Short-time CFO altered course at Marsh Supermarkets

Within months of becoming chief financial officer of Marsh Supermarkets Inc. in July 2005, John Elbin realized the company was in dire straits.

An internal report he prepared showed the locally based grocery chain had reported negative free cash flow for nine years and counting—a trend masked by the sale of property holdings.

“Essentially, the company was being liquidated over the 10 previous years by selling off real estate to fund the negative free cash flow and pay out the dividend,” Elbin said in a deposition this spring.

“So the company was being self-liquidated. And when the real estate ran out … they would hit a brick wall, the company would crash, and go into bankruptcy.”

That doomsday scenario never happened, of course, because Marsh found a buyer in the nick of time. In September 2006, Florida-based Sun Capital Partners completed the purchase of Marsh for $88 million in cash and the assumption of $237 million in debt.

Elbin spent less than five months at Marsh, resigning in December 2005. The company said at the time he quit “because he disagreed with other members of senior management on actions” to improve the company’s performance.

Despite his short tenure, Elbin was a pivotal figure in the 80-year-old company’s history, according to excerpts of depositions made public in Marsh Supermarkets’ lawsuit against former CEO Don Marsh.

The depositions show Elbin forced management and board members to face up to the grocery chain’s escalating financial challenges. That reality check led insiders to cut expenses, close stores and take other steps that held the business together until the sale closed.

Elbin—a 59-year-old Carmel resident who served as chief financial officer of locally based Lilly Industries Inc. before it was bought for $1 billion in 2000—declined to comment. But the newly public depositions show one of his concerns was what he considered excessive and inappropriate expense reimbursements to Don Marsh and his son David, then the president.

The expense reimbursements are at the center of the grocery chain’s pending lawsuit that seeks to recoup millions from Don Marsh. In a separate legal battle settled three years ago, the company accused David Marsh of using company coffers for personal expenses, including lavish vacations.

But according to Elbin’s deposition, he was even more concerned that golden parachute payments stipulated in the employment agreements of insiders, especially Marsh family members, were overly lucrative and could scare off potential acquirers.

The golden parachutes “were so excessive relative to the equity value of the company, it was beyond the pale,” Elbin said in his deposition. “The accepted norm for those payments is roughly 2 to 5 percent of the equity value, and just in order of magnitude, they were 50 percent with Marsh.”

Nearly all insiders ultimately agreed to reduced payouts, shaving millions of dollars off what a buyer would have to pay. But David Marsh held out and as a result was terminated.

In his deposition, board member Steve Huse said Elbin was more outspoken about the company’s problems than his predecessor, Doug Dougherty, whom Don Marsh fired in May 2005.

He said Don Marsh and Elbin “got into it very quickly.”

But while Huse, an Indiana restaurateur, praised Elbin for helping the board grasp the severity of the company’s challenges, he’s still upset over his abrupt departure in December 2005.

In an interview with IBJ, Huse said it’s not unusual for CEOs and chief financial officers to butt heads, since CEOs tend to be entrepreneurial and financial officers tend to be detail-oriented. But he said executives usually are able to work through their differences.

And Huse said that while Don Marsh may have his shortcomings, detractors are overlooking the substantial contributions he made to the company and to the community during the 38 years he served as CEO.

But what really riles Huse is the $250,000 bonus Elbin received Nov. 17, 2005—just three weeks before he left the company. He received that bonus to induce him to change his mind about an earlier decision to quit.

“It was certainly not fair to accept the bonus,” then quit for good so soon afterward, Huse said.

Huse said the board’s law firm, Baker & Daniels, negotiated the agreement that brought Elbin back when he previously said he’d quit. He said it was “an omission” by the law firm not to tie the bonus to a requirement that Elbin remain with the company for a specific period.

David Herzog, a Baker & Daniels partner who chairs the firm’s business litigation group, declined to comment.•

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