Be on the lookout for the signs of market changes

By Patrick O. Ring

Some iconic names in family business are providing us with valuable lessons. As the adage goes, "There's a time to hold 'em and a time to fold 'em." The recent decisions by the Washington Post Company to sell its namesake newspaper and by the Forbes family to explore a sale of Forbes Media LLC show an appropriate concern for the long-term interests of their shareholders. Their decisions also show foresight and courage.

These are clearly large companies and household names, but the lessons they can teach us apply to family businesses of all sizes, in every industry.

At the family-controlled, publicly traded Washington Post Company, a decline in print advertising revenues forced change. The chairman, Donald Graham, and his publisher and niece, Katharine Weymouth, went off-site to quietly consider what the company's flagship newspaper would look like three years down the road. They concluded that the Washington Post, under its current ownership, would not be a competitive business.

 

Forbes magazine, like the Post, has seen ad revenues decline in recent years. But, as the Wall Street Journal reported, different factors are at play for the Forbes family. An upcoming financial repurchase obligation (of a 45% equity interest held by a private equity firm) places a big bet on the actual value of Forbes' print and digital businesses. Given the market realities facing the publishing industry and despite the reported financial promise of Forbes.com, is it worth betting the family capital to stay on course? The Forbes family has retained a financial adviser to explore a sale of Forbes Media LLC.

The common theme for both family-controlled companies is that the publishing business has changed quickly and fundamentally. Similarly, shifts in demand (how customers will want to receive content) and in the revenue model (who will pay for that content, and how much) will affect every business sooner or later.

 

Take time to reflect

Many family businesses are so consumed with running their day-to-day operations that they don't take the opportunity to step back and consider the future. Are they driving their business or being driven by factors outside their control? The question relevant to every business is, "In x years, will our customers still want to buy what our company is selling?"

What will these developments mean for your family business? Your company's history may be a great source of pride and inspiration for employees and family shareholders. However, not paying attention to the need to generate positive cash flow will put family capital at risk. Most families don't have the resources to fund negative cash flows for very long. An adherence to the "We've always done it that way" approach can put you out of business.

 

Inspiration in an empty office

In July 2011, Washington Post columnist Thomas Heath wrote about MyerEmco, a family-owned chain of consumer electronics stores. The company realized (too late) that changing consumer buying habits had drastically changed its market. It was competitively crushed between the forces of the Internet and the big-box retailers. MyerEmco went out of business. With personal guarantees of MyerEmco's corporate debt, the family lost almost everything.

Subsequently, as Heath described it, MyerEmco president Jon Meyer sat in his (then) empty office and wrote on a sheet of paper how his former market had changed and, more importantly, what that change implied going forward. He concluded that families (as opposed to individuals) would be making the electronics purchasing decisions. Further, he had seen a growing demand for sound systems throughout the home (as opposed to the purchase of individual components). Still in control of a database of MyerEmco's 280,000 former customers, he reinvented the company as MyerConnex, which now sells and installs sound systems. It is a much smaller company, but it is profitable and growing. It's too bad Meyer didn't do the writing exercise a few years earlier.

 

Action steps

What lessons can be learned from these family businesses? Here are a number of steps to take now. Don't wait until there are few attractive options left for your company:

1. Consider how your market will have changed three to five years from now. Will your customers still want to buy what you are selling? Given trends beyond your control (e.g., technology, consolidation, shifting demand and regulation), will customer demand be moving toward your service/product offerings or away from them?

2. What will your competitors look like? Will the little guys still be around? Will the larger firms consolidate?

3. What can you change within your product/service offering to better competitively position your company? Can you afford that investment? Are your family shareholders prepared to be patient and defer distributions?

4. If this forward-looking exercise provides a clear path, then make it happen. Invest in the human capital, production facilities, systems and R&D that are required. Sell your new vision to the family shareholders; explain why these steps are necessary and how attractive returns will be generated for all family owners.

5. If your three- to five-year outlook is bleak and you don't see a clear path to change it, go to Plan B. Do as the Graham family did when they made the wrenching decision to sell the Washington Post Company's media assets to Jeff Bezos, founder of Amazon, and as the Forbes family is currently considering.

 

New avenues

Years ago, the Washington Post Company (recently renamed Graham Holdings Inc.) began to acquire non-media businesses, which now include Kaplan Education; a majority stake in Celtic Healthcare, a provider of home health care and hospice services; and Forney Corporation, a supplier of industrial furnace parts. This diversification will allow the Graham family and its public shareholders to continue in business—the same shareholders, just no longer in the newspaper industry.

Two members of another iconic business family, brothers J.B. and Tony Pritzker, also have started a new family venture with their share of the distributions from the breakup of the Pritzker family empire. Via their investment firm, Pritzker Group, J.B. and Tony Pritzker have been investing in private (often family) companies. These include businesses that need growth capital or liquidity (preferably from patient investors) and find the longer-term perspective of Pritzker family capital to be appealing.

What's the takeaway? From time to time, look up from your desk and make sure you're not driving your business into a tsunami. Often a very high-level perspective can be most helpful and illuminating. The process itself doesn't have to be complicated. Remember that Donald Graham of the Washington Post Company had a quiet but very thought-provoking off-site meeting. Jon Meyer of MyerEmco developed his plans on a piece of paper in an empty office after the loss of his family business.

As your vision comes into focus, there are many resources to help to you formalize and implement change. If it's scary out there, consider taking your family into a different, more attractive business. As hard as these decisions are, they will give you and your family shareholders a rallying point. You will have a business to get excited about once again.

Patrick O. Ring is managing director at Headwaters SC in Baltimore (pring@headwaterssc.com).

 



Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

 

 

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March/April 2014

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