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September 26, 2022
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Crafting an Enterprise Strategy for Your Family Business

Crafting an Enterprise Strategy for Your Family Business

Ensuring the resilience and longevity of a family-owned enterprise requires a strategy that’s focused on growing joint family wealth, often through a diversified portfolio of jointly-held assets. But a strategy of broad diversification is difficult to execute, so it should not be undertaken by families without the appropriate structure and processes. First and foremost, successful multi-generational families need to create a long-term vision of the boundaries of the enterprise. Once the decision to diversify is identified, families who are successful realize the need to dedicate significant resources to identify, evaluate, and prioritize opportunities to expand enterprise borders. Finally, families who are successful must be willing to rebalance their portfolios, selling off underperforming assets or assets that are at the peak of their value and allocating capital only to areas that have a strong long-term outlook. Families with a successful enterprise diversification strategy achieve this outcome by clearly articulating their strategy and developing structures and processes that allow for effective oversight of the diverse enterprise.

Even the most harmonious, well-run family businesses face serious challenges when it comes to developing a strategy that will endure for generations. One of the biggest of these challenges is protecting and growing family-owned assets for future generations. To do that successfully, the owners of family businesses, like any investor, need a diversification strategy.

Ensuring the resilience and longevity of a family-owned enterprise requires a focus at the enterprise level, rather than the business level. I use the term “enterprise” rather than “business” here purposefully, to represent the overall assets of the family (e.g., real estate, passive investments, minority investments), rather than a single operating company. Creating an enterprise strategy requires a focus on growing the overall wealth of the family, rather than on growing a specific business. This focus often leads to a strategy that some research would suggest is ineffective — unrelated diversification, that is, investment in seemingly unrelated businesses.

In the context of corporate strategy research, conglomerates have often been dismissed as underperformers, when compared to focused companies. According to a McKinsey study, median total returns to shareholders were 7.5% for conglomerates and 11.8% for focused companies. The authors of the McKinsey article state, “the argument that diversification benefits shareholders by reducing volatility was never compelling,” with the rationale being that individual investors can diversify their investments on their own.

Yet, family businesses often favor investing together, rather than having individual family members diversify their own investments. The rationale may be financial (e.g., tax advantages or economies of scale from pooling investments) or non-financial (e.g., the ability to pursue common purpose and values, or the desire to stick together as a family). Beyond a desire to stick together, it may be difficult for owners to invest individually, due to ownership structures such as trusts or shareholder agreements that constrain the ability for individual owners to exit jointlyheld investments. For these reasons, one of the hallmarks of family ownership is a focus on longevity of the enterprise and stability of returns, as well as softer goals like supporting community, employees, customers, and stakeholders.


Take the case of E Ritter & Company, the family holding company for Ritter Communications and Ritter Agribusiness. Their tagline is “investing in our community for over 130 years.” Their investments are in seemingly unrelated businesses — farm management and telecommunications products and services. While these businesses grew out of family investments that were made over a century ago, the family had an opportunity to change their strategy when they sold a majority stake in Ritter Communications to a private equity investor three years ago. Yet, instead of distributing the money to individual family shareholders, the family elected to keep the money together and develop a third business under their holding company — Ritter Investment Holdings. Their commitment to staying together is an example of a focus on diversification to achieve a multi-generational strategy. It also demonstrates that defining themselves as a business-owning family rather than a family in a particular business gave them the flexibility to think broadly about their future.

Figuring out how to stay in business for generations requires a strategy that’s focused on growing joint family wealth, often through a diversified portfolio of jointly held assets. A diversified portfolio can weather the ups and downs of factors outside the owners’ control.

Research has suggested that the relationship between diversification and performance follows an inverted U-shaped curve, meaning that a limited amount of related diversification increases performance, but once diversification becomes too significant, performance declines. This research suggests that diversifying close to what you know makes sense, but getting too far afield from a core operation will decrease performance.

Michael Porter’s research demonstrates the downside of unrelated diversification, showing that firms tend to divest of acquisitions in unrelated fields. I would agree with this approach as well. However, more recent research, as well as anecdotal evidence from firms such as Alphabet, suggests that some firms can deliver strong returns through unrelated diversification. In fact, a 2018 study found that the negative effect of unrelated diversification on performance has lessened noticeably over time, with firms in the 1970s through 1990s demonstrating inferior performance from unrelated diversification whereas post 2000, this effect has diminished.

These studies support the strategy that family enterprises have consistently espoused: diversification at the enterprise level works. That said, a strategy of broad diversification is difficult to execute. So, it should not be undertaken by families without the appropriate structure and processes.

First and foremost, successful multi-generational families need to create a long-term vision of the boundaries of the enterprise. Take the case of Schurz Communications, Inc., which has effectively navigated an evolution from owning newspapers, TV, and radio stations to broadband operations and cloud services providers. The owners’ commitment to stay together through this evolution is captured in this podcast with fifth generation CEO Todd Schurz. The successful exit of their legacy businesses required a family commitment to stick together, a thoroughly researched investment approach, and a carefully selected board of directors with expertise to support the transition.

One area where many families fail is that they lack a centralized decision-making board across the array of family-held assets. When assets are held in different entities with their own governance structures, reporting, and performance goals, there is no capacity to develop an enterprise-level strategy that optimizes risk and return. Carlson Inc., current owners of CWT (a travel management company) and Carlson Private Capital Partners (“CPCC”), and former owners of hospitality entities including Radisson Hotels and TGI Fridays restaurants, understood the value of this structure when they elected to create their investment arm under the umbrella of their operating company CWT and under the oversight of its board.

Once the decision to diversify is identified, families who are successful realize the need to dedicate significant resources to identify, evaluate, and prioritize opportunities to expand enterprise borders. In the case of CPCC, this meant hiring a team of seasoned investment professionals. This function could also be outsourced or could be built in partnership with other investing families.

Finally, families who are successful must be willing to rebalance their portfolios, selling off underperforming assets or assets that are at the peak of their value and allocating capital only to areas that have a strong long-term outlook.

In sum, families with a successful enterprise diversification strategy achieve this outcome by clearly articulating their strategy and developing structures and processes that allow for effective oversight of the diverse enterprise. And, they should remember the wisdom of Michael Porter in his seminal HBR article From Competitive Advantage to Corporate Strategy, where he maintained that corporate strategy needs to ensure that the whole is more valuable than the sum of the parts. For families, that value may go beyond immediate returns to shareholders to encompass other values, such as stability of returns over time, or supporting employees or communities. But, regardless of how value is defined, the family enterprise strategy will need to deliver that value for generations to come.

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