The Tracy family, owners of food industry redistribution company Dot Foods, took a deliberate approach when they decided to expand their joint investments beyond their operating company.
The investment community uses the term “two-step distribution” to describe Dot Foods’ business model. The company buys food and redistributes it to wholesalers. When Dot Family Holdings, the family office that is the holding company for Dot Foods and four other businesses the family owns, looked for new investments, they built on the core business’s distribution expertise to find two-step distribution companies in other (non-food) industries.
Joe Tracy, a second-generation family member who has worked for the family business since 1987, took over at the beginning of 2023 as CEO of Dot Family Holdings. Prior to that, he was CEO of Dot Foods. He talks about how the family created a structure for their embedded family office.
How did you decide to start Dot Family Holdings?
About 10 years ago, we decided there was not as much opportunity for growth within our current channel, food redistribution, so we contemplated diversifying. We did a lot of research to figure out where two-step distribution is used in other industries. We wanted to invest in some of those businesses and take what we’ve learned in our core business and apply it outside the industry. We created a parent holding company — our family office — that could own not just the core business but other businesses as well.
As most families do, we debated the direction for several years: No. 1, should we do this at all, or should we focus on the core business? If we could convince folks that the core was always going to be the priority and we still had other resources to invest, should we do it together or separately?
Then, if we’re going to do this, how should we do it? That led to the restructuring, which we executed in 2018, and the creation of the holding company.
Does the family office have dedicated staff, or does it use employees of Dot Foods?
Until this year, we had only one employee solely dedicated to the family office, which was a vice president of corporate development, who works on reviewing potential acquisitions and potentially selling any businesses that need to be sold. This role also supports existing businesses that we own. We recently decided to hire a CFO for the holding company to support these other businesses.
I spend 50% of my time outside the core business, and my brother John spends about 75% of his time outside it. The general counsel spends 50% of his time outside the core business.
We also have some executives who retired from our core business but didn’t want to go from 100 miles per hour to zero. Our retired CFO works part-time but spends all those part-time hours outside the core business. The former president of our transportation company provides part-time support to our other companies on transportation projects. Our SVP of warehouse, who retired in January, is now working on projects for two businesses in the warehouse area. We also have a former leader in the HR area who is working to support a couple of the businesses. These people had been exclusively in the core business for 25 to 35 years.
What investments do you make outside the core business?
We have invested significantly in four businesses outside of Dot, as well as some side investments in private equity and venture capital.
In addition, we have built up a public securities fund that is guided by an investment committee with family members plus an investment manager. We also started our own captive insurance company.
As part of the reorganization, we took all the company facilities in the core business and put them into one real estate company. Then we created a separate real estate company to purchase the facilities for the businesses outside our core business. We own facilities in two of the four businesses outside the core. All of the building locations that we have purchased are either entirely or partially leased by these two companies.
We don’t distribute cash from our core business to family members. We’ve agreed to invest it together because we think we can make better and larger investments together with better returns, and it’s a way to diversify the enterprise.
What services does the family office provide the family?
We are predominantly a C Corp. If you’re a pass-through or an LLC, the tax burden for a large business is pretty significant. That’s not our scenario. Most of the family members facilitate their own tax returns. We buy umbrella insurance together, using our insurance resources to shop for a more significant umbrella than you can buy in the marketplace on your own. We coordinate the legal firms that family members use for estate planning — a significant piece for most family members is company stock, which has some restrictions. You don’t want to use 10 different law firms, so the company shops and vets and endorses a couple of firms.
What challenges do you face in making this family office structure work?
One of the challenges for all family businesses is that you need to provide shareholders some liquidity. That comes in two forms: First is some annual cash flow that is predictable, like dividends, and second is the ability to sell their shares for a fair price when they so choose. In order to do that, you have to get third-party objective enterprise evaluations done on a periodic basis. We get our value assessed twice a year. It provides the family comfort in terms of their ability to sell some of their shares when they want to make an investment outside the family business. As you head down this path of becoming a diversified enterprise, it becomes more and more challenging to value the entire enterprise since it is not just the core business anymore. It includes other businesses in other industries.
How does this structure benefit the family?
We look at it as having a well-diversified consolidated group of investments that produces a good return for the family. The family couldn’t do that unless we’re investing together – a lot of those investments could not be made by an individual due to their scale and complexity.
