Is Putting All Your Eggs in One Basket All It’s Cracked Up To Be?
In my dealings with family controlled businesses of all sizes and in many different kinds of industry, one critical question about capital management constantly arises.
Should you put all your eggs in one basket by reinvesting all spare earnings back into the business and owning it all 100% in your own name?
Or should you crack a few eggs and make an omelette of things such as a management buy-in, investing in external assets, re-structuring debt, lowering the risk attached to key family members... and so on?
Of course, there are positives and negatives attached to both courses of action, but let’s take a look at cracking a few eggs and see if it’s the right path for your business.
For example, it has been shown many times that owning a percentage of your business, say 80%, can actually be far more beneficial (in a number of ways) than owning 100%. As iconic American publisher Henry R. Luce said “Business is a continual dealing with the future, an instinctive exercise in foresight” and I have to say if Henry was still around today I’d tell him I agree 100%.
In fact, in his own words, he was articulating the reasons why Strategic Capital Management can be so critical. It all comes down to setting strategic objectives and ensuring you have the capital necessary to meet those objectives (the exact opposite of doing things when you have the capital and not doing them when you don’t.)
One example of Strategic Capital Management I have been involved with is the highly successful family controlled Uni-span Group that has dealt in innovative scaffolding and formwork equipment in Australia and abroad for more than 25 years.
Uni-span is a growing company and their philosophy was to re-invest their retained earnings in the company. Of course, while money from the banks was very readily available prior to the GFC, Uni-span found their bank was very supportive only after the company learned how to effectively communicate with them.
This enabled their bankers to truly understand how the business worked and what its requirements were… which allowed them to fully utilize debt capital available in the market. The bank very quickly realized that this company was a leader in its industry and, with the bank’s support, Uni-span was able to grow while some competitors were struggling for capital.
It was during this time that Uni-span really started considering how they manage and allocate their available capital across the business and the family group. They re-considered their whole situation and took some major steps which included:
•Serious strategic planning to set clear objectives for the future of the company
•Quantifying the capital necessary to meet those objectives and putting steps in place to ensure its availability
•Enabling a management buy-in which included what we term ‘emotional family members’
•Diversifying their revenue stream by utilising superannuation funds to purchase a building to house their company
• Re-capitalising the business and instituting a higher level of proactive reporting to the bank
These steps, and a number of others, had the positive effects of ensuring high staff morale and solidifying Uni-span’s relationship with the bank. Of course, it also made family members happy because for the first time they could see an asset (the company’s building) as an income-producing asset not tied to the business. And very importantly, it reduced the pressure on key family members.
But for your business (and let me play devil’s advocate for a minute) it’s important to remember that diversifying risk is a two edged sword. By lowering risk you could also lower your returns.
By investing in areas other than your own business you’re achieving the safety of diversification, but you’re at the mercy of marketplace forces that you might not fully understand and certainly can’t control…which can result in lesser returns.
Conversely, when you re-invest in your own company you may get higher returns but you are in a situation where you have all your eggs in the one basket… and we all know what happens if you drop a basket of eggs.
So, what’s my final opinion? Well, such decisions are personal and individual. But if there is one thing I’ve learned over the years, it is that there is no complete solution for all family businesses other than full integration.
With a fully integrated family business, every single decision is part of a totally comprehensive Generational/Business Plan that gives a coordinated pathway to the immediate and the future.
And I can guarantee you that full integration is all it’s cracked up to be!