Built to Last | Justin Burris

Justin: I'm Justin Burris. As Emily mentioned, I've spent my entire career working with family companies. I've worked at family companies of all sizes. Now that I'm a cofounder and partner at Majority Search, I focus on family companies of the smallest size, really as small as 1,000,000 of EBITDA. But before this, I spent almost 7 years at a firm called BDT Capital Partners, which works with some of the largest founder and family owned companies in the world. Incredibly unique experience and an opportunity to really get up close and personal with some of the largest companies in an intimate way that I think is pretty uncommon. And it's led me to recognize a couple of commonalities across those largest family companies and what they did so well to get to the size that they are, and also the takeaways that companies of any size could use and apply it to smaller companies that are interested in Root. If you look at the list of the largest family companies out there, and this is just one list, I should say. There are lots and lots of lists. This is a publicly available list by, researchers at Ernst and Young and the University of St. Gallen in Switzerland. It's not a perfect list. It's based on revenue, for example, and it's based on the best estimates of researchers for a lot of private companies, but it's probably the best list that's publicly available out there. There are lots and lots of familiar names on the list. Just go through the top, Walmart, Berkshire Hathaway, Cargill, Ford, Coke, Comcast, Dell, Tyson, Nike, Mars, tons and tons of familiar names. If you look across them, there are a couple of things that stand out. First is just how old all of these companies are. Family companies have a reputation for being extremely long term oriented. That is true. These are highlighted here, the companies that are over 50 years old. As you can see, it's the majority of the list. The second is just how disproportionately consumer and media focused these companies are. This is really interesting. It's actually in contrast to the US economy at large. US economy, if you look at the S and P, primarily technology, health care, financials, these companies are consumer and media mostly, which is different, and we'll talk about why that is the case. 3rd is the definition of family company is pretty interesting. These companies, despite being family, meaning that there are multiple members of family that are involved and the family actually has a meaningful ownership stake, they all or at least, you know, significant majority of them rely on, the expertise of outsiders. So highlighted here are the members of this list that have nonfamily CEOs or independent directors on the board. Super important. We'll talk about why that is and how that's helped the companies become the scale that they are today. So first, let's talk about age. This is probably what family companies are most known for, the long term horizon. Average age of a company in the S and P five 100 is about 20 to 30 years. Family companies are fundamentally very, very different. If you look at this list of the absolute largest, you're almost as likely to have been founded in the 1800 as during the past 50 years. Kinda wild, honestly. There are just very few new companies. A couple of reasons for that. The first is partially definitional, where in order to even, be eligible for this list, you do need to have multiple family members that are involved. So almost by definition, if you're a founder owned company, you wouldn't actually qualify for this list. It's not to say that you wouldn't be the same size. It's just a sort of an eligibility criteria to be on this list to begin with. More interestingly, though, is, what it takes to actually get to the scale that a lot of these companies on this list are. And, by and large, these companies have gotten to where they are because they've really benefited from compounding over multiple decades. You know, in this case, 50 years or more for the most part. Obviously, the magic formula for compounding is both the rate of growth and also the amount of time. So the longer you can keep compounding going, the better. And the best family companies really adhere to the sort of magic formula of having the capacity for reinvestment continuously. So really having that reinvestment run rate, taking advantage of it, and then, basically trying to stop everything else that could get in the way from doing so. I wanna talk about a specific example here that has, the two elements that make compounding most effective. 1 is sorry. One is the capacity for continuous investment, and 2 is a reason specifically in that industry why bigger is actually better so that you have a compounding moat over time. Every couple decades, you see an industry pop up, usually due to some change in technology or regulation that permits the emergence of a whole set of companies that exhibit these criteria. Actually, a better example than this potentially even is that, both Hyatt and Marriott, both great examples of family companies, were founded in the exact same year. Related with the emergence of the jet age, there came a need, for hotels next to every airport, and those two chains both took advantage of it and opened all across the country. People were traveling everywhere. It was the same brand. So bigger was better, and there was the opportunity for continuous reinvestment by opening hotels or buying other hotels and reflagging them adjacent to every, airport across the country. Another good example of so jet age in the fifties, 19 sixties after, the Interstate Highway Act was passed is another good example. You had a huge surge in infrastructure construction across the country. Trucking was booming. In 1958, Pilot was founded. 1964, Loves was founded. 1968, Flying J was founded. All great examples of long term family companies where they could literally open truck stops at every single intersection along the interstates. They're they're all still family owned today, actually. That's 19 sixties. There are other examples. You could say 19 eighties, cable television is a perfect example of this. In the 19 nineties, category killer retail chains were a great example. 