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In 1970 the investment writer “Adam Smith” (George Goodman) received a letter from Benjamin Graham about an investor he’d never heard of who lived in Omaha. Graham suggested he go and talk to him. When it’s the “Dean of Wall Street” telling you it’s worthwhile listening to a talented investor Adam Smith realised that he would be stupid not to travel to Omaha. Buffett was a gracious host and they spent some time together.
“We are driving down a street in Omaha; and we pass a large furniture store. I have to use letters in the story because I can’t remember the numbers. “See that store?” Warren says. “That’s a really good business. It has a square feet of floor space, does an annual volume of b, has an inventory of only c, and turns over its capital at d.”
“Why don’t you buy it?” I said.
“It’s privately held,” Warren said.
“Oh,” I said. “I might buy it anyway,” Warren said. “Someday.”
That phrase—“That’s a good business”—I heard several times, always applied to something solidly managed, with a secure niche, plenty of capital and a respectable return on invested capital.”
So there we have it: at least 12 years before Berkshire purchased it, Buffett was observing the business economics of the NFM, and he was impressed. In the decade after the drive around with Adam Smith NFM grew to take two-thirds of the furniture sales in Omaha. Old competitors closed and potential new ones simply shied away, fearing slaughter. The problem for Buffett was that NFM was 100% owned by the family and they showed no sign that they wanted to sell, so he could only admire from a distance – and let them know that he would like to buy it one day. It was easy to maintain contact as Susan Buffett was friendly with the Blumkins, especially Fran, wife of Louie.
By 1983 Louie’s sons, Ronald, Irvin and Steve, had spent many years with the business. But there was tension. Mrs B was just as tough on family members as she was on others around her, with regular admonishment, which led to periods of moody non-communication. She complained that she was being bossed around by “the kids”. So if the business was sold the new owner would be boss, and he could sort out “the Bums”.
Her three daughters (and therefore) sons-in-laws each had 20% equity stakes in the business, but she wanted for them to sell their shares leaving the business in the hands of Louie. On top of that, she was 89-years old and she didn’t want the family fighting over inheritance of the business. And, of course, there were estate tax considerations. Thus she became open to the idea of selling most of it, thus turning a single illiquid asset into liquid money that could be allocated to family members who could then go their own ways.
Buffett approached Louie to discuss an acceptable price. To bolster his chances he made the point that if the business was sold to one of the big chains then sooner or later they will send in their own managers to run things – and they might leverage up and sell at the first opportunity. Under Berkshire’s wing, on the other hand, Louie and his sons would retain operational control, and the business will be run for the long term, benefitting staff, customers and Omaha. What they had spent their lives creating would live on, with its extraordinary ethos and culture.
It was only once Louie was on board that they went to see Mrs B in the store. She made up her mind about people very quickly. Fortunately, she liked and trusted Buffett and the deal was made there and then. Forever afterward she would (jokingly?) say that Buffett tricked her into selling by begging her to name a price. When she did he immediately said yes. ‘He bought for cash and never took inventory. He told me he trusted me with his life — more than the Bank of England. ‘He’s plenty smart,’ she added. ‘He bought a bargain.’
Buffett put the encounter like this: “I went out on my birthday, August 30th, 1983. And had that contract (reproduced below)… And I gave
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