Why salespeople must ask "why"

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(MoneyWatch) This is an excerpt from Tom Searcy's newly released 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.

In an unusual strategic disposal, Walmart (WMT) sold its McLane Co. division to Warren Buffett in a $1.45 billion deal in 2003. McLane is an example of a firm that didn't really fit as a holding of the giant retailer but was a welcome addition to Warren's collection of companies. But why?

McLane, based in Temple, Texas, was one of the nation's largest wholesale distributors of groceries and nonfood items to convenience stores, drugstores, wholesale clubs, mass merchandisers, quick-service restaurants, theaters, and other establishments. It had been acquired by Walmart back in 1990.

But why would Walmart want to sell? Revenues were not the problem. Prior to the acquisition in 2003, McLane had annual sales of about $22 billion. It was already the largest distributor to convenience stores in the country.

Indeed, for Walmart, selling a piece of itself was a rare event; according to the New York Times, one company executive said that he could not recall its having happened before.

Warren's why was easier to grasp. The deal would allow McLane to continue handling distribution for Walmart, but the shift in ownership freed it to pursue distribution contracts with Walmart competitors such as Target and Dollar General, as well as for supermarket chains.

The deal followed Warren's pattern. Warren likes a noncomplex business that is easy to understand. The grocery delivery business fits that description. It is also a business that is unlikely to fundamentally change the way it operates or be threatened by new inventions. Warren likes companies that provide people with goods that they are going to continue to need in good times and bad. Obviously, people are going to continue to need groceries.

Burt Flickinger, managing partner with the Strategic Resource Group, a retail consulting firm, called the deal "a real home run for both Walmart and Buffett." It came at a time when $7 billion in food-distribution sales could be in play, depending upon whether Fleming emerged from its Chapter 11 bankruptcy court filing.

Analysts did not expect a culture clash in the transfer from Walmart to Berkshire Hathaway. Both companies drape their competitiveness in a down-home manner. In fact, Warren had even visited Walmart's headquarters in Bentonville, Arkansas, to speak at its Saturday morning meeting for store managers.

Warren understood the why for Walmart: addition by subtraction. He saw the move as Walmart's effort to shed a business in which profits are narrow and prospects seemed dimmer than they had when Walmart purchased it 13 years earlier. With razor-thin operating margins of about 2 percent, and given the economics of convenience stores, McLane was the weakest link at Walmart. Warren understood that it was the lowest-margin business that Walmart had; so taking it out of the portfolio was going to improve Walmart's overall financial returns.

"In the past, some retailers had shunned McLane because it was owned by their major competitor," said Warren in the 2003 letter to shareholders. "Grady Rosier, McLane's superb CEO, has already landed some of these accounts--he was in full stride the day the deal closed--and more will come."

Once Warren understood the why, the deal moved along in typical speedy fashion.

"For several years, I have given my vote to Walmart in the balloting for Fortune magazine's 'most Admired' list," Warren added.

"Our McLane transaction reinforced my opinion. To make the McLane deal, I had a single meeting of about two hours with Tom Schoewe, Walmart's CFO, and we then shook hands." (He did, however, first call Bentonville.) Twenty-nine days later Walmart had its money. "We did no 'due diligence.' We knew everything would be exactly as Walmart said it would be--and it was."

Once your know the "why," your "how" follows

Start with the understanding of why a deal makes sense to your prospect. Once you know your prospect's biggest problems, you'll need to find your biggest solution to match. You already know that the solution must solve

Question 1: Does your "Warren Buffett deal" show 8 to 14 percent improvement for the prospect, and is it credible?

A rule of thumb is to make sure that your solution shows an 8 to 14 percent improvement for your prospect. That may be an improvement in costs, in ramp-up time, in on-schedule installations, or whatever else is a major initiative for your prospect.

Question 2: Are the "Warren Buffett deal" costs for your company reasonable and doable?

Be detailed in assessing the costs for your company. Ask and answer the following kinds of questions before you begin your deal making:

1. Will I have to hire additional personnel?

2. Will I need additional technological equipment?

3. Will I have to travel excessively?

4. How quickly can I do this?

5. How much employee time wills this take?

6. Will the CEO need to devote huge blocks of time to this?

7. Will I be able to do this project (and others like it) and still keep my smaller deals going?

8. Is this a sensible long-term solution for my company's problems?

Question 3: Is your solution for Your Warren Buffett deal quick?

The intersection of the prospect's pain with the speed of your solution is what we call the pointy end of the spear. It's what gives your solution the power to break through the shield of objections that can surround a deal.

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