The Family Office: An Alternative Capital Solution

Contractors who need growth capital or want to see their company prosper after succession may be able to find like-minded investors in private equity firms backed by family wealth

Many circumstances can lead a business owner to decide it is time to sell or bring a capital partner into the business. A retiring owner may not have a willing successor or the younger generation may want to grow the business but lack sufficient capital to take it to the next level. While a business owner may desire to sell their business outright, very often earn-outs, seller notes, and minority stakes mean that their professional and economic future are tied to the ongoing performance of their business, now under new ownership.

Consequently, aside from aligning financial interests, business owners must carefully assess the cultural and personality fit of any prospective investor. Family office investors are a relatively unknown option that can offer better compatibility and superior economics over the long-term. 

Family offices are organizations dedicated to managing the wealth of an ultra-high net worth family, usually with a net worth of at least $200 million. The origins of their wealth most commonly stem from the sale or operation of a successful private business, providing them with an inherent understanding of the unique circumstances of family businesses. Many of these family offices choose to acquire or invest in closely held businesses with the goal of making more money than can be achieved via public markets.

Selling or partnering with a family office might be a better option if any of the following statements apply:

  1. If what happens to your business, employees, and community matters to you post-sale.
  2. If you are going to have an ongoing interest and involvement in the business, and care about partnering with someone who can add value.
  3. If you require a creative, flexible structure outside of the “plain vanilla” asset sale.

Maintaining your legacy

While obtaining a fair price is a major part of selling a business, owners must realize that buyers may have differing intentions. Strategic buyers and institutional firms often treat small and mid-sized acquisitions as candidates for downsizing (e.g., eliminating duplicate costs, etc.) or a quick flip. Many prospective sellers place a premium on purchasers and partners who are likely to respect the knowledge and experience of various key stakeholders, including employees, suppliers, and the community at large.

Family offices will offer that respect because they come from family businesses themselves. Another advantage that family offices offer is that of a long-term perspective, fostering a multi-generational outlook for the company’s future. Rather than chasing quick, speculative profits, family offices are committed to patiently creating sustainable value by running the business the right way for long-term performance.  For example, their conservative nature often translates into using minimal amounts of debt to ensure the resilience of the business during recessionary times.  

Experienced outlook

Having the right owner can dramatically impact the value of a given company.  While some family offices consider a variety of sectors, most tend to prefer investments in industries where they have experience— generally where they initially made their money. Partnering with a family office can provide a business with the benefit of a knowledgeable owner who can add value by sharing best practices and any other skills that contributed to their prior successes.  Unlike traditional investment funds, which generally have dozens if not hundreds of investors, most family offices focus their attention towards the success of a limited number of companies.       

Flexible capital

Without the restrictions placed upon traditional institutional and public buyers, family offices have the ability to structure a transaction in a personalized way most relevant to a business owner.  For example, an agreement may allow for a staged buyout over time or the opposite—for the original owners to buy back into the company. Many family businesses seeking growth capital are sensitive to “forced exit clauses,” which enables an investor to force a sale of the entire business after a stipulated amount of time.  Traditional funds have a fixed lifespan and therefore require this clause to ensure they can return capital back to their investors.

Challenges of working with family offices

Working with a family office presents some unique issues which should be taken into consideration.  Since numerous family members must often approve potential investments, deals tend to take longer to complete.  From our experience family offices invest not just based on the numbers but also upon the relationship; and often request multiple one-on-one meetings to get comfortable with their future partners. Additionally, some family offices can be hard to find due to their preference for privacy. Others operate publicly, with an active role trying to meet business owners to see if there exists a fit between the parties (in full disclosure, I am a partner at a firm that is backed by a network of family offices).

The family office has been a rising source of capital that can offer business owners a collaborative partner with parallel objectives. When owners place importance on the values behind their business rather than solely the highest price that can be attained in today’s market, the family office can provide a superior long-term solution that better accommodates employees, communities, and other stakeholders.

Jay S. Lipsey ([email protected]) is a partner with McCombie Group, a private investment firm backed by a network of families and high-net-worth individuals from across the Americas. It actively seeks to deploy long-term equity into established, family-owned operating businesses.