We have a supplier who owns and runs a small business. The business is located on a nice lot on a block of what used to be a by-way that ran from one sleepy beach town to another. Fifty years and two airport improvements later, that unmortgaged piece of property is in the middle of a block on the main road through the fastest growing part of a wealthy cosmopolitan county. The business does well enough: it covers its expenses and supports the family. Selling the land the business sits on, however, would ensure that no one in the family ever again have to get up and go to work in the morning.
Why do they keep operating their little low-margin, high-effort business? “This gives Dad something to do with his time” is the answer the current CEO gives when asked. Should we hold this up as an example of bad strategic planning? We don’t think so. In fact, we think it is an unusually good example of planning for a family business.
Standard business theory tells us that every asset should be used to produce its highest economic value. In this case, that would generally mean the family would sell the land and close the business. Or they would at least borrow against the land and invest the resulting funds in assets that produce a higher economic return. In this case, however, the value of giving the founding patriarch a purpose for his days has a higher value to the family than the land has.
Over time the family has done a little investing. Using the land as collateral, they have bought nice homes in the neighborhood and a family vacation home in the mountains. They have also purchased “some stocks and bonds.” They clearly have not, however, made any significant effort to diversify their assets. Why not?
The economically approved answer might be that the continuing development of the neighborhood around the land suggests that the return on the land will improve over time and/or that there is a tax advantage to holding the land until after the father has died. But, in this case – and, often, in the context of a family business – the family’s non-economic needs constitute a type of return the family has determined to be important.
That doesn’t mean that the family has ignored economic returns in favor of their non-economic needs. They have specifically catalogued and considered both the costs – direct cash costs and opportunity costs – and the risks of keeping the business running. Based on that information, they have consciously balanced family needs against alternative economic possibilities.
Weighing family needs against potential economic returns has to be done carefully. It can often be complex and require both objectivity and expertise that the family has to hire outsiders to bring to the discussion. Nevertheless, we believe that the family’s non-economic needs and goals should be recognized as legitimate needs and goals of the owning family and should be made explicit in the discussion of the strategy for a family-owned business.