Capital & Financing

Consider family investors as a source of minority equity capital

As a result of the market dislocation brought on by the COVID-19 pandemic, many private family-owned businesses find themselves in a precarious situation with budgets stressed and a seemingly never-ending battle to find suitable sources of capital. Family business owners who never expected to raise money outside the family are now faced with (1) extremely tight and expensive debt markets, (2) difficulty accessing new federal programs (some may have already exhausted limited PPP loans) and (3) potentially limited additional access to family capital or a reluctance to put additional capital into the business.

While some families look to potential acquirers as a solution to both de-lever family risk and raise capital for their businesses, many families are not ready or never intend to sell their businesses. Even if a family is willing to sell, there is a growing valuation disconnect between potential acquirers and sellers resulting from the impact of COVID-19 and other business, political and social uncertainties.

Of the many structures and approaches to marry up sources of capital with family businesses, minority/growth equity is well suited for today's difficult markets. A growing number of families who previously sold their companies or otherwise have significant investable assets are looking to invest in private companies for the long term as opposed to investing in the public markets. These families are seeking companies that operate with a shared vision and values.

Family investors often focus on partnering with family businesses because both parties’ needs and interests often match up well. The inherent flexibility family investors bring to their investing can be helpful to family businesses.

Minority/growth equity provides a business with the capital necessary to support and grow operations without the family owners giving up control (other than, in most cases, some limited negative controls afforded to the holders of preferred equity) while also limiting the dilution caused by artificially depressed valuations. This capital solution can be structured in multiple ways, including simple common equity, but often takes the form of structured preferred equity.

Features of structured preferred equity
Structured preferred equity can be highly bespoke. Typical characteristics of structured preferred equity include:

Downside protection. Debt-like protection in the form of a liquidation preference over common equity (i.e., the preferred capital is first in line to receive a return of the invested amount in preference to the family's and other equity holders' common ownership), but without debt-like enforcement mechanisms, such as security interests, robust covenant compliance or foreclosure remedies.

Preferred return. Interest in the form of a "yield" (e.g., 8% to 12% yield on principal investment, which may compound and may be paid-in-kind instead of paid in cash).

Upside economics. Preferred equity may be "straight preferred" (receives priority return of capital and yield), "participating preferred" (receives return of capital and yield and participates with common equity on an as-converted basis) or "convertible preferred" (receives either a return of capital and yield or participates with common equity on an as-converted basis). Straight preferred is less common but usually most favorable to the family owners. Convertible preferred is less dilutive to the family owner than participating preferred and is usually the family owners’ second choice. The type of preferred equity will often dictate the amount of yield payable on such preferred equity (i.e., straight preferred will have a higher yield than participating preferred).

Governance. Representation on the company’s board of directors and select negative control and minority protections, such as:

− Limitations on the business's ability to incur debt, make capital expenditures inconsistent with the budget or complete material acquisitions, dispositions or investments

− Capital structure protection (e.g., anti-layering, restricted payments, organizational document amendments)

− Approval rights over equity redemptions and repurchases and affiliate or related party arrangements

− A voice in senior management hiring and firing decisions

− Information rights

Liquidity. Exit or other liquidity rights at pre-determined dates (e.g., a right to cause the company to redeem the preferred equity after some agreed to period (e.g., five years) at a pre-determined or market valuation or a right to cause a sale or IPO of the company).

Sources of structured preferred equity
Sources of structured preferred equity include traditional private equity funds, privately held businesses with dedicated investment divisions, public and private pensions and family capital providers. Each source of capital has unique investment objectives and operational limitations. For example, while a traditional private equity firm may have flexibility in its investment mandate to make minority investments, these firms may still be faced with time limitations on their funds. Therefore, they may seek to realize liquidity on an investment earlier than, for example, a family capital provider.

While private equity investors have been very successful in supporting the next stage of growth for family-owned businesses, a growing number of family capital providers are entering the minority/growth equity market. Family capital providers have significant flexibility in structuring their investments. Family providers of structured preferred equity allow for flexible durations, structures and terms while bringing a unique perspective to working with family businesses given their sources of capital, the duration of their investing and their investment philosophies.

Choosing the right partner
When evaluating a potential source of minority capital, family business owners should consider multiple dimensions — not only the terms of the capital but also the suitability of the partner providing the capital. Given the negative controls, minority protections and liquidity rights attached to structured preferred equity, selecting the right partner is a critical consideration.

As discussed in detail above, the form of capital dictates the relative rights and obligations of the parties involved, but how those rights and obligations are exercised by the investor will determine actual outcomes for the business and its owners. Families should keep the following considerations in mind when selecting a partner:

• Does the partner share a common understanding of how businesses are built and operated, including how business decisions affect employees, business partners and the community?

• Does the partner understand family and founder dynamics, such as developing the next generation, creating robust succession plans and preserving legacies?

• Is there an appropriate alignment of values between the family and the partner? How will the partner behave when times are good? How do those behaviors change during tough times?

• Does the partner share the same investment horizon as the family? Specifically, will the partner look to force a sale of the family business or other liquidity event (e.g., will the partner "put" the preferred equity back to the company, which in practice forces a sale of the family business due to lack of alternatives to fund the put) prior to the family’s preferred timing?

• To what extent does the partner require involvement in key operating and financial decisions, such as setting annual budgets, reinvesting in the business and pursuing acquisitions and divestitures? Is the level of partner involvement and authority commensurate with the value and expertise it provides?

• How flexible is the partner and its capital base? Can the partner step in with speed and certainty to provide additional, differentiated capital to execute on offensive or defensive strategies?

• Does the partner have the right strategy, the right team and the right resources to make good on its promises?
Similar to how capital providers perform detailed due diligence on prospective investment opportunities, family owners should apply the same rigor to selecting a partner. Owners should ask the right questions of the partner and its team to develop an informed understanding of how the partner operates and adds value. Owners should treat the selection process like an interview Find the "A" player that possesses the right attributes and competencies, in the right role, to achieve clearly defined objectives.

Despite cautionary tales to the contrary, past performance and behavior is often a good indicator of future results. Providers of family capital often share a common set of values and experiences with the family-owned businesses they look to invest in, making them particularly well-suited to partner with family business owners who care about preserving the family legacy and maintaining company culture.

During this period of market uncertainty, family business owners should consider all the tools available to maximize business continuity, wealth preservation and flexibility of liquidity. Preferred minority/growth equity structures are a useful mechanism to accomplish a number of objectives while retaining future flexibility.

Paul Carbone is president and managing partner and Brad West is general counsel and chief compliance officer of Pritzker Private Capital ( Ryan Harris, Cole Parker and Adam Wexner are partners at Kirkland & Ellis LLP. Harris leads the firm's Private Investment & Family Office Practice (

Practical steps you can take to help your business survive COVID-19

Conflict and disruption are woven deeply into the fabric of most family businesses. If there isn’t an external threat occupying the family’s attention, an internal one is ever present. Because of this state of existence — one requiring constant vigilance— family businesses are, in many ways, better prepared than their non-family peers to address an existential threat like COVID-19. But in family firms, since generally family members are the ones addressing these challenges, decision making is often accompanied by heightened emotions.

Although the current situation is perilous, there is a road ahead for family businesses during these troubling times. Here are some practical ways to navigate these waters.

Reducing liabilities
Most family businesses don’t enjoy considerable cash reserves. Income is used to pay overhead, reinvest in the business or make shareholder distributions. When a force such as COVID-19 effectively shutters the market, dramatically reducing income, the business must in turn reduce its short-term liabilities to maintain profitability. There are three effective ways to accomplish this goal:

Reduce, defer or eliminate shareholder distributions. When a family business is facing a crisis, the business must be managed in crisis mode. Ownership must remember that its first obligation is to the ensure that the business survives. Whether the reduction, deferral or elimination of shareholder distributions proves most appropriate, there will inevitably be difficult conversations with family members, some of whom may not be part of the business but rely on the distributions for their livelihood. Though awkward, those discussions are necessary. Shareholder distributions are the easiest short-term liabilities to reduce. And lenders tend not to be willing to renegotiate loan agreements if the business is still distributing cash to its shareholders.

