The Strategic Divestment Decision in the Family Business Through the Real Options and Emotional Lenses

The Strategic Divestment Decision in the Family Business Through the Real Options and Emotional Lenses

Rania Labaki, Gérard Hirigoyen
DOI: 10.4018/978-1-7998-2269-1.ch012
(Individual Chapters)
No Current Special Offers


Divestments have received little attention in family business research, although representing one of the most important strategic and financial decisions. Additionally, they have been insufficiently studied from the owning family's emotional perspective. This chapter contributes in filling these gaps by focusing on the core entity of the family business as object of divestment from the Real Options and Regret theoretical lenses. It suggests a characterization of the family business divestment decision and a series of propositions with case vignettes around configurations of divestment options, their valuation, and influence in different emotional family business archetypes.
Chapter Preview


Divestments are among the most important strategic and financial decisions in organizations. They started to gain scholarly interest in the 1980s (Montgomery, Thomas, & Kamath, 1984, p. 830) and have been increasingly studied since, mainly in relation with the financial value creation (Haynes, Thompson, & Wright, 2000; Kaplan & Weisbach, 1992; Lee & Madhavan, 2010; Rosenfeld, 1984). In family businesses, however, the underlying processes of divestment decision-making do not only obey financial and strategic logics but also emotional logics.

As the headline of an International New York Times article puts it, “Selling a business involves more than money”. Founders often have a deep attachment to their company, making of their divestment an emotional and a reversible decision. It is indeed not uncommon for founders to buy back their company shortly after the sale (Sullivan, 2016). Examples of family owners and managers who faced the emotional dilemma of selling or not selling the family business are not hard to find.

In August 2019, The New York Times featured an interview with John Brooks, four years after the sale of Malt-O-Meal, his family’s business which was the fourth-largest cereal producer in the USA. Mr. Brooks acknowledged that the sale was not satisfying as it left a void in his life and set the three branches of the family apart. He wished the family still owned the company (Sullivan, 2019).

In 2011, The Guardian and ProPublica’s headline stated “Bancroft family members express regrets at selling Wall Street Journal to Murdoch”. This sale was concluded following Murdoch’s offer for a significant premium to the share market price, in a context when newspapers share prices were flagging. The article featured quotes from some family members who were happy with the price they got while others were confessing that looking back, they wished they did not sell their shares (Tofel, 2011).

In 2008, the American Anheuser-Busch, also known as the “King of Beer”, was sold to the Belgian AB InBev. As reported in the book documenting the sale, members of the senior generation looked at how much money they were personally going to make. For August IV, member of the young generation, however, “it wasn’t about the money.” Acknowledging the enduring emotional tie he has to the business, August IV tried to prevent the deal at any cost. When the senior generation, Patrick Stokes and his father, decided to sell out, it became very hard for him to do anything at that point though (Macintosh, 2010, pp. 315-316).

In 2006, Pierre-Emmanuel Taittinger, member of the younger generation, was prone to regrets following the sale of the French century-old Taittinger House of Champagne to the American investment fund Starwood Capital. Taking up the challenge of reconsidering his family’s divestment decision, he managed to buy it back at a significantly higher value, less than a year after the initial sale. All these examples illustrate the role of family emotions, namely regret, when it comes to divestment.

Still, most of this literature to date has overlooked the underlying emotional processes of divestment. This phenomena was initially explained by the secrecy surrounding the divestment process (Hayes, 1972) as well as by the sensitive and confidential nature of divestment as a research topic (Duhaime & Baird, 1987, p. 495). Additionally, divestment is sometimes not thoroughly planned (Hayes, 1972) and monopolized by a restricted group of managers from the headquarters (Torneden, 1975). These explanations are particularly true for family businesses which are known for their reluctance to publicly disclose information (Davis, 1983; Lee, 2006). Also, the emotional rationale is by far more complex in family businesses than other types of businesses given their hybrid identity intermingling family and business systems (Davis, 1983; Sundaramurthy & Kreiner, 2008).

Key Terms in this Chapter

Family Business: A business controlled by at least two family members who hold key managerial and/or governance positions.

Divestment Option: The option to abandon owned assets permanently through their resale. Also referred to as abandonment option, its mechanism is equivalent to a put option.

Emotional Value: The net present value of the emotional cash-flows at a given period, discounted at the emotional rate of return in the eyes of the owner. It is also the difference between the discounted financial cash-flows representing the financial value and the minimum price at which the owner is willing to sell.

Divestment Option Value: When the present value of the remaining cash-flows of an asset or project falls below its liquidation value at a given period, the difference reflects the value of the option of divestment. It is the additional loss in value that the owners could risk if they do not divest immediately. The divestment option value varies across family business emotional archetypes.

Regret: The emotion that a family member realizes or imagines if the present situation, perceived by the family on the one hand and by the business, on the other hand, would have been better if s/he would have acted differently.

Liquidation Value: The immediate value in cash that would be generated from selling the business.

Divestment: The rupture of an investment cycle, acted through the sell-off of tangible, intangible and/or financial assets and/or through downsizing human resources, towards expected positive financial and/or emotional cash flows and value creation for the shareholders.

Agency Relationship: An arrangement between two parties, such as between a principal (owner) and an agent (manager), which entails a delegation of action from the principal to the agent with the expectation that the latter operates in line with the owners’ interest. A divergence of interest is known as the agency conflict. This relationship can also operate between two principals (majority-minority owners).

Complete Chapter List

Search this Book: