Berkshire Beyond Buffett(30)
Later, when Bill Child proposed opening a store outside of Utah, Buffett opposed the idea, as Child’s Mormon religious beliefs prevent him from operating company stores on Sundays. Such practice is common in Utah, home to a large Mormon population, but Buffett was skeptical about whether a retailer could prosper elsewhere without the benefit of Sunday sales. Buffett explains what ensued:21
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store—for about $9 million as it turned out—and would sell it to us at his cost if it proved to be successful. On the other hand, if sales fell short of his expectations [$30 million in first-year sales],22 we could exit the business without paying Bill a cent. This outcome, of course, would leave him with a huge investment in an empty building. I told him that I appreciated his offer but felt that if Berkshire was going to get the upside, it should also take the downside. Bill said nothing doing: If there was to be failure because of his religious beliefs, he wanted to take the blow personally.
RC Willey’s Idaho store opened in 1999 and was an instant success, ringing up sales of $85 million during 2000. Child transferred the property to Berkshire, and Berkshire wrote him a check. As Buffett noted, highlighting the uniqueness of Berkshire’s corporate culture that this represents: “If a manager has behaved similarly at some other public corporation, I haven’t heard about it.”23
RC Willey continued to grow, opening additional stores in California, Idaho, and Nevada. In 2001, after forty-six years at the helm, Bill Child stepped down as CEO and president. But to this day it remains a family business: Child’s nephew, Jeffrey S. Child, is now president; his nephew-in-law, Scott L. Hymas, is CEO; and another nephew, Curtis Child, is CFO.24
Experts on family business routinely advise members to plan for succession, engage professional managerial assistance, and use a paid board of advisers. Despite such routine advice, families often hesitate to bring in outsiders. As a result, when the family business faces a crossroads, it may be unprepared.
Such were the woes of Houston-based Star Furniture Company when, once again, Berkshire rescued an excellent family business from fortune’s fate.25 As in other deals, the financial price Berkshire paid was only part of the exchange. The rest of the remuneration was in the value of Berkshire culture, especially autonomy and permanence.
Star Furniture was a multiple-family business founded in 1912, owned by and supporting seven different families. The son of one, Melvyn Wolff, joined the company reluctantly, as his partners did not embrace his entrepreneurial vision. The company struggled: there were too many owners; it had too little capital and too much debt. It tended to make meager profits, and in some years, lost money.
Wolff began to force changes in 1962. Until then, he aimed to outperform his company’s chief rival, a massive furniture store twenty-five times its size. He finally figured out that such an effort was doomed. He learned in a marketing seminar not to “attack a superior force along a broad front.”26 This meant not trying to emulate the larger store, which offered a selection for every taste, but to carve out a niche. Doing research, Wolff identified what niche his rival was weakest in and riveted on it: the high end of the middle market.
To seize this niche required expansion and therefore capital, which the beleaguered company lacked. After striking out with all local banks in Houston, a friend connected Wolff with a banker in New York, who agreed to make a big loan with one condition: he required an audited financial statement. Wolff protested, arguing that was expensive and unnecessary. The banker explained its importance: “For all I know, your accountant could be your brother-in-law.” Wolff then laughed out loud. His accountant was, in fact, his brother-in-law.
Wolff’s partners opposed the loan and the expansion plan. So he made a buyout offer, funded by selling the store the company owned and closing two it rented—leaving it with three to nurture. At that point, Wolff enlisted his sister, Shirley Toomin, to join the business. Over the next two decades, the siblings focused solely on the high-end middle market. Brother and sister drove impressive growth, gradually moving operations toward the freeways that crisscross Houston and honing the company’s image to its target market. By 1996, Star was among the larger furniture store chains in the United States.
Wolff and Toomin had virtually their entire net worth in the stores, and they wanted to diversify. They were concerned that, on their deaths, their estates would be saddled with large tax bills that could be met only by selling stores. The scenario was anathema because it would displace the scores of loyal employees who had spent their careers helping build the business.