Manage existing debt. One common way to put a Band-Aid on a more general problem is to renegotiate, stretch or stop paying liabilities as they come due. For secured lenders (e.g., banks), renegotiation of existing debt is an exhaustive process and generally requires professional assistance. For trade creditors and landlords, however, the business should assess who requires immediate payment and whose payments can be deferred while the situation stabilizes. This is not a long-term solution and, if debts remain unpaid for a considerable amount of time, a bankruptcy filing becomes more likely.

Reduce workforce expenses. Coronavirus threatens to impact the global economy for several quarters — with complete shutdowns of certain markets for multiple months. Absent meaningful income, payroll cuts might prove necessary. This can occur by reducing salaries, eliminating non-essential positions or furloughing entire shifts or departments with the hope of rehiring these individuals once operations resume. Prior to a layoff, management should seek the advice of counsel to avoid incurring unnecessary liabilities, such as those triggered under the WARN Act. Unfortunately, the most fruitful way to reduce payroll is to adjust above-market compensation for family members or to cut the positions of relatives whose roles are not essential to run a scaled-back operation. Termination (or temporary layoff) of a family member, while challenging, is preferable to cutting an employee whose skills are needed to maintain operations.

Although a sudden reduction of liabilities can prove daunting, a decade of strong economic conditions has led to more lax internal fiscal policies for many businesses. Management should undertake a comprehensive overview of finances to determine how best to manage liabilities going forward — such as revisiting financial arrangements with family members. In the years to come, a family business that emerges from this episode might find itself far leaner and more profitable as a result of cost-cutting measures taken today.

Policing credit risk
The best way a family business can protect itself from a customer’s financial distress (and a potential bankruptcy filing) is largely common sense — collect as much money as you can, as soon as you can. The following are options (ranked in order of preference) to protect your business from a potential credit issue:

Payment or cash in advance. In an ideal world, businesses would receive payment in advance of providing goods or services or otherwise incurring any out-of-pocket expenses. While often an unlikely option, this ensures against a credit issue should a client file for bankruptcy or otherwise wind down.

Collect on delivery. Collect on delivery, a form of advance payment where the delivery of product is not consummated until payment is received, dramatically limits credit risk by ensuring there is no lag time between providing the product or service and receiving payment.

Credit insurance or third-party guaranty. Credit insurance is another way to protect against bad debt. It can be expensive, but an insurer might be inclined to offer credit insurance on a broad array of accounts for a discounted premium. Alternatively, if the customer is not the end user of a good (e.g., if it is a distributor), a third-party guaranty from the end user might prove viable.

Payment in terms. Term payments carry the greatest potential risk for family businesses because customers could file for bankruptcy after the goods or services have been provided but before payment has been made. Should a customer file for bankruptcy or otherwise wind down its operations, the business could receive little to no money on account of the outstanding receivable. If terms are necessary, the business should insist on relatively stringent terms (the quicker the remittance, the better). The business should also be more diligent in watching for red flags, such as missed or late payments, bad news in public filings or any word on the street that would suggest the business should halt its dealings with its client.

Existing and new lending options
COVID-19 has had (and will continue to have) widespread implications for the lending industry.

For existing loans, one of the consequences of an economic meltdown is that lenders are not fiscally able to default all deficiencies in their portfolios without putting themselves at risk. Both lenders and their borrowers are facing the coronavirus crisis together. The phrase “amend and extend” is often used to reflect the lending policies during the Great Recession in which lenders entered into forbearance agreements with their borrowers and extended the loan terms. It is expected that lenders will adopt similar policies with their existing borrowers this time around.

In addition, family businesses can look to alternative sources of capital during the crisis. For example, the Small Business Association (SBA) has several programs designed to help businesses weather COVID-19. The SBA’s Economic Injury Disaster Loan Program and its Express Bridge Loans can help businesses during this downturn. The Economic Injury Disaster Loan Program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to help small businesses overcome the temporary loss of revenue they are experiencing. The SBA’s Express Bridge Loan Pilot Program allows small businesses that currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork.

Unlike the Great Recession of 2008-09, banks’ balance sheets are strong and capital is available. The family should determine their cash needs by creating a 13-week cash flow analysis. Once this is complete, and if cash is needed beyond what is generated from operations, they should contact their lender(s) and/or take advantage of the aforementioned government programs.

Reorganization, sale or winddown
Whether a lender’s knocks on the door have grown louder and more persistent or lawsuits from unpaid vendors have started to mount, few moments are sadder than the realization that reorganization, sale or winddown of a family business is inevitable. In times of crises, such as the one presented by COVID-19, the hard answer is often the only answer.

From an emotional perspective, it is important to understand two important points: (1) it’s not your fault; and (2) a liquidity event is not necessarily the end of the road. Many business owners facing such daunting decisions seek the counsel of a mental health professional who can help alleviate some of the emotional burden.

The following are several commonly available logistical options to help address an untenable fiscal situation:

Out-of-court workout. Given the breadth and impact coronavirus will have on the economy, it is likely that lenders will prove more willing to negotiate out-of-court workouts of existing debts than they had been in past years when their loan portfolios were much stronger. The restructuring of debt can provide a company with breathing room and potentially free up additional capital. However, it is important that in negotiating a new or revised agreement, the business does not offer improper concessions like excessive monthly payments or significant personal guaranties. If personal guaranties are deemed necessary, the business should consider allocating potential liability among shareholders.

Reorganization. Reorganization is generally accomplished through bankruptcy. The filing of a bankruptcy petition immediately ceases all out-of-court collection activity and provides the company with the freedom either to address a trade creditor problem — one in which the company cannot pay its outstanding receivables in a timely fashion — or to renegotiate the terms of a considerable liability (e.g., loan agreements or pension liabilities). Many companies of all sizes use bankruptcy successfully to reorganize their debt and emerge leaner and healthier. Additionally, a recent amendment to the Bankruptcy Code has made reorganization much more affordable for smaller businesses. There are downsides, such as the need to publicly disclose the company’s books and the potential that creditors might derail the process and force a sale. Transfers of the company’s assets to “insiders,” including family members, might be subject to clawback, and shareholders might ultimately be divested of their equity, depending on the case. But overall, reorganization is a powerful strategic tool when used correctly, and can save a family business from sale or winddown.

Sale. Whether accomplished in or out of court, the sale of a family business under circumstances such as these might prove necessary. In selling the company, the family can address certain intangible concerns, such as ensuring that the company’s name is in good hands. Additionally, employment for family members already involved in the business may be saved. If the sale is being undertaken at the behest of a secured lender, the family can extract concessions, such as the elimination of personal guaranties to motivate the family to cooperate in the marketing and sale process.

Winddown. For a family business, this is the least preferred option. If the decision to wind down has been driven by a secured lender, as with a sale, the family can seek to extract certain concessions, such as the elimination or reduction of personal guaranties. In circumstances such as those brought on by COVID-19, the family should work together to ensure that the winddown of the business doesn’t leave any family member destitute. Open dialogue in these situations is imperative so that once the winddown has been consummated, healing can begin and family relationships can remain intact.

During troubling times such as these, it’s important to remember what matters most — health, happiness and loved ones. By making hard decisions early, a family business can avoid harder ones down the line.                    

Michael Brandess is a partner at the law firm of Sugar Felsenthal Grais & Helsinger LLP ( Sheldon Stone is a partner at the financial advisory firm of Amherst Partners (

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact    

Financial strategies to deploy in tough times

Many economists believe the United States may already be in a recession, due to widespread business disruptions from the COVID-19 ­pandemic.

Unemployment claims spiked to 6.64 million during the week that ended March 28, the highest weekly number on record. While it was widely believed the economic expansion the country had enjoyed was overdue for a correction, the coronavirus accelerated the speed at which economic activity has nosedived.

