Reinventing the Family Firm - Chapter 1

DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

“From family-owned heritage businesses to family- owned portfolios – from family business to family in business” There are also several other relevant factors when it comes to a decision to sell one’s legacy business: ♦ The predominant philosophy within many family firms seems to be that they should be set up to run forever, i.e. as if the ideal time horizon of their existence might be “for eternity.” However, the actual managerial time horizon tends to be much shorter. A particular generation of owners/managers, for instance, might only be in charge for a relatively short time period, say, for 15–20 years. The ability to assess the extent to which members of the next generation are suited to successfully running a specialized firm, in the case of SUI an integrated shipping company, becomes an important consideration. In the long run, it might be more appropriate for the next generation to manage a more diversified portfolio of activities. ♦ Having “all one’s eggs in one basket” might not be desirable for an owning family, especially when the value of their assets concentrated in one sector might fluctuate wildly – for example, owing to developments in the freight markets facing shipping firms. As discussed, having all the family’s assets tied up in one highly capital-intensive business creates difficulties: The bulk of the free cash flow needs to be continually reinvested in the legacy business, with little or no free capital to be used at the discretion of family members. There might be little-to-no discretion for the owners when it comes to the payout of dividends, causing frustration even though family owners might not necessarily be inclined to be reliant on dividend income. Such restrictions might be reinforced by clauses to limit the distribution of dividends, typically imposed by financial institutions as a condition for having provided loan financing. In many cases, it would be unlikely that a family could come up with all the capital needed to make the reinvestments required to keep a capital-intensive legacy business going. ♦ There might also be emerging industry trends that call for exiting a particular business. The emission of CO2 in our atmosphere resulting from the burning of oil and other fossil fuels, for instance, has led to a significant scaling down of offshore oil exploration. Therefore, the offshore supply ship business has become much less attractive. The health considerations and governmental regulations regarding cigarette smoking have had a similar effect on the attractiveness of tobacco firms and so on. It should be noted that the author did not foresee the negative development in the offshore supply ship segment due to increasing concerns regarding CO2 emissions from oil. In general, it can be hard to pinpoint such negative factors in many industries’ attractiveness.

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