John Couzens: Good morning. I’d like to introduce Joe Curci, president of A. Finkl & Sons, a manufacturer of high quality specialty steel products. Finkl has been a Northern Trust client since 1889. Joe joined Finkl in 1991 as CFO and rose to president, making acquisitions and dealing with ownership matters along the way. But the journey to getting there is interesting and something we’ll be talking about.
As business owners, I think it’s important that we’re all knowledgeable about transactions, the back story, the motivations behind them and how they turned out. Today, we’ll give you real life examples so that you can take those into your own businesses and see how they might relate and help you with your decisions going forward. So with that, I’ll turn it over to Joe.
Joe Curci: A. Finkl & Sons was founded in 1879, and by the time I got there, the Finkl family had built and managed the company for several generations. This was truly a remarkable accomplishment in contrast to the typical experience of most family businesses that do not sustain ownership past two generations. They were committed to building the best possible management team and balancing that with the needs of the family.
Over the course of many years, various members of the management group were provided with the opportunity to build equity positions in the company. And so, by the time 2007 came, there were really three distinct blocks of shareholder groups: the older former management who had owned a part of the company; the family; and the existing management.
Finding common ground among the three shareholder groups was difficult, especially since their differences were amplified over time. Coupled with that challenge, the company had been at our current location on the north side of Chicago since 1902, and it needed to be modernized. Without the space or the facilities to do it there, we needed to relocate the business and build a new plant. So with all those things combined, we really had to balance the desires of the three shareholder groups.
The older former management shareholders, at 80 and 85 years old, were concerned that investing capital to build a new plant would not pay a dividend for six or seven years. Yet, the current management of the company, which had built up ownership, was relatively young and was happy to continue to run and grow the business.
After further discussions amongst the shareholders, it ultimately became the right decision to look to sell the business.
Couzens: I’d like to dive into some of the common themes we often see in privately held companies. And the one that shows up a lot is shareholder alignment. We all can think of stories — from a local McDonald’s franchise to a larger manufacturing business — where there are issues that come up because shareholders are individuals. They lead their lives, have different personal circumstances and needs for liquidity, and experience changes with marriage, divorce and health. For all those reasons, shareholders who were once aligned on a common purpose have divergent needs that affect their interest in owning a business or getting a dividend from a business.
Can you talk about shareholder alignment issues you’ve experienced?
Curci: That’s an interesting question because that was really the trigger that ultimately led to the sale of our company. We had a shareholder agreement that had gone on for a long period of time. And often these things are put together by the driving force — the majority shareholder — who, at the time, was the family. They were interested in being able to pass along the stock at a reasonable value for estate purposes. Everything was done at book value for purposes of transferring ownership. You couldn’t transfer outside existing shareholders or your descendants.
Now, as that shareholder agreement came to expiration, the mix of shareholders had changed. So there was a healthy discussion about using a lower value or a fair market value. But ultimately, the shareholder agreement became a fair market value transfer. And once that happened, we figured we’re building a new facility, we need capital, we need outlets for our product — now is probably a good time to look around and explore the possibility of selling.
Couzens: So by renewing and amending the shareholder agreement with fair market value trading, shareholders could choose what they wanted more, whereas if it was book value, they didn’t want to trade, right?
Curci: Effectively, there were limitations on who you could transfer to, but the value then became more real, so there would be more possibility of transactions amongst shareholders; whereas with the old shareholder agreement at a lower value, you really were just going to pass that on to your family.
Couzens: In that experience, were there any good arguments in favor of trading at book value, beyond the interests of one block of shareholders? For example, maybe there is an argument that it’s too hard to figure out fair market value. What were the challenges that you addressed there?
Curci: There are always challenges, for example, fair market value today versus fair market value a year from now; how long does that value hold? If you look at what just happened over the last couple of years, if you picked the year-end and said that is the value for the next 12 months, you’d have a line outside your door of people wanting to sell in the last year and a half.
Also, you get a business valuation done and someone can contest it either high or low, bring in another valuation firm and have somebody else break the tie. But there’s no good answer for that. The primary argument for leaving it at below value was strictly to manage estate taxes and pass the business on to family members without having a huge tax liability.
Couzens: The final theme we’re going to talk about here is the reluctance of owners of privately held companies to be proactive in looking at management succession or developing exit strategy alternatives. There’s a real close-to-the-vest mentality typical of family business owners.
And the irony is that business owners have had to be proactive in every part of their lives — starting, running, building and dealing with adversity in a business. You’ve got to be proactive to stay ahead of the curve. Yet in questions of transition, whether it is management succession or transition of ownership, they are reactive.
Joe, you have some experience with how families look at this sort of planning. What are your thoughts on this?
Curci: I think there are a couple of reasons owners are reluctant to look at these issues. On a day-to-day basis, they’re involved in the business and that’s their life and their interest, and it’s more enjoyable dealing with the business needs than ownership issues.
The second major reason is you’re bringing family into it, and as you look out to future generations, you’re thinking: I built this business to a certain size and a certain complexity, so who’s capable — not necessarily who’s next in line — but who’s capable of running it?
And that’s difficult for people to do, especially when you have multiple children. Maybe it’s a nephew, a niece or granddaughter. So I think there’s that natural tendency to avoid these things and assume they’ll work themselves out.
Couzens: Thanks, Joe. This is great perspective and I think we’re all going to benefit from your experiences. We appreciate your insights.
For more with Mr. Curci and other panelists, visit northerntrust.com/wealth.