Chapter One of "The R.C. Willey Story" 

Describes sale to Berkshire Hathaway 

SALT LAKE CITY - The following first chapter of Jeff Benedict's "How to Build a Business Warren Buffett Would Buy: The R.C. Willey Story" is reprinted here with the permission of publisher Shadow Mountain. To pre-order the book through Barnes and Noble, click here.

A LETTER FROM WARREN

March 9, 1995
Salt Lake City, Utah

Gripping a Federal Express envelope from Warren Buffett, 63-year-old Bill Child closed his office door at R.C. Willey Home Furnishings' corporate headquarters. The CEO and principal shareholder of Utah's biggest furniture chain wanted to be alone. For months, investment bankers had been trying to entice him to sell his company, dangling more than $200 million in front of him. Numerous national furniture chains had offered a similar price. Bill had turned them all down, convinced he'd only sell to Buffett.

But would Buffett want to buy?

A couple of weeks earlier, the two men had talked by phone about R.C. Willey and the prospect of Berkshire Hathaway Inc.- Buffett's holding company- acquiring it. On the surface, Buffett liked what he heard. But he had asked to see a little history on the company and the financial statements from the previous two or three years. Buffett had promised to review them and then let Bill know in writing whether he'd be making an offer.

Bill opened the envelope and slowly removed Buffett's letter, marked "personal and confidential." Anxious, he paused. It was hard to believe that he was dealing one-on-one with the man who controlled the conglomerate with the highest-priced shares on the New York Stock Exchange. Buffett had a significant stake in American Express, the Coca-Cola Co., Wells Fargo bank, the Washington Post Co., GEICO and scores of other highly respected companies and corporations - and now he was actually thinking about buying a company that Bill had spent his life building.

Forty years earlier, at age 22, Bill had taken over his father-in-law's retail appliance store, a 600-square-foot cinder-block building on the edge of a cornfield in remote Syracuse, Utah. At the time, the business was in debt and its only asset was a three-quarter-ton pickup truck used for home deliveries. With no business experience, Bill set out to make the store profitable. A few years later, he convinced his younger brother Sheldon to join him.

Sheldon turned out to be a master salesman and a superb merchant. Bill mastered everything else, from business management to customer service to marketing and advertising. A great team, the brothers spent nearly every day together for 33 years, growing their business. In addition to appliances, they started selling furniture and ended up building 12 additions onto their Syracuse store, ultimately making it the single largest appliance and furniture store in Utah. Eventually, additional R.C. Willey stores opened in and around Salt Lake City. By end of 1994, the business was doing more than $250 million per year in sales and controlled more than 50% of all furniture sales and more than one-third of all the electronics sold in the state.

Dozens of photographs displayed on Bill's office walls and furniture tops captured a career packed with professional achievement, nonstop growth, and satisfied customers and employees. It had been a great ride. But Bill was getting older and wanted to retire soon. Sheldon was ready for a change, too. They were at a point in their lives when selling the company made some sense.

Yet Bill kept saying no to every offer that came along. Money wasn't the issue; $200 million was an unimaginable sum. Rather, what had kept Bill from saying yes to an offer was his concern for the store's legacy. Over a couple generations, tens of thousands of loyal customers had come to rely on R.C. Willey as a hometown store that always put service ahead of profits and never opened on Sundays. These attributes also had a lot to do with why so many employees stayed with the company for decades. All that would surely change under new ownership.

Bill couldn't accept the idea of turning over control of their family-run operation to bankers or competitors. His brother fully agreed. But holding onto the business wasn't a good option either. It consisted of 1,000 shares of privately held stock, none of which had an assigned value. Bill held the majority of the shares. Sheldon was also a shareholder in the company. And Bill's children each held a limited number of shares. If Bill or Sheldon died, under the federal estate tax regulations the heirs would face a death tax of 55% of the assessed value of the business, as determined by the IRS. An evaluation of $200 million would require a death tax well over $100 million. Then the remaining shareholders would have no choice but to sell the business, possibly at a fire-sale price.

Bill felt locked in. Finding a buyer willing to maintain status quo on R.C. Willey's management philosophy and one able to address Bill and Sheldon's personal concerns about estate taxes and inheritance seemed like a longshot.

But Buffett had a reputation for acquiring highly successful companies and taking a hands-off approach toward the management team and company philosophy. He also provided a great solution to the death tax by offering to pay for companies with shares of Berkshire Hathaway stock or cash. Since the Berkshire stock was registered with the New York Stock Exchange, Bill and Sheldon would suddenly have an assigned value to their holdings and the transaction would enable their children to acquire shares of Berkshire stock. The inheritance problem would be resolved through an easy distribution.

With so much riding on Buffett's letter, Bill started reading.

"Thanks very much for sending along the audits and additional information about your company," Buffett wrote. "It is obvious that you have a jewel of an operation. Financial statements frequently give a clue to the personality and character of an enterprise - and the statements of R.C. Willey paint a great portrait."

Bill took a deep breath. The world's greatest investor had just issued his stamp of approval on the company Bill had taken from a one-room store to a dominant home furnishings retail chain.

"I could promise you a transaction," Buffett's letter continued, "that would be 100% certain to close and that would absolutely minimize any distraction to your management and employees." Those were the magic words. Buffett was promising an ownership change that would go virtually unnoticed by customers and employees. It was the perfect solution.

"I will send you a letter by Federal Express on March 13 that will outline what we would be able to do," Buffett concluded. "Whatever the outcome, you have my admiration for developing a truly outstanding business."

Ecstatic, Bill couldn't wait to tell his brother. No one else would fully appreciate, much less believe, the humble beginnings of the company that Warren Buffett was about to buy.