How well managers run a business before acquisition must be less important than how they run the company afterwards, when it has become your property. To make the most of your purchase, learn the most effective ways of managing the managers.
Establishing trust
When you buy a business, in effect you hire the managers in place. You can take one of three attitudes towards them:
Three Possible Attitudes
1 . I do not trust these people to do a proper job, and will replace them with my own nominees.
2. I do not trust these people to do a proper job, but will control them tightly to ensure that they do.
3. I do trust these people to do a proper job, and will let them get on with it in their own way.
For Buffett, the first two attitudes would rule out the acquisition. It rarely makes sense to buy a company whose managers you cannot trust. Ask yourself the following three questions:
* Is this person competent to do the job?
* If "no", why did I keep them?
* If "yes", why am I refusing to let them show their competence?
A policy of non-interference
Buffett does not interfere with a manager's work, even when he thinks he knows better. This is crucial. There are two quite separate jobs: running the business, and running the people who do it. Buffett restricts the latter to a very few vital functions, including approval of capital expenditure, approval of top management rewards, and making the top appointments. The key word here is "approval": the managers come up with the plans and you, after due questioning, agree to the idea, revised or not. Ensure your managers tell you bad news as soon as they know it; otherwise they should be free to seek your advice as much or as little as they like.
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