Mergers and Acquisitions, Channel investors, Mergers and Acquisitions

Friday’s Exit Strategy: Your Kids Will Never Own ‘Your’ Business

Poke around the IT service provider market, and you'll find plenty of family owned businesses. And one day, the journey from Entrepreneur to Exit (E2E) may involve selling or transitioning your business to a son, daughter, neice, nephew -- someone in the blood line.

But if you really think about it: Your kids will never truly own your business. They'll either move onto jobs and careers elsewhere. Or they'll stick around and take over the business -- in which case it becomes their business. Built around their vision. Not yours.

My point? Succession planning is a two-way street. If you want your kids to take over the family shop, you have to trust them to run the business based on their vision and the road ahead -- not the legacy you leave behind. They've got to treat the business like an asset -- an investment to be nurtured and managed closely, rather than a family heirloom that doesn't change with the times.

Example Family Transition: The Ziff Brothers

When it comes to successful family ownership transitions, I'm reminded of two families. First up is the Ziff family, which started out in publishing and then diversified into various investments. The other involves a series of business and IT services companies launched by the Cagnazzi family of New York.

William B. Ziff, Jr.
William B. Ziff, Jr.

Let's start with Ziff Davis, a publisher that William B. Ziff, Sr. and Bernard G. Davis launched in 1927. Among its flagship publications in the early days: Popular Aviation.

When Ziff Sr. died in 1953, his son (William B. Ziff, Jr.) stepped in to run the business. Davis exited by 1958.

Somewhere along that transitional journey, Ziff Jr. truly made the company his business. Instead of resting on existing revenue streams, the second-generation owner built brands like Car and Driver. The true boom years arrived the 1980s, when Ziff Davis sold off many of its consumer magazines for more than $700 million, and doubled down on IT magazines. Brands like PC Magazine, Computer Shopper and PC Week flourished.

Then, another family inflection point arrived in the early 1990s. Ziff Jr. wanted to transition the business to his three sons . Alas, they weren't interested in the company. Ziff Jr. ultimately sold the business for roughly $1.4 billion. The sons, armed with part of that war chest, went on to launch Ziff Brothers Investments. They diversified their holdings, and built a family fortune worth $14.4 billion as of 2016, Forbes estimates.

The moral of the story: You don't have to remain in the original business to ensure your family's legacy. As for Ziff Davis, the company and various pieces have been acquired and sold multiple times over the past two decades. There were some tough times amid the transition from print to online. Some owners nearly destroyed the company with far too much debt. But under current CEO Vivek Shah, Ziff Davis's fortunes have been rising again.

Example Family Transition: The Cagnazzi Brothers

In another example, I'll point to the Cagnazzi family from Long Island. The story goes something like this: Victor Cagnazzi Sr. in the 1970s built a company selling business forms for classic pin-fed business machines. Gradually, Cagnazzi's four sons entered the business -- named ISG -- and pushed it towards computers, computer supplies and computer networks.

Presidio CEO Bob Cagnazzi

I grew up in the same neighborhood as the Cagnazzi kids. They were roughly five to 15 years older than me. As a teen in the 1980s, I witnessed some of their business transformation. My dad's residential real estate company purchased computers from the Cagnazzi team. The fledgling PC era was good to our neighborhood.

But the Cagnazzi kids didn't stop there. They expanded into networking and Internet systems in the 1990s. Revenues grew from about $8 million in 1991 to about $70 million in 2001, according to Competition Plus. That's when Dimension Data acquired the business.

Everyone retired right after the deal. I haven't heard from the family since that time.

The Cagnazzi Kids Play an Encore

Or not. Much like the Jacksons or the Osmond brothers, various iterations of the Cagnazzi brothers have reemerged in the IT services spotlight. They've launched, sold and led major IT services firms. In the current chapter, Bob Cagnazzi is CEO of Presidio -- the massive IT solutions provider. Brother Chris has been involved in various finance and M&A operations, and brother Victor Jr. has a hand in the company's cloud efforts.

The moral of the story: The Cagnazzi brothers didn't just "run their dad's business." Doing so would have triggered certain death during the rise of Staples, Office Depot and OfficeMax more than two decades ago. Instead, the Cagnazzi kids took the best of what their dad had built, reshaped it and expanded it for modern times. Then they sold that business, unlocked the asset's value, and continued the creative process at additional ventures in recent years.

In short, they kept building assets without necessarily holding onto one particular business for the long haul.

Forget Emotions. Build Assets

Too often, family succession planning gets sidetracked by emotions. Founders intertwine their identities with the business and never quite manage to let go. When the next generation of family steps up to run the business, they often stumble. They look back instead of looking ahead.

As Forbes points out, less than one third of family businesses survive the transition from first to second generation ownership. Another 50 percent don’t survive the transition from second to third generation.

Instead of worrying about the emotions of building, running and selling a business, do what the Ziff brothers and the Cagnazzi brothers did:

  1. Focus on build assets.
  2. Always treat the business as an asset -- rather than your emotional  family identity.
  3. Make sure the true asset -- the dollar value -- remains with your family, even if the business doesn't.

If you happen to transition the business to your kids, make sure it's truly their business to own, operate, expand -- and yes, perhaps even destroy. If you've managed the dollars and cents correctly, you'll unlock the value of the assets as the business transitions from one generation of leadership to the next.

Joe Panettieri (@JoePanettieri) is co-founder and executive VP of After Nines Inc. and its IT media platforms — ChannelE2E and MSSP Alert. His great grandfather arrived to the United States from Italy around 1917, charting the way for three generations of entrepreneurs.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.