Beware of the One-Person Company

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When we think of a family business, we often associate it with a single family; one that might span two or three generations. But there are times when a business functions as a one-man institution. In this case, the business is largely driven by a single person; a person who has the intellect, charisma, and capability to build a successful business by himself. This “One-Person Company” is unique in that there is no expectation of succession, nor can its success be replicated, and that is because no one else can do what this one person can.

Warren Buffet is a prime example: He is credited with building an unrivaled investment empire at Berkshire Hathaway. Buffet became known for his hands-on approach building up the business brick by brick and was often forced to go against the grain and take on his shareholders to implement his vision. Ultimately, he has proved himself to be right time and time again, emerging as the “Oracle of Omaha” and a force to be reckoned within the investment world.

Critics often ask, how will Berkshire do after Buffet leaves? Sure we are told that he has hand picked his assistant, Mr. Jain, to carry on the Berkshire legacy. But does he have it in him to match the impeccable investment record of Buffet? We will have to wait and see.

Herein lies the great challenge with the One-Person Company. When the success of a business hangs on the intellect and keen judgment of an individual, it takes on an isolated nature in which it becomes increasingly difficult for others to contribute to the success. This, in turn, makes it frustratingly complex to predict the long-term stability of the company, especially when there is so much riding on the sound-mindedness of the star individual.

Dangers of the One-Person Company

Let’s consider a situation when this isolation can be dangerous and risky. Some years ago, a friend who had been a reputable management consultant created an associate company to manage various projects. Four of his friends invested a sizeable amount in the capital of the company. A mere three years later, the capital had eroded by 50%. My friend, the CEO and chief promoter, had been drawing his slice of emoluments and expenses and had not been concentrating on the poor sales results. As the losses kept mounting every year, the investors felt that enough was enough and pulled out with only half of what they had invested initially. There was no other recourse. The success of the enterprise was dependent on the expertise of a single person, and though that person was a proven consultant with a history of professional success, the friends’ bets all turned out to be risky ones.

As I saw this unfold before my eyes, it struck me that it is not for nothing that large consulting firms, law firms, or medical polyclinics are not open to general investors. The firms’ ownership is largely consistent of only those who can contribute expertise and have a share in the success of the firm. When the expert contributor or partner leaves, he sells his shares. It is a structure that ties the immediate success of the firm to each contributing member of the organisation, creating a constant stream of present contributors.

In a way, a family business can either take the shape of the One-Person Company or a firm made up of present contributors. To be fair, there is more than its fair share of One-Person Companies throughout history that have become incredibly successful. However, given that the family business is made up of family members who can all contribute in their unique ways, perhaps it is worth considering betting the success of the company on their respective performances.