Research indicates that as many as 86% of middle-market, privately owned businesses in the US are positioned to make a generational transfer. In anticipation, family business owners will be tasked to evaluate potential financing options to support the transition. Businesses uncomfortable with the risks of leverage will look to obtain an equity partner. Though equity financing can be a source of essential capital to any transitioning business, there are additional considerations when selecting the appropriate equity partner to aid in the continuation of a family business. In a generational transfer, preservation is at the helm of the handover.
In a recent survey of 1,000 of the world’s largest and oldest family businesses, EY found that those focused on family cohesion and profitable business growth were the most successful. Thus, it is no surprise that conserving status quo is a key objective of a business seeking a generational transfer. The complicated reality however, is that once an equity partner is engaged, owners often see the daily operations of the business and the long-standing vision of the company compromised –the primary objective of the transfer lost.
In the evaluation of equity financing options, the exchange of control for financing is what it all comes down to. How much is a founder willing to give up to preserve the family business? If preservation is key, is equity financing really a viable option?
Equity Options:
Traditional Private Equity
Private equity has the ability to offer a family business value-add in addition to capital. Since its returns are generated on exit, the private equity firm is highly motivated to grow the business and increase sale value. Value-add can come in the form of resources, managerial experience, and established industry relationships. Depending on the long-term goals of a family, private equity can provide a business with the required confidence to expand beyond its current limits.
With an ownership interest in the company, a private equity firm requires a considerable amount of control over a business. This often includes seats on a company’s Board of Directors and noticeable influence over internal decision making. In order for private equity to bring true value to a business, owners need assurance that the firm sees eye-to-eye with the family on corporate objectives prior to engagement- to avoid disappointment. It is not uncommon for businesses with a private equity investor to feel as though they are being viewed purely from a financial standpoint; with little attention directed towards understanding key success factors and the driving philosophy of the business. For many owners, specifically those looking to stabilize capital structure, the investment timeline offered by private equity is not attractive. They will inevitably find themselves back in the private equity market to refinance, and timing may or may not be favorable.
Source: http://www.forbes.com/sites/groupthink/2015/11/11/succession-equity-financing-options-for-family-businesses/
