In the course of my daily readings I came across a tremendous article covering the downside and risks associated with intra-family buyouts and succession. Penned by John A. Davis, senior lecturer in the Entrepreneurial Management unit at Harvard Business School, the piece examined one tragic story of family transition gone bad, using it to point out some of the pitfalls of family succession and how NOT to manage it.
I am sure many of you have read about the Market Basket story in the past. I remember following it several years ago as it worked its way through the legal system. In his article entitled “Managing the Family Business: Market Basket’s Lessons About Buyouts,” this is how Mr. Davis introduces us to the sad story:
Buyouts of family owners rarely happen—even when it is clearly a good option.
Market Basket, a highly respected supermarket family business in New England, learned this lesson the hard way last summer [summer of 2014]. In this real Greek American tragedy, two branches of the Demoulas family warred for 30 years, in and out of court, over legitimate grievances involving a lot of money and, of course, over control of the company …
The founder, Arthur Demoulas, had two capable sons, Mike and George, who joined him in his little store, took it over, and then built a great supermarket business. The founder died, then George unexpectedly died, and Mike took over.
I highlight the tragedy above because it points out the first mistake many business owners make; having no clear, written succession plan. When tragedy occurs without a plan, the consequences can be devastating to not only the family but sadly also even more so to the business, its customers, employees, and suppliers.
The ramifications of an unexpected turn can be far reaching. That is why it is vital for business owners to have a clear succession plan in place long before something unplanned occurs. No one likes to face issues like this, but if you do, you prepare your family and company in advance in case one of the big D’s – Death, Disability, Divorce, Disinterest, and Disagreement – occurs. I have highlighted this last big D because the story of the Market Basket transition now takes a disagreeable turn for the worse:
The brothers had an agreement that the surviving brother would take care of the other brother's family, but instead, George's branch accused Mike's branch of defrauding them out of their shares in the company. The two branches went to war.
A buyout was proposed, but the two sides were far apart on price. In 1990, they went to court. After a few years of expensive, embarrassing, and exhausting battling in court, a judge awarded George's branch with 50.5 percent of the company's shares. Problem resolved?
No. Another buyout was proposed but couldn't be agreed on. The battle moved to the board.
A key point that we often make to business owners we meet with is this: Selling your business with your relatives in the best case scenario can be extremely emotional, even more so if you are expecting your relative(s) to buy you out at a fair market value.
We meet with business owners regularly who tell us horror stories about the “buyout” they had in place (usually based on nothing more than a handshake around the family dining table during Christmas dinner) that never came to pass because the agreement with the cousin, nephew, brother, sister, aunt, uncle, etc., failed to materialize because of valuation differences. This is why we advise folks that it is far better to find a third party to acquire the majority of the business, cash out any owners that need or want to exit, and retain current owners that wish to stay. This is far cleaner and allows the family to avoid nasty trials over internal valuations.
Sadly the Market Basket story gets even worse. According to Mr. Davis:
Mike's branch wanted to invest aggressively in the business; George's branch wanted more dividends. Mike's branch kept a slim majority on the board until 2014, when George's branch obtained control and fired the CEO—who happened to be a cousin, Arthur T. Demoulas. Management was outraged, and the employees walked out in support of their CEO.
The company lost tens of millions of dollars as shoppers largely honored the wishes of workers. Eventually, the Mike-Arthur T. Demoulas branch bought out their cousins with the help of outside investors.
The good news is, as I discussed above, outside investors stepped in and bought out half the family and the issue of ownership was alleviated. However, this didn’t happen before the business was severely impacted by the loss of customers, goodwill, employees and ultimately millions of dollars in income. Do you think that affected the ultimate price the investors were willing to put into the business to buy half the family out? You can bet it did. Keep in mind that the original litigation started in 1990, but half the family was cashed out in 2014. In the intervening 24+ years, you can imagine the impact this horrid situation had on sales and income.
Mr. Davis goes on in his fine article to outline key reasons why intra-family buyouts are generally not successful. One of his points we encounter all too often: Expecting family members to have the financial wherewithal to be able to actually afford to cash you out. Even if you can come to some agreement on valuation, the reality is if your business is worth $10 million, and your half is then worth $5 million, odds are high that your partner family members will not have that much cash laying around to buy you out.
So what happens? You agree to a long, long, long earn-out – in some cases for years – in the HOPEthat your family members will be able to grow the business so that throughout the next 5-10 years they can eventually pay you the $5 million they owe. Look closely at your next of kin that are running the business with you. Do you really think that cousin Larry has the DNA to become a great CEO? It matters not that he has been working in the mailroom for 30 years; he may not (and most likely will never) have the skill set necessary to run a multi-million-dollar business.
I use Mr. Davis’s article and the Market Basket story to illustrate one key point: In most cases, it is far better to look for outside investors/buyers from the start rather than waiting until the business is tanking due to a family disagreement.
At our M&A seminars we spend a great deal of time discussing the various methods of creating working succession plans including ESOPs, family member buyers, outside investors, high net worth individuals, corporate strategics, etc. The point being – not every solution fits every business. However, to avoid situations like Market Basket’s, we strongly recommend looking at outside folks for help.
Most family business owners are concerned about two issues simultaneously and they sometimes see them as being polar opposites:
The great news is that both can be accomplished even in an outright 100% sale of the family company.
In most cases, because of brand recognition, buyers will retain the original company name and often will take great pride in recounting the 100-year history of the business going all the way back to the founder. And, just as importantly, key long-term employees are usually retained in order to maintain business continuity. So in most cases, the legacy of your firm in the industry and local community will continue on for years.
But most importantly, you and your partners will be relieved of the financial burden of running a company and the risk associated with that, and you will be able to maintain good familial relations throughout the process, which is perhaps ultimately the greatest benefit of all. Just take a look at what happened to the Demoulas family!
If you find yourself in a position where a succession plan is needed to ensure the longevity of your family business, I suggest that you and your partners attend an educational Generational Equity exit planning workshop. As I mentioned, these are designed to help your family see the benefits/risks of all methods of succession. While there you and your partners will be able to meet one-on-one with our exit planning team and confidentially investigate if our services might be a good fit for your family’s situation.
And above all else, as you and your family look for transition methods that make sense, remember to realize that at the end of the day, all you have is family. If you destroy those relationships bickering over valuations and buyouts, you have more at risk than just money; you have family ties that go back generations that could be destroyed.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2015 Generational Equity, LLC. All Rights Reserved.
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Equity, LLC’s affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Equity to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Equity is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.