Case study 2

Part 1: The story

Written by Professor Christine Blondel from
INSEAD,Senior Advisor to KPMG Enterprise
on Family Business Intelligence

kpmg.com/familybusiness
Part 1: The story
Case study 2
Family business dynamics

Trust

y Le
gac ad
Le er
sh
ip

People Growth
— Develop and retain — Develop long-term growth
family and non-family talent strategies
— Set clear roles and — Optimize operations and profits
responsibilities — Entrepreneurship within the
— Establish remuneration business
and employment policies
hip
eurs

Ownership

Purp
Entrepren

ose
Transition Risk
— Engage the next generation — Understand the appetite
— Transition management for risk
and/or ownership — Manage technological,
— Ensure a tax-effective financial and operational risks
ess

transfer of ownership — Protect the reputation of

Fa

— Review exit strategies the family and the business

sin
m

— Design and implementation

ily

Bu

of controls

it y
Dec

abil
isio

Cap

Wealth Governance
nm

— Secure and maximize — Structure the business and

ak

family wealth its ownership for the future

ing

— Diversification of family — Sustain family values and an

assets aligned vision
— Ensure a tax-effective — Understand the role of
wealth strategy the family in decision making
— Trust and estate plans — Maintain family harmony

t
men
n
Co
mm ic alig
unic teg
ation Stra

Source: KPMG Enterprise Family business dynamics, 2017

2 Case study 2 Part 1: The story

© 2018 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
 Supermarket Supermarket

Supermarket Supermarket

Franchises
Timothy Sages hung up the phone with satisfaction. The businesses in terms of working capital requirements, with
franchisee of the Sages group operating supermarkets in the customers paying cash and suppliers payments being on
South of the country was willing to sell their operations to favorable terms. The development of new supermarkets
the Sages group and the bank acting on the family’s behalf however, could be costly to fund. In the early days, expansion
had negotiated a very good price. This was good news for had been supported by Thomas’ inheritance, his parents had
the Sages family because the franchisee was not any longer given him a plot of land and some cash, and one of his friends,
respecting the group’s long-standing principles of great quality David, investing capital into the business in exchange for a
at a good price; the business was declining and the franchisee 10 percent equity stake.
was getting difficult to deal with. Timothy had become aware
that the family owning the franchise was in conflict, with As the business developed, the expansion was financed in a
some members eager to exit the venture. variety of different ways including:

One question was still looming: how would the Sages 1. Re-investment of cash generated by the business; dividend
group finance this acquisition? It represented about payments were kept to a minimum of a return for David;
10 percent of the group sales and the real estate was also
up for sale as well. 2. Loans were granted by a couple of banks who believed
in Thomas’ vision and had supported him from the
beginning and trusted his business acumen;

A Family Business 3. Franchises were developed, whereby independent owners

developed their chains of supermarkets under the Sages
brand: franchisees invested upfront, paid a fee for the use
of the brand and used the central buying structure;
Timothy’s father, Thomas Sages, had built a very successful
chain of supermarkets, starting with a small, high quality 4. Shares in the business were issued as part of the
grocery store in 1954. Supermarkets are considered good management remuneration package and 10 percent of
the shares had been put aside for that purpose.

Case study 2 Part 1: The story 3

© 2018 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
 The issuing of bonds had previously been restricted to large

Bank publicly-traded companies but some financiers had started to

structure portfolios of bonds from medium-size companies.

He would also investigate if the government would be willing

to grant a loan against a pledge to keep employment in the
region. The Sages group had always been a loyal employer and
its reputation was high.

Capital Timothy picked up the phone and called his trusted advisor.
They needed to meet, review the financials, and discuss the
different options.

This was the first time that the group had considered a buy-
out of one of its franchises, and it was felt necessary in order Questions for discussion
to regain market share in the South. This represented an
important investment and Timothy wanted to identify the best —— What are the options for financing the acquisition of the
approach before going to the board. franchisee’s operations? What are the pro’s and con’s?

The bank advising the Sages group was willing to lend up —— What is your personal experience with respect to
to two thirds of the acquisition price. This however, would financing growth?
be secured against the real estate of the newly-acquired
supermarkets. One third of the acquisition price was still to
be found.

Like many family businesses, the Sages group preferred a

solid balance sheet and was reluctant to take on a high level of
debt. In light of this, Timothy’s options included:

—— securing additional loans from another bank and utilizing

the real estate from other supermarkets as collateral if
required;

—— selling some of the real estate;

—— identifying another franchisee to take over the newly-

acquired supermarkets;

—— seeking a private equity partner; or

—— issuing bonds — a more desirable option

4 Case study 2 Part 1: The story

© 2018 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
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Publication name: Case study 2 Part 1: The story
Publication number: 134830e-G
Publication date: January 2018