ILMA Compoundings - November/December 2020 - 33

absent. Fairway's vaunted revenue-persquare-foot numbers dropped by a
third. The stores were looking shabby
because the company couldn't afford
to keep them up.
By 2016, saddled with $267 million
in debt, Fairway filed for Chapter
11 bankruptcy. Although Fairway
managed to reduce its debt by $140
million through the bankruptcy process, it didn't use bankruptcy to close
stores or break any of its expensive
leases. Sterling walked away. Another
private equity firm, the Blackstone
Group Inc., took over.
In 2018, Blackstone exited, and the
company was purchased by two other
private equity firms: Brigade Capital
Management LP and Goldman Sachs
Group Inc. They hired a turnaround
CEO with grocery experience. He was
the company's fourth CEO in six years.
By 2019, Fairway was once again
in deep trouble. The company had
limited alternative sources of liquidity
as virtually all tangible and intangible
assets were pledged to their existing
credit facilities. In a court-supervised
process, Fairway sold several of its
stores and a distribution facility to
other companies. It continued to
operate a handful of stores. It's unclear
whether any part of Fairway can
survive its latest bankruptcy.
Were there other options back in
the day? Probably.
In 2007, Glickberg had an ownership succession issue. His two partners
wanted liquidity, and so did others in
management who owned small stakes.
THE IMPORTANCE OF LIQUIDITY
It's reasonable for owners to expect a
competitive return for the risk undertaken and liquidity when desired or
needed in a manner that considers
and protects the financial health of
the business for now and the future.
Producing competitive returns in the
long run is possible when a company

does a good job serving the needs of
its employees, customers and suppliers
and is engaged in the communities in
which it operates.
Family businesses can protect all
owners and the business itself with a
shareholder agreement that includes
provisions for how the value of
company stock is determined and
requires that the stock be offered first
to the company at the determined
value on terms specified in the
shareholder agreement. The terms
protect both company and individual
owner interests and typically include
an initial cash payment followed by
principal and interest paid over a
period of years.
There might have been several
options available to Fairway for
accomplishing the desired owner
liquidity. Even in the absence of a
shareholder agreement, a company
buy-back of stock could have provided
to owners wanting to exit some cash
upfront, followed by principal and
interest payments over a period of
years. Or the company could have
raised cash for buy-backs by taking
on bank debt or selling a minority
interest to an employee stock ownership plan. Or an individual investor
or family office or private equity firm
with relevant experience and common
values could have been invited in as a
minority investor to raise cash to buy
other owners out. But Fairway sold
controlling interest to a private equity
firm with no relevant experience and
self-centered values.
THE ROLE OF GOOD GOVERNANCE
It's not clear whether Fairway had a
board with independent directors at
the time when ownership succession
issues were being considered. Typically,
talented independent directors can
help owner-CEOs like Glickberg
identify options, and they can relate
experiences that shed light on the pros
and cons of options. Families that

establish a board with independent
directors often say years later that it
was one of the most important business decisions they ever made.
Maybe Glickberg felt forced into
the decision to sell controlling interest
to a private equity company. Trouble
is, the private equity company he
engaged paid itself first and took the
high-flying risk of rapid growth knowing that even if high-value was never
achieved and Fairway ran out of cash,
it had already gotten its money back.
PLANNING AHEAD AND
LEARNING FROM OTHERS
In hindsight, there were probably
other ways for Fairway to address
ownership succession in a way that
was fair to owners who wanted liquidity and better for other stakeholders.
It's important for family business
owners to build wealth outside the
business through retirement, health
savings accounts and diversified
outside investments. In general,
planning for both ownership and
leadership succession in a family
business is carried out over years and
takes into account the probability of
the unexpected.
We can't go back in time. We all make
mistakes. The best we can do is learn
from Fairway's story: Establish and nurture a board with independent directors.
Maintain shareholder agreements with
clear valuation and buy-back processes.
Make sure potential investors share
your values. Plan ahead for ownership
and leadership succession.
Sligh is a consultant for The
Family Business Consulting
Group.

This article of the same title
was originally published on the
The Family Business Consulting
Group's website. It has been edited
according to Compoundings style.

33
ILMA Compoundings - November/December 2020

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