Many transactions in the merger and acquisition market are driven from the widely available capital of private equity funds. Money that should generate returns for the underlying equity providers in a relatively short period of time – about 5 years or so.
For many family businesses, then, private equity is a far cry from their bedtime show. Of course, family businesses also need to make money. But in family businesses, the long-term perspective across the generations and other values are usually predominant. For example, pride in the product, good care for staff, sustainability and place in the local community.
Private equity world is changing
In the last two to three years, we have seen a strong change in the private equity world from our practice. Due to the availability of cheap money, the number of these providers of venture capital increased enormously over the past 10 years. With this also the competition and the need to distinguish yourself as a private equity firm.
The standard approach of the average investor has always been to bring in growth capital – preferably with a good deal of bank financing – and then to apply efficiency measures to costs and working capital. By achieving substantial cash flow growth for several years, the value of the company increases with -hopefully- a successful sale at the end of the investment period. See here the “standard” private equity model.
This model is no longer sufficient to stand out in today’s market. So we see more and more private equity parties who actually try to add value to the business. For example, by helping parties with specific knowledge about digitalization, sustainability or international growth.
Distinctiveness may also lie in the possibilities of the transaction structure: while a few years ago the funds willing to take a minority stake could be counted on one hand, this is now commonplace. This therefore allows entrepreneurs to bring in growth capital without losing control themselves. Also, a fixed part of the capital can be secured and taken privately with a so-called “pre-exit” without selling the company outright.
New forms for investment in family businesses
For family businesses, certainly not all forms of private equity are interesting, but because there is now really something to choose from, we see more and more interesting combinations emerging. A family business can opt for a co-shareholder without giving up control. Transfer to the next generation is also still possible.
Apart from the percentage of shares that goes to the investor, it is especially important that all parties involved are on the same page in terms of norms and values. What are the core values of the family business? Are these endorsed by the investor? Can it perhaps contribute to them or does the investor even add additional core values?
Next, the most important question is why an outside shareholder is sought. Often the answer lies in additional growth capital to tap new markets or, for example, the acquisition of a competitor. But the buyout of a family member or several family members can also be a reason.
Finally, it is crucial that agreements are made about the longer term: most investors will want to exit after 5 to 10 years to monetize their stake. Will the family then want to co-sell and if not what are the possibilities to buy back the investor’s shares? There are often more possibilities here than you think! Discussing everyone’s wishes and properly recording the agreements is crucial here.
If an investor can be found from the wide range of private equity with whom there is a real click and the extra capital provides added value, this can also be a good step for family businesses. Provided, of course, that clear agreements can be made for the future!
We can help you
This is a step that requires some homework. At Clifton Finance we know the world of family businesses like no other and have a large network in private equity.
We can advise you on the right co-shareholder for your company and on an appropriate transaction structure. For more information call Gonneke van der Lee (06 52466518) or Maarten Vijverberg (06 55853074)