What Would it Be Like to Lose Control of Your Business? Sydney Commercial Plumbing Chapter 1
by John McAlister
Many family business owners have come to us in crisis mode, concerned that their long-term control of the enterprise was in jeopardy. This is a case study reflecting the experiences of several of our clients. The names have been changed to protect their privacy.
Nancy is president of Sydney Commercial Plumbing, a successful $200M family enterprise spanning three generations, and a client of the Beringer Group. She came close to losing her business a few years ago and came to us for help. This is her story:
Sydney Commercial Plumbing’s Transition (or, how the Sydney family almost lost control of their business)!
Nancy knew she had a problem. The kind of problem that can tear a family apart. She knew she didn’t know how to fix it. For the first time in her career, she wasn’t even really sure where to start.
Her family had enjoyed business success without too much family drama, which was becoming more and more rare amongst profitable, multi-generational family businesses. Unfortunately, she feared that was about to change.
During the last family holiday gathering six months ago, her niece, Emily, asked a seemingly simple question: “What’s my ownership worth?” Unfortunately, like an iceberg, there was a lot more to that question than initially appeared…
Emily never had much interest in the family business, focusing instead on her passion for teaching. Now an elementary school teacher, Emily owned 5% of the business, like each of her six siblings and cousins. Emily’s best friend from childhood, George, had gone on to study finance in college, earning his undergraduate and master’s degree in the field and starting his career in investment banking. Now he’s working for a P.E. firm with interest in this space.
A casual conversation between Emily and George about what the business could hypothetically be worth someday grew into a serious conversation about what her shares were worth now. He threw out some aggressive valuations which got her attention. She began dreaming about how she could now afford to buy a house and never have to worry about money. George created a spark of interest which was quickly growing into a bona fide bonfire as she spoke to the other shareholders – both active and non-working about “unlocking” the value in their equity by selling to his firm.
Nancy had heard whispers of frustration from the inactive family members in the past, but now it felt like the volume was increasing every day. Dividends had been nearly non-existent for the last ten-plus years as the company navigated challenging market conditions and reinvested in itself but working family members continued receiving their generous salaries and fringe benefits (company cars, gas cards, private flights, etc.). Although their compensation was not unusual for successful family enterprises of this size it had become a source of constant tension between her family in recent years. She had even heard “through the grapevine” that her non-active uncle commented his ownership was worth as much as a pet rock!
“If this deal closes, George will be a hero in his firm,” Nancy thought. “But I could lose my business, my extended family, and my income. And I don’t want to be forced to work for another company.”
She worried too that an acquisition would come with a huge tax bill of 30% or more for her and the other shareholders. It would also force major lifestyle changes on Nancy and the other three active shareholders. She enjoyed the travel, dining, and other perks that ran through the business, which would all go away, along with her quasi-celebrity status in town.
Oh, the town… She thought of the community they had operated in for nearly 60 years. Sydney Plumbing was an employer of over 500 people across several states. Many were second-generation employees. If the company was sold to private equity and the operation was moved, she would be betraying the neighbors she lived amongst all her life. And the culture which is the core of their success would be lost forever.
She knew she had to do something but did not know what. This was going to be a sticky one. Who has experience with transition planning for successful multi-generational family businesses? She picked up her cell, dialed her attorney, and asked for a recommendation…
… To be continued…
Are you dealing with tension between active and inactive shareholders?
Unfortunately, this is very common in family-owned businesses. If left unaddressed, the business that should be pulling you together will actually tear your family apart. Fortunately, we have decades of experience implementing solutions where both the working family members and the inactive benefit. Let’s discuss how the Beringer Group can help you. Call me at 678-392-4337 to begin a conversation.
About the Author
John R. McAlister
After working with CIGNA Financial Advisors, John co-founded an advisory firm in 2000, focussing on complex family transitions. He sold his practice in 2012 to become part of TBG. He is a graduate of the University of Georgia.