“We had been going with this strong economy for as much as 10 years now, and we were at a place where everyone was really comfortable and there weren’t headwinds in sight, so distributions and dividends were running along smoothly,” says Jonathan Flack, leader of family business services at PwC Private Company Services. “With [COVID-19], it’s as if we just fell off a cliff without the ability to see around the corner.”

Even in such unprecedented circumstances, many family businesses are poised to succeed through the tough times ahead, precisely because of their conservative approach to business, and lessons they’ve learned from past recessions.

At the start of the financial crisis in 2008, Mike Schrage, president of family-owned Centier Bank, announced at the Indiana bank’s Celebration of Excellence, its annual meeting, that Centier would get through without any layoffs.

“That was a huge deal at the time, because our associates had been reading the headlines and saw that other banks and companies were laying people off, and they started to get concerned,” says Anthony Contrucci, Schrage’s son-in-law and Centier Bank’s vice president of community and business development. “After that statement, our associates were reassured and did not have to fear for their jobs.”

Contrucci says the moment illustrates the family’s values of always putting Centier’s shareholders’ needs third, behind those of associates and customers. Even in flush times before the Great Recession, the bank managed growth, kept dividends below peers’ and built up capital ratios and loan loss reserves. Then, during the recession, the family took additional steps to make sure the bank would make it through.

“Like our family has done several times over the generations, we recapitalized the bank with tens of millions of dollars to protect our associates and customers, to ensure the bank’s continued success, and to afford us the opportunity to grow and leverage the opportunity,” Contrucci says.

The recapitalization — along with the family’s frugal mindset — did allow Centier to expand and leverage the opportunities that arose during that tumultuous time, despite having to take $95 million as a loss from its investment portfolio. In the years following the Great Recession, the bank doubled its total assets.

Since then, the Schrage family has continued to be frugal, which Contrucci says leaves the bank as prepared as possible for the current challenges.

‘Cash is king’
“It’s almost impossible to plan for a recession or economic downturn while in the throes of it,” Contrucci says.

“Disruption always leads to opportunity if you are prepared, don’t panic and know where to look. However, that requires a disciplined approach of savings and preparation during the good times to both weather the storm in the bad times and to be able to be opportunistic.”

According to a Credit Suisse report, family businesses outperformed their peers, on average, in the last recession, and have many advantages to withstand the pressures of an economic downturn. Among them: a shared history and sense of purpose and a tendency to avoid debt when possible, giving family firms a cushion in most recessions. Still, family businesses, like all businesses, are more vulnerable during a recession.

In some ways, this recession is different than those past because it was not initially driven by fundamental problems in the economy, says Marshall Rowe, president, business owners services at The Colony Group. Regardless of what’s driving the recession, the best course for most businesses is to keep a focus on maintaining their capital.

“Cash is king,” Rowe says. “You want to think about how you can conserve cash, so managing your inventory, reducing your orders, managing cash that way is really crucial.”

Finding areas to cut
At Centier Bank during the Great Recession, the family asked associates to help look for ways to cut back and came up with more than $2 million in savings. Suggestions that resulted included reducing paper, switching to generic products, renegotiating vendor contracts and instituting a hiring freeze.

When it comes to freeing up capital in a recession, nothing should be off the table, says Jim Murphy, managing partner with Belden Hill Partners.

“You can start curtailing capital expenditures, particularly those that are growth oriented,” Murphy says. “If the sales aren’t going to be there, you try to trim the capital expenditures and preserve cash.”

Companies might also try to tighten credit and collections and consider divesting or sunsetting some endeavors. While it’s still important to take advantage of opportunities, when times get tight, businesses should prioritize which ones to go after — and which ones to put on hold or abandon entirely.

“Not understanding when cuts need to be made is one of the biggest mistakes family businesses can make,” says Justin Miller, a national wealth strategist at BNY Mellon Wealth Management. “Sometimes, not making smaller changes now can lead to the need to make bigger changes down the road.”

Keeping the family in the loop
Often in a recession, there’s a need to pare back or eliminate shareholder dividends. When that happens, it’s important for business managers to let family members know as soon as possible. That allows family members to plan for lower income this year and make necessary changes to their lifestyle, Rowe says.

Such communication goes most smoothly when there’s a clear family governance structure, and those involved in the day-to-day running of the business have the authority to make such decisions.

“Families that don’t have those structures in place should start putting them in place now,” Miller says. “Having the appropriate decision-making structures in place make it easier to address potential conflict when it arises.”

Family meetings should take place frequently, with a focus on education about the business strategy and the actions the family has taken to maintain the business in previous economic contractions. When conflicts arise, bringing in a neutral third party, such as a financial adviser, may help.

In some cases, it will also be necessary to take a hard look at personnel expenses, an area that family businesses are often loath to cut. In this case as well, early and open communication is imperative.

“It’s important to communicate effectively with your staff and your employees about how the business will need to be run in order to survive and to think about alternative ways to support your employees,” Rowe says.

That may mean laying employees off so they can collect unemployment or looking at alternative arrangements such as reduced hours or job sharing. The goal, Rowe says, it to do whatever possible to help employees understand that the family values them and wants to support them as much as the business possibly can.

Outside capital
In addition to reducing costs, family businesses should be considering other sources of capital. That’s particularly important for businesses whose revenue has been cut off because of forced business shutdowns or stay-at-home orders caused by COVID-19.

Family business leaders should be having ongoing conversations with their bank about any potential issues with current debt obligations and the potential need for additional credit. For families who have a long-term relationship with a bank, keeping the bank abreast of cash flow challenges can make credit requests go more smoothly.

“It’s important to let the banks know what’s going on,” Murphy says. “They don’t like surprises.”

Still, some family businesses are averse to debt and haven’t had to borrow money in recent years. Before meeting with lenders, they should be prepared to open their books, share information about the current business situation and future plans, and report details about distributions to the family.

“If it’s your first time borrowing, or your first time in a long time, you may find that the banks’ diligence process is very robust post the financial crisis in 2009-2010,” says Flack. “It can be a jarring experience to go through for family businesses, because they’re opening up a lot of confidential information for the first time, and often being challenged for the first time.”

Murphy recommends that even those families who don’t immediately need credit have a conversation about the possibility with their bank, or at least consider opening.

“If companies have the asset base, we always promote having a line of credit available,” Murphy says. “A lot of banks have been providing credit at attractive terms. Even if you don’t need to draw it right away, it’s good to have it available.”

Family businesses should also discuss with their banks and financial advisers whether they might benefit from any state or federal initiatives aimed at mitigating the financial impact of COVID-19.

For now, many lenders are viewing the current crunch as a short-term issue and are finding ways to work with clients.

“I am hearing that they’re being flexible about upcoming interest payments, as well as their ability to expand their facilities,” Flack says. “It feels like we’re in this together, and if we don’t react in a proactive way for continuity that’s good for both family owners and banks, then we’re not going to get through this. The spirit has been positive.”

Potential opportunities
Family businesses that come into the recession from a place of strength may also need capital — not to keep their business afloat, but to take advantage of opportunities that present themselves.

Such opportunities may include gaining market share or acquiring the assets of competitors who haven’t been as conservative with their balance sheets. One key advantage that many family businesses have is the institutional knowledge and experience of older family members who have often guided the company through multiple recessions.

“The advice in both good times and bad is not to panic,” Miller says. “You don’t want to make poor, short-term decisions that are going to affect your long-term success. Part of the reason family businesses survive for multiple generations is their ability to think beyond the short term. A lot of people are looking at the stock market and some of the recent big drops, but family businesses are thinking in terms of years or decades as opposed to days or weeks.” 

Beth Braverman is also a contributor to Directors & Boards and Private Company Director. 

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact     

The pros and cons of debt

For many family business owners, debt is a four-letter word that’s synonymous with risk, vulnerability and outside control.

