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.
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