Founders Keepers

Investor Warren Buffett once said that he tries to “invest in a business so wonderful that an idiot could run it. Because sooner or later, one of them will.”

This week, we discussed with Julie McLaren from Focus the red flags to watch out for when investing in founder-run businesses. Julie works with founders and their companies to increase sales. (Full disclosure: Julie is a client of our firm).

My favourite book on a family-run business is “The Eatons”, written by Rod McQueen. While Timothy Eaton rose from rags to riches, Eaton’s sadly vanished after the third generation. At a forum I recently attended to discuss one particular family-run company, the consensus in the room seemed to be that the founder envisions the business concept, the second generation grows it, and the third generation never fails to blow it all up. 

Founders often take more risks, not to mention define their company’s culture. Sometimes, however, the founder can also have difficulty giving up control. This can result in friction with fragmented decision-making and no clear succession plan. Customers and employees often notice a divided leadership team that isn’t working from the same page (read “Rogers v. Rogers”, which documented the boardroom drama at Rogers Communications during Covid-19).

There’s no consistent valuation premium or discount that a publicly traded, founder-run company normally attracts. Sometimes the founder is an asset to the stock valuation (such as Elon Musk with Tesla) and other times the founder is not (such as Rupert Murdoch, who once demanded his four children each pay him $100 million as a show of respect).

Stocks that accompany a dual-class voting structure (think of tickers that end with a .A or .B), however, are a different story. This shouldn’t be mistaken for a situation when a founder simply owns a lot more common shares than you or me. A dual-class voting structure exists when the founder owns a different class of stock in the same company that carries significantly more votes compared to the other common class of shares. The consequence of a dual-class structure enables the founder to make unilateral decisions without shareholder consent. 

A good example of this was when Frank Stronach controlled Magna International. For years, that stock was simply uninvestible for many Canadian money managers. Stronach held 66% of the votes but owned a mere 0.6% of the equity. Consequently, he made decisions as he pleased. After Stronach left the company and this horrid voting structure collapsed, the stock price took off to the benefit of the common shareholders.

Schneider & Pollock doesn’t seek to find or avoid owning founder-run companies. However, dual-class voting structures often sour our interest; there would have to be a very compelling investment thesis to warrant a purchase of a stock where the founder unilaterally calls all the shots. Each founder’s personality is nevertheless studied carefully as we research founder-run companies.

If your business is looking for an experienced sales expert to help boost your sales, please contact Julie McLaren at jmclaren@bringonfocus.com. Julie will provide a free 30-minute consultation to discuss your business and ways she can help grow your revenues.

-written by Jeff Pollock