Diversification: A corporate strategy to enter into new products or product lines, new services or new markets, involving substantially different skills, technology, and upon understanding the associated risks, an agreed upon commitment from both ownership and executive management.
The other night I had the opportunity to dine with an old high school friend. He is the second-generation owner of a very prosperous family business that provides banks with check scanners. If you’ve ever had a check scanned at a bank, it was probably done on his equipment. He’s now in the process of turning his business over to current non-family management and ownership of his two sons (more complex than he had thought!).
We talked about how he helped his father built the business from scratch. How he had found himself on the bleeding edge of technological change as the world moved from analog to digital. And how he leveraged technology and legislation to build a worldwide enterprise. It was during this conversation that he mentioned he and his sons had now diversified 3 years ago by buying a competitor and more recently into financial software but away from their core hardware business of check scanners. A decision to grow his business.
Talk about a big decision! One of the keys to my friend’s success has been his ability to anticipate where his market was headed. But he said he didn’t need to be a rocket scientist to know that the use of checks continues to be in decline as it is replaced by credit cards, debit cards, and bank transfers as well as new disruptive technologies so in his case, the writing was maybe not on the check but definitely on the wall. Checks have a 5- 10-year window so, if they wanted the family business to continue……. It was diversify…or die! Time to reinvent the business!
If that’s what your tea leaves are saying, then the question becomes how to diversify successfully. But first, take some tips from my high school friend. He says first you have to take a step back and confirm ownership’s goals. In other words, do you want to GROW your business? Or do you want to MILK your business? My friend pointed out the only 10% of family-owned businesses make it the third generation NOT because the business fails but because ownership fails due to opposing interests born of greed and genuine financial need. Better get ownership on the same page and committed before launching a diversification strategy.
Second, owners need to decide on organic growth from inside the company using new products, new markets, or new people. That requires new funding and will take time to grow OR they might decide to go outside the core business and acquire a business. The new business might be either strategic (a competitor or supplier) or just purely a new business 100% outside of the core business – much riskier since it is all new.
Third, find the person or persons who have the “fire in the belly” to lead the diversification effort. It’s also crucial that such a person has a feel for or can tap into market intelligence to bring leadership and passion to the new venture.
And finally, my friend acknowledged that it’s hard for owners when they are already successful to ask them to again RISK money and time on new investments. So, owners must have a reason and a well-vetted business plan to feel good about taking that RISK. Once committed, you’re all in.
And the check scanning business? It is having a record year despite the COVID 19 virus.
And to ensure the family’s financial long term security, my friend and his sons are 10 years into a 25 year plan of investing in income-producing real estate….and in their case multi-unit / studio, 1 bedroom, and 2 bedroom apartment buildings. It seems one son was a finance major and has experience in the mergers and acquisitions side of property management. As my friend points out, it probably also doesn’t hurt, that a staggering 90% of all the world’s millionaires achieved their wealth by investing early in income-producing real estate. 90%! Smart family.