Family businesses love the Buffett way

RC Willey is a third generation family business based in Utah selling home furniture across much of western America. It’s also owned by the fourth largest business in the US in terms of revenue, Berkshire Hathaway.

Most people have heard of Berkshire, or at least its famous owner, Warren Buffett. But few people know about the dozens of family businesses owned by the Omaha-based company.

RC Willey is typical. Bought by Berkshire Hathaway nearly 20 years ago for $175m, the family still manage the business. Unless you make the effort to find out, you wouldn’t know that the Sage of Omaha owns RC Willey - it’s pretty much as it would be if it was still owned by the family. And that’s exactly how Berkshire likes it.

The story of how RC Willey and many other family businesses came to be bought by Berkshire is told in a recent book called Berkshire Beyond Buffett by Lawrence Cunningham. Other examples cited by Cunningham are the Houston-based Star Furniture Company, which is over 100 years old and still has family in management positions, despite being bought by Berkshire nearly 20 years ago. And Helzberg Diamonds, a third generation US-wide jewellery shop business.

Cunningham, a professor of business law at George Washington University, knows Buffett personally and reckons that Berkshire is run as a family business where the executives nurture businesses for the next generation.

This culture is summed up by Buffett’s remark about buying businesses:

“You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever. Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''

It is because of this ethos that family businesses have often sold to Berkshire, said Cunningham. As he writes in his new book: “Berkshire’s culture of permanence offers an attractive outcome. For families who wish to be involved in managing the family business, Berkshire likewise provides a solution.”

He goes on to write that families looking to sell their business often accept a lower price from Berkshire then they would get for it on the open market. He points to the case of RC Willey, which sold at a discount of $25m to Berkshire because it bought into Buffett’s corporate culture.

“So valuable is Berkshire’s culture - especially the values of permanence and autonomy - that business sellers undeniably treat it as a valuable part of what they receive on the sale,” writes Cunningham. “It is its culture that enables Berkshire to acquire companies at lower prices than rival bidders.”

Cunningham makes a wider point that Berkshire’s culture is so ingrained in the business that it will survive many years after the 84-year-old Buffett has passed away.

For the sake of family businesses, let's hope it does.