Shareholder Conflict - The Front Lines

THE WALL STREET JOURNAL
MARKETPLACE
Friday, November 17, 1995 B1

by Thomas Petzinger Jr.

All Happy Businesses Are Alike, But Heirs Bring Unique Conflicts

Washington, D.C.

Wall Street is handling a record volume of major acquisitions this year. But the dollar value is trifling compared with another takeover wave just beginning: the inheritance of family businesses by baby boomers.

Like any change in control, this one is fraught with potential conflict. Founders often bequeath equal shares of a business to children of unequal ambition. In-laws and cousins have to become business partners. Without proper planning, the transition can be traumatic.

Just ask the Forman family of Washington, D.C., scions of a $100 million-a-year liquor-distribution business. Though they are discreet people, they agreed to share their story as a cautionary tale.

At the risk of turning a business column into a Russian novel, some family history is essential.

Founded at the end of Prohibition in 1934, the Forman operation was built up by its second-generation owners, the brothers Isidore and Maury Forman. Ultimately, there were four heirs, each with 25% of the business: two of Izzy's sons, Barry and Howard, plus Maury's children - a son, Matt, and a daughter, Tracy. Though Tracy assumed no management role, her husband eventually did. His name is Hal Munter.

Three of the heirs wound up at the family's flagship spirits business, based in Washington. The fourth, Matt, took charge of a family-owned beer and wind distributorship in suburban Virginia.

Early on, it was clear the family had to contend with Barry's ambitions. He loved the business. It was the only place he ever worked. He had been to Wharton to learn to manage it. He became a leader in a national trade group and joined the Young Presidents Organization.

Fortunately for Barry, his younger brother accepted a middle-management role. But his cousin-in law Hal was a different story. Hal had been an antitrust lawyer before joining the business in 1984. He was no pushover, and he had demonstrable management skill besides.

Tensions mounted almost immediately after Hal's entry. There were fights over who reported to whom, over who called the shots, over who was responsible for the vital (and fun) job of schmoozing with liquor companies. "Things were very, very, very tense," Hal recalls.

As the intramural conflict escalated in Washington, a separate rivalry broke out with the beer business in Virginia.

"I was out here in Virginia hearing the bombs going off," Matt recalls, "but occasionally it would work its way over here."

The two warehouses were pushed apart, and the family lost hope of combining accounting, customer service and other operations, causing the Formans to miss out on valuable-efficiencies in an industry that counts out its profit in pennies.

As their frustration and unhappiness worsened, the Formans looked outside for help. They turned to therapists. They recruited nonfamily business executives as directors. But none of this solved the root problem.

"We had three people who thought they ought to be the boss," Barry says, "and only two entites."

Somebody had to go.

In came Baker-Meekins Co. of Baltimore, a boutique appraisal firm specializing in ownership disputes. The first step was to establish a value for the business. Though Baker-Meekins had drawn the combatants into the nitty-gritty of the process, the outcome came as a jolt to everyone - as it invariably does.

It is axiomatic that people who grow up in a business have little idea of its asset value. In this case Barry, the lifelong employee, was startled at the magnitude of the appraisal. By contrast, Hal, a later arrival, dismissed the price as too low.

As the parties pondered, Barry found himself becoming more philosophical. He was nearing 50. He yearned for a Wharton MBA. "At this price," he finally said to Hal, "you can color me gone." And with that he enrolled in a GMAT cram course.

But the end game is never simple. When the lawyers came in to prepare for closing, new conflicts errupted. Suddenly, Hal astonished everyone by declaring himself a seller. "Somebody had to say uncle," he says, "so I said uncle."

Though happy news for Barry, Hal's decision to get out devastated his brother-in-law, Matt. Now, it appeared Matt would be left as one-third owner of a business that was two-thirds controlled by the other side of the family.

A rapprochement was soon at hand. Barry and his middle-management brother agreed that despite owning 66% of the equity, they would share 50% voting control with Matt.

Hal has since left town with his payout, happy to be free of the conflict but deeply saddened at his separation from the business. Barry now controls the Washington spirits business, while Matt still runs Virginia. "I've got my sandbox," Matt says, "and Barry has his."

But in coming to terms on the buyout of Hal, a few amazing things happened between Barry and Matt. They decided to begin attending one another's budget sessions. They merged their banking, accounting and strategic planning. Now they are making succession plans for their own children.

So business owners, take note: Your beamish babes, so equal in your eyes, may not be equally suited to managing their birthright. Creating a transition plan may involve some heartache today, but surely less than if you leave your successors to come to terms without you.