Family business owners are often faced with the dilemma of how to raise capital for growth without relinquishing control of their company. They don’t readily consider private equity because PE firms are known to demand a majority position in exchange for their investment. That situation is changing as more family offices invest in PE funds. The phrase “family office” is shorthand for financial advisers who manage ultra-wealthy people’s money.
Family offices are highly motivated to consider family business opportunities because those companies often meet PE investment criteria, including:
- A tenured, proven CEO.
- An industry that preserves wealth, such as discrete manufacturing, distribution and logistics, and health care.
- A predictable revenue stream and a history of sustained financial performance.
- A growth plan that would benefit from specific capital investments and the value-added advice and services the PE firm can bring.
Alignment is essential
Before engaging with a PE firm, ask yourself why you want the investment and for how long. From the PE firm’s perspective, there are good and bad reasons for seeking capital. Good reasons include shoring up the balance sheet, diversifying personal wealth or looking for a vested partner that will help take your company to the next level. Bad reasons are anything related to financing personal family expenses.
It’s important to work with a PE firm that has the right hold period for your company. It’s in the DNA of family office-backed PE firms to take a longer view, and they will seriously consider a five to seven year horizon, far longer than the three years typical PE firms will invest.
The difference is that the family office-backed PE fund wants to be involved with the company to help accelerate its growth and take it to the next level. That’s true even if the PE firm is a minority shareholder. To protect the investment, the minority PE owner will negotiate management rights over major decisions such as budgeting, capital expenditures, key hires and sale of the company. For the business owner, this can equate to getting capital expenditures for new equipment and manufacturing processes, and help implementing a formal budgeting and planning process to identify growth opportunities and improve margins.
Family business owners can negotiate their protections, too. Typically they would include a buy/sell agreement where the PE firm can plan to exit using a pre-determined timeline and valuation formula — returning the family to 100 percent control.
A true partner will want to build predictability into the deal covenants so no one — including the family owner — is surprised at the end of the investment term.
Family businesses can find outside financing to grow their companies without giving up control. It’s on them to do the research and find a partner with shared values.
Eli Boufis is executive principal of Chicago-based Driehaus Private Equity, LLC.