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Ravi Nagarajan
Ravi Nagarajan
Articles  | Author's Website |

Book Review: The R.C. Willey Story

October 28, 2009 | About:

In the spring of 1954, Bill Child was a new graduate of the University of Utah preparing to start a career as a school teacher in a rural town thirty miles north of Salt Lake City. Within weeks, he was running a small appliance business founded by his father in law, R.C. Willey, who had fallen gravely ill and died a few months later. Starting with a small family business that had revenues of $250,000, Mr. Child built an enterprise with sales of $257 million prior to selling the company to Warren Buffett's Berkshire Hathaway forty one years later.

RCWilley.jpgMany of us read inspiring stories of business success frequently and it is not uncommon to start feeling a bit jaded when one hears of another up-from-the-bootstraps story. However, the story of Bill Child's success at R.C. Willey is undeniably the "real thing". Author Jeff Benedict does an excellent job of capturing the story in How to Build a Business Warren Buffett Would Buy: The R.C. Willey Story. Through persistence, honesty, and a tireless work ethic, Mr. Child was able to take a heavily indebted small appliance store and turn it into a huge commercial success.

Building a Sustainable Business

R.C. Willey had already built a sterling reputation for customer service and low prices, but the business did not yet transcend its founder when Mr. Child took over in 1954. Mr. Willey's personality, business connections, and banking relationships were key to the past success of the company. Once Mr. Willey died, it was up to Mr. Child to establish new business and banking relationships and to begin to pay down the substantial debt carried by the company.

The book outlines the history of R.C. Willey in some detail, from the difficult period immediately after Mr. Child took over to the periodic expansions undertaken in the subsequent decades, and finally to the sequence of events leading to the sale of the company to Berkshire Hathaway in 1995. What I found most remarkable about the story is how relatively simple concepts drove business success. Focusing on the customer, avoiding the use of debt, intelligent use of marketing to build brand awareness, and a dedication to building a company culture all contributed to the outcome.

Foregoing the Last Dollar

Another theme that emerges throughout the book is the wisdom of not necessarily chasing after the last dollar in business dealings. For example, the business experienced a serious reversal when the company that underwrote extended warranties for merchandise declared bankruptcy. While R.C. Willey had no legal responsibility to honor the extended warranties, Mr. Child chose to do so in order to retain customer loyalty and build the brand.

Another example involves R.C. Willey's policy of remaining closed on Sundays. This is a highly unconventional approach for a retail business. While Mr. Buffett was respectful of the company's policy after the acquisition, he hesitated to expand into Idaho and Nevada due to the disadvantages imposed by closing on Sundays. Mr. Child offered to personally build the company's Idaho warehouse and store to prove that the concept would work and, once the store proved to be a huge success, sold it to Berkshire Hathaway at his cost without interest.

Perhaps the most important decision Mr. Child made was to sell the business to Berkshire Hathaway rather than to a number of other potential acquirers who had offered significantly more money. Mr. Child wanted to ensure that the company's unique culture would survive over the long term once he was personally no longer running the organization. Only Berkshire Hathaway could provide such a home for R.C. Willey and, as a result, the business was sold for $175 million rather than the $200 million offered by other interested parties.

Seamless Web of Deserved Trust

There is also a story in the book where Mr. Child reveals that Berkshire Hathaway included four additional shares (worth $100,000 at the time) in the transaction due to an accounting error. Mr. Child notified Berkshire Hathaway's CFO regarding the error but was told that Mr. Buffett wanted him to keep the shares.

This is the type of behavior that builds mutual trust and results in long term maximization of business value. The individual who squeezes out the last dollar when selling his business is not creating an environment of mutual trust and probably does not care much about the long run destiny of the business. The approach taken by Mr. Child promotes business relationships based on a "seamless web of deserved trust", a term coined by Berkshire Hathaway Vice Chairman Charlie Munger.

Through this seamless web, businesses like R.C. Willey can continue to thrive over the long run because the culture that led to its success will not be tampered with. Berkshire Hathaway ends up with opportunities to acquire businesses at attractive valuations due to its reputation for not tampering with proven success. The end result is a win-win situation for all concerned.

Disclosure: The author owns shares of Berkshire Hathaway.

About the author:

Ravi Nagarajan
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

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Rating: 4.0/5 (15 votes)

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