Consider Management Quality When Buying a Business

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Consider Management Quality When Buying a Business

Imagine that you are considering buying part of a business, potentially to keep and to profit from for a long time. What signs should you look for that the company’s directors and managers are interested in doing business with you?

What to look for in a company

Investors should look for companies that offer clear communication about the business, have established a clear separation between business and personal relationships, and have set clear goals for measuring progress in conducting the business. In practice, these goals often involve raising barriers or instituting policies meant to inhibit human nature. By snooping around the edges and examining the outward signs of how a company’s management team behaves and rewards itself, we can surmise how committed they are to honoring their role as stewards of investor capital.

While it would be impractical for every private shareholder to visit management and dig around for scuttlebutt, this doesn’t mean that individual investors should simply give up on investigating the people who run their businesses. On the contrary, through a handful of public sources, investors can begin to crack the nut around one of the most subjective elements of stock research: management.

What we mean by stewardship

We will refer to the host of topics surrounding management as "stewardship." Famous investor Philip Fisher describes the qualities he looks for in managers as trusteeship. Others refer to these issues as corporate governance, fiduciary responsibilities, and other names. We call it stewardship because we look for managers who see themselves as stewards of investors’ capital and who have signaled their self-image to us in verifiable ways. We find the alternative—managers who see the company they run as their personal piggy-bank—repugnant.