Family succession isn’t always an option in the corporate world

What choices are left to entrepreneurs who have been building their business on their own or with a few friends for the last 30 years? 60-year-olds are incredibly vital, still eager to enjoy the best that life can offer and yet keen to maintain an active role in the business community as well. However, decades of stress and working ridiculous hours have often left their mark on their health and their family relations, and let’s face it – any successful business leader would like to take a moment to enjoy their achievements without losing their grip on the game. Spending a long time doing something monotonous with the same people may also lead to fatigue or the realisation that a change is needed for either the founder or the business to reach new heights and set new goals.

Can the business be trusted in the hands of the next generation? What if there is no desire to continue in the family business? There aren’t too many success stories of family dynasties in the Estonian business community, because not everyone is born a natural business leader or a visionary founder. Old grandpa’s farm didn’t stay afloat forever, even though the crop yield was excellent and there was a shiny new car in the garage. Most successful companies in fact fail to maintain their success for decades. An article published by KPMG in 2015 stated that the average lifespan of a Fortune500 company is 30-40 years, just barely over the span of a generation. New competition emerges, new technologies become available and the dynamics of conducting business are in a constant flux. Rooted preferences and methods become an obstacle, which may lead businesses on the path to self-destruction.

Selling to competition may hurt staff and partners

Possibly the easiest way for unburdening oneself completely from a business shareholding would be selling to a competitor. Any enterprise, which after years of hard work and dedication has found success in a particular niche, is of great interest to its competitors as a potential asset for increasing market share or entering uncovered export markets. This however raises concerns over safeguarding the interests of the company’s partners, clients, and staff. How to protect them from changes which might hurt their well-being? These stakeholders and their input have been largely responsible for the success of any corporate entity, as most partnerships are built on years of cooperation and loyalty, which the new owner may not value as highly.

Successful Estonian entrepreneurs have certainly been approached at different times by various funds interested in acquiring their holdings. The founder is left with a wad of cash, but without control over the enterprise. Add to this the regret over seeing your crown jewels boosted up and sold to an even more anonymous owner only a few years later at a considerable profit, and the result can be compared to a bitter hangover after missing out on the jackpot despite winning some petty cash. The joy of seeing some extra zeros on your balance statement could be short-lived, as inflation voraciously claims its stake of the pie and the pressure to find a relatively risk-free asset class for safekeeping investments and cash resources builds up to a panicky frenzy. Several business founders have admitted that if given the possibility, they would invest the profits from selling their businesses back into their companies, as it’s the safest investment they know personally. However, most growth funds are not interested in such partnerships and although the company may witness a new and stronger level of corporate governance, the original founders have very limited options for enjoying these benefits after selling their majority stakes.

The Swedish model for investing in SMEs

There isn’t a single investment vehicle on Estonian or other Baltic stock exchanges investing in local SMEs, offering partial exits to founders and allowing investors to participate in the success of these enterprises. Sweden on the other hand has dozens of such perpetual investment funds consolidating successful SMEs and listing the group assets on the stock exchange. The focus isn’t on earnings from selling assets, but on improving the corporate management quality, improving export capabilities, and achieving economies-of-scale effects for the portfolio enterprises over several decades. The most prominent Swedish funds operating in this segment are e.g., Volati, Storskogen, Teqnion, Röko and Novax.

The benefits of this model include keeping the original owners involved in their businesses, the possibility to swap a share of holdings for cash and the remainder for equity in the fund. This approach effectively solves a variety of issues, ranging from how to re-invest the cash-out, how to ensure a reasonable living standard for the next generations and how to maintain the stability and export competitiveness of the enterprise. New investors will find access to an alluring asset class that would normally be out of their reach. Listing each individual enterprise separately for public trading would be inefficient and resource-consuming but consolidating dozens of successful SMEs into a single group to be listed on a Scandinavian stock exchange could bring some spark back into the eyes of Estonian entrepreneurs and pension fund managers.