Going into business with a family member or members makes sense - chances are you already know how they think, how they operate and usually what their financial situation is. And a lot of these cases, the businesses have been around for so long that you’ve just managed to “fall” into it. There are many perks to owning or running a business with your family, however, at Bsale we’ve come to learn that buying out a family member in a business transaction can be quite complicated.
The Succession Plan
A great example of these complications is a case called Market Basket which tells the tragic story of a family business transition gone bad. In a piece written by John A. Davis, senior lecturer in the Entrepreneurial Management unit at Harvard Business School, entitled “Managing the Family Business: Market Basket’s Lessons About Buyouts,” this is how Mr. Davis introduces us to the story of Market Basket:
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.
What is interesting about this introduction, is it outlines a common mistake made by business owners - no succession plan. What Market Basket highlights is when there is no succession plan in place, decisions can be made out of emotion and therefore hugely impact the family, as well as the business customers and employees. What seems to be common in family business buyouts, is the succession plan may well be in place, verbally, but has not been documented and legally represented in the form of a contract or similar.
The Big D’s
In Carl Doerksen’s recap of this case study, titled “Family Buyouts – The Challenges of Cashing Out Family Members” where he suggests “you prepare your family and company in advance in case one of the big D’s – Death, Disability, Divorce, Disinterest, and Disagreement – occurs.”
Mr. Davis goes on to outline key reasons why intra-family buyouts are generally not successful. Throughout this process a lot of family members go wrong by “expecting family members to have the financial wherewithal to be able to actually afford to cash you out,” meaning even if you and the family come to an agreement that the business is valued at X, the chances of them having your share in cash lying around is extremely unlikely.
Just when you think it couldn’t get any more entangled, employees began to boycott the company as perfectly summed up by Hollie Slade. In her Forbes article, she wrote “thousands of employees of Market Basket, the ubiquitous, $4.3 billion regional grocery chain, risked their livelihoods to strike--and essentially shut down their employer--not for higher wages but to protest the ouster of their beloved leader, Arthur T. Demoulas (the friendly "Artie"), who'd been deposed by his evil cousin, Arthur S. Demoulas (the more ominous "Arthur"). The wicked board of directors finally caved to a buyout of the family-owned business, Artie returned in triumph, and everyone went back to work.”
So although this article is about family buyouts and how challenging it can be, it’s important to remember that your employees become your family too. As do your customers and suppliers. Having things in place, early, before the problem occurs is key to ensure the future still holds success post-sale.