Choices and Consequences
Many years ago, a CEO inherited a major New England distribution company from his father. The company had a good location and capitalized on emerging industry trends. The father also created several other companies in diverse industries as he was the entrepreneur of the family. When he died, through a series of family deaths and ownership transitions, the CEO gained voting control.
Grandson in Charge
The distribution company was run for many years by one of the grandsons. The rest of the family was employed in other businesses outside of the family. For a long time, life was good, customers called the company, revenues were stable and customers paid their bills on time. Some would say that the running the business was like shooting fish in a barrel, except that the fish were becoming more difficult to shoot.
The Market Changed
What had once been a sleepy industry was no longer the case. A scarcity in the market accelerated customer demand. Seeing opportunity, private investors are routinely offering to buy competitors at significant multiples of earnings. The investment opportunity has dual benefits: owning the real estate and running a stable operating business that can pay the rent. Good businesses are selling for historically high multiples as financial and strategic investors continue to capitalize on limited capacity and hard, leverageable assets.
The Best of Intentions
The CEO controlled the finances and dreamed of expanding the business. Plans were made but nothing was ever done. Since he controlled the stock, no changes were made unless he approved them. Board meetings rehashed the CEO’s interests and plans. He was not a greedy person but he was unable to execute. Fear of failure and living up to his father’s expectations were crippling factors. In his mind, by risking nothing he emerged unscathed.
Today, the clock is ticking on acquisitions and industry valuations continue to rise. In addition, new distribution facilities are being constructed. New buildings have operating costs significantly below any legacy buildings. This development puts added pressure on current operators to upgrade their facilities or consider selling and capitalizing on market interest and valuations.
The Quandary: “What Would the CEO Do If the Business Was Sold?”
Having spent his life within the confines of the family enterprise, the CEO’s life has been the business. Long divorced, he has few hobbies and sees his family from time to time. In short, “managing” or overseeing the business has been his major focus. Dreaming of future success continues to be a consuming occupation. Controlling the business is a self-validating force. He has nothing else to do.
Watching the Grass Grow
The family is stuck. Given the ownership control, there is little opportunity for anyone other than the CEO to change the course of history. Staying in control remains a stronger attraction for the CEO than maximizing a legacy for his family. It is unclear if he is aware of the consequences of new industry construction and significantly lower operating and capital costs.
- Family history preordained the current outcome, the dust will settle, eventually. Not every business can be saved when it gets into trouble.
- A strong case of CEO narcissism prevented anyone from managing or influencing the CEO. It could not be done; he was his own worst enemy. Challenging him had extremely negative consequences.
- Exit timing is essential in industries that have remained dormant and are now in demand. If there are hard assets involved there is an avalanche of investment cash looking for a home.
- Change is a pervasive factor everywhere. It can be easier to wait until the decision is made or obvious, than to make the decision. But there are consequences.
- The nature of the business, including high barriers to entry, high switching costs for customers and long-term returns allowed the CEO to avoid making hard decisions. It also wasted years of good cash flow when the industry was not under pressure.