The Family Business Reflection Forum co-organized by IESE’s Chair of Family-Owned Business and the Instituto de Empresa Familiar continues to give us plenty to talk about.
In the first of this three-part series, Prof. Marta Elvira highlighted the core benefits of strategic alliances as engines for growth, which Prof. África Ariño brought to life in the second article by sharing some real-world success stories.
In the last of this series, we’ll shine the spotlight on another key issue when considering a strategic alliance: the financial aspect.
The FRICTO framework
During the event, I had the pleasure of moderating a session with three expert panelists: Jaime Hernández Soto, founding partner of MCH Private Equity, Jorge Lucaya, founding partner of AZ Capital, and Hugo Serra, CEO of GCO (Grupo Catalana Occidente).
Preparing the panel discussion brought back memories of my time as a professor of finance and advising MBA students on what to keep in mind when modifying a company’s capital structure. In these cases, we always used the acronym FRICTO as a guide:
Flexibility
Risk
Income
Control
Tempo
Opportunity
Seven insights from three distinguished panelists
Event attendees were mainly owners of family-controlled firms, so the discussion was more strategic in tone than financial. Even so, I’ve taken the liberty of using the FRICTO framework to underline the panelists’ recommendations.
FLEXIBILITY
1 – Identify your target companies and be patient. When the time is right, start talking. This dialogue may plant the seeds for a solid partnership, which doesn’t need be limited to the exchange of shares.
2 – Never forget the option of disinvesting. Not every partnership will be a success. If things aren’t working out, the sooner we course-correct, the better.
RISK
3 – Strategic direction. Family businesses aspire to leave a positive legacy, so the most critical consideration in this type of acquisition is its impact on long-term strategy. To this end, acquisitions must satisfactorily address the following questions:
- Does the acquired company add value?
- How does it add value?
- Will there be a good fit between both entities?
If the answer to any of these questions is unclear, better think twice.
INCOME
4 – Fit over financing. When it comes to the balance sheet, assets–not liabilities–are what matter. In economic booms of high liquidity, companies should resist the urge to acquire just because they’ll get easy financing.
TEMPO
5 – Properly time the transaction. For acquiring firms, the prospect of quickly building up industry presence is exciting, yet can lead to disastrous consequences if lacking a strategic foundation.
CONTROL
6 – Mergers present more challenges than acquisitions. Establishing the exchange equation isn’t easy for several hard-to-manage issues, including the difficulties inherent in defining shared future project, merging two corporate cultures, determining the management team, and balancing different corporate governance bodies.
While there are examples of successful mergers, these are always more challenging to achieve than effective acquisitions.
OPPORTUNITY
7 – Pay attention to price. Paying more than the acquired company is really worth will have consequences in the medium or long term. Don’t get carried away and keep a cool head!
Numerous other insights emerged from the panel discussion but I’ve centered on these seven FRICTO-inspired recommendations for the sake of space. I hope they have given you some food for thought!
Homepage image: Edmond Dantès · Pexels