Question

FAMILY BUSINESS DYNAMICS

Thomas Sages looked stern and preoccupied upon his return from the funeral of his friend David’s wife,
Laura. When David died a few years earlier, the shock was great for Thomas, and this new loss revived
the wound.
David had been Thomas’ closest friend since they were young; he also was his business associate –
contributing 10% of the business equity when Thomas started the expansion of his supermarket chain.
And the ties were further strengthened when David and Laura’s son married Thomas’ daughter.
As Thomas’ thoughts wandered, he found himself thinking about the future of the business he had so
successfully built. Two of his children worked in the business, and he felt rather comfortable with their
ability to lead it forward – even though he had occasional disagreements with them about new
developments. His concern, revived by the funeral, was more about the transfer of his ownership stake.
He had written a will many years ago, and he thought that he should revisit it.
The high quality grocery store that Thomas launched in 1954 had quickly developed into a very
successful supermarket chain thanks to his entrepreneurial drive. While his son Louis, born from a first
marriage, had never been included in the business, the three children from his second marriage had all

of the consumer credit division and Timothy of the supermarket operations. Their older brother Charles,
however, had left the business after some tension. When his children joined the business, Thomas gave
each of them 5% equity, to link the responsibility of ownership to that of management. His wife Martina,
his friend David, and a fund for the managers, each owned 10% of the capital.
David’s shares had gone to his only son David Jr who was married to Caroline. Thomas wondered how
he should transfer his own shares, which represented 55% of capital. One of his first questions was
whether or not to link ownership and leadership of the business: Caroline and Timothy would probably
not wish to deal with a “sleeping partner” such as Charles, especially given the fact that Charles had left
the business with some bitterness. An option would be to give Charles some real estate, and to give
shares to the other two. Splitting the real estate from the operations had been done by other family
businesses for similar purposes. Maybe Charles should even be encouraged to trade his 5% stake against
some real estate. Thomas then wondered if the business should be further split: real estate to Charles,
“bank” to Caroline, supermarket operations to Timothy. However, the fact that David Jnr. (Caroline’s
husband) owned 10% of the shares, and that the management fund also owned 10% of the shares
meant that the matter needed to be closely examined. At this point, Thomas also realised that he
needed to better understand the consequences of the latest inheritance laws – they had recently
changed and he was not sure what his wife Martina should receive should he die before her. He also
needed to think about Louis, his elder son, who never received shares from the business but was
entitled to a share of the inheritance. Their relationship had been distant for many years, but they had
grown closer recently and Thomas wanted Louis to be part of the plan. Thomas decided that he needed
to discuss these issues with his trusted advisor, and picked up the phone.

1. Describe the how successful Thomas manage the family business and what options should Thomas
consider when planning for ownership succession.

2. Evaluate in how the best practices implemented by the second generation entrepreneurs including
high quality were influence the business. Also State your personal experience and tailored estate
planning advice.

3. Explain what advice/guidance have you found useful or pitfalls that you have experienced through
this case.

Answer 1

1. It is given in the case that Thomas had started the business along with David as a supermarket which has now expanded to a chain of supermarkets. He further strengthened the relationship with marriage of their daughter with David`s son. His own children were part of the business venture and they looked at different aspects of the business. Thomas had given them 5% equity and linked them to responsibility of ownership of business. His wife and management fund also owned a significant part of the venture. Now Thomas has to take certain decisions regarding the future and plan the succession of ownership since he held 55% stakes in the equity. In case of David, his equity was transferred to his son and that prompted Thomas to reconsider the will he had made earlier to reflect the recent change of events. He also wants to include Louis since he did not get any part of the business he is involved in. He has few options at his disposal. He can either split his stake equally among all his children and provide them individual responsibilities for the future or look at options to provide different stakes based on the work they have been doing. But doing that would mean an uneven split in the inheritance and that can cause issues within the family. Another option would be to include real estate as part of any inheritance and future planning. Charles who was allocated 5% equity is not playing any active role in the business. Thomas can ask him to join back in the business or trade real estate with him and get back the 5% equity he has with him. With that his equity holding will rise to 60%. He can then split this among the children. He can place clauses and terms that till his wife is alive the succession plan does not change. If his wife were to die earlier for some reason, then he would get her share in the business and that too will be shared among his children. These are few options Thomas would have at his disposal with regards to succession planning.
2. Thomas and David started the business as small supermarket. It was their children who came in with ideas which helped the business to move to next level and expand further. It is mentioned in the case that his children were looking after the consumer credit division and supermarket operations. Consumer relationship management is an important part of business and this can make or break business deals with customers. The fact that the supermarket was expanding shows that the customer relationships were strong and there was mutual trust between them. This would have been defiantly down to the leadership shown by the credit division which forms an important aspect of the customer relationship. The supermarket was also managed properly and efficiently. This again was down to the leadership by their children who were managing the supermarket operation. While Thomas and David were looking at the long term vision and developments, the second generation with their leadership and focus on high quality were involved in ensuring the business grew faster. It is mentioned in the case that Thomas had occasional disagreement with his children on the new developments but still the supermarket was expanding. This shows that his children had a good influence on decision making and this would have definitely helped the growth of business. I have also observed multiple times that with changing times the guard needs to be passed on to younger generation who can take advantage of the new markets and technologies and get the best business benefits.
3. In the case, it is shown that Thomas who had initially planned his will and made his decision regarding the future is looking at revisiting the same. This shows that there should always be provision in the long term decision and succession plans to incorporate new changes. It is also mentioned that Thomas was trying to involve Louis, his child from first marriage and give him certain benefits and part of his fortune. This shows we should also involve our relations in the long term future no matter how difficult the past has been. The decision and planning which Thomas was doing to transfer the stock from Charles and give him something that he could use better can also be considered as something we can look to implement. Just having an ownership stake without using it properly would not benefit the business. Rather than being a silent partner, we can look to exchange it with something we might find useful in the short and long term future. These are some of the points that I have learnt from this case.