Take Gregory Pettinaro, managing partner of Pettinaro Enterprises, a real estate development and investment group in Newport, Del., with more than $500 million in real estate assets. Pettinaro says he prefers not to risk cash flow by saddling the firm with leverage. This strategy helped the business survive the 2008-10 financial crisis, which resulted in the worst real estate downturn since the Great Depression.

“I’m conservative. We try to use as little debt as possible,” says Pettinaro, 54, a second-generation owner of Pettinaro Enterprises. “As big as the business is, I don’t feel the need to take huge risks. I’m just in a position in my life and career where I don’t want to put my business at risk.”

His entrepreneurial father, by contrast, was more aggressive with leverage as he built the business, Pettinaro says. His father, Verino Pettinaro, was more comfortable with risk if it allowed the business to grow by taking on new projects and expanding cash flow. “I think the original founders always take a lot of risk,” Gregory says of family businesses.

“Sometimes you need to borrow,” says Verino, 80.

The Pettinaro story illustrates that when it comes to using debt financing, the tolerance level in the family business sector is a moving target. The willingness to borrow can vary wildly among family businesses because of economic conditions, the industry, the life cycle of the enterprise, growth opportunities, the ages of shareholders and family values, to name a few factors.

Debt can enable business owners to swing for the fences. The legendary Walt Disney and his brother Roy went heavily into bank debt in the early years of their company, according to Bob Thomas in Walt Disney: An American Original. In 1951, Walt wrote a friend that he was at the “limit of my personal borrowing ability.” For decades, dealing with bankers was a constant issue for the Disneys. When Walt developed Disneyland he struggled to raise money, according to Thomas.

“I even put my family in hock by borrowing on my life insurance and stock,” Disney told a reporter.

Advice on borrowing: Plan for contingencies

When Rosa Porto needed $5,000 to open a bakery in 1976, she went from bank to bank and came away empty-handed.

Although Porto had saved a lot of money by being thrifty and selling cakes and Cuban baked goods from her Los Angeles home for five years, she was unable to come up with the collateral required by the bank, says her daughter, Beatriz Porto. Eventually, Bank of America “took a chance” on the Cuban immigrant, and she opened her first bakery in Echo Park, Calif.

That gamble paid off. Today, Porto’s Bakery and Café operates a handful of stores in Southern California and employs more than 1,000 people. The company doesn’t release sales figures, but Porto says on a Saturday a typical store can serve 10,000 to 15,000 customers with an average sale of $25.

The business is now owned by Rosa and Raul Porto’s three children, Beatriz, Raul Jr. and Margarita. The family’s third generation also works in the business.

Despite the company’s success, Porto says the family’s attitude toward debt remains conservative.

“When you get bigger, everybody wants to give you money,” says Porto, who is vice president of community relations. “We’re immigrants. We’re not used to borrowing money. In Latin countries you borrow money from relatives.”

Still, the business always borrows when it opens a new location because it makes good business sense, particularly when interest rates are very low. The business goes to banks rather than investors for financing, Porto says. The Portos shop for the best terms, which means the loan instrument can vary from store to store.

“Banks have special deals, like car dealers. Sometimes it’s short term. Every time you borrow money it’s different,” she says.

But the Portos are very careful not to over-leverage.

“We don’t borrow the whole thing,” Porto explains. “We believe in saving money ourselves. Instead of living lavishly, we save it and invest back in the business. We have modest distributions, and the rest is saved to go into the bakery.”

Albert Napoli, a lecturer in entrepreneurship at the University of Southern California Marshall School of Business, knows the Portos well.

“It’s unbelievable. Betty [Beatriz] and her brother and her sister are always working. They live in nice houses, but no sprawling estates. They live way below their means,” Napoli says.

Porto recommends that family business owners know what their goals are when borrowing money. They should be prepared for economic downturns or other outside forces that could affect the business, she cautions.

“Don’t wait for the $15 minimum wage to hit and then say you can’t afford it,” she says.

Surround yourself with a team of advisers and experts who can guide you, such as lawyers and accountants, Porto says.

“We came from nothing, and we know we can lose it,” she says. — Maureen Milford

In other cases, debt can solve problems. Joe Shoen, CEO of the parent company of U-Haul International, says debt helped end difficulties created by an epic, bitter family fight that began in the late 1980s. When the business was forced to file for Chapter 11 bankruptcy protection, a banking syndicate led by Wells Fargo Foothill provided a $550 million credit facility that allowed creditors to be fully paid.

“Debt was a way out of it. The banks supported us,” Shoen explains.

Counterintuitively, debt also can be a means of riding out hard economic times and tight credit markets.

Ford Motor Company used $23.5 billion in loans as means of implementing a daring plan to transform the business and remain independent. As luck would have it, Ford borrowed the money in 2006, on the eve of the financial crisis and a severe downturn in the auto market. The company did not take any government bailout funds. But to qualify for the loans, Ford put up nearly all its assets as collateral, including its blue oval trademark, a move the descendants of Henry Ford did not take lightly.

“When we pledged the blue oval it was enormously emotional for me personally and for my family, because we weren’t just pledging an asset, we were pledging our heritage,” William Clay Ford Jr., fourth-generation executive chairman, said in a conference call when Ford got the logo back in 2012.

Still, high-profile cases of family firms that have seen businesses buckle under enormous debt become cautionary tales for most family enterprises. Some families manage to operate with little or virtually no leverage.

Consider Mars Inc., a family-owned food company that ranks as one of the world’s largest private companies. Mars is clear about why it refrains from debt — to ensure freedom.

“Many other companies began as Mars did, but as they grew larger and required new sources of funds, they sold stocks or incurred restrictive debt to fuel their business. To extend their growth, they exchanged a portion of their freedom. We believe growth and prosperity can be achieved another way,” Mars says on its website.

Dave Oreck, founder of vacuum manufacturer Oreck Corp., is philosophical about why he stayed out of debt. While his business plans would minimize the need for any long-term borrowing, advantageous circumstances might also have played a role, he says.

“To get along without it, that was my preference. We were able to fund as we went,” says Oreck, 95. “I never really borrowed [long-term] from anybody. Maybe it was the luck of the draw. I don’t know.”

In-N-Out Burger, a California restaurant chain run by a third-generation member of the Snyder family, rings up annual sales of more than $1 billion and is essentially debt-free, according to a Forbes article. Company president Lynsi Snyder, whose grandparents Esther and Harry started the business in 1948, has said she wants to keep the company the way her family would want. She told Forbes she considers herself a protector.

The Snyders favored a slow-growth policy and stayed smaller than competitors, according to the Los Angeles Times’ 2006 obituary for Esther. This philosophy limited expansion to store locations that could be reached by company trucks within a day to ensure freshness of the food. Lynsi Snyder told CBS This Morning in 2015 the company would never franchise outlets or go public.

“The only reason you would do that is for the money and I, I wouldn’t do it,” Snyder told CBS. “My heart is totally connected to this company because of my family and the fact that they’re not here, you know. I have a strong tie to keep this the way they would want it.”

With debt offering such a range of positive and negative outcomes, family businesses must have a clear understanding of their purposes for borrowing and well as their risk tolerance levels.

“You take on debt in the context of your strategic plan,” says Craig Aronoff, co-founder of The Family Business Consulting Group and a principal consultant at the firm. “And your strategic plan is developed with the goals of shareholders, what opportunities and threats the market gives, and the strengths and weaknesses of the business.”

Borrowing should be done for healthy reasons and with a long-term horizon, says Jonathan Flack, U.S. family business services leader at PwC.

“Don’t be afraid of it. Think about it long-term,” Flack advises.

Judicious use of debt
When family businesses need external financing, debt is the preferred method, rather than new equity, research shows.

“Rarely do they want to give up any kind of family ownership,” Flack observes.

