“Choose a business any idiot can run, because sooner or later one will”
This is our first blog article in our series on famous and insightful business quotes. Many of them will come from probably the best two investment minds in the world, being Warren Buffett and his business partner Charlie Munger of Berkshire Hathaway fame.
Today’s two quotes are indeed from these two, namely:
“Choose a business any idiot can run because sooner or later one will.”
and “Whenever a bad business comes up against an excellent manager, the business invariably wins.”
These are two of Buffett’s more famous and pithy quotes. Due to Buffett’s skill in articulating ideas, they are self-explanatory but some of the application to small business is well worth an examination.
If we take the first quote, to some degree, it has limited relevance to small businesses as they are very unlikely to be put under full management. However, the core concept is to buy or start a business whose economics and features are so strong even an idiot can’t blow it up.
This I believe dovetails perfectly with the second quote. Again, self-explanatory, but many people fail to heed the inherent wisdom and believe they are the ones gifted enough to turn a bad business around. Further to the second quote, often Buffett further expounds that what you are really trying to do is get a great manager managing a great business. Why? Because you now have two positive complementary “forces”” working for you, i.e., a great manager AND a great business. When you get both, the results are often magnificent with each force multiplying the other.
Buffett and Munger have seen too many good managers let their pride get the better of them and spend years of their life, which they can never get back, trying to fix a business in an industry with terrible economics or is doomed perhaps by technological change.
Likewise, in Mum and Dad business world, I often argue the greatest danger in terms of probabilities is not going genuinely broke and losing the family home, but rather being stuck in a barely profitable business. The owners spend huge hours in the business trying to turn it around only to make a meagre profit that covers neither the hours nor the capital they have tied up in it.
People will often persist in these businesses for years in order to avoiding being seen to fail or putting pressure on themselves fearing they are giving up too easy. Certainly, we are not advocating people give up at the first hurdle, but if you have tried a number of things and been in the business say 3 years and it is still earning way below a true economic return, it is time to consider exiting this business.
Unfortunately, we sometimes also see consultants and business coaches hold out false hope that with another round of changes to the business excellent profits will suddenly materialize. It would be far more ethical for them to advise their clients they are in a poor business and even if they were blessed with top 1% business acumen the results would be little better. The fault in fact does not lay with the business owners, effectively no one can really repair this business.
Of course, the best option of all is to avoid buying or starting one of these businesses in the first place. This is usually easier to see when buying an existing business. Here we can examine the current owner’s figures and see if that the business is rewarding them correctly for not just their labour they are inputting, but their capital too.
If you are considering starting a business up some things can still be done to mitigate the risk of entering into a bad business. Budgets where you examine how poor the performance can be and you still get an acceptable return on your labour and capital can help.
If the proposed business is a common type that exists elsewhere there may be financial benchmarks that exist to see if they typically earn returns on capital that justify you investing.
If you would like some analysis done of either your existing business, or one you are proposing to buy or set up, we at RWK would be delighted to help you make a commercially intelligent decision in either remaining in your current business or commencing a new one.
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