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To Keep or Sell the Family Business?

The recent sale of two southeast Michigan iconic family businesses to large national companies brings up a great topic: Should you keep or sell the family business?

Hiller’s Markets on the west side of Metro Detroit recently sold its boutique chain of seven markets to the largest grocery market chain in the country – Kroger. Even more recently, Garden Fresh Gourmet, a company operating out of Ferndale famous throughout the Midwest and nation for their salsa, sold to food giant Campbell Soup.

Disclaimer
I have absolutely no inside knowledge of either of these sales or the family businesses prior to the sales. Like many in the family business arena, I have watched their operations grow and have heard or read about their business models. Although always subject to speculation, why these companies decided to sell will remain their private business – as it should. However, the underlying decision making process of whether to sell the family business is always a great topic for consideration.

Background
There is often quoted data on the success of family firms. It is said that 50 percent will pass the family business to a second generation, 12 percent to a third and 4 percent to a third. These statistics are so old that finding their origin may be more difficult than finding new relevant data. However, they are the numbers used most often and they actually tell a good story. Assuming a generation is 20-25 years, how many businesses last 20-25, 25-50, or 50-100 years. I suspect that family businesses out last their non-family counterparts. Furthermore, you need to look closely at two definitions: family business and success.

Most professionals in the field define a family business as three fold; the family maintains ownership control, family members are active in management and the family involvement is multigenerational. Easy enough until you try to define family these days. Even so, that definition is much easier than defining “success” of a family business over time.

The stat quoted above about a 50 percent passage to the second generation is usually stated – “only 50 pecent manage to transfer successfully to a second generation.” WOW! That’s a great number! Again, how many startups last 20-25 years? I assume lots less than half. What if some of those who didn’t pass to the second generation chose to do so for strong positive reasons? What if the second generation had no interest in the business and chose other careers? What if the family decided to sell the business for the huge payday and move on to other things? It would be hard to consider either of those situations a failure. Selling the family business might allow the family financial freedom, or to start other businesses for which they have passion. Some families become extremely philanthropic in many ways including a Family Foundation to carry on the family legacy. Indeed, in many cases selling the business might be a win, and certainly not a failure.

Keep or Sell
It’s a great topic. Business-owning families should put this topic on the family meeting agenda periodically – every other year. The discussion brings out the pros and cons of owning the business, but the discussion goes much further. Obviously there are the financial considerations, like what’s the fair market value of the business? Then, there is the further query that regardless of the FMV, what would it take for the ownership to consider a sale? Those two numbers are often very different. If we do sell, who would get a “payday” and how? Consider whether any of the family employees remain employees of the purchaser, and would that be part of the “deal?”

Is the current operation meeting the vision and mission of the family? What does the future hold? Who are the stakeholders beyond the shareholders? Is there a commitment to employees?

Discussing these issues before any commitment to sell will lead to a better decision for all concerned. Exploring the “keep or sell’ dilemma prior to the decision at hand will help manage any impending conflict that may result. Establishing the benefits of a sale for all stakeholders, and executing a deal that fulfills those expectations will go a long way to maintain family harmony.

I have witnessed far too many family business sales where some family members felt they were thrown under the bus while the sale resulted in riches for others. Once the damage is done, it becomes very difficult to repair. Most family members believe that entering the family business means that “one day this business will be yours.” While the expectation is generally unfounded and almost never discussed, it still remains an underlying expectation.

Due Diligence
In this case the due diligence isn’t only in assets, liability, market share and good will. Due diligence is also in collecting the expectations of the stakeholders, establishing reality, and acting appropriately on those conclusions.

This process is much more difficult than the financial due diligence. It isn’t the work of business brokers or CPAs. But not unlike the financial due diligence, this process requires the help of outside professional facilitation. Addressing the likely issues around the sale of a family business, before it actually happens will deliver a far better result.

Editor’s note: Corp! magazine covered Garden Fresh Gourmet and its recent sale at www.corpmagazine.com/features/cover-stories/campbell-buy-garden-fresh-gourmet-231-million/

Richard Segal

Rick Segal is the principal at Segal Consulting. He holds an Advanced Certificate in Family Business Advising with a Fellows status from the Family Firm Institute. Rick is the founder of the Family Business Council and its affiliated study group. Reach Rick at [email protected] or by visiting www.segalconsulting.biz