Outside Ownership in a Family-Business: A Good or Bad Idea?

Tips for finding an outside director for your private company board

Nordstrom, founded in 1901, is one of the country’s oldest department store chains. It is also one of the few that is still controlled by family management. While it is now a public company, the Nordstrom family owns roughly one-third of the stock and the company is run by three Nordstrom siblings who act as co-presidents.

In a saga that started last June, six of the family members representing the family ownership stake, along with a buyout group, have been attempting to buy back the stock of the publicly-traded company in order to take it private once again. The family made an offer of approximately $8 billion, which was viewed as too low by the Board of Directors. Last month, the Board ended its buyout talks with the founding family.

This situation brings to light a topic that many family-owned businesses face over the course of their existence:  Should we bring in outside capital and allow outside ownership?

Some family businesses view it as a necessity. As the business evolves, so does the need for attracting and retaining talent outside of the family. It is not uncommon for a member of the C-suite to request an equity stake in the family business at some point in their tenure. In addition, outside investors can bring some much needed capital and industry experience to help spur growth.

But having additional owners also means that there are now more voices that need tending to. Ownership also comes with a certain mindset and understanding of what it means to be an owner. For example, it is typical for owners to personally guarantee third-party debt obligations, an exercise that many management-level employees can get skittish about. Not to mention, most privately-held family businesses are structured as a pass-through business where the taxable income of the company is picked up on the personal tax returns of the owners.

There is also the possibility of disagreements over the future direction of the company, which lies at the heart of Nordstrom’s story. An outsider may not have the same level of emotional connection to the business, and may be apt to charge forward with business decisions that on the surface make financial sense, but can be a difficult pill to swallow for a family member who has “grown up” in the business.

In Nordstrom’s case, the quest to take the company private again stems from the family’s desire to “navigate a challenging retail landscape at a critical time when the public market for retail stocks is highly volatile and increasingly focused on short-term results and risks.” The Board, however, felt the family’s offer was well below the company’s market value and wouldn’t satisfy shareholder expectations.

There are many considerations when evaluating the decision of non-family ownership, including alternative solutions. Once the ownership is extended, it is much more difficult to unwind – as the Nordstrom family is finding out.

Steven E. Staugaitis is a director at Kreischer Miller Steven E. Staugaitis, Kreischer Millerand a specialist for the Center for Private Company Excellence. Contact him at Email.

 

 

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