Evolution from a family-owned company to a family-owned investment portfolio

The process

It is, of course, a key pre-requisite that a suitable buyer for the firm can be found, and that the price is right. We shall not have to discuss this further here; rather, we shall raise some other issues that typically might come up during the sales process, such as:

• Resistance from employees. A sale might represent a source of uncertainty for employees, who may be concerned that it will impact their jobs. So, to ameliorate at least some of this resistance, it may be useful to incentivize the top management and employees to conclude the transaction.
• Payment in cash. It should be kept in mind that the main purpose of a sale would be to build up a more diversified portfolio. Hence, it is important that the firm would be sold for cash and not for shares, nor based on some sort of earn-out scheme. In this way, the risk for the selling family would also be more manageable.
• Stakeholders and others in the company network might not appreciate the far-sweeping changes a sale could mean. Critical voices are typical. The sellers should be prepared for this and be ready to accept that others might describe them as incompetent, or even as idiots.
• With a considerable amount of cash in hand, there may be a temptation to rush into new investments. This should be avoided. It is key to avoid suboptimal decisions due to money burning in one’s pocket.

So, why sell the family company?

There are three major reasons to sell the family firm. These are:

1. Too large a share of one’s assets are tied up in the family firm. Many such firms would need to generate funds for expansion and development, therefore the owning families are usually strapped for cash. Furthermore, there may be quite heavy taxes to be paid by family members as a fraction of the value of the firm. While many countries have abandoned such wealth tax, it is still the norm in some countries, e.g., Norway. In general, the cash requirements of many firms, as they are growing, may be such that private family owners may simply not be able to come up with the additional capital needed. As a result, the family company may have to go public or be sold. For some family-owned companies, however, where relatively large dividend payouts may be sustained, there might be an opportunity for the owners to diversify into other areas, i.e., develop a diversified portfolio while still maintaining the ownership of the family’s firm. This, however, is not the most common situation.
2. To enjoy the “power” of diversification. A diversified portfolio is typically much more liquid than when the bulk of one’s values are tied up in a single entity. Thus, one might be in a better position to enter new existing growth prospects, i.e., to be much more flexible and opportunistic. In addition, one might be able to exit relatively easily from less attractive businesses. It would be easier to “cut the losses”.
3. To reduce the risk of critical success factors that are largely outside the owning family’s control. Examples of this might be, say, ship owning, where the uncontrollable freight-rate movements may significantly impact a firm’s value; tobacco companies, where unforeseen legislations might adversely impact sales; or cement manufacturing, where heavy CO₂ emission may represent further adverse environmental exposure. The bottom line here is that non-controllable factors might significantly impact the value of a family-owned firm.