Dennis T. Jaffe
01/01/2005
In 1968, the Nordstrom family, the clan behind the eponymous Seattle-based shoe and clothing company that was then rapidly expanding, faced a difficult choice. As the second-generation Nordstroms approached retirement, they realized the company comprised the lion’s share of the family’s net worth. Looming estate taxes meant that the family had to determine the business’s market value, while finding a way to sate its appetite for the capital needed to expand. They found themselves with two choices: sell the company outright or go public. They chose the former and negotiated a deal with a department store chain. They set a price and informed the third generation of their decision.
The boys in the third generation, who had grown up with the chain, felt they could run the company better on their own, and decided to make a counter-proposal to their parents. They would raise the capital they needed to buy them out by going public. The family would retain control, but also be responsible for greater transparency and fiduciary duty to outside shareholders.
The Nordstroms’ dilemma is one that confronts many third-generation family businesses: ownership versus sale or divestiture. The business is often the heart and soul of the family, so letting go is difficult. But practical considerations intrude. The family may receive a generous offer from a much larger company it feels it cannot refuse. It needs to balance the feelings of the family members against the practical considerations of running a properly capitalized business.
Illustration by Jonathan Barkat.
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