Monroe Milstein grew up
working in the wholesale garment trade in New York with his father, Abe. In
1972, Milstein, then 45 with a wife and family, decided to take an enormous
risk: acquire some of the assets of a troubled clothing retailer and start his
own business. Milstein’s father refused to lend him the money, fearing that his
son was making a rash decision by straying from the wholesale trade. It was the
younger Milstein’s wife, a Holocaust survivor, who loaned him the capital. The
enterprise, Burlington Coat Factory in Burlington, N.J., became a family
business that, at one time, employed the Milsteins, two of their sons and a
grandchild.
 | | (Photograph by Thomas Hart Shelby.) |
By 2005, Milstein’s sons were successfully running the company
that had expanded to 363 stores and 28,000 employees in 42 states. Then, he
recalls, "I woke up one day and realized I wasn’t so young anymore." Because the
family held so much stock, he feared that upon his death, estate-tax bills would
force them to sell the company.
While time conspired against Milstein, now 80, the economy was
on his side. When he decided to sell in 2006, he dove into a market flooded with
private equity investors. Last year, mergers and acquisitions numbered more than
11,000—up from 7,400 in 2002, according to Thomson Financial and Robert W. Baird
& Co. Milstein and investment bank Goldman Sachs sold Burlington Coat
Factory to Boston–based private equity firm Bain Capital (cofounded by Mitt
Romney) for $2.1 billion in a take-private transaction.
"It’s a seller’s market," says Paul Schaye, managing director
of Chestnut Hill Partners, a New York–based boutique investment bank
specializing in M&A originations for private equity investors. He describes
it as a "very frothy" marketplace right now. "Everybody is awash with money, and
interest rates are low enough that you can leverage businesses and buy
businesses. Sellers can ask for lower fees from investment banks because the
banks are tripping over themselves to get deals," he adds. "If a business is
doing well and it’s a noncommoditized business, sellers can ask for the full
price."
But selling a family business means more than just calculating
the numbers. Multigenerational businesses carry tremendous emotional weight—and
can often be the entity that ties together otherwise disparate family members.
Liquidating a business can bring newfound wealth and freedom to some members of
a family, most often the older generation, while leaving others, usually sons,
daughters, nieces and nephews, with little but broken family bonds and no
direction for their individual careers. Contrary to popular perception, many
younger family business employees hold little or no equity in the companies
built by their forebears.
Despite risks, the booming M&A market is luring more and
more families to sell out. Bob Burns, managing director of the Minneapolis
branch of private investment banking firm Goldsmith Agio Helms, points to
another factor driving privately held businesses to the auction block: larger
competitors created by mergers and acquisitions, whose indomitable access to
capital puts the squeeze on smaller companies without such resources. "When a
family runs a business for one or two, or even three generations," Burns
explains, "there is a point where the family loses its appetite to reinvest
family money and put more money at risk in a more highly competitive national
and international environment."
These dynamics combine to make the current M&A frenzy very
alluring to family business owners. But this path is also fraught with pitfalls.
Worth spoke with three entrepreneurial families who recently decided, for
various reasons, that the time was right to liquidate.
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