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University of Massachusetts Amherst

Family Business Center

Marshall Paisner: Sustaining the Family Business

by Shel Horowitz

Just after he retired and passed his car wash chain to his children, Marshall Paisner received a phone call from a business friend: "The good news is I'm a very wealthy man; the bad news--I sold my business."

Paisner came to the Family Business Center's June meeting to emphasize strategies for keeping a family business viable generation after generation. He spent two years studying companies that had stayed family-owned and viable into the 3rd, 4th, or 5th generation. One of Paisner's key points: look very closely when you get "an offer that's too good to refuse"; often, it's not really as good as it looks. Especially when that offer comes from a consolidator "rolling up" smaller firms.

For example: "A competitor came to Jack, a trucker with a $15 million offer for a company valued at $9 million. His banker went to see if anyone else was interested, and found a foreign consolidator who offered $30 million. He took the money, but 50% was in stock. It was paper. The sons were kicked out, they were too friendly with the help, too involved in the community. Now they're waiting for Jack to die" in order to inherit the money they expected to earn through the business. "Is that what we want for our kids?"

Paisner suggests a very different approach: Jack could have recapitalized his stock, converting 90% to nonvoting. His sons could have run the business, made their mistakes, and learned the necessary skills. "And Jack would have played a lot of golf, He would have given away the nonvoting stock over time, at discounted rates. Over ten years, he could have transferred a lot of the business and still controlled the vote. The boys could have borrowed the money to purchase the voting stock at market value when he was ready to quit. They would have insured him for the debt. Jack would have had real estate income, profit sharing revenue... he would have had just as much income per year as if he'd sold the business, paid the taxes, and reinvested the rest. His kids would eventually own the business free and clear and the family would have been very proud of what they're doing."

Paisner has tracked five businesses that sold to consolidators. "They received paper, very little cash." The best performer dropped its stock price from $26 to $21.40. The worst of those still in business dropped from $37.12 down to 43 cents. "Eventually the consolidator has to return a profit to the stockholders. So they start to retrench, lose money, and the stock goes down. People think consolidators are a good deal; they're absolutely terrible, and the paper turns out to be bad. The return on investment of after-tax dollars from the sale of a business is almost always less than the return of profits from the business."

In researching the companies that do sustain themselves, Paisner identified some key commonalities.

  • A culture that believes in resisting an offer that seems too good to refuse.
  • Recognition of family value as more important than market value.
  • Leaving their children a legacy of opportunity, not of wealth. "Warren Buffet is giving his kids just enough to enter a business, and giving the rest to charity. Parents take away a wonderful opportunity" if they merely pass on the wealth.
  • A process to build family pride--that builds "eagles, not turkeys." And part of that is the notion that a job in the family business is not an entitlement--even if a family member enters somewhat above the ground floor, the position should be earned, not granted. And pay, for family and nonfamily employees should be based on performance rather than longevity.
  • A second generation that is allowed to make its own mistakes and creates a new management style that suits the changing company. • Employees who are truly empowered to do what it takes to meet or exceed customer needs.

This cultural legacy, he says, has to be learned very early—at the family dinner table.

Paisner's presentation went into far more areas, ranging from stories from his experience in the family car wash to discussing the kinds of investment vehicles that allow dynasties like the Rockefellers and Kennedys to pass their wealth down the generations. If you'd like the rest of the story, buy a copy of Paisner's book, Sustaining The Family Business.

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