Hold, Fold or Sold
How to think about the future of your family business.
All things have a natural life cycle: They are created, they grow, they evolve and eventually they come to an end. Your family business is no different. While there are millions of possible paths forward for your company, they can be simplified down to three basic categories; hold, fold or sold.
A “hold” strategy is often mistaken as business as usual. This is a sure-fire way to end up in a “fold“ scenario. Deciding to hold onto your business is a commitment to continually work on it.
All business leaders endeavor to improve their company’s bottom line. Family business leaders must also work to preserve their company for successive generations. This involves not only keeping the company healthy but also preparing next generations to take on that responsibility.
When a company continues for decades if not centuries, it will need to evolve in order to survive. IBM started manufacturing typewriters but now develops artificial intelligence systems to aid in data analysis (and Jeopardy trivia). My own family business evolved from protecting ammunition during shipping in World War II to making part of Polaroid instant film to building materials.
My grandfather was fond of saying, “Change is the price of living.” It became such a ubiquitous motto in our company that we hung engraved plaques with the saying in every company building. Your business cannot remain stagnant; you will have to continually change to meet the challenges of tomorrow.
A family business failure is the nightmare scenario that keeps many CEOs up at night. It can happen for a variety of reasons. The market can move in a direction that makes your business model obsolete, like Blockbuster Video. A black swan external event could unexpectedly overwhelm your business, like California Pizza Kitchen with the COVID-19 crisis. Or the business could simply wither away from years of mismanagement and neglect, as too often happens when business leaders misunderstand the “hold” strategy.
Whatever the reason, realizing your business is doomed will be exceptionally painful. Contrary to popular belief, not all captains must go down with the ship. When you realize the company is destined for failure, it is wise to do your best to rescue as much remaining value for your family as you can. In some cases that would involve a liquidation; in others, you would follow a “sold” strategy.
The decision to sell your family business will not be an easy one. There are invisible lines on our corporate balance sheets that carry the emotional weight of the previous generation’s blood, sweat and tears as well as the hopes we hold for future generations. Wrestling with these emotions will be different in each of the three reasons for selling: sales under duress, strategic sales and opportunistic sales.
A sale under duress is the worst-case scenario and is usually a consequence of the predicaments related to folding. In this case, you have little bargaining power while trying to salvage the scraps of value left in the company. Obviously, we all want to avoid being in this quandary at all costs. However, if you do find yourself in a position where a sale is necessary, moving quickly rather than dragging your feet is likely to result in a better outcome.
A strategic sale can be arrived at for a variety of reasons. Usually the owners have taken into account market conditions, business cycle, chances of future family members joining the company, family wealth risk with assets being concentrated in the business, estimated sale amount, potential damage to employee morale, etc. In deciding whether to proceed with a sale process, the owners must balance all those quantitative reasons for a sale against the emotional weight of letting go.
An opportunistic sale is closely related to a strategic sale, but the calculus of the pros and cons happens after the business owner receives an unsolicited offer. In this scenario you have an advantage: a firm understanding of the variables before you have to make a decision. You are also in the best position to negotiate a favorable exit because an unsolicited offer typically means the buyer is highly motivated to purchase your business.
Think it through
No matter if your business stays in the family for six more generations or is sold by year-end, one cannot separate the emotional attachment that comes with a family-owned business. The legacy of what your family has built is special and should receive due consideration before you proceed down any of these paths.
Chris Yount led his third-generation family business to new heights before selling the company in 2018. He now shares his wealth of experiences by serving as a board adviser, angel investor and author (www.ChristopherYount.com).