Wertschöpfung!
As much as all this talk of 'Exit Strategy' makes sense for the UK and US ways of doing business, let me introduce you to another concept that deliberately avoids and prevents any exit by the owners.
The German family company is not quite what outsiders think it is. You may be thinking of the local electrician, car dealer, widget maker, or other proud members of the 'Mittlestand' - medium sized companies, up to about 500 employees.
Firstly, the German family business can be a vast enterprise. BMW, Miele, Aldi, Lidl and Bauer Media spring to mind - multi billion dollar international enterprises.
Secondly, these companies have planned for succession (so, for the founder, a personal exit strategy) but the families remain closely tied to the company. Often, not because they want that, but because the founder set up a series of legal devices that make the company and its properties only of value to his or her family. Typically, covenants on land, buildings and shareholdings, such as forbidding the use of real estate as collateral for debt, only family members can own shares and the use of convoluted, interlocking trusts, combined with commercial companies.
If outside investment is sought, the founding articles will often stipulate how many family members must be on the board and even give them the deciding vote (e.g. BMW).
US companies in particular, are very fond of going for an IPO at the first possible opportunity. Cash-in, run-in, get-out! Retire rich! My experience of these people and their ultimate fate, is that, unless the sums involved run into billions, the money is soon gone. If the founder doesn't blow it all on Scottish castles and South Sea islands, his heirs soon will!
The founder of the average German family company is all too aware of this tendency of his or her progeny to develop a premature yearning for S-Class Mercedes and yachts on the Med. They realise that future generations may want to expand the business through debt, rather than dedication and diligence.
The magic word is 'Wertschöpfung' (the creation of value).
It usually takes a few generations to create a major company and at first, without loading the company with heavy debt, progress will be slow. The advantage is, whatever kills off your indebted competition, leaves you relatively unscathed. Road-works on the High Street kills off footfall - the competition in a rented shop fails to pay the rent and is gone. The competition in a mortgaged shop fails to pay the mortgage and has to refinance and survives a few months longer. But one more thing and they are dead as well.
By adhering to the principles of Wertschöpfung, you are reducing risk.
However - the one giant risk that a strategy of Wertschöpfung cannot cover, is future generations not adhering to the principles of Wertschöpfung. They may do things like take on debt or outside investment. Most of the time, that heralds failure or a total loss of control. Your family has lost the company, in exchange for flash cars and a big house. Add another generation and your heirs are right back to where you started and all that work was wasted.
The only way you can prevent that and take care of future generations, is to actively prevent an exit strategy, by means of covenants and trusts.
Of course, the principles of Wertschöpfung ain't for everybody - especially if you don't really care for your heirs that much, or you don't see much of a long-term future for the market you are in. If that is the case, as the man said, prepare that exit strategy!
(And for those of you playing the 'Home Game', you may remember that I outlined in another thread, the basics of 'Aldifizierung' (Aldifying the market) which is a whole branch of retail economics. Wertschöpfung is very much a component in that business model.)
