APPENDIX B

National Association of
Wholesaler-Distributors

Profile of the
Perpetuation Crisis

Report of a study of small business commissioned by the National Association of Wholesaler-Distributors, and conducted with the cooperation of thirty-eight affiliated wholesaler-distributor commodity line asso

ciations.

Copyright 1975 by the National Association of Wholesaler-Distributors. reserved. No reproduction without express approval of this Association.

All rights

FORWARD

The National Association of Wholesaler-Distributors (NAW), and the ninety-seven independent commodity line associations which are NAW members, believe the survival and success of American small business to be essential to the vitality, and viability, of the economy.

The vast majority of U.S. wholesaler-distributors would be classed as "small business" by any of the several accepted definitions. Further, 99+ percent of these firms are closely held corporations the shares of which are owned by one or a few people (often a family) and are not traded on an exchange, or over the

counter.

For a variety of reasons, including the burden of taxation, the non-availability of "outside" growth capital, and even certain characteristics of the society in which we live, these closely-held corporations face severe problems of growth and survival in the 1970's.

It is to these problems that NAW's accelerating program of "perpetuation education" for small businesses is addressed. As a part of that on-going effort, this profile constitutes a vital, fundamental step toward a working understanding of the problem.

In 1970, Harold W. Squire, former President of Northamerican Heating and Airconditioning Wholesalers Association (NHAW), completed a graduate paper in finance on "Disposition of Close Corporations" while working toward his doctorate at The Ohio State University. Dr. Squire, who is Chairman of the Board of his own wholesale supply company and professor of finance in Capital University's Graduate School of Administration, discovered that many close corporation owners apparently give little thought to perpetuating their firms, despite evidence that such businesses often last only one generation.

The research project on which the following report is based resulted from Dr. Squire's convictions that (a) few wholesaler-owners adequately understand the dimensions of the perpetuation problem they face; and (b) that a way or ways must be found that will permit the major shareholder of a close corporation to divest himself of control without unfair surrender of the fruits of his long years of labor.

In 1973, NHAW proposed to NAW that the affiliated associations be invited to join in a broad study project to gain precise understanding of the actual ownership and "perpetuation" status of U.S. wholesaler-distributors.

Robert C. Banasik, Ph.D., P.E., Assistant Professor in Capital's Graduate School of Administration, was retained to conduct a survey of closely-held distributor corporations. A total of 38 commodity line associations elected to participate. Eighteen thousand firms received the survey questionnaire, and an astounding 5,000 responded.

The results of that survey, analyzed by Dr. Banasik and interpreted by him and
Dr. Squire, form the bulk of the report which follows.

Importantly, Dr. Squire initially believed that, because many owners would see the tax advantages of merging their small firms into larger (publicly traded) ones,

a rapid increase in mergers would take place. The "merger route" seems to offer a particularly attractive alternative to the corporate owner who controlled most of his firm's stock, was nearing retirement age, and had no close relatives in line to succeed him.

Now, as a result of this study, Dr. Squire has concluded that this owner is in fact an unlikely candidate for merger. While he may devotedly desire a merger, we know now that the larger firm, to whom he fancies his company attractive, in general judges his company not attractive.

Thus the survey results make a need for the individual owner's understanding of his situation and the need for planning toward rational disposition of ownership, by means other than merger in the vast majority of cases, more apparent than ever.

PROFILE OF THE PERPETUATION CRISIS

From a survey of 18,000 independent wholesale business establishments, conducted by the National Association of Wholesaler-Distributors, 1973-74.

THE likelihood that an independent, closely-held American business will survive the lifetime of its present owner is in serious jeopardy.

That statement is founded in the results of perhaps the most
comprehensive "ownership characteristics" survey'
ducted among U.S. small businesses.

ever con

Of all American business entities, at least seventy-five percent are entrepreneurships unincorporated and dependent

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for their continued existence on the personal activities of a single owner, or perhaps a small group of partners. Such firms have "perpetuation" problems that are well recognized, and the survival problems of entrepreneurships are not treated in this report.

The second largest "class" among U.S. businesses are closely
held corporations; numbering in excess of two million, and
defined as "a small business, the shares of which are not
sold on any stock exchange nor over-the-counter, and in which
a majority of the corporation's shares are owned by one or
two persons. or by a family."

Survival

1 perpetuation of Small Business" survey, conducted by

the National Association of Wholesaler Distributors in 1973-74.