InSight

Exit and Growth Strategies for Middle Market Businesses

How “Anti-Fragile” are You?

By Jeff Wright | Apr 16, 2013

Black SwanI recently read Nassim Taleb’s new book Anti-Fragile. Taleb is the brilliant thinker and writer who also wrote the best-selling book The Black Swan a few years ago. Taleb’s books have stimulated my thinking about our business and the company owners we talk with.

Taleb is a former successful hedge fund analyst and trader. While on Wall Street he developed innovative models around risk management. His models demonstrate that down side risk cannot be predicted by normal bell curve distribution but rather have more of a “long tail” distribution. In colloquial terms he popularized the term “Black Swan” events to illustrate his ideas about risk and risk management.

Much like in nature, when due to a freakish genetic mutation, a rare black swan is born; in Talab’s world Black Swans are hugely disruptive events that seem to come out of nowhere. They are not predicable, and while they are rare, they WILL occur.

“Anti-Fragile” is Taleb’s term for systems, things (and yes, people) that are not vulnerable to Black Swan events and in fact can grow and thrive under the stress of disruptive events.

Back to our business, I think about Taleb’s ideas in the context of the company owners we know – especially those over 55, with the majority of their net worth in their businesses. How Anti-Fragile are they? Too many eggs in too few baskets is the epitome of Fragile. How vulnerable are these good people to a Black Swan event, e.g. 9/11?

Many of us have been business owners and celebrate the can-do spirit of entrepreneurship. We generally believe the right time to sell a company is when the owner is ready to sell the company. But keeping an optimistic outlook is being tested right now. There are a lot of known risk factors that appear pretty frightening: a moribund US economy; trillions in national debt and no plan to deal with it; gridlocked government; unlimited Fed money printing; coming inflation and higher interest rates; contraction in Europe and much of the world; severe Middle East tension; North Korean nukes.

These known risk factors make a compelling case for the older business owner to move from a “Fragile” to “Anti-Fragile” position. When coupled with the current (but probably temporary) seller’s market, the case grows even stronger. Now throw in the risk of the out-of-nowhere Black Swan event and the case becomes overwhelming.

Company owners have to make their own decisions and when hired, our job is to unlock the highest value possible in the market. We don’t push owners into the decision to sell. But I’m torn between this passive stance and a sense of responsibility that company owners need to understand the risks involved with hanging on to a business in their later years with little life “runway” for a recovery.

Is a Black Swan event going to happen tomorrow, next month, next year?  We don’t and can’t know. But the Black Swan IS out there.

Posted by Jeff Wright.

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One Response to “How “Anti-Fragile” are You?”

  1. Sam Adams says:

    Jeff,

    Great post! I once had an investor tell me “diversification is my last line of defense”. He was being “anti-fragile” by spreading his risk around. Business owners over 55 can protect the wealth they have stored in their business (and are saving for retirement or for their children) by finding the right moment to sell their business and diversifying their assets. This reduces the chance that ordinary risk, or a black swan event, can hurt the wealth they have carefully built up.

    Sam Adams

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