But even when taking on debt, family firms are prudent in their use of leverage, according to a 2012 Harvard Business Review article by Nicolas Kachaner and George Stalk Jr. of the Boston Consulting Group and Alain Bloch, a co-founder of the Family Business Center at the business school HEC in Paris. Their study of 149 family-controlled, publicly traded companies with revenues of more than $1 billion found debt accounted for 37% of the capital on average at family companies from 2001 to 2009, compared with 47% of the capital at non-family businesses.

Still, in the life of a business there are many solid reasons to use debt financing.

The top reason is to grow the business. Debt might allow a family to acquire another enterprise, upgrade technology or modernize facilities, to name a few reasons.

When Pettinaro bought a massive portfolio of commercial properties in the wealthy Greenville, Del., area for more than $100 million in 2015, the deal was done with cash and the assumption of the existing debt on the property.

Shoen of U-Haul says debt is simply an integral part of doing business at his company. 

“We have to have debt. That’s just the way it is,” Shoen explains. “But you have to always remember you have to pay this money back. So you always have to be thoughtful and careful.”

Another good use of leverage can be to repurchase shares from shareholders whose interests are no longer aligned with the rest of the ownership group or who need some liquidity for estate planning or other uses, Flack says.

Indeed, rigid and arbitrary rules prohibiting debt can prevent a company from seizing opportunities and staying competitive, says Jennifer Pendergast, the John L. Ward Clinical Professor of Family Enterprises at Northwestern University’s Kellogg School. She has worked with family firms whose owners say the previous generation decreed the company should never have debt or keep borrowing within tight limits.

“All they’re thinking about is managing downside risk. They’re not thinking about the bigger strategic picture,” Pendergast explains. “They’re stuck in a mindset that might have worked two generations ago, when the business was at a different scale. The world changes. The competitive landscape changes.”

In a fast-changing environment, debt can sometimes be the only option to stay competitive through acquisitions or other strategies, she says.

Banks as partners
Most family businesses turn to traditional banks when they need external financing, research shows.

Bank financing is attractive today because of the low interest rate environment. What’s more, the interest from a bank loan is tax-deductible as a business expense if the loan is used for business purpose and the business is legally liable. Debt financing also prevents the family’s ownership from being diluted.

“Rarely do family owners want to give up any kind of family ownership,” Flack says.

Family businesses also pay less for debt than non-­family businesses in tight credit environments, researchers have found. One reason is that the interests of lenders and family business owners tend to be aligned, according to Margarita Tsoutsoura, an associate professor at Cornell University’s S.C. Johnson College of Business. Lenders want to see family businesses survive and pay off their debt.

Family firms whose chief executive is a family member tend to receive the most attractive rates, Tsoutsoura says. Her research found 17% of loans to family businesses contain covenants requiring the founding family to maintain a minimum percentage of ownership. Some lenders might require having a succession plan in place.

“In banking, relationships matter,” Tsoutsoura explains.

In general, debt financing among family firms is short-term, Flack has found.

“Family businesses are very attractive to banks, as family businesses are typically conservative borrowers who maintain stable operations from year to year,” Flack says.

On the downside, banks may require some personal guarantees or impose restrictive covenants that are not palatable to some shareholders. Debt repayment can cut into cash flow. And the higher risk can cause conflict among family members.

At the end of the last decade, bank loans were part of a bitter, public court battle between a father and son over control of N.K.S. Distributors Inc., a liquor distributorship in New Castle, Del. At one point, the bank required the third-generation business to bring in a restructuring officer who testified the company was insolvent when he joined the board in 2009.

How to borrow wisely
Those who work with family businesses offer this counsel:

• Families should reach a consensus about what level of debt is appropriate for the business and fits well with their risk tolerance levels. Make sure shareholders are aligned on the reason for incurring debt. Be smart about risk, Aronoff advises. “It has the potential to help you reach your goals.”

• Have a long-term perspective. For example, will any debt taken out today continue into the next generation?

• Make sure to find a lender whose interests align with yours. The lender should be viewed as a partner, not an enemy. 

In the final analysis, the relationship of family firms to debt is as kaleidoscopic as the families and businesses themselves. Owners articulate their own goals and run their companies according to their own lights, Aronoff says.

“That’s the glory of family business,” he says.          

Maureen Milford is a frequent contributor to Family Business. She recently profiled Nixon Medical of New Castle, Del.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

When the 'hard side' meets the 'soft side'

In the family business world, issues tend to be divided into those requiring “hard side” expertise (such as investing, tax planning and legal compliance) and those necessitating “soft side” competencies (like family meeting facilitation, leadership coaching and conflict resolution).

In an environment where love and money intersect on a daily basis, this dichotomy is unhelpful. For example, financial issues must be explained in a way that family members will understand, and family values around inclusiveness determine who may own shares in the business.

In this edition, we address two “hard side” areas that require “soft side” sensitivities: debt and valuation. If you don’t look up from your spreadsheet and note the expressions on your family members’ faces, you’re setting yourself up for an argument, or maybe worse.

Here are some questions that straddle the lines between “hard side” and “soft side”:

• Does your family reject debt out of hand because the business founder never borrowed (or because a previous generation borrowed too much)? Is an inherited fear of debt holding you back from an expansion that could boost profitability?

• Has your ownership group developed a policy on how much debt the family is comfortable with?

• Has your ownership group reached consensus on the option of taking on a private equity investor or other partner in lieu of borrowing?

• Are your family members taking too much cash from the business for perks like cars, fancy meals or short business trips that turn into long vacations?

• Does your business have an independent board that can help you sort out questions related to debt, risk and cash management?

• Are dividends or other liquidity options available to family members so they have a means to obtain cash and realize a return on their investment in the family business?

• If a family shareholder wanted to cash out, would the business leaders view this as a slap in the face or an individual making a financial decision in their best interest?

• Does your shareholder agreement spell out how the value of an owner’s shares would be calculated upon exit?

• If there are wealth discrepancies among households, has your family come to terms with the difference between what is “fair” and what is “equal”?

• Have you developed a mission statement for the family’s collective wealth, based on your shared family values?

• How are you teaching your NextGens about ownership, management and stewardship?

Wealth and assets are emotionally charged issues. Having clear policies created through a consensus-driven process — before they are needed — will help your family prevent or manage conflict when money questions are raised. You may need the help of both “hard side” and “soft side” consultants to help you navigate around minefields.

The questions raised here are challenging ones, with implications for the future of the business and the family (individually and collectively). They will take time to sort out. But if family members believe the process of addressing them was fair, they will likely be comfortable with the result.

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Show me the money

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.

Going public enables the family to retain shares in the business — and even control, if a dual-class structure is created. However, this may not be the right option if family members plan to stay in top management, since financials will be public, and the company will be vulnerable to media scrutiny.

Selling to a strategic buyer (another operating company, such as a competitor, supplier or customer) can be a good choice for families wishing to exit. One major factor is that strategic buyers seek synergies with their existing operations, which often means layoffs for employees of the acquired firm, and perhaps a move out of the community where the family business is based.

Private equity recapitalizations are the liquidity option of choice for many family firms because they enable some family members to retain a stake in the company while others cash out.

Private equity funds generally have an investment horizon of five to seven years before seeking a liquidity event. In the usual scenario, the company will have grown before it is sold, enabling family shareholders to realize a higher value for their stake.

There are downsides to partnering with private equity. The PE fund takes a seat on the board and thus has a say on strategy. These investors use debt to finance their acquisitions, so there is a risk of overleveraging the business.

In recent years, family offices — private entities that manage investments for high-net-worth families — have begun to make direct investments in other family businesses rather than joining in private equity funds. Family offices have traditionally shunned publicity, though recently their investments have been noted in the media.

Because family offices share both the long-term investment horizons and the sensibilities of business families, these types of partnerships stand a good chance of being amicable. But most family offices still operate under the radar and thus are hard to find.

This issue features a special report on private equity and other liquidity strategies. And our cover story describes how the four Flanagan brothers, owners of Canada’s largest independent food distributor, developed a transition plan enabling three siblings to exit with one brother remaining at the helm — in a harmonious process whose main goal was to preserve their close relationship.

