Managing the Family Business: Lessons about Buyouts

During my career, I’ve worked for a couple of family-owned businesses, and I’ve had family-owned businesses as B2B CFO clients. One of the features of a family-owned business is the expectation that the business will pass to the next generation. But that may not be the best solution for the family – or the business. That’s why I was fascinated by an article in the HBS Working Knowledge blog that highlighted the case of Market Basket, a family owned grocery chain. I’ve quoted that article below:

“We recognize that unity in the family and ownership group are fundamental to long-term success for the family business. And while we can try to maintain accord in other ways, long-lived family companies, like Riedel in Austria (11 generations), DeKuyper in the Netherlands (10 generations), Rothschild (8 generations), and Denihan Hospitality in the United States (4 generations), can tell you that unity sometimes requires pruning the shareholder tree.

But buyouts of family owners rarely happen—even when it is clearly a good option, and even when it’s the only way remaining to resolve serious conflicts affecting the family and business. And when buyouts do happen, they usually come late.


Market Basket, a highly respected supermarket family business in New England, learned this lesson the hard way last summer. In this real Greek American tragedy, two branches of the Demoulas family warred for 30 years, in and out of court, over legitimate grievances involving a lot of money and, of course, over control of the company. They nearly ran this fine business into the ground. Here’s how it happened:


The founder, Arthur Demoulas, had two capable sons, Mike and George, who joined him in his little store, took it over, and then built a great supermarket business. The founder died, then George unexpectedly died, and Mike took over.

The brothers had an agreement that the surviving brother would take care of the other brother’s family, but instead, George’s branch accused Mike’s branch of defrauding them out of their shares in the company. The two branches went to war.


A buyout was proposed, but the two sides were far apart on price. In 1990, they went to court. After a few years of expensive, embarrassing, and exhausting battling in court, a judge awarded George’s branch with 50.5 percent of the company’s shares. The judge also wisely mandated a shareholder agreement (unfortunately with a buyout mechanism that was not very specific) and a board for the company that included some independent members, chosen by both sides. Problem resolved?


No. Another buyout was proposed but couldn’t be agreed on. The battle moved to the board: Mike’s branch wanted to invest aggressively in the business; George’s branch wanted more dividends. Mike’s branch kept a slim majority on the board until 2014, when George’s branch obtained control and fired the CEO—who happened to be a cousin, Arthur T. Demoulas. Management was outraged, and the employees walked out in support of their CEO.


The company lost tens of millions of dollars as shoppers largely honored the wishes of workers. Eventually, the Mike-Arthur T. Demoulas branch bought out their cousins with the help of outside investors. The company also took on significant new debt to fund the buyout.




The Market Basket buyout should have happened 20 years earlier. Why didn’t it? Why do we avoid this useful approach? The most common arguments are:

“We can’t agree on price.” Of course you don’t agree. The side that wants to leave generally wants a higher price (or terms of the buyout) than the side that wants to stay on as owners. Negotiating on price and terms at the time of a buyout strains relationships further. Often buyers and sellers develop hardened positions, and talks break down.


All family ownership groups need to have a shareholder agreement that includes a buy-sell agreement, a formula or a process to determine the price of shares and a process for how shares can be bought and sold in.


“Who has the money?” Buyouts are often expensive and either other owners or the company must have the money to buy the shares of the sellers. Sometimes you can bring in external investment or debt to help buy out certain owners. And even if you have cash available to buy a departing owner’s shares, there are other uses for the money-mainly, growing the business and paying dividends. Most families and business leaders do not plan ahead for buyouts and do not budget funds for them.

Every family business should do an accounting every few years to see how it would be able to buy out one or more major owners. It’s a good stress test for a business.

“It’s an emotional process.” Buyouts in family companies are not just about the money. Lots of emotions can surface in a buyout, even if all parties get along. People can feel angry, resentful, jealous, fearful, relieved, proud, or exuberant. These emotions can get in the way of thinking about each party’s self-interest and also the interests of the larger shareholder group and the company.


Owners should recognize their feelings but make an agreement that they will stick to a fair and orderly process to make the buyout happen. Third parties often get involved in buyouts to mediate the process and keep emotions from sabotaging the buyout. A good board will recognize the importance of settling shareholder issues and help regulate differences. And, again, if you have a well-defined buy-sell agreement in your shareholder agreement, there will be less to argue about, and it’s easier to keep the process orderly.



Most family companies that live long enough will face the need for a buyout of one or more shareholders. You should get ready for this likely event. Get help from trusted advisors to develop a shareholder agreement that includes a specific buy-sell agreement. Review the terms of your shareholder agreement every few years with the board members and with the owners. Create a fund (or at least a very strong balance sheet) to help with a potential buyout. And remind yourself and the family that unity in the family is priceless, and work to achieve it.


By taking this advice seriously, you won’t necessarily avoid needing to buy out relatives, but you will be able to meet this challenge in a responsible way.

photo credit: Eurocent via photopin (license)


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