The 2024 NFL Draft occurred this past weekend, and while you, as a family business director, might not be sitting 8^th on the clock in next year’s NFL Draft, there are certainly draft day themes that can be applied within your family business.

Coaches, owners, and executives from every team gather around in their “War Room” for seven rounds stretched over three days, trying to answer the same questions family business directors ask themselves.

• How can I most effectively use the resources & assets I have to maximize the return on my investment?
• What is more important, addressing the biggest need or obtaining the best asset available at the right price?

NFL Draft “assets” may look different than those of the family business, but the themes of considering shareholder & owner preferences, allocating capital, and preparing for next-generation leadership mirror many of the responsibilities of a family business director.

Shareholder Preferences & Risk Tolerance

What are owner expectations? What are shareholders’ risk tolerances?

Differing owner and shareholder preferences based on historical success, appetite for risk, and their current succession plan are key factors that lead NFL teams to draft and operate very differently.  One strategy in the draft involves using assets to aggressively trade up in the draft.

My hometown team, the New Orleans Saints, is known for trading up in the draft. Over the last 16 NFL Drafts, the Saints have traded up 26 times and traded down zero. Mickey Loomis, the Saints’ general manager, clearly understands the team’s shareholder and owner preferences regarding risk tolerance.

Trading up in the draft shows an increased appetite for risk.

Trading up in the draft shows an increased appetite for risk. On the one hand, the ability to draft a generational talent who can lead your team to victory is ever enticing and perhaps worth the risk of losing other lower-round picks. On the other, there is research highlighting the overvaluation of high draft picks, diminishing the overall expected returns of organizations who take the gamble to trade up.

Similarly, your family business has a distinct culture that operates from these same considerations. Matching your family shareholders’ growth objectives with their relative risk tolerance is a key challenge for family business directors and one that is tied directly to what your family business means to you.  Is your family willing to risk the enterprise for the sake of maximizing growth? Or does your family worry more about making sure you don’t kill the golden goose? Successful family businesses need to evaluate how they invest for future growth in light of their family’s risk tolerance, growth objectives, and business meaning.

What if some of our shareholders are risk averse?

Rather than “trading up” and allocating a majority of your capital resources into a single venture or diversification strategy, the family business may be better suited to diversify the risk across the different needs of the Company.  One of the best to do it, Bill Belichick, was famous for trading back and diversifying his assets. Belichick was playing a numbers game — a lot of draft picks, even high-round picks, end up not panning out. Sprinkling capital allocation decisions across more picks can potentially ensure the organization’s longevity.  A seven-yard out route might not be as exciting as a deep ball down the sideline, but the likelihood of success greatly increases. The proof of this approach to the NFL Draft may be in the pudding: Six Super Bowls for Coach Belichick.

The Saints finished 9-8 last year and haven’t won a playoff game since the 2020 season. That hurt to type out, but the point is having a larger appetite for risk does expose your organization to greater swings in performance (higher highs and lower lows).  Yet, the Saints traded up again last weekend. Will it pay off?

Family businesses also face the question of how much risk they are willing to accept.

Family businesses also face the question of how much risk they are willing to accept.  While the draft may point to the benefits of careful diversification and prudence, many of the most successful enterprises have been extremely successful in putting all their eggs into their business’s single basket.  Your family business’s strategy ultimately comes down to what the business means to you and your shareholders’ risk tolerance.  Even in tough times, shareholder preferences and expectations guide the company’s risk tolerance, capital allocation strategy, and, holistically, the identity and direction of the company.

Next-Gen Leadership

As we have discussed in the past, planning for next-generation leadership is vital for family businesses to survive.

The success of an NFL franchise is tied closely to the success of the quarterback.  Due to this, six quarterbacks were taken in the opening twelve picks of the first round this past weekend, an NFL Draft record.  Family businesses also need to make sure they are nurturing their current quarterback and future leadership.  To return to Bill Belichick, processes, systems, and culture can get you through a lot — but you need your Tom Brady to ultimately lead your organization successfully for the long term.

NFL general managers, just like family business directors, need to ask if they have the right ownership succession plan in place. Have we built an organization that matches what the next generation of leadership wants from the business? Is the next leader of our organization currently with the company or do we need to externally recruit them?

Having a plan for when succession becomes a reality is imperative for continuing on-the-field success. If an unforeseen event occurs, you will have a strategy in place to determine how the business will operate moving forward.  While you cannot plan for a devastating injury to your starting quarterback, you can have the framework for how to respond to such an event.

Conclusion

Through transparent and consistent communication with family shareholders, family business directors can more easily align the company’s appetite for risk and capital allocation strategy with the shareholders’ expectations. Successful family businesses need to evaluate succession planning strategies in light of their family’s growth objectives and shareholders’ risk tolerance. Careful planning today can stave off a losing season in the future.