Capital & Financing

When families have grown a company over generations, the decision to sell a stake in the business is often an emotional one. Sometimes the whole family wants to exit. In other cases, some shareholders (for one reason or another) need to be bought out. In still others, the business may need more growth capital than the family is willing or able to provide.

Finding the right liquidity strategy is essential in order to preserve family bonds, especially if the business has been the “glue” keeping family members together.

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There is now a real investor desire, and even a need, for strong companies to be in the public markets. According to a May 2017 Ernst & Young report, the number of domestically incorporated U.S. listed companies dropped by more than 45% between 1996 and 2016. The amount of cash liquidity in the U.S. banking system is $2.2 trillion, according to Federal Reserve economic data (Dec. 7, 2017).

Going public can be the capstone accomplishment of a long and successful career.

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Private equity and strategic buyers aren’t the only suitors pursuing family businesses today.

Family offices, those low-key organizations formed to manage the wealth of ultra-high-net-worth families, are discreetly wooing business families who might be interested in selling a stake.

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The way Charles Kittredge sees it, private equity took his family’s company, Crane Currency, to a new level. That’s saying a lot for a business that’s been around for 217 years.

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Private equity investors know good opportunities when they see them. And right now, their eyes are trained on family enterprises.

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Savvy families understand that encouraging next-generation entrepreneurship increases the likelihood of the family enterprise continuing into the future. Forward-thinking families go the extra mile to nurture budding family entrepreneurs by providing funding for their ventures.

The Rowntree family of Toronto has established a family financing program to help its rising generation start their own companies. Rowntree Enterprises has transitioned out of its original business—car dealerships—to focus on real estate and private equity investing.

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Our cover subjects for this issue are the Schwab family, who instituted an Employee Stock Ownership Plan (ESOP) in their company, Harrisburg, Pa.-based D&H Distributing Co. The ESOP not only funded the buyout of some family owners but also has motivated D&H's employees, leading to exponential revenue increases since 1998, when the plan was put in place, the Schwabs say.

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Transitions require capital and renewed commitment to the business. A generational transition can force difficult decisions. Many owners dream of keeping their business in the family, yet this becomes increasingly difficult over time. Ownership stakes become dispersed among family members whose priorities are heavily influenced by their age and involvement in the business. Older members approaching retirement typically prefer high dividends, while the younger generation might want to reinvest for long-term growth.

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I was recently approached by the wife of an acquaintance, who told me a very sad story. Her husband, who had inherited the presidency of a third-generation family business and for years had succeeded in building the company, now found himself near bankruptcy. The origin of the problem was a dispute with a former offshore partner who had sourced raw materials for their family’s company. The dispute grew larger and larger and consumed million of dollars in legal fees.

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Despite the barrage of recession-related doom-and-gloom stories, financing is still available for family-owned businesses. Many healthy banks are hungry to lend to the right clients. Even in these trying times, business owners who do their homework can find a stable lender that understands their industry.

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