Private equity and the family business

A private equity firm may not seem the natural partner for your family business, but taking on external investment doesn't have to mean losing all control.

A private equity firm may not seem the natural partner for your family business, raising fears of conflicting goals and City boys “taking over” the company you have spent years building up. Rupert Bell, director at 3i Growth Capital, argues that it doesn’t have to be that way.

At 3i we meet many family businesses who wish to build on their established tradition, but who are faced with a complex set of challenges regarding future leadership, ownership, control and expansion strategy.

Many of these are built on continuous, but ultimately closed management succession, as one generation passes the business on to another. In these cases, bringing in an external shareholder who is exposed to a wider range of businesses can encourage new thinking and help companies adopt best practices based on that partner’s understanding of what leading companies are doing.

Family business owners are often worried about losing control to external investors. That’s understandable: we can all cite examples of owners selling out only to find their family heritage undermined by new owners.

Fortunately, there is a way to harness the experience and business connections that external capital can bring, without having to cede control. A specialist minority investor can offer the best of both worlds.

Approach with caution

Of course, you will need to grill potential investors closely to ensure you’re both working towards the same goals – and they will want to do the same with you. The question to keep asking is: ‘Can I work with this person to grow my business even faster than I can alone?’ Don’t be shy: go and speak to the people they’ve worked with before to find out what they’re really like.

Private equity isn’t the right choice for everyone. It excels in helping ambitious companies expand their geographical reach or range of products, strengthen their team or grow via mergers and acquisitions (M&A). Where family owners are not interested in such growth opportunities, private equity would not be appropriate and could even be a recipe for disaster. Fundamentally, “lifestyle businesses” do not work in a private equity framework.

For the more ambitious family business, a private equity firm with a significant minority stake can help owners with many of the problems they may be facing.

Introducing a private equity partner can act as a catalyst for changes in the shareholder structure, for example where family relations have broken down or where some of the owners wish to withdraw wealth without forcing others to exit completely.

An external investor can also help rebalance your own wealth and attitude to business risk. If you have all your eggs in one basket, you naturally become conservative in decision-making just as your business is ready to expand. Diversifying some of your capital by selling a minority stake allows you to make the bold decisions that can transform the business, such as buying your nearest competitor, moving into foreign markets or hiring new managers.

A guiding hand

Most importantly, an informed and well-connected investor who has helped companies in your sector internationalise or make acquisitions can really save you time by showing you the shortcuts and introducing you to the right people.

Of course, bringing in a private equity partner means you will have to put serious thought into exit strategies – theirs as well as yours. Private equity needs to crystallise its investment within roughly five years, via flotation on the public markets, recapitalisation or a secondary deal with a new investor. Sometimes the firm’s stakeholdings are even sold back to the family, as happened recently with 3i’s investment in French dairy product manufacturer Senoble.

You’ll need to determine whether the proposed exit timing will suit your company, and whether you’ll realise your investment too. Different investors’ attitudes to exit vary widely and the key to getting it right, as ever, is thorough research and transparent communication between family and investors.

Facing tough times in your industry need not be a block to doing a deal. Uncertainty often brings opportunity, and having access to outside capital at a time when your competitors are struggling can open all sorts of new avenues. Impressive managers will emerge from downturns with their competitive position enhanced, and private equity’s experience, knowledge and contacts can help them on that journey.

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Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.