Unsure about succession? Pass the firm over to the employees

John Lewis Partnership - was once a family business, but now owned by its employees   Photo: Wikimedia

John Lewis Partnership - was once a family business, but now owned by its employees   Photo: Wikimedia

Here’s a novel way of dealing with succession when there’s no obvious successor in the family, or even when there is - pass the ownership and the running of the business over to the employees.

It’s not a particularly common practice, but it does happen. One of the more famous examples of it was the John Lewis Partnership in the UK, which started as a family-owned retail group in the late 1800s and transitioned to an employee partnership structure in 1929 under the stewardship of its second generation owner, Spedan Lewis. After some hiccups along the way, the ownership change has been hugely successful, and the John Lewis Partnership continues to flourish in the 21st century.

You want to come up with a good future for the people you’ve worked with for years.

Nearly 100 years after the creation of the John Lewis Partnership conversions of family businesses into employee ownership structures continue to happen. In many ways, employee ownership is the ultimate example of stakeholder capitalism, and can be very appealing to family businesses wanting to keep the legacy of the company intact after they sell it.

Here’s a recent example of a business selling itself to its employees - and it offers plenty of inspiration.  The company in question is called Crystal Flash and is based in Grand Rapids, Michigan. The story about its transition was described by MiBiz, an online publication covering business in the mid-west state.

Crystal Flash, a fuel distribution company, had been led for 40 years by Tom Fehsenfeld, a third-generation member of the family that founded the business in 1932. The business has annual sales of around $200 million and is majority owned by the Heritage Group, which is in turn owned and run by Fehsenfeld’s extended family.

With no obvious successor to Fehsenfeld and the Heritage Group wanting to sell the business, a plan for the company’s future had to be found. The obvious options were to sell the business, merge it with a competitor, or list Crystal Flash on the stock exchange.

But in the course of looking at all the options, Fehsenfeld came across the idea of selling the business to its employees, using an employee stock ownership plan (ESOP). As the MiBiz article says, this option offered the best balance between releasing Crystal Flash’s value and maintaining the company’s legacy with its main stakeholders, its employees. The use of an ESOP also had certain tax advantages over the various other selling options.

Although Fehsenfeld liked the ESOP option for Crystal Flash, he had to convince Heritage that it was the best strategy for the business, given that a straight sale would net more money.

It’s a wonderful outcome for the selling family and for the family that’s going to continue with it.

Here’s what Fehsenfeld told MiBiz about the sale: “That (the tax advantage) was one of the factors that made me think about that (the ESOP scheme), in addition to the fact that you feel emotionally connected to your employees and you don’t really want to see the company broken up and split into pieces. You want to come up with a good future for the people you’ve worked with for years.”

Anyway, Fehsenfeld managed to convince the parent company - the tax advantages helped - that an ESOP sale was a good idea. The deal was also premised on Fehsenfeld finding a successor for his CEO position at Crystal Flash, which he did.

And here’s what Fehsenfeld's succcessor Tom Olive said about the deal, as quoted by the MiBiz article:  “It’s a wonderful outcome for the selling family and for the family that’s going to continue with it.” It looks like all parties involved in the deal are happy - if so, there are few better outcomes in the business world.

Of course, most family businesses aren’t going to take such a radical approach to succession, and the Crystal Flash sale wasn’t the end of the family business, given that it was a subsidiary of the family-owned Heritage Group. Nevertheless, the example does provide an interesting way in which an employee ownership scheme successfully helped a family out of a succession quandary.