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Create an enterprise strategy for your family business

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Ensuring the resilience and longevity of family-owned businesses often requires strategies focused on increasing joint family wealth through a diversified portfolio of co-owned assets. However, broad diversification strategies are difficult to implement and should not be implemented by families without proper structures and processes. First and foremost, successful multi-generational families must create a long-term vision of their corporate boundaries. Once a diversification decision is identified, successful families recognize the need to dedicate considerable resources to identifying, evaluating, and prioritizing opportunities to expand their corporate boundaries. Finally, successful families should rebalance their portfolios, selling underperforming or peak value assets and allocating capital only to areas with strong long-term prospects. Families with successful corporate diversification strategies achieve this result by articulating their strategy and developing structures and processes that enable them to effectively oversee their diverse businesses.

Even the most harmonious and well-run family businesses face serious challenges when it comes to developing strategies that will last for generations. One of the greatest of these challenges is protecting and growing family-owned assets for future generations. To do this successfully, family business owners, like any other investor, need a diversification strategy.

Ensuring the resilience and longevity of family-owned businesses requires a focus on the corporate level, not the business level. We deliberately use the term “enterprise” here rather than “business” to represent a family’s collective assets (real estate, passive investments, minority investments, etc.) rather than a single operating company. . Developing a corporate strategy should focus on growing the wealth of the entire family rather than growing a specific business. This focus often leads to strategies that some research suggests are ineffective. That is, irrelevant diversification, that is, investment in seemingly irrelevant businesses.

In the context of corporate strategy research, conglomerates are often dismissed as underperforming compared to centralized firms. A McKinsey study found that the median total return to shareholders was 7.5% for conglomerates and 11.8% for concentrated companies. The authors of the McKinsey article said, “The argument that diversification benefits shareholders by reducing volatility has never been convincing.”

However, family businesses often prefer that individual family members invest together rather than diversify their own investments. or economies of scale by pooling investments) or non-monetary (e.g., the ability to pursue common goals and values, or the desire to come together as a family). Beyond a desire to unite, it can be difficult for owners to invest individually due to ownership structures such as trusts and shareholder agreements that limit the ability of individual owners to exit jointly held investments. . For these reasons, one of the hallmarks of a family business is its focus on the viability and profit stability of the company, as well as on softer goals such as supporting the community, employees, customers and stakeholders. is to


Take E Ritter & Company, the family holding company of Ritter Communications and Ritter Agribusiness. Their tagline is “Investing in our community for over 130 years.” Their investments go into seemingly unrelated businesses: farm management and telecommunications products and services. These businesses grew out of his family’s investments made more than a century ago, but when he sold a majority stake in Ritter Communications to his private equity investors three years ago, the family changed strategy. got the chance to Yet, instead of distributing the money to individual family shareholders, the family opted to pool the money together and develop a third business under a holding company, Ritter Investment Holdings. Commitment is an example of a focus on diversification to achieve a multigenerational strategy. It also shows that defining ourselves as the family that owns the business rather than the family of a particular business gave us the flexibility to think broadly about the future.

Figuring out how to keep a business going for generations often requires a strategy focused on increasing joint family wealth through a diverse portfolio of co-owned assets. A diversified portfolio can weather the ups and downs of factors beyond the control of the owner.

Research suggests that the relationship between diversification and performance follows an inverted U-shaped curve. This means that a limited amount of associated diversification will improve performance, but if the diversification becomes too large, performance will suffer. The research suggests that while it makes sense to stay close to what you know, getting too far away from core operations can lead to poor performance.

Michael Porter’s research shows the downside of unrelated diversification, showing that companies tend to sell acquisitions in unrelated areas. I also agree with this approach. However, more recent research and anecdotal evidence from companies such as Alphabet suggest that some companies can offer significant returns through irrelevant diversification. Indeed, a 2018 study found that the negative impact of irrelevant diversification on performance decreased significantly over time, with firms from the 1970s to 1990s exhibiting lower performance due to irrelevant diversification. , since 2000, this effect has decreased.

These studies support strategies that family-owned businesses have consistently advocated. So diversification at the corporate level works. That said, implementing a broad distribution strategy is difficult. So a family that doesn’t have the right structures and processes shouldn’t do it.

First and foremost, successful multi-generational families must create a long-term vision of their corporate boundaries. Take Schurz Communications, Inc. for example. The company has effectively evolved from owning newspapers, television and radio stations to broadband operations and cloud service providers. The owner’s commitment to staying together through this evolution is captured in this podcast with 5th Generation CEO Todd Schurz. It required a carefully researched investment approach and a carefully selected board of directors with the expertise to support the transition.

One area where many families fail is the lack of a centralized decision-making board across the family’s set of assets. When assets are held in different entities with their own governance structures, reports and performance objectives, there is no ability to develop enterprise-level strategies that optimize risk and return. Carlson Inc., the current owner of CWT (a travel management company) and Carlson Private Capital Partners (“CPCC”), and former owners of hospitality entities such as Radisson Hotels and TGI Fridays restaurants, recognize the value of this structure. Understood, their investment arm is under the umbrella of the operating company, CWT, and is overseen by the Board of Directors.

Once a diversification decision is identified, successful families recognize the need to dedicate considerable resources to identifying, evaluating, and prioritizing opportunities to expand their corporate boundaries. For CPCC, this meant hiring a team of experienced investment professionals. This capability can be outsourced or built in collaboration with other investment families.

Finally, successful families should rebalance their portfolios, selling underperforming or peak value assets and allocating capital only to areas with strong long-term prospects.

In short, families with successful corporate diversification strategies achieve this outcome by articulating their strategy and developing structures and processes that enable them to effectively oversee their diverse businesses. And we must recall Michael Porter’s wisdom in his influential HBR article. From Competitive Advantage to Corporate Strategy, he argued, that corporate strategy must ensure that the whole is more valuable than the sum of its parts. It may encompass other values ​​such as the stability of the company or the support of employees and communities. But no matter how value is defined, a family enterprise strategy must deliver that value to the next generation.

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