Breaking Up Is(n’t) Hard to Do

Capital Structure Shareholder Engagement

Kicking off with the inspired lyrics, “Down dooby doo down down,” Neil Sedaka assured legions of teenage girls in 1962 that “Breaking Up Is Hard to Do.”  Sixty years later, the actions of the Follett family are telling family business directors that maybe breaking up is not so hard after all.

Tracing its roots to a Chicago area used bookstore opened by Charles Barnes (who later partnered with Clifford Noble) in 1873, the Follett Corporation has been owned by the Follett family since 1923.  Soon thereafter the company began to focus on the educational market, with publishing, wholesaling, and retail operations on college campuses.  Continued expansion over the decades culminated in the operation of three business segments:

  • Follett School Solutions, a K-12 software and content company
  • Baker & Taylor, a distributor of physical and digital books and services to public and academic libraries
  • Follett Higher Education, an operator of collegiate retail stores

Starting in 3Q21, the Follett family began to “break up” the family business, selling each of its three operating divisions to a different buyer.

  • In September 2021, Follett announced the sale of Follett School Solutions to Francisco Partners.
  • Two months later, Follett announced the divestiture of Baker & Taylor through a management buyout.
  • Earlier this month, Follett announced the sale of Follett Higher Education to an investor consortium led by a family office, Jefferson River Capital.

We don’t know what motivated the decision of the Follett family to exit its legacy businesses.  Whatever the cause, the series of transactions over the past six months provides a timely reminder that to thrive, businesses need the right owners.  Even though the broad theme of books and education would seem to have provided better “glue” for the three business units than many conglomerates we see, the businesses were sold to three different buyers.  Although no financial terms were disclosed for any of the transactions, we can only assume that selling the divisions to different owners generated greater net proceeds to the Follett family than a selling to a single buyer would have.

What are some possible explanations for that?  Why do different businesses sometimes need different owners?

Risk Profiles

Some businesses are inherently riskier than others.  All else equal, selling large-ticket discretionary items that consumers can easily defer or substitute is riskier than selling staple items that consumers need regardless of economic conditions.  That is why the beta (a general measure of risk for public companies) of General Motors is 1.20x while that of General Mills is 0.50x.  Return follows risk, and some shareholders are better equipped than others to stomach greater risks in hopes of earning greater returns.  That is why some investors own General Motors while others own General Mills.  Owning a General Motors-type business while having General Mills-type family shareholders is not a sustainable situation.  Both the business and the family are likely to suffer.

Return Preferences

Shareholder returns come in two forms: current income and capital appreciation.

Shareholder returns come in two forms: current income and capital appreciation.  Some investors seek current income, while others desire capital appreciation.  Some businesses are better positioned to provide current income, while others more naturally provide capital appreciation.  As with risk profile, if the return attributes of your family business don’t “fit” with the return preferences of your family shareholders, there is likely trouble ahead.

Capital Needs

Businesses are either in “planting” or “harvesting” mode.  Businesses with a strategy for tackling a large market opportunity often require more investment capital than the operations of the business can provide.  As a result, they need to seek out external sources of capital, whether debt or equity.  For many families, owning these businesses can be challenging if there is a reluctance to undertake significant borrowings or to admit non-family investors into the shareholder group.

Businesses are either in “planting” mode or “harvesting” mode.

On the other hand, some families are flush with capital that needs to be put to work and can grow restless with mature businesses that are perpetually in “harvest” mode.  Pushing incremental capital into a business that cannot use it effectively can also breed serious problems for enterprising families.

Portfolio Composition

Finally, some businesses may be worth more to a particular investor because of the composition of the rest of that investor’s portfolio.  The traditional “strategic” acquirer scenario is the most obvious case, but not the only one.  Even what are typically classified as “financial” acquirers often seek out certain types of companies, as illustrated by Francisco Partners, the acquirer of Follett School Solutions.  The press release for that transaction notes that “FSS will join Francisco Partners’ growing portfolio of K-12 education-focused businesses and technologies, including Renaissance Learning, Discovery Education, Freckle, myON and Mystery Science.”

A legacy operating business often demands – and receives – the lion’s share of the family’s attention, but it is important for family business leaders to occasionally step back and take a broader portfolio view of the family’s wealth.  Taking an inventory of the overall wealth of the family can help leaders to assess what businesses make sense for the family to own and which businesses might make more sense for someone else to own.

Conclusion: Getting Back to Why

Why is your family in business together?  From an economic perspective, what does your family business mean to your family?  Breaking up may be hard to do, but for some family businesses it may be the right thing to do.  Selling a family business – or a piece of the family business – does not mean that the broader family enterprise is failing.  There are plenty of other businesses to be acquired and/or philanthropic objectives to be pursued.  The Follett family illustrates this point well, as described in the press release for the Follett Higher Education sale: “The Follett family and its Board of Directors have enjoyed being part of improving the world by inspiring learning and shaping education for the past 150 years and the Follett family will continue to drive education through advocacy with future projects.  The next steps for the Follett Family legacy will be to enhance its effects with future family business education and the Follett Educational Foundation.”

Do your family businesses have the right owners?  Does a careful analysis of risk profile, return preferences, capital needs, and portfolio composition reveal a good “fit” between your family shareholders and the various businesses your family owns?  If not, do you have a strategy for moving toward a better fit?  Your enterprising family’s long-term sustainability may depend on it.