Companies, like entrepreneurs, grow old

Professor Damodaran is a well-known name among managers and students of finance, his name is often found in the footnote indicating the sources used to calculate the WACC in some investment or business valuation. The database made freely available since the early days of the internet by the Stern professor is perhaps the greatest contribution to the development of financial theory applications and it remains inexplicable, at least to familyandtrends, how Aswath Damodaran has not yet won the Nobel Prize in economics. Since August, Damodaran has also been contributing to a better understanding of family businesses with his new book The Corporate Life Cycle where he argues that every company has a life cycle, from start-up to decline, that you have to accept that this happens and that you have to manage your business accordingly. There are three possible ways to combat ageing: 'renew' by fixing what is not working in order to return to growth, 'reconfigure' by expanding into new markets or developing new products, and 'rebirth' by completely changing the operating model in the hope of starting a new life.

The first consideration is the confirmation that the three-generation anathema is a false myth of family capitalism: only 13.81% of the world's enterprises are over 70 years old; three generations are equal to 75/90 years, so family enterprises are longer-lived than at least 86.19% of enterprises. Who knows whether the author's authoritativeness and his endless database will be enough to make the anathema that Schumpeter hurled from the steps of Baker Library at Harvard in the 1940s ("in three generations from suit to suit") and that still hovers over so many members of the fateful third generation go into oblivion?

The second consideration is the confirmation of the responsibility that every entrepreneurial family has to generate at least one entrepreneur in every generation who with the strength of a united shareholding 'regenerates' the enterprise by adapting it to the changing competitive environment. When this does not happen, as Damodaran confirms, the enterprise becomes old and like those cute but dusty knick-knacks in the homes of old aunts, it goes out of time and the market, it stops doing something useful for the customer.

The third consideration concerns how to react to ageing. Renovation is an effective strategy when actually renewing some business process or area but only if the sector as a whole is not ageing. The Damodaran database, again, offers some interesting data on the 'old' sectors; they show negative revenue CAGRs 19-22: 79.87% of the 154 companies in the Air Transport sector, 71.74% of the 644 companies in the Hotels/Gaming sector, 66.67% of the 51 companies in the Transportations/Railroads sector, 60.47% of the 382 companies in the Restaurants/Dining sector, 53.59% of the 334 companies in the Publishing&Newspaper sector. Reconfiguring is a good path but, Damodaran warns, one should not pay too much attention to the size of the market and too little to the unique strengths one possesses. Damodaran echoes Porter here, who has always maintained that analysis of the competitive environment is useful in the short to medium term, but that in the definition of the long-term strategy, i.e. 10-50 years, it is the company's competencies rather than the environment that count. Rebirth, lastly, involves cannibalising or disrupting existing activities in order to be reborn in completely new areas: this can only happen when the company is led by a change agent with leadership and authority vis-à-vis investors and when one has the luxury of at least ten years to complete the rebirth. Damodaran does not speak specifically of family businesses, but one cannot fail to see how it is more likely that it is these types of businesses that have the characteristics for rebirth.

Damodaran concludes by saying that when renewal, reconfiguration or rebirth is not possible, the company must prepare to age peacefully, limiting investments, taking fewer risks, releasing more cash flow through dividends and capital repayments. This trajectory requires a company leader who does not want to grow, who prefers to limit risks and investments, who does not embark on new initiatives... in essence, an ageing company needs 'old' leadership.