Twelve times EBIT sounds reasonable on the surface, but I've learned the hard way that the multiple means nothing without answering three questions. First, is the competitive advantage durable? When we bought See's Candies in 1972 for $25 million—about 5x pre-tax earnings—the brand loyalty was so strong that earnings grew for five decades with almost no reinvestment. That's the kind of moat I need to see. If this business can be disrupted by a well-funded competitor in five years, 12x is too high. Second, do I trust the people running it? I've said it a thousand times: integrity matters more than IQ in a manager. If I have to install watchers to watch the watchers, I don't want the business at any price. Mrs. B at Nebraska Furniture Mart, Ralph Schey at Scott Fetzer—they ran their businesses like they owned every share. Third, does the price leave a margin of safety? If EBIT drops 25% in a recession and I still earn a decent return on my investment, the price works. If I need everything to go perfectly, I'm paying too much.


Accretion is the most dangerous word in M&A because it sounds smart and means almost nothing. Any deal can be made 'accretive' if you finance it with cheap debt or buy a company with a higher earnings yield than your cost of capital—that's arithmetic, not value creation. When we bought GEICO for $2.3 billion in 1995 to complete our ownership, I didn't care about next quarter's EPS. I cared about owning a business with a permanent 15-20% cost advantage over every agent-based competitor in America—a business that would compound intrinsic value for decades. What I care about is per-share intrinsic value over time. That means: what are the owner earnings (net income plus depreciation minus required capital expenditures), how durable are they, and does the purchase price leave room for error? If a banker can't explain how a deal increases intrinsic value per share over a five-year horizon without using the word 'accretive,' he doesn't understand the deal well enough to be pitching it.


Charlie and I have a simple rule: if you need synergies to justify the price, you're paying too much. When we bought Burlington Northern Santa Fe for $34 billion in 2009, we didn't model a single dollar of synergies—the railroad's economics stood entirely on their own. It was a duopoly with irreplaceable infrastructure and pricing power that would grow with the economy. Real synergies are the obvious, arithmetic ones: eliminating a duplicate corporate headquarters, combining overlapping distribution networks, consolidating purchasing for raw materials. You can bank those with confidence. Fiction is when someone tells you cross-selling will generate $200 million in new revenue, or that 'cultural integration' will unlock hidden productivity. In my 60 years of doing deals, I've seen synergy projections exceeded exactly zero times and missed by 50% or more roughly half the time. The safe approach: price the deal assuming zero synergies and treat anything that materializes as a bonus.


Leverage becomes unacceptable when it can turn a temporary business problem into a permanent destruction of capital. I watched dozens of perfectly good businesses get destroyed in the late 1980s and early 2000s LBO waves—not because the businesses were flawed, but because the debt loads couldn't survive a normal recession. When revenue drops 15% and you have 6x EBITDA in debt with tight covenants, the lenders take the keys and the equity goes to zero. At Berkshire, we carry almost no debt at the parent level despite having the capacity to borrow hundreds of billions. We could leverage up and earn higher returns in good years, but we'd risk catastrophe in bad ones. My threshold: if a deal requires more than 3-4x EBITDA in debt to produce acceptable returns, it means the equity return only works because of financial engineering, not because the business is a good investment. I'd rather earn 12% safely than 20% with a chance of zero. Dexter Shoe taught me what happens when things go wrong—we paid with Berkshire stock, and when the business deteriorated, that cost was permanent.


This is the lesson Charlie Munger taught me that transformed Berkshire from a $20 million company into what it is today. Early in my career, I was a cigar-butt investor—buying mediocre businesses at bargain prices and extracting one last puff. Then in 1972, Charlie convinced me to pay $25 million for See's Candies—about 6.5x pre-tax earnings—which felt expensive to my Ben Graham-trained brain. But See's earned 25%+ on tangible capital and could raise prices every year because of brand loyalty. It's now produced over $2 billion in cumulative pre-tax earnings on virtually zero incremental capital. Compare that to a mediocre business at 8x earning 8% on equity: it needs to reinvest every dollar just to maintain its competitive position, it has no pricing power, and in five years it's probably earning less than today. The wonderful business at 18x compounds at 15-20% for decades; the cheap business at 8x returns your money slowly while consuming your attention. Time is the friend of the wonderful business and the enemy of the mediocre one.


It's a simple capital allocation comparison, though most CEOs make it needlessly complicated. If Berkshire's stock is trading at 1.1x book value—implying the market is significantly undervaluing our collection of businesses—and the best acquisition available is priced at fair value, the buyback wins by a wide margin. I'm buying something I understand perfectly at a deep discount to intrinsic value. In 2011, we announced buybacks at 1.1x book value because the discount was too large to ignore. But if our stock is trading at 1.4x book and I find a Precision Castparts or BNSF at a fair price with durable economics, the acquisition wins because I'm adding a permanent earning asset. The key question is always: which option increases per-share intrinsic value more for continuing shareholders? Most CEOs never ask this honestly—they buy back stock at peak prices to boost EPS and justify their options, then issue shares at low prices to fund acquisitions. That's the exact opposite of rational capital allocation.


