Greening the Family Business

Family Business


When thinking about any kind of investment, it is well to keep in mind the old adage, “There is a time to buy and a time to sell.” This is a perspective that is usually disregarded when business owners think about their single most significant investment: the family business. Before making your next major investment in the business, step back and consider whether it really makes sense. With that fresh $1 -or $1 million-that you invest today in working capital or fixed assets, you are, in effect, buying into a business again. The question is: “Is it worth the price?”

Consider the Hechinger Co., a publicly traded but, as of this writing, still family controlled company. It operates in a tough, consolidating industry where the giants such as Home Depot and Lowe’s compete for dominance. Hechinger’s family owners and managers made the decision to invest heavily in order to compete head-to-head with Home Depot. The capital markets were skeptical about the strategy and, as it turns out, appropriately so. With the announced sale this past August to Leonard Green Partners for $2.375 per share, the Hechinger family and the public shareholders’ investment in the business has been devastated.

When business is good, generating attractive returns on invested capital, the hardest decisions may be about how to allocate new capital between various new projects or whether to perhaps devote profits to redeeming some stock from the cousins. But if you really want to ensure the long-term viability of your business, it is important to think how the markets would view the business’s current operating performance and the expected returns on new capital. Can the performance be sustained? What would a new investor pay for the business?

Over the years, noted entrepreneurs have amassed great fortunes by building businesses and selling them at a huge gain. Wayne Huizenga is one of these. He has spotted trends and positioned his businesses to participate. He created Blockbuster Video, for example, to take advantage of consumers’ preference for the convenience and cost-savings of watching movies at home. His Auto Nation is designed to benefit from Americans’ nearly universal distaste for negotiating when buying a car. Just as important, Huizenga has known when to sell. He sold Blockbuster to Viacom, and, after seven years and a $200 million investment, he has put his Florida Marlins baseball franchise on the block. The philosophy of continually reassessing the return-on-investment of each of his businesses has served Wayne Huizenga well.

There is a significant difference in whether you think of yourself as managing a business or the family business. The former suggests an ability to step back and question whether the old-line business continues to be a prudent investment of family capital and how or whether it can be improved. The latter assumes that the traditional business will survive as a viable entity if the family just works harder and pours more money into it. Emotional ties can be hard to change. The Hechinger Co. and many others who didn’t change them come to mind.

For many family businesses, a forward look at the health of the forest, rather than life in their particular tree, may be quite important. A number of years ago, the Pirelli family took a strategic look at the consolidating mass tire market, increasingly dominated by Michelin, Goodyear, and Bridgestone. Rather than invest massive sums in what was becoming a commodity market, promising lower returns on their investment, the family chose to exit the consumer end of the business. They then diversified their investments into more profitable businesses: cable transmission and communications. The Pirelli family continues in business. It is just not in the mass tire market.

What’s going on in the markets confirms that the financial stakes are high. Corning Inc., a publicly traded company still dominated by the Houghton family, recently announced that it would sell the core glassware business for which it has been famous for generations. Instead, it will concentrate on the manufacture of high-tech fiber optics, an industry in which it has also been an innovator. The decision spurred a 47 percent increase in Corning’s stock over a period of six months as investors anticipated higher multiples from the growth of this business.

The spring issue of Family Business discussed the O’Malley family and their Los Angeles Dodgers. It is sad that the Dodgers will no longer be family owned, but the economics of the industry seem to indicate that, as an investment, baseball stinks. The O’Malleys had few further options for improving the value of their investment. And so the decision to sell the franchise to Rupert Murdoch’s Fox Group appears to be a very prudent, albeit emotionally difficult, business decision. It has been reported that the O’Malley family plans to reinvest a portion of the proceeds in a different business with more attractive expected returns.

There is a general assumption pervading the literature on family business that if the family gets its ducks in a row (professionalize management, improve communication, forge mission and vision statements), then the business will succeed. What is often overlooked is the fact that some businesses (hardware, glassware, auto tires) have become inherently tough investments.

During a recent presentation to an industry group of commercial printing company owners, we posited, “You’ve just won the lottery. What will you do with the money?” Members of the audience mentioned some exotic financial investments, but no one said that they’d invest in their printing business. Why not? “Because, it’s a tough, unattractive business,” one responded. Yet each owner (and family) continues to put new investment into working capital and fixed assets in an attempt to build sales and return the printer’s profitability to what it used to be.

In our valuation advisory practice, we see many families struggle to maintain businesses that are no longer competitive in their markets. Turning $1 of fresh investment into 50 or 75 cents of value creates anguish for the business and for family shareholders. In some cases, these “investments” reflect a fundamental optimism-in others, desperation. In nearly all cases, though, the benefits of an investment perspective have been ignored. When the investment implications become understood, it can be like turning on the lights.

If the expected returns from new investment in your family business are good, invest with confidence. If the prospects are not good, it is time to follow the lead of the O’Malleys and put the family into a business that does make sense. FB