What’s the secret to a successful liquidity plan? Resolving this family business quandary, like so many others, requires intentionality, planning, communication and trust.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Creating shareholder liquidity: A checklist before going public

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.

What questions should family business owners be asking in 2018 to determine if they are ready to take their company public?

Question #1. Which has greater priority: maximizing wealth and liquidity or maintaining maximum control?

One will prevail over the other, and it is best to consider this question early in the process.

Illustrative of this is the recent Snap Inc. IPO. The founders retained control through a dual-class stock structure that gave them 89% of the voting power although they held only 44% of the equity. Because of the lack of voting rights, Snap Inc. shares were excluded from the relevant MSCI indices, suppressing the pool of prospective investors.

Question #2. Whose wealth is being maximized, current or future generations?

The more generations, the more important the question. Generational interests can easily diverge, as demonstrated by the separation of the Pritzker family’s assets after years of discord.

Question #3. Who gets a vote on the upcoming direction and process?

This issue must be discussed and ideally settled before the owners consider going public.

Question #4. How will current service providers be handled?

Some of your legal, accounting, tax and estate advisers may be adversely affected. Others may see a windfall. Some will be displaced because of market needs, requirements or lack of qualifications. Long-time advisers may be displaced even if they are highly qualified, and long-term relationships may end up stressed or severed.

Question #5. How will current stakeholders — board, employees, customers, local community — be affected?

You should also consider what weight should be given to stakeholders who are not decision makers. Family employees and long-time executives and board members may be displaced. This issue is highly personal; no single approach is best for every family ownership group.

Question #6. Who should serve on the team that will decide the myriad questions that must be answered regarding which stock exchange to list on and which service providers — investment bank, accounting firm, investor relations firm — to engage?

These six questions are worth bearing in mind whenever a significant change in ownership is contemplated. They are even more important before beginning the process of creating liquidity via going public. Once the above items have been addressed, there is another set of considerations regarding alternatives. There are alternatives to going public via an IPO that may be a better solution for your company.

Liquidity alternatives for family businesses
Private equity firms will often allow business owners far more control than they would have if they took the company public. Of course, terms are highly negotiated, and more than one family founder has been forced out when the company struggled. Private equity and venture capital investors currently a have near-record amount of “dry powder” awaiting investment, estimated to be $638 billion, according to Pitchbook. When PE firms invest capital, they generally plan to grow the company and make it more successful for later sale. While this plan will ultimately require the family to relinquish all ownership, it will enable them to exit with greater wealth than they likely would have been able to realize without the PE partner.

• A sale to an ESOP (Employee Stock Ownership Plan) provides family owner/operators unique flexibility. The sale of all or some of a company’s stock to an ESOP provides liquidity for shareholders as well as incentives for management and employees. Participating employees receive company shares through the ESOP as a retirement benefit. Under Section 1042 of the Internal Revenue Code, shareholders can avoid capital gains taxes when selling to an ESOP if within 12 months of the sale they reinvest proceeds into “qualified replacement property,” such as stocks and bonds of U.S. companies. Within limits, the sponsoring company can deduct the principal and interest payments on the loan the ESOP used to purchase shares.

Special Section: The quest for liquidity

The ABCs of PE

Private equity pros and cons

Family offices: 'Quiet capital'

Succession plans must incorporate liquidity planning for the family

Merging into or selling to another public entity has more certainty of closing a highly negotiated deal. While an IPO can be adversely affected by general market conditions that might make success — or even closing — impossible, a merger/sale is dependent on a very small group of decision makers. Even that risk can be mitigated with “break-up” fees paid should a closing not take place.

• A variation of the above is a special-purpose acquisition corporation, or SPAC. This entity raises a “blind pool” of public capital from investors with the sole purpose of finding a private company with which to merge. The private company management often retains full operational control and majority equity ownership of the now-public company. Promoters of a SPAC list these as advantages over traditional IPOs: (a) The seller will know the price at the beginning of the process. (b) Costs are lower, since the entity is already public. (c) The deal structure is flexible.

• A newer potential vehicle for liquidity is a Reg A+ public offering. This allows startups and later-stage pre-IPO companies to use equity crowdfunding platforms or traditional investment banks to raise as much as $50 million from both accredited and non-accredited investors. Unlike traditional S-1 public offerings, with a Reg A+ offering companies are allowed to test the waters with prospective investors during the approval process, eliminating the “quiet” period.

There are two tiers. Tier 1 allows the company to raise up to $20 million, while Tier 2 allows the company to raise up to $50 million. Larger Tier 2 capital raises require audited financials.

Going public: Which exchange?
Foreign exchanges come in and out of favor depending on that countries’ specific capital market dynamics. For an extended period the German market was booming as economic unification powered the German economy. More recently, the London Alternative Investment Market (AIM) and the Australian market have gained acceptance as viable, if not first-tier, markets.

NYSE and Nasdaq. If one decides to go the traditional IPO route there are two major markets to consider, the NYSE and the Nasdaq. Over-the-counter (OTC) networks are for small companies that can't meet exchange listing requirements.

NYSE and Nasdaq vary in their requirements for initial listings. Specific requirements for each exchange and the alternatives offered are available on their respective websites. Among the deciding criteria are the following: pre-tax income, market cap, total assets, market value of public float, stockholders’ equity, minimum price and operating history.

Reality check
Have you considered all the personal and emotional ramifications of being part of a public company? Employees, customers and owners will be affected. You will be required to report results every quarter. No meaningful problem or dispute will escape disclosure. There is a reason there are fewer public companies today, and that private companies controlled by private equity and venture capital are staying private much longer.                          nFB

Allan Grafman is a director serving audit, compensation, nominating and governance committees. He has served on nine boards of public, private and PE-controlled companies. Previous roles include operating partner with a PE fund, CEO of a technology company and positions at ABC/Disney, Tribune and Archie Comics. He is CEO of AMV

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Family offices: 'Quiet capital'

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.

“Families that have built and grown successful businesses are increasingly looking for opportunities to invest in [other] family-owned businesses,” says Irene Mello, director of the Direct Investing Network at Family Office Exchange (FOX), a network for wealthy families and their family offices.

This relatively recent development is part of a growing trend by family investment firms to allocate a portion of their assets to investments in operating businesses. The past 24 months have seen a big uptick in this “direct investment” by the family office sector, notes Russ D’Argento, CEO of Fintrx, which provides data and research on the family office sector to the private capital markets.

In FOX’s 2017 Global Investment Survey, 57% of family offices reported being involved, in some fashion, in direct investing in operating businesses. It’s safe to assume at least some of those investments are in family businesses. Most family offices are looking for deals under $1 billion. Almost all companies bought by family investment firms are private businesses, observers say.

To facilitate direct investing, the family office sector is beefing up its staffing. According to the FOX investment survey, 81% of family offices employ at least one full-time staffer to source and evaluate direct investments.

There are several reasons for the increase in direct investment. To begin with, family investment firms today are very sophisticated and have hired top-tier talent, D’Argento says. As savvy financial investors, they’ve become increasingly dissatisfied with the “2-and-20” fee model used by private equity funds — a 2% management charge and a 20% performance fee — says Angelo Robles, founder and CEO of the Family Office Association, a global membership community of successful families and single-family offices.

Family companies provide great cash flows and growth opportunities, explains Bobby Stover, Ernst & Young’s Americas family office leader. Because public markets are extremely efficient today, it’s harder to find growth opportunities there, he says.

A growing sector
Finally, there are just more family investment firms seeking opportunities nowadays. In 2016, there were at least 10,000 single-family offices worldwide, with at least half started within the previous 15 years, according to Ernst & Young’s “Family Office Guide.”

“Family offices are arguably the fastest-growing investment vehicles in the world today.… The increasing concentration of wealth held by very wealthy families and rising globalization are fueling their growth,” the EY guide states.

