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.

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.

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.

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.