Reinventing the Family Firm - Chapter 1

DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

Below are five key pieces of advice, gleaned in particular from the portfolio strategy at SUI but also from other examples:

♦ Avoid becoming “trapped” in capital-intensive businesses. The very capital-intensive shipping business requires substantial investment in new ship assets. An excessively asset-heavy business will often call for larger investments in capital than the owning family might be comfortable with. When we owned the shipping company, for instance, there was little-to- no free cash flow. All our cash reserves had to be reinvested in new ships. Living comfortably in this kind of situation represents a key conundrum. While one’s assets in the firm might represent considerable value, the funds available to be spent by the owners could be very limited. ♦ Build on the specific competences of the members of the owning family. The author/chairman of SUI, for instance, has been active in academia for most of his career, having held professorships at MIT and Wharton, and having been the president/CEO of the Norwegian School of Business (BI) and IMD in Lausanne. Hence, it was natural to build on this experience and navigate SUI into the educational business sector. ♦ Diversify into a range of different fields and learn from early successes and mistakes. A very good example of the power of a well-diversified business portfolio can be found in the family firm FERD, controlled by Johan H. Andersen and his two children. This family business was initially engaged in banking, going on to become the owner of Norway’s largest tobacco firm, Tiedeman’s. Since exiting these heritage businesses, the company has developed an impressive diversified portfolio, with holdings in such fields as building materials, packaging, transportation, real estate, and multiple other ventures. The FERD group shows superb growth and financial returns and is also relatively open in its reporting on the group’s performance on an annual basis. Much of its success can be attributed to learning from earlier successes and mistakes. ♦ Invest in the development of family members’ education and skills. A key aspect of the reinvestment philosophy at SUI is to invest in the owning family members’ educational activities so as to develop the foundation of an even stronger cadre of well-educated family members. The next generation might then ultimately be able to do an even better job for SUI in one or more subsidiaries and/or at the holding company level. ♦ Learn from the best practice of venture firms. Family businesses should approach their ventures in a dynamic way, in a similar way to public venture firms. Viking Ventures, for instance, has been an inspiration for SUI, adding to its existing investments through acquisitions, then ultimately selling the now much larger firm within a specific time period, eventually going public. The accelerated growth that can be generated by making acquisitions in a timely manner can lead to substantial value

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