High margins with customer concentration is a red flag wrapped in a green flag. I'd ask three hard questions. First, why do these customers stay? Is it genuine switching costs—proprietary technology embedded in their workflow, regulatory requirements, years of integration—or is it just habit and inertia? When we looked at Lubrizol (which Berkshire acquired for $9 billion in 2011), the customer relationships were deep and technical—their fuel additives were specified into formulations that took years to qualify. Switching was genuinely expensive. Second, what happens if the top customer walks? If two customers represent 40% of revenue on annual contracts, those beautiful margins can vanish with two phone calls. I want to see contracts with multi-year terms, or better yet, no contracts at all with 20-year relationship histories—that tells me they stay because they want to, not because they have to. Third, do the high margins attract competition? 35% EBITDA margins are a neon sign saying 'disrupt me.' Unless there's a genuine moat—patents, scale economies, network effects—those margins will erode.


Earn-outs sound like a fair compromise but they're almost always trouble, for three reasons. First, EBITDA is easily manipulated during the earn-out period: defer maintenance, cut R&D, push revenue recognition forward, delay filling open positions. I've seen sellers hit their EBITDA targets while systematically hollowing out the business I just bought. Second, earn-outs create poisonous misalignment—the seller is optimizing for a 2-3 year target while I need the business to thrive for decades. Every decision becomes a negotiation: 'Is this expense necessary or is it just reducing my earn-out?' Third, they frequently end in litigation regardless of outcome. If the target misses, the seller blames the buyer's integration decisions. If it hits, the buyer argues the metrics were gamed. When I buy a business, I want the seller to feel fairly treated on day one and to stay motivated for year twenty. If we can't agree on a price without contingencies, it usually means one of us is wrong about the value—and I'd rather know that before closing, not after.


Culture is the most valuable and most fragile asset in any acquisition. When we bought Nebraska Furniture Mart from Mrs. B—Rose Blumkin, who'd built it from nothing as a Russian immigrant—we didn't send in consultants, we didn't change the compensation system, we didn't impose reporting templates. She'd created the most productive furniture store in America by treating customers fairly and keeping costs ruthlessly low. If we'd 'integrated' her into some corporate framework, we'd have destroyed exactly what we paid for. The same principle applied to every great Berkshire acquisition: Borsheim's, Dairy Queen, See's Candies, Jordan's Furniture, Nebraska Furniture Mart, Scott Fetzer. We provide permanent capital, complete autonomy, and we stay out of the way. The worst acquisitions I've seen—not just ours but across corporate America—are when some MBA consultant decides to 'integrate' and 'standardize.' That's usually code for replacing the entrepreneurial culture that built the business with bureaucratic mediocrity that destroys it. My advice: if the culture is the reason you're buying, protect it like a national treasure.


When someone uses the word 'transformative,' I reach for my wallet—to make sure it's still there. Revenue is the most overrated metric in business. I can double Berkshire's revenue tomorrow by buying a large, low-margin commodities business. It would add nothing to per-share value and distract management from our core operations. I focus on three things. First, owner earnings per share—net income plus depreciation minus maintenance capex, divided by shares outstanding. Does the deal increase this number on a sustainable basis? Second, return on incremental invested capital—for every dollar we deploy, what do we earn going forward? When we bought Dairy Queen, it didn't transform our revenue, but it generated 20%+ returns on invested capital with minimal ongoing investment. Third, durability—will this business still have its competitive advantages in 10 years? If doubling revenue means doubling complexity, doubling headcount, and halving management's attention span, you haven't transformed anything. You've just created a bigger, more fragile enterprise.


Walking away is the most valuable skill in dealmaking and the one most people lack. The sunk cost fallacy destroys more value in M&A than bad financial models. When we walked away from acquiring Socal Edison in 1999 after months of intensive work—lawyers, accountants, regulatory analysis—it was painful but right. The regulatory environment had shifted, the deal terms no longer made sense, and continuing would have meant overpaying just to justify the effort already spent. I've never once regretted a deal I didn't do. I've regretted plenty I did—Dexter Shoe being the most expensive example, where I compounded the error by paying with Berkshire stock. The ability to say 'no thank you' after months of work, with investment bankers collecting fees only if the deal closes and your own ego pushing you forward, separates good acquirers from serial destroyers of capital. At Berkshire, we look at hundreds of deals per year and do maybe one or two. Our batting average isn't from being smarter—it's from being willing to put the bat down.


There are two completely different kinds of goodwill, and confusing them is one of the most common mistakes in M&A analysis. Economic goodwill is the earning power above what tangible assets alone would produce—it's wonderful and I love buying it. See's Candies has enormous economic goodwill: the brand commands premium pricing on a relatively small asset base, generating returns on tangible equity of well over 100%. Accounting goodwill is just the gap between what you paid and the target's book value—it tells you nothing about value, only about price. It becomes a warning sign when a serial acquirer's balance sheet shows growing goodwill but stagnant or declining operating earnings per share. That means they're paying premium prices for businesses that aren't delivering premium returns. When we wrote down $11 billion of goodwill on Precision Castparts in 2020, I acknowledged I'd overpaid. Accounting goodwill that exceeds economic goodwill is the mathematical proof of overpayment—and it's shockingly common in corporate America.