2000s, honestly, you could probably even say consumer Internet in 20 tens, enterprise software. Every decade or so, there is one of these sort of generational watershed opportunities where you can achieve continuous reinvestment over time. And, usually, that marks the birthplace of a lot of family companies the way you see in trucking gear. This is probably the most known curse of family companies is that, you know, there are huge benefits to getting old, but getting old is really, really hard. The most commonly cited statistics, these are from John Ward, is that only 30% of family companies make it to the 2nd generation, only 13% make it to the 3rd generation, and just 3% make it to the 4th generation or beyond. There are lots of obstacles to getting old. Probably the largest though is not really obsolescence. It's that families decide, that they're no longer interested in having all of their net worth concentrated in a single asset, and they literally just choose to transform their net worth, from one operating company into a broader portfolio of assets in order to diversify. There are a couple of reasons why that's particularly appealing to them. 1st, you know, every consecutive generation, you need to undergo a leadership transition. It's hard to navigate that. There's always opportunity to get it wrong, and sometimes families just don't have the wherewithal in order to navigate it appropriately. 2nd is, just with every passing generation, you are bound to feel next close to the family. So you feel closer to your siblings than you do to your cousins. And if you're a second generation, you probably own the business along with your siblings. If you're 3rd generation, it's with your cousins. If you're 4th generation, it's with your second cousins. And there's just less bonding you guys together with every passing generation, so the temptation to sell the business becomes stronger and stronger over time. And then the 3rd piece is, the business needs to grow faster than the family in order for every single shareholder to feel like they're equally well off. So there's always a temptation, for example, if you're a family member and a shareholder in a certain generation to basically rob future generations in a sense by selling the business, capturing the value at that time at some premium multiple, and calling it a day. It really takes sort of that long term approach of thinking of the next generation and the one after in order to convince you that the right thing for you to do is to not diversify your wealth and instead to keep it all concentrated on the single asset. Almost all of the family business literature that's out there, and there is tons and tons of it, and we have a couple of folks from Chicago here, is concentrated on basically how do you create anti aging cream that allows family businesses to persist across generations? So there are I mean, we could have hours of conversation about some of these techniques, but there are things like setting up a family council in order to make sure that family members have the opportunity to get along with one another. It's things like having independent directors in the boardroom. It's things like having a family charter to make sure that you create a statement of your mission, vision, and values that can persist across generations and align people around a single goal. Honestly, it's a whole body of work. It's endlessly fascinating. We don't have enough time to get into it. The single most important takeaway from all of that literature, at least to me and others will opine I'm sure as well, is don't trap family in the business. If family shareholders are interested in exiting, the right thing to do is to let them exit, not to make them feel like their entire career is has to revolve around the company and that there's no way out for them. If they want to leave, they'll probably end up wreaking havoc actually within the walls of the business and potentially prompting a sale sooner than would otherwise be prudent. The second characteristic of lots of these large family companies I wanna talk about is that they're disproportionately consumer or media. Super interesting because this is actually unique to family companies. It's totally counter to the S and P, much more technology, health care, financials. These are much more consumer and media. There are a couple of reasons for that. One is that families actually do have a distinct advantage in leading consumer and media companies compared to their more professionally managed counterparts. The reason for that I mean, I think the best example is you take a consumer brand like an apparel brand, for example. And, you know, if you look across the the fashion industry, so many of the largest fashion companies remain family owned because they really act like multigenerational stewards of the brand. They won't do things, for example, like try to, juice earnings that quarter by stocking a brand in Kohl's. You see that all the time for nonfamily owned apparel brands. So in some ways, families are just better stewards of these consumer assets. The second piece is just what causes you to sell. Usually, you sell a business if you feel less personal attachment to it and it's less part of your identity. Almost by definition, consumer and media brands, they're widely known, they're easy to relate to, and they become part of your identity much more often. So, you know, just for example, you you're probably much more likely to sell your grandfather's insurance brokerage than to sell some consumer brand that you own, like a condiment, for example, that includes his secret recipe. Like, that's just something that you're gonna resonate with and that you're gonna be much harder pressed to part with. It's really interesting. One specific example of a company that I worked with at one time, 3rd generation business, over a dozen family shareholders absolutely hated each other, like, couldn't be in the same room. They received multiple offers to sell the business where every one of them would have, made, you know, large fortunes. And despite the fact that they literally couldn't be in the room together, they still refused to sell the business because it was such a part of their identity that they couldn't imagine life without it. And, really, interestingly, for consumer brands, it's easy because you have the brand to relate to. But even for non consumer brands, there are all sorts of types of companies where, the boards will actually