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Warren Buffet Was Wrong On What He Said About Exit Strategy

By Quiet Light
| Reading Time: 3 minutes

I have to disagree with Warren Buffet. He may be one of the most successful investors to ever live, and he is easily one of the greatest business minds of our generation, but when it comes to something he said on exit strategy he is either dead wrong or someone quoted him incorrectly.

Here’s what he (supposedly) said:

I have an entrance strategy, but I have no exit strategy…we’re buying to own, and that changes everything.

In the interest of full disclosure, I have not been able to reliably tie this quote back to Warren Buffet.  I found this quote on another website which attributed it to him.  So it is possible that I don’t think he’s dead wrong – I just think whoever misquoted him is dead wrong.

Short Term Strategies Often Fail In The Long Term

Although I disagree with the implication of this quote, I  do love this quote because short term strategies have the tendency to work only in the short term. In the long term, short term strategies have a tendency to introduce points of weakness, overlook obvious threats, and discourage proper investment if the payback period is too long.

Too many entrepreneurs, in my opinion, have become enamoured with the idea of ‘flipping’ a business. While there is nothing wrong with quickly turning a business over (we have helped many people do just that), there is something wrong when the fixes and improvements one makes are merely cosmetic and are not established for the long-term success of the business.

Adding true value to a business requires that we look at the long-term, both for our own sake (if we are going to hold on to the business) or for the sake of the new owner (if we are going to sell).

What Is Misleading About This Exit Strategy Quote?

For as much as this quote encourages us to think long-term about our businesses (whether we are flipping them or buying to hold), it perpetuates the myth that exit strategies necessarily focus on the short-term strategy to maximize value. This is simply false.

Sustainability is a tenet of website value. Every experienced buyer will question the sustainability of a website, and every broker will examine this closely before bringing a website to market. Its because of this that dishonest website flippers tend to congregate to unmoderated marketplaces and channels where they can take advantage of less educated buyers.

And it is for this reason why newer buyers should consider carefully before pursuing an acquisition outside of some moderated channel.  While a website broker may not do a full due diligence on a company,  you can be sure that reputable website brokers are concerned with the quality of their listings and filter out low-quality and high risk listings. Good listings can be found in unmoderated marketplaces, but a lot of high risk businesses also exist there as well.

Develop Your Exit Strategy – It’s a Good Thing

In the online world, developing an exit strategy is a good thing, even if you have no intention of ever selling your business. Developing an exit strategy forces you to:

  • Identify potential threats that could scare away buyers
  • Invest in realistic growth plans that provide a maximum return on your investment
  • Identify weak areas of your business and force you to strengthen these areas
  • Provide you with a realistic landscape of what opportunities are actually being presented to your business
  • Provide you with flexibility should you find yourself in a position to sell.

What is so often misunderstood or overlooked, and what the quote from Buffet betrays, is that exit strategies do not involve seeking short-term fixes for long-term problems.  Rather, a proper exit strategy should focus on stabilizing a business to ensure a smooth takeover by new ownership and enabling that new ownership to grow the acquisition in a smart, sensible way.

The Last Word

While your decisions will likely vary slightly if you are preparing your business to sell in the near future, overall, preparing your business for sale involves paying closer attention to the business than you normally would.

Once a business is well established, it can be easy for a business owner to grow slack in their responsibilities. Missed expenses sneak into the books, opportunities are not as aggressively pursued, and threats that you have been living with for years are simply left as threats (albeit threats that haven’t been realized yet).

A sound exit plan changes this behavior. Knowing that your business will be scrutinized in every last detail forces us to scrutinize every last detail. And this is a good thing.

So run your business as if you are preparing to sell it – even if you would never dream of actually putting it up for sale.

2 replies on “Warren Buffet Was Wrong On What He Said About Exit Strategy”

Comments are closed.

  • Great post, Mark.

    I remember reading this quote somewhere as well and thinking it sounded…off. Running your business in preparation for a sale seems to be sound advice. You’ll maximize profitability, limit your single points of failure, etc.

    Some differences, though. (I may not reinvest heavily in a business I was planning to sell, but it might be the better move if I saw potential and were holding the business long-term)

    1. You pointed out the one significant difference I would make as well. Running a business in preparation to sell it does not account for a significant re-investment. But even re-investment is something that can be accounted for in a valuation. One time investments can either be added back, or, if it is a regular re-investment (such as a website upgrade that should be done every 4-5 years) amortized over the life expectancy of that investment.

      But yes, I don’t believe the quote is real. 🙂

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