There are many circumstances that lead an owner to decide it is time to sell or bring a capital partner into the business. A retiring owner may not have a willing successor or the younger generation may want to grow the business but lack sufficient capital to take it to the next level. While a business owner may desire to sell their business outright, very often factors like earn-outs, seller notes, and minority stakes mean that their professional and economic future are tied to the ongoing performance of their business, now under new ownership. Consequently, aside from aligning financial interests, business owners must carefully assess the cultural and personality fit of any prospective investor. Family office investors are a relatively unknown option that can offer both better compatibility and superior economics over the long term.
Family offices are organizations dedicated to managing the wealth of an ultra-high net worth family, usually with a net worth of at least $200 million. The origins of their wealth most commonly stem from the sale or operation of a successful private business, providing them with an inherent understanding of the unique circumstances of family businesses. Many of these family offices choose to acquire or invest into closely held businesses with the goal of making more money than can be achieved via the public markets.
Selling or partnering with a family office might be a better option if any of the following statements apply:
- If what happens to your business, employees, and community matters to you post-sale.
- If you are going to have an ongoing interest and involvement in the business, and care about partnering with someone who can add value.
- If you require a creative, flexible structure outside of the “plain vanilla” asset sale.
Maintaining your legacy
While
obtaining a fair price is a major part of selling a business, owners must
realize that buyers may have differing intentions. Strategic buyers and
institutional firms often treat small and mid-sized acquisitions as candidates
for downsizing (e.g., eliminating duplicate costs, etc.) or a quick flip. Many
prospective sellers place a premium on purchasers and partners who are likely
to respect the knowledge and experience of various key stakeholders, including employees,
suppliers, and the community at large. Family offices will offer that respect
because they come from family businesses themselves. Another advantage that family
offices offer is that of a long-term perspective, fostering a multi-generational
outlook for the company’s future. Rather than chasing quick, speculative
profits, family offices are committed to patiently creating sustainable value
by running the business the right way for long-term performance. For example, their conservative nature often
translates into using minimal amounts of debt to ensure the resilience of the
business during recessionary times.
Experienced Outlook
Having
the right owner can dramatically impact the value of a given company. While some family offices consider a variety
of sectors, most tend to prefer investments in industries where they have experience—generally where they initially made their money. Partnering with a family
office can provide a business with the benefit of a knowledgeable owner who can
add value by sharing best practices and any other skills that contributed to
their prior successes. Unlike traditional
investment funds, which generally have dozens if not hundreds of investors,
most family offices focus their attention toward the success of a limited
number of companies.
Flexible Capital
Without
the restrictions placed upon traditional institutional and public buyers,
family offices have the ability to structure a transaction in a personalized
way most relevant to a business owner. For example, an agreement may allow for a staged buyout over time or the
opposite—for the original owners to buy back into the company. Many family
businesses seeking growth capital are sensitive to “forced exit clauses,” which
enables an investor to force a sale of the entire business after a stipulated
amount of time. Traditional funds have a
fixed lifespan and therefore require this clause to ensure they can return
capital back to their investors.
Challenges of Working
with Family Offices
Working
with a family office presents some unique issues which should be taken into
consideration. Since numerous family
members must often approve potential investments, deals tend to take longer to
complete. From our experience, family
offices invest not just based on the numbers but also upon the relationship;
they often request multiple one-on-one meetings to get comfortable with their
future partners. Additionally, some family offices can be hard to find due to
their preference for privacy. Others operate publicly, with an active role
trying to meet business owners to see if there exists a fit between the parties
(in full disclosure, I am a partner at a firm that is backed by a network of
family offices).
Conclusion
The
family office has been a rising source of capital that can offer business
owners a collaborative partner with parallel objectives. When owners place
importance on the values behind their business rather than solely the highest
price that can be attained in today’s market, the family office can provide a superior
long-term solution that better accommodates employees, communities, and other
stakeholders.