commission, like, copy table copy table books or corporate biographies in order create that sense of identity that brings people together across generations, and they're incredibly powerful. Lots of the largest companies on this list, without naming names, they literally have coffee table books if you go into their, waiting rooms, and they're they're interesting to leaf through. Just to name 2 examples of specific industries where you see the power of family brands leading to larger persistence than you otherwise would, Confectionery is a perfect example. I think everybody can really relate to candy. It's, like, something that you kinda wanna be a part of. And as a result, most of the large family companies, at least in the Western Hemisphere, are family owned, Hershey, Mars, Ferrero, Lindt, Haribo, and Perfetti. It's only a couple of examples that are, not owned by families anymore. Another good example of this is the liquor category, at least for spirits. Bacardi, Braun Foreman, Pernod Ricard, Constellation, Sazerac, even though the MH family, really. It's amazing just how vast families cling to brands that they love. There are only a couple of examples of large spirits companies that are not family owned, and even in those cases, companies like Diageo, which is the largest on this list, really get there by being a trusted steward for family brands and usually actually even working constructively with the families that they're buying for and that they're buying their brands from in order to make sure the brands are shepherded appropriately. 3rd takeaway, this is the last one that I wanna talk through, is the reliance on the expertise of of nonfamily members. In this list, about half of these companies, despite being family owned, are, actually led by nonfamily CEOs. And in even more of these cases, it's it's about 75 or 80% of them, they have independent directors in the boardroom. This is really part of a broader recognition that the expertise of shareholders needs to and the involvement of them, needs to evolve as companies evolve over time. I think the best analog probably is in the venture capital world where conventional wisdom, at least until the past decade, was that, you know, the best founder is not necessarily you know, the best founding CEO is not necessarily the best scaling CEO, is not necessarily the best CEO of the company once it goes public. You know, you kinda shift from product to marketing to capital allocation, and that really is just the company's demanding different, skill sets of its owners over time. Family companies are the exact same way, and the best functioning family companies are really exceptional at, sort of evolving the, involvement of the family based on what they actually need and what the family is able to supply. It's super interesting that, you know, there are lots and lots of cases, for example, where you'll see a family company that brings in a non family CEO almost to tide over until the next family CEO is actually ready to step into place. And having this continuous sort of dialogue with the company based on the family's capabilities and the company's requirements is just the hallmark that you see of the companies that get to this scale. One thing I'll say also, just working closely with a lot of these family companies, and my my background was really in as an investor primarily. It is amazing how effective, family members of companies of this size become in in skills like executive compensation and capital allocation. It's almost like they all were investment bankers at one point themselves. They just become so fluent in it because it's what it's what's required of them and just really super impressive across the board. So let's summarize the takeaways. The largest family companies in the world do so. They get there by harnessing compounding, and they harness compounding by continuously reinvesting in their business over time. They preemptively establish family governance structures, which I'm sure we'll hear more about today. They maintain a gravity of identity as you can see in the cases of the consumer brands here. They allow those who want to exit the business to do so, and they evolve the family's involvement in the business based on the needs of the business over time and also the capabilities of family members. I think, you know, how do we apply this to companies of all size? This is something that my partner, Tim, who is here somewhere, and I talk about a lot is almost starting with a thought experiment of if you are trying to build a large multigenerational family company yourself, how are you gonna go about doing it? First is you wanna pick a pick an industry where you think the treasure, in this case, is really going to be worthwhile. So that means a space where it's a large market. It's a growing market. There actually are benefits to scale over time, and you have significant reinvestment runway. 2nd is you wanna pick a mission that's so interesting that you're convinced that people that you've never met before in subsequent generations will still feel a level of attachment to it. So consumer brands are the best example of that, but at least in our spaces, you know, they can be as sort of boring and uninteresting as a truck tire recycling. But if you frame it the right way and sort of have the right, environmentally sustainable mission around it, it becomes something that people can relate to. And we really do try to instill that in all of the teams that we partner with. 3rd is, relying on the expertise of others. You know, I think we, work really hard to make sure that we're picking the right people for the job at the and then surrounding them with the right people so that they don't feel like they're on an island themselves and they can rely on the expertise of independent directors. And then, fourthly, you know, I think, there is something to be said for you know, you're embarking on this journey. You wanna make sure the people who are on it with you want to be on it. And having an escape, an escape valve so that people can exit if they're so inclined without causing mutiny that brings down the entire ship is absolutely critical. Those are the magic ingredients for compounding in multigenerational family companies, and I really appreciate the time. Thank you.

This transcript was generated with Transistor AI