You can't unbake a business

When family businesses team up there's almost always an expiry date. The Ferguson and Plarre baking families started strong but wound up in a 'Texas shootout'.

In some ways the story of the Fergusons and the Plarres is like an ordinary story of marriage and divorce: two families join together, doesn’t work out, they argue, split up and work out custody.

But this is business, not matrimony, which means it’s not quite as simple as that.

There may be some examples of two separate family businesses successfully joining up and staying together, but I don’t know of them. Even different branches of the same family usually can’t work together for long. The Lowys and the Saunders successfully ran Westfield together for 30 years, but Frank Lowy and John Saunders started that business together after migrating to Australia, and then John Saunders sold out in 1987 so that Westfield became a single family operation.

The Fergusons and the Plarres had been running two separate family businesses in Melbourne for nearly 80 years, passing them on through the generations when, in 1980, the two patriarchs of the time, Bob Ferguson and Ralph Plarre, decided they should merge.

They had been co-operating for years, helping out with ingredients when one was short of something. The Plarres built a new bakery in the Melbourne suburb of Niddrie in the mid-60s that was big enough for both of them, they decided to join forces. It seemed like a good idea at the time.

To oversimplify the arrangement, the Fergusons brought in the stores; the Plarres brought in the bakery. The Fergusons, Ken, Bob and Alan, owned 75 per cent of the company and six seats on the board; the Plarres owned 25 per cent and two seats on the board.

That was the first mistake: it was unbalanced and couldn’t work for long. In 1987, Bob and Alan Ferguson resigned from the board and became the first franchisees, in effect taking direct control of some stores rather than simply participating in the overall business.

The Ferguson family still owned 75 per cent of the business, but the board now consisted of just Ken and Ralph with Bob and Alan as franchise partners.

That worked surprising well for a while. The profit grew rapidly from $100,000 to $600,000 in two years, and in 1989 they took on their first non-family franchisee. At that stage franchising was in its infancy in Australia and Ferguson Plarre Bakehouses was a pioneer.

In 2001 the business was turning over $13 million and doing well, but Bob and Alan Ferguson decided the time had come to sell. Ken Ferguson and Ralph Plarre each bought 25 per cent for about $1.5 million, and so the business became 50/50 between the two families. Balance at last.

But that couldn’t last either. Ralph and Ken worked well together, basically leaving each other to get on with his side of the business – Ralph to the baking, Ken to the stores.

The two families didn’t mix socially and, by all accounts, didn’t talk much at work either. And inevitably this marriage of convenience hit the rocks when the next generation moved in.

Well, actually it was the next generation of Plarres, Stephen and Michael, plus Ken Ferguson’s second wife Pam, who joined the business in 2002 as marketing head and became a 25 per cent shareholder at the same time.

It seems that Ken and Ralph had neglected to set up any dispute resolution procedures – didn’t think they’d need it. It was a 50/50 ownership structure with a deadlocked board, no dispute process and no exit strategy.

Shareholder agreements, with careful dispute resolution processes and pre-arranged exits are rarely needed at the time a partnership is set up. Everyone is in love then. A good lawyer will design these processes so they won’t be needed when things go wrong, as they so often do.

It took a decade for things to go wrong between the Fergusons and the Plarres, although it sounds like it wasn’t an easy ten years.

I only got the Plarres side of the story (the victors get to write the history), which is that Steve and Mike, having been in the business part-time from the age of 14, and full-time after Uni, wanted to introduce corporate governance processes, key performance indicators and wanted one CEO instead of two (Ralph and Ken).

The Fergusons were apparently happy with the way things were: effectively two separate businesses running side by side – baking and retail. They wouldn’t interfere with manufacturing if the Plarres didn’t interfere with running the stores.

(By the way, there is no baking in-store – all the products are delivered baked each morning to the franchisees. There is no franchise royalty, and the model works on gross margin from selling the product to franchisees, although there is a 1.8 per cent administration levy).

Steve Plarre in particular wanted to run it as one unified business with one CEO. In June last year he and the Plarre family made an offer to buy out the Fergusons. It was rejected as too low. They got a valuation from Ernst and Young, which was the same number. Still too low.

It was then lawyers at 10 paces. At one stage the Plarres actually filed in court, but they ended up in what Steve Plarre now calls “a bidding war”, which appears to have been a variation on the common “Texas shootout”, in which the warring parties each send a sealed bid to an independent umpire and the highest wins the auction and buys the other out.

In this case it seems they bid against each other until the Plarres finally got to a price that the Fergusons would accept, and bought them out with some help from the Bank of Melbourne (they thought about bringing in private equity but were sick of having partners, so borrowing was the way to go).

So now the Ferguson Plarre Bakehouses are 100 per cent family-owned… by the Plarres. Ralph, now 67, owns 40 per cent, Steve and Mike own 25 per cent each and their independent chairman, Rod Douglas, owns 10 per cent. The four of them make up the board and Steve is CEO.

The first thing Steve did when he took over was to have a joint meeting of the 54 franchisees and the bakery production crew, to introduce them to each other.

Things are going to be run differently from now on, he told them. There will be a strategic marketing review, and an incentive model. There will be quarterly meetings called “Momentum”.

“We will love you more”, he said, “but we will ask more of you.” If you want to exit, we understand.

Steve says that 18 months on, no one has exited and the business is now growing.

Steve and Mike have four young children between them and have laid down a rule that any kids wanting to come into the business need to spend at least two years working somewhere else first, and then when they join the business they must report to someone other than their parent or uncle.

And that’s the story of the Fergusons and the Plarres, a salutary tale if ever there was one.

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