest on the beach. – Pete B. Aug 20 '18 at 10:45
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Another reason someone might sell out: They are equity-rich but cash-poor. If they're running their company well Warren Buffet isn't going to mess with that--they keep their de-facto position but get a pile of cash.

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There could be 101 different reasons why someone would sell out their company. Some examples I have heard Buffet say over the years include:

1) It is a private family owned company, and the company doesn't have anyone in the family who wants/ is willing to take over once the current leader passes away. So they sell it, take the profit, invest in something passive for the family. Instead of selling out to their competitor.

2) Being a C level executive of a publicly traded company is a giant pain. You have to spend a lot of time justifying everything you do, raising capital, watching what you say etc. When you get bought out by Berkshire, Warren tends to be easier to deal with then a lot public investors. Warren is also notorious for staying out of your hair until he sees something that he doesn't like. You have more time to focus on the business, even if you own less of the company.

3) The company could be a gold mine, but has some bad management, and is undervalued because of the management. Buffet sees that and puts someone more competent in charge, the stock goes up he sells.

4) He liked the company so much he decided to buy it, and put you back in charge to run the company with a good compensation that takes away your exposure to the market. Good stable pay can be valuable to.

5) You bought the company when it was doing badly, you turned it around, the stock is much higher, and you have a large equity position, but no longer want to be in charge of the company. You want to move onto the next bad company so you can turn it for a profit. You find a suitable replacement, and sell out your position in the company to someone like Warren. You get your payday, he gets a good company.

I am sure there are more, some of them have been mentioned in this thread.

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Because Warren Buffet knows something you don't know. Also you may be a dummy and call from him is not an indication of how well your company is doing.

As an owner you can estimate answers to this questions:

  • How much money I can earn in the next 10-20 years
  • How much money I can loose in the next 10-20 years

and Buffet can either:
- make more money than you think you are able to earn. Simply because you don't have R&D funds and/or development money
- Loose more money than you think your company is able to. Because, believe it or not, people are buying companies to lose money on them because then they can deduct more money on "loss" side and therefore earn more money by paying lower tax (in general simplification).

And most important: People don't like waiting for gratification. You gonna earn 10 millions during those 10 years? Buffet is giving you 5 millions on the spot. No waiting. Not in five years. Right here. An individual looks different on theirs personal income than people who calculate income in matters of years if not decades.

You think you can spend one million on drugs and hookers and then live forever on interest form remaining 4. Because that what YOU personally need.
Buffet have those "comfy money" for years. And I cannot say why multimillionaires want to have more millions.

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    people are buying companies to lose money on them because then they can deduct more money on "loss" side and therefore earn more money by paying lower tax I'd like to see any justification for this. A $100 loss is a $100 loss and can offset taxes but not at 100%. ie) you get 25% of that back but not $100. – Chris Aug 20 '18 at 18:52
  • Imagine you earn enough money to go into highest tax. For example 45% from 151,000. So you lower your income by 2000 (by giving to charity) and you fall to 40% tax. You spend 2000 but you SAVED 8350. Companies by investments can avoid extra taxes, avoid paying dividend to shareholders (so they have very large income but show no profit). – SZCZERZO KŁY Aug 21 '18 at 7:48
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    The tax bracket is a marginal tax bracket, if you jump down a bracket only the portion of the $2000 that is below the bracket will be taxed less. See this link for more info investopedia.com/ask/answers/071114/… – Chris Aug 22 '18 at 1:25
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Suppose that I'm either an owner or part owner (through shares) of Example Corporation.

why would any owner want to sell a profitable, well-run business that's likely to be around to give returns well into the foreseeable future?

A modified version of gnasher729's answer: because, after 30 years of 70 hour weeks, the owner wants to relax. He couldn't watch his children grow up; maybe he'll see his grandchildren grow up.

Or... he's getting divorced and doesn't want his wife to have access to it. Better to sell the company and give her cash.

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RISK. BH is taking on risk, and alleviating risk to you, as owner. Risk comes with a cost. On the buy sell, one will offer less if the risk is high. On the sell side, one will accept less if the risk is high.

Each other's risk assessment, AND risk value will be different. Longer the time horizon results in exponential increase in risk.

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