This appears to be an opportune time for family business owners to consider family investment firms as a way to raise capital.

Special Section: The quest for liquidity

The ABCs of PE

Private equity pros and cons

Creating shareholder liquidity: A checklist before going public

Succession plans must incorporate liquidity planning for the family

“It is becoming well known that families are looking to invest in private companies at the same time many family-owned companies are looking for capital from private investors to help solve their own transition issues,” says Sara Hamilton, FOX's founder and CEO.

In the past, family businesses generally had two choices — selling to a strategic acquirer (often a competitor) or to a private equity fund, says Paul Carbone, managing partner of Pritzker Group Private Capital, a family investment firm.

Family office represents a third option, Carbone says.

For family business owners, a family investment group could provide flexible capital with an investment tailored to their individual situation, Carbone says. He says Pritzker likes to think of it as pulling on the oars together.
For example, many wealthy families have run businesses themselves.

“These families have real-life operating experience and therefore special insight into what it’s like to run a family business and what’s needed to drive strong performance,” Mello says. “This perspective gives them a real edge as investors, as they understand the needs of family businesses, relate to the challenges they face and can provide advice and support that’s value-add and action-oriented,” Mello says.

Family offices sometimes want a controlling stake to influence the direction of the company, but many are open to minority investments where “they can back a strong management team with a proven track record and provide growth capital to accelerate a strategic plan,” Mello says.

Since family investment groups place a lot of importance on evaluating management teams, they’re showing greater flexibility around deal structures and a higher interest in growth capital, Mello notes.

Aligned interests
In addition, family offices tend to understand the culture of the families they do business with, Stover says. For a family office, the term “long term” means generations, not seven to 10 years, he points out.

“It’s sticky capital,” says D’Argento. “They hold and keep investments until it’s appropriate to exit them. There’s less of an institutional feel, and it’s a bit more personal.”

Take Vincent Mai, who spent more than 20 years in private equity. Mai says he found it frustrating “to be selling really good businesses I didn’t want to sell, and I saw the need for an alternative structure.” In 2012, he founded The Cranemere Group, a private holding company backed by family offices that acquires and holds family businesses for the long term.

Lansing Crane, former chairman and CEO of Crane Currency, which partnered with private equity in 2008, thinks family offices provide distinct advantages. “I think they’re a great solution,” he says.

But 10 years ago, family office wasn’t an option for his family business, Crane says.

“Most of the time, a strategic single-family office is much better than private equity because there’s an alignment of interests,” says Robles.

But because the family office sector is so discreet, finding a partner can take work, say those in the field.
“It’s a fragmented, cloudy world,” D’Argento says.

Patricia M. Soldano, a consultant with GenSpring Family Offices, suggests that family business owners join a network and attend conferences to learn what the various family offices do.

“It’s hard. There’s no list [of family offices seeking investments],” Soldano acknowledges.

Stover agrees most connections between family enterprises and family office happen through networking. 

“It’s known as ‘quiet capital,’” he says.      

Maureen Milford is a business writer based in Wilmington, Del.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact


Private equity pros and cons

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.

Ten years ago, things were changing at the bank note producer, which has had the contract to make currency paper for the U.S. Treasury since 1879. Crane had repositioned itself as a currency business and had expanded internationally. The family shareholder base had grown, and some lacked strong emotional ties to the business. A few owners wanted to sell some shares. At the same time, company leaders wanted to continue to grow the enterprise.

Enter Lindsay Goldberg LLC. In 2008, the private equity firm took a 40% equity stake in Crane and eventually increased it to 49%. Lindsay Goldberg became “a very valuable resource,” says Kittredge, the company’s former chairman and CEO and a sixth-generation family member.

Thanks to Lindsay Goldberg’s ability to provide help when needed, “We became a much better-run business,” Kittredge says.

In January, Lindsay Goldberg and the Crane family sold the business for $800 million to the Crane Co., a diversified manufacturer of industrial products. (The two companies were unrelated before the deal; the similar names are a coincidence.)

Lansing Crane, another sixth-generation family member who was Kittredge’s predecessor as chairman and CEO, says Lindsay Goldberg “was as good a partner as we could have wished for.” The private equity firm always had the best interest of all shareholders in mind, he explains.

“They were patient even when the company was not performing well,” Crane says. “They stuck with us and gave management time to meet expectations.”

When the family owners of Crane Currency turned to Lindsay Goldberg a decade ago, it was to execute a financial strategy known as a private equity recapitalization (recap). In a recap, family owners can take some chips off the table while retaining ownership and involvement in the business. Family owners reduce their risk while maintaining the opportunity to benefit from any future growth.

In the case of Crane Currency, Lindsay Goldberg invested for 10 years, which is much longer than a traditional private equity deal. The partnership helped build the company and, when it came time to sell, bring in a high price.

But recaps can be fragile marriages.

Despite Crane Currency’s positive experience with private equity, Lansing Crane recognizes there can be a built-in friction between private equity investors and family owners because the parties’ objectives are not always 100% aligned.

Risk and returns
Private equity investors are typically concerned with maximizing returns in a short time frame. Family enterprises, by contrast, put resilience first and performance next, says George Stalk Jr., senior partner emeritus at Banyan Global.

Family business owners tend to be unwilling to take risks for higher returns. “They are worried about the long term,” says Stalk. “They are constantly worried about getting into trouble.”

Special Section: The quest for liquidity

The ABCs of PE

Family offices: 'Quiet capital'

Creating shareholder liquidity: A checklist before going public

Succession plans must incorporate liquidity planning for the family

For the family business sector, debt is associated with fragility and risk, Stalk and coauthors found in a 2012 study published in Harvard Business Review. Family enterprises tend to be much less leveraged than non-family firms, he says. Private equity, however, uses leverage as a tool to fatten returns. 

When family business owners hear of unfavorable stories that involve partnerships between private equity and family enterprises, alarm bells go off, Stalk says. This often leads family business leaders to be leery of private equity, a point on which private equity investors and family business advisers agree.

Consider the story of K’Nex Brands, a designer and manufacturer of construction toys based in Hatfield, Pa. K’Nex was founded by the Glickman family, owners of The Rodon Group, which specializes in injection molding of small plastic parts. In 2016, the Glickman family sold a majority equity stake in K’Nex to Cathay Capital North America.

At the time of the deal, Michael Araten, a married-in member of the Glickman family who was then the CEO of K’Nex, said in a statement: “Our strategic visions are perfectly aligned, and we have already started to tap into Cathay’s deep expertise in China and Europe.”

Less than two years after Cathay completed the recapitalization of K’Nex, PNC Bank, a secured creditor of K’Nex and its parent company, Smart Brands International Co., auctioned off the company’s assets. The sale proceeds were reportedly used to pay K’Nex's debt to the bank. Basic Fun!, a Boca Raton, Fla.-based toy and novelty company, announced in February it had bought the assets of K’Nex, bringing the company under outside ownership.

Jie Gao, who handles corporate communications for Cathay Capital, said the firm could not disclose more information. Neither Araten nor K’Nex’s lawyer responded to repeated requests for comment.

Smoothing your relationship with a private equity investor

Advisers offer these tips for family business owners considering partnering with private equity:

  • Before embarking on a private equity deal, families should decide what their priorities are for the family enterprise and the family as a whole. “Families should define for themselves what their definition of success is and what the best outcome would be,” says Patricia Angus, co-director of the Family Business Program at Columbia Business School and CEO of Angus Advisory Group.
  • If private equity is the choice, it’s crucial to pick a partner whose goals and objectives match the family’s priorities.
  • To help avoid future conflicts, establish a set of ground rules governing the partnership, such as levels of debt and control. Underlying issues must be ironed out in advance, says Carrie Hall, who leads Ernst & Young’s Family Business Center of Excellence in the Americas. Rules should be put in writing. 
  • Reach out to other business families who have partnered with the private equity group you’re considering. Find out how the investors behaved when times were good and when times were rocky.

