HOW PRIVATE EQUITY HELPS FOUNDER AND FAMILY-OWNED BUSINESSES
Updated: Apr 28
1. WEALTH DIVERSIFICATION
For many entrepreneurs, their business represents their largest single financial asset. This concentration of wealth created by the business creates an inherent risk to their net worth should something happen to adversely affect its valuation. Therefore, a transaction with a private equity fund helps to diversify a business owner’s net worth by generating liquidity (i.e. cash) for the founder or family owner.
2. TEAM DEVELOPMENT
While many family or founder-owned businesses can generate strong growth and profitability for a time, they will ultimately stagnate if they haven’t invested in a team that can manage a larger organization with its new assortment and complexity of challenges. And, routinely certain departments are under- or undeveloped such as Finance or Sales. The good news is that private equity funds are in the common practice of helping companies supplement their teams with high quality talent who can help the business get to the next level.
3. BUSINESS BUILDING
Beyond team development, many founder and family-owned businesses have not fully embraced best practices regarding systems or process. In order for small companies to become large companies, they need to be built upon a framework that will support the transition to a larger organization. This applies to things like data capture & analysis, workflow management, compliance, and financial controls. Given that private equity funds invest across a portfolio of companies, they have an excellent vantage point to identify and help implement the necessary systems and/or processes to help management teams drive their business forward.
4. FINANCIAL SOPHISTICATION
Private equity funds have earned a reputation for taking an analytical eye to the businesses in which they invest. Frequently, a founder or family-owned company’s prior reporting processes will evolve under new ownership to become both more strategic and granular. Business owners will get a flavour of this during the due diligence process when an investor begins analysing the business to better understand it. A test of whether a fund is focused on the right things is if an owner gains new and valuable insight about their company that they had not previously considered. The end goal is for a company’s investors and management team to know precisely where the key drivers of value exist and focus on the areas that really move the needle.
5. CAPITAL FOR GROWTH
Don’t forget that private equity funds often reserve capital to support the growth of their partner companies beyond what it takes to close the deal. For many businesses, growth via the acquisition of smaller businesses in the same industry can be an excellent way to increase scale and profitability. So, if you aspire to acquire smaller businesses and fold them into your organization, make sure to ask any investors with whom you are speaking about their ability to fund future deals.
6. “TWO BITES OF THE APPLE”
In many cases, a private equity fund will want the founder or family shareholders to retain some ownership following a transaction. The helps ensure that the person or people that drove a company’s prior successes are aligned with the new investor’s goal of supporting future growth. The amount of retained ownership varies for each deal but generally ranges from 10-30%. By holding onto some of the equity in the business, owners stand to benefit from the next exit if the business increases in value. In some cases, the proceeds from an owner’s second transaction, or the “second bite of the apple” exceed proceeds from the initial transaction.
Family Legacies www.family-legacies.com is a multidisciplinary family business consulting company. Our consultants are leaders in their respective fields including; Family Business Consulting, Strategic Planning, Financial Planning, Wealth & Risk Management, Corporate Finance, Business Transitions & Exit Planning - Buy, Improve, Grow & Sell Businesses, Commercial & Family Law, Executive Coaching, Leadership Development & Facilitation, providing our clients with a professional and integrated multi-disciplinary service.