The art of the deal: Lessons from Warren Buffett

buffett 2 Flickr Photo Courtesy of Art Comments

This is an excerpt from Tom Searcy's upcoming book, "How to Close a Deal Like Warren Buffett -- Lessons from the World's Greatest Dealmaker," written with Henry DeVries and published by McGraw-Hill.

(MoneyWatch) Warren Buffett looks at many, many deals. Some of them he likes and pursues. When he finds one he loves, he moves fast.

For several years, one of Warren's managers, Nebraska Furniture mart's Irv Blumkin, had been telling him about a furniture-retailing giant in Utah, RC Willey. Blumkin had also told Bill Child, CEO of RC Willey, how pleased the Blumkin family had been with its relationship with Warren.

Warren thought RC Willey's story was amazing. Child had taken over the business from his father-in-law in 1954, when sales were about $250,000. Aided by his brother, Sheldon, Child had built the company a hundredfold to a 1995 sales volume of $257 million, accounting for more than 50 percent of the furniture sales in Utah.

In early 1995, Child mentioned to Blumkin that he might be interested in selling. Warren quickly switched into deal-making mode.

"From that point forward, things could not have been simpler," wrote Warren in his 1996 letter to Berkshire Hathaway shareholders. "Bill sent me some figures, and I wrote him a letter indicating my idea of value. We quickly agreed on a number, and found our personal chemistry to be perfect. By mid-year, the merger was completed."

How to know what the right deal looks like

When you try to think of your biggest prospect ever, an initial idea is to think of selling to huge companies, or as we call them, "logo" companies. In rare cases that works, but selling to these companies generally isn't a good strategy.

Sure, Warren Buffett made deals to take large positions in Coca-Cola, American Express and Gillette. But those are not the deals that made him the greatest dealmaker in the world. Many of the companies he bought were hardly household names.

Going after big companies instead of big deals can be a recipe for disaster. You know the companies we mean, like Walmart, General Electric or UPS. They're very well known and very large, and getting a big deal there will raise the eyebrows of all your colleagues and your competition, but it might sink you in the process.

Never go after the company -- always go after the deal

When we work with small and midsize companies, we often hear the siren song of the logo deal. This is not a discussion that I hear only occasionally. In one flavor or another, we hear this conversation in almost every company we meet. The promise of affiliated greatness for your brand because of someone else's strong brand is very hard to pass up. Believe me, I know.

Here's a quick summary of why this is a dangerous temptation:

1. All hat, no cattle. Your industry probably has a lot of companies that are doing business with these big players. Their websites and case studies are full of the logo-player company names. This means that you will be going to extreme lengths to get something that has little benefit because it is not unique.

2. Black hole prospects. If you go after the big companies for their name, you are invariably going to be asked to do more, answer more and spend more for a deal than you are used to. The never-ending requests and meetings can drain your resources, leaving you without those that are necessary to take advantage of other great opportunities with real scale and potential that aren't logo deals.

3. What happens when the dog catches the car? If you land a logo company and your company is not prepared to implement, you get to fail in a spectacularly public way.

If your next Warren-style deal ends up involving one of those companies, that's one thing. But don't try to force that situation to happen. If you do, you'll end up frustrated and unhappy. All the eyebrow raising in the world won't compensate for the misery you may have to endure along the way.

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