Another case involves Strauss Coffee, a subsidiary of family-run Strauss Group, the Israel-based food company whose products include Sabra hummus. Strauss Coffee spent years feuding with its private equity partner, TPG Capital. To help with its global growth strategy, Strauss Coffee had sold a 25% stake to TPG in 2008.

At one point, TPG even went to court to stop Strauss from firing a TPG representative who was serving as the coffee company’s CEO, according to published reports. The case was dismissed and the CEO was fired in 2014. But TPG had gone so far as to allege Strauss Group had abused its rights and asked a Dutch court to order an inquiry, Reuters reported.

Strauss Coffee appeared elated when it bought back the TPG shares in March 2017.

“This is an important day of celebration for Strauss Group and Strauss Coffee,” said Gadi Lesin, CEO of Strauss Group, in a statement when it announced the repurchase.

Proceed with caution
While private equity firms today might try to distinguish themselves from the pack by positioning themselves as “patient capital,” some advisers are skeptical.

“If a private equity firm says they’re investing for 20 or 30 years, run, don’t walk, out of the room,” says Ernest M. (Bud) Miller Jr., who has served on the board of family-owned companies and is the former dean of the School of Business at Clayton State University in Atlanta. Miller has likened the deal process to being pursued by a persistent suitor. “They’ll tell you anything so they can date you,” he says.

Miller cautions, “Be very, very careful about bringing in a third-party investor, even in a minority position.”

Proponents of private equity say troubled deals, while sensational, are rare exceptions. Many more partnerships end happily without ever grabbing a headline because the sector is a private asset class, they note.

Still, private equity managers agree partnerships are trickier and more complicated and take longer to put together than other M&A transactions. Deals require partners who understand the family dynamics, observers say.

“There’s a complexity that is not present when you have a complete buyout,” says Carrie Hall, who leads Ernst & Young’s Family Business Center of Excellence in the Americas. “More cooperation is needed, more communication, more share value.”

Family business owners considering private equity should be well aware of what they’re getting into, says Kittredge.

And remember, notes Stephen McGee, managing director of Bigelow LLC, an M&A advisory firm: “Private equity is just one solution.”  

Maureen Milford is a business writer based in Wilmington, Del.        

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

The ABCs of PE

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

For starters, these savvy investors know that profitable family businesses abound. Numerous studies of family-controlled public companies have found they outperform their non-family peers. What’s more, private equity firms are well aware that baby-boom business owners are staring down retirement. In a 2016 survey of family business stakeholders, PwC found 30% of those who planned an ownership transfer within five years said they’d seek to sell to an outside party, up from 12% in 2012. To private equity firms, family businesses can provide opportunities to create additional value by taking steps such as reducing costs or growing the business.

When these factors are combined with the huge pile of money private equity has yet to invest — known as “dry powder” — family business becomes a rich prospect pool.

“Anyone looking to sell all or part of their business is going to get a lot of attention,” says Brian O’Connor, managing director and co-head of the consumer group at Vestar Capital Partners, a middle-market private equity group that has invested in more than 15 family-owned businesses.

Competition is so stiff that family businesses report they’re frequently getting cold calls from private equity groups trying to shake the tree. Bobby Stover, Ernst & Young’s Americas family office leader, says he receives a least a call a week from private equity managers looking for prospects for a new fund.

“If a family is thinking of selling, there’s never been a better opportunity,” says Steven N. Kaplan, professor of entrepreneurship and finance at the University of Chicago Booth School of Business. “Valuations are about as high as you can get.”

Deals in recent years include the sale of Belk, once the largest U.S. family-owned department store chain, to Sycamore Partners in 2015; the acquisition of Lasko Holdings Inc., the largest U.S. provider of portable fans and heaters, by Comvest Partners and JW Levin Management Partners LLC in 2016; the sale of a majority stake in Argus Media, a producer of energy and commodity data, to General Atlantic in 2016; and the acquisition of a majority equity stake in Edward Don & Co., a distributor of food service and equipment supplies, by Vestar Capital Partners in 2017. 

A ballooning sector
In simple terms, private equity involves the raising of money from high-net-worth individuals, pension funds and other institutional investors. The resulting private equity fund is structured as a limited partnership and invests in family businesses and other private companies.

The conventional model calls for the fund to take a controlling position in a company for about five to seven years, with the goal of increasing its value and making dazzling returns in a liquidity event, such as a sale of the company or an initial public offering.

These active investors seek to boost returns through such methods as buying low, increasing revenues, tweaking strategies, changing the senior management team and cutting costs. Leverage, used to turbo-charge the return on equity, is critical. Similar to the process of buying a house, private equity investors allocate a certain amount of their own money to fund the deal and then borrow the rest. The leverage can boost the return generated by the investment — but debt also increases risk.

Special Section: The quest for liquidity

Family offices: 'Quiet capital'

Private equity pros and cons

Creating shareholder liquidity: A checklist before going public

Succession plans must incorporate liquidity planning for the family

The private equity sector has ballooned in the past 30 years to thousands of firms worldwide, from mega-firms like The Blackstone Group to boutiques. The amount of dry powder is at record levels, rising to nearly $1 trillion in the third quarter of 2017, according to Preqin Ltd.

“The dimensions of the business have exploded in ways unimaginable in 1989,” says Vincent Mai, former chairman/CEO of AEA Investors, a middle-market private equity firm, from 1989 to 2011. “Everything is much less relationship-driven and much more transactional. It has evolved into a highly efficient, institutional, transactional market.”  

A potential downside
For family business owners, there is a potential downside: The ultra-rational nature of private equity often is antithetical to their values.

“Private equity has a reputation for being rapacious [and] slash-and-burn,” Kaplan says.

Owners of family enterprises tend to be influenced by non-financial goals, such as maintaining control of the business, preserving the family identity and fulfilling commitments to employees, suppliers and the community, says Patricia Angus, co-director of the family business program at Columbia Business School and CEO of Angus Advisory Group.

“They feel a deep commitment to employees, community, the environment and their reputation,” explains Diana Propper de Callejon, managing director of The Cranemere Group, a private holding company founded by Mai that invests in businesses to develop and hold for the long term.

“Family businesses make decisions with their heart,” says Stephen McGee, managing director of Bigelow LLC entrepreneurial advisory firm.

Consider that when the Lasko family decided to sell their business, the code name for the effort was “Legacy,” notes Jerry W. Levin, executive chairman of Lasko Holdings and head of JW Levin Management Partners.

“It was absolutely critical they find a partner willing to continue the legacy,” Levin says. 

What’s more, family business owners are wary of leverage, which is a key part of private equity deals, explains Carrie Hall, who leads Ernst & Young’s Family Business Center of Excellence in the Americas.

As private equity has evolved, firms are structuring deals that are more appealing to family business owners. Some private equity funds are willing to take a minority ownership interest and lengthen investment horizons.

Private equity can bring diverse expertise to the table to help a company grow. As a group, private equity investors have gotten better at increasing value by improving companies rather than relying on financial engineering tricks, Kaplan says.
Succession issues are generally cited as one reason family owners might welcome private equity. In some cases, shareholders might want to take some chips off the table to diversify holdings.

At Lasko Holdings, the second-generation owner, Oscar Lasko, was in ill health (he died in April 2017) and his son, Bill, wanted to do other things, Levin explains. Bill Lasko’s children had no interest in the business, Levin says.
Sometimes shareholder conflicts threaten a company’s wealth. Private equity financing becomes a way to buy out a dissident shareholder and resolve the conflict, according to “Private Equity in Family Firms,” a study by Marisa Henn and Eva Lutz.

Other families might want private equity capital and expertise to help them grow the business. Their goal is to retain a stake in the company.

Mai’s advice to families considering private equity is to take their time and think through the decision.
“If you rush things, that’s when you make mistakes,” Mai says.                                                                         

Maureen Milford is a business writer based in Wilmington, Del.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact