The Warren Buffet Way

The economy is in crisis and from Wall Street to Main Street there is serious concern, but Warren Buffett is still spending money. As 2008 came to a close the superstar investor had doled out nearly $5 billion for troubled investment banking firm Goldman Sachs and another $3 billion for GE, and word is he is not finished shopping for bargains yet. So, at a time when the word is to cutback and streamline, Buffet is on the hunt and ready to buy.
Every move Buffetf makes is analyzed and dissected as businessmen and women from around the globe look for cues from the Oracle of Omaha. Heck, a Chinese investor is even paying more than $2 million dollars just to have lunch with the man. But, what if you could get advice from Buffett on how to tell the difference between the losers and the winners when it comes to where to put your money? And we are not talking stocks or bonds; we are talking about investing in businesses, even franchises.
According to acclaimed Buffet expert Robert P. Miles, Buffett has offered specific advice that could help those looking to franchising. And there is every indication Miles knows what he is talking about. Buffet himself recommended Miles' book the Warren Buffett CEO, in one of his legendary annual reports for his company Berkshire Hathaway. Miles says Buffet has five criteria every Buffett investment must meet. All five were met in 1998 when Buffet purchased the Dairy Queen franchise. And Miles is convinced the formula Buffet used to discern the wisdom of the DQ purchase is one that every prospective franchisee can use to make decisions as well.[insert banner]
Miles says the five criteria formula Buffet uses to decide purchase or pass begins with the bottom line. "He looks for a business that is earning money, if it is not earning money he is not interested," Miles says. "That is why he stays away from technology. His question is show me the earnings. The more the earnings, the more he is interested."
So, making money tops the list, and then Miles says Buffett looks for simplicity. "He is looking for a simple business, if it is too complicated he would never understand it. He likes Dairy Queen because they make ice cream." And Miles says Buffet is not only looking for simplicity in concept but also businesses that are in sectors that are easier to forecast. "If there is too much change going on in that particular (sector of) business and he can't go out 10 years from now and say where it is going to be, he has a difficult time valuing it." And that is why Miles says Buffett likes mainstay corporations. "He picks businesses that have been around for a while like Coca Cola, Gillette, Washington Post, Wells Fargo and American Express. Those make up more than half of common stock holdings."
Michael Keller is Director of Marketing for Dairy Queen International, and he says DQ was a perfect fit for the Buffet formula because of its long track record. "The secret to Dairy Queen's success is the value of the brand and the fact that it's been 68-years since we started and it looks like we have another 68 years in us," Keller says. "There is something very fundamental about the love affair with an iconic brand."
If Buffet loves a business that is making cash, Mile says he hates one that is saddled with debt. And Miles says the third piece in the formula is that Buffett requires a business purchase to have "little to no debt. The more debt that a company has the less attractive it is to Warren."
Miles says in addition to a potential purchase not being weighed down with debt, Buffett's set of criteria also places great value on a business that does not require a heavy outlay of investment capital. "He is looking for a high return on equity kind of business," Miles says. "If the business requires a great deal of capital to be put in to make it grow it is less desirable than a business that just throws off cash."
And the final piece in the Buffett investment plan is the brilliant investor's insistence that there be strong leadership at the top and that the leadership is staying put. "He is looking for management because management has to come along with every purchase," Miles says. A point upon which Keller agrees,"Warren tends to acquire businesses that appear to have really good long term value and a demonstrated track record of performance. And he acquires a management team because he doesn't tend to make management changes." As an example of Buffett not wanting to micromanage his business investments, Miles cites the 220,000 employees of companies owned by Berkshire Hathaway and the scant 19 employees at the home office in Omaha. Miles says Buffett has to have confidence that the companies he purchases are being run right.
And Robert P. Miles is convinced the Buffett plan is a simple overlay into prospective franchisees formula for buying into a franchise plan. "I think those five criteria fit pretty nicely into the franchising mold," Miles says, "in terms of having demonstrated earnings, simple business, having little to no debt because franchisors require you to put up equity and put up your time, have a high return on equity, be throwing off cash rather than you having to put in more cash every year, and people buying franchises because they want to own them. Most do not want to be absentee owners."
A tired cliché is the desire not to "reinvent the wheel". But a sincere truth in the overused expression is the value of emulating those who have found something that works. I dare say Warren Buffet has figured something out about discerning the wisdom of a business opportunity that is worthy of emulating.
If you would like to learn more about Warren Buffett or Berkshire Hathaway check them out online at http://www.berkshirehathaway.com/. Of particular note are his letters to Berkshire Shareholders. The letters contain much more than the usual communiqué between a CEO and his shareholders and include timeless nuggets into the mind of the greatest investor of our time.