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Before You Invest In Family Business - Business - Nairaland

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Before You Invest In Family Business by chigomiced: 3:31pm On Feb 05, 2015
While family businesses have the unique characteristics of a family, they, like other companies are often in search of financing to propel their growth.

As a family grows and changes, the family business must also evolve to accommodate changing dynamics, experts note.

They add that the future of the family members, maintaining the independent nature of the family business and the preservation of family unity depend on the growth of the family business and its capacity to generate sufficient profit for all its members.

According to a report by KPMG, the number of people who live off family business revenue increases generation after generation. The future of the family and its unity are more likely to be key priorities of a family business in comparison to other companies, which brings additional pressure for growth that needs to be addressed.

The report titled, ‘Financing family business growth through individual investors’, states that a business requires strong financing to achieve quick growth.

It adds that access to capital after the 2008 financial crisis, is not always easy and finding funding sources can be very difficult for a business, especially a family business.

The view of family businesses that the stakeholders need to have total control over their company can make financing options more limited, it says.

It notes that the strong desire of family businesses to retain majority ownership creates the opportunity for high net worth individuals to play a role in bridging the funding gap via partnering.

Family enterprises retains majority ownership

The report says that more than three-quarters (76 per cent) of those surveyed say that family members retain a majority share of the business.

In addition, it adds that majority of family owners are unwilling to sell the business or relinquish control over it, therefore it should be managed with prolonged existence in mind.

It recognises independent board members

Around half of those surveyed say that more than 50 per cent of their governing board is composed of non-family members.

As might be expected, given the need for more professionalised systems and procedures in bigger and more complex companies, the larger family businesses are most likely to have a formal board of directors.

It says that only 13 per cent of smaller family ventures use family councils to reach strategic and operational decisions.

However, in larger companies, the board is also more likely to have a higher number of independent members, reflecting the need for more outside expertise and stronger corporate governance as companies mature.

High net worth individuals manage investments themselves

About 72 per cent take responsibility for half or more of their investments. In addition, 61 per cent say their investments are solely self-managed, or mostly self-managed, with experts consulted when needed, KPMG reveals.

Only 25 per cent manage their investments through a family office.

It adds that 60 per cent of high net worth individuals are looking for investments with reasonable risks and reasonable returns and are focused on long-term capital appreciation, which are common in family owned businesses.

Nearly half (44 per cent) of high net worth individuals have previously invested in a family business and the vast majority (95 per cent) say that it has been a positive experience in comparison to other investments.

To make informed decision before investing in family owned venture, the reports suggested the following:

Target family businesses in an area or sector you know well

KPMG says an understanding of the market in which the company operates will be highly attractive to family businesses, as they will appreciate the input and experience you can bring. It will also make your investment easier to monitor. Nevertheless, keep in mind any need for diversification in your portfolio.

Be flexible on equity

Many family businesses are open to the idea of offering equity, although they are less keen on the idea of relinquishing their position of control.

It advises, “Try and be creative in negotiations to find a solution that fits both sides.”

Highlight the value and experience you can bring

Most family businesses are looking for more than just financial backing, the survey notes.

According to the survey, if there are connections in particular areas, particular expertise or experience of working in similar environments, family businesses are likely to see these as helpful to their growth plans.

Emphasise your long-term perspective

The report adds that as family businesses are managed with the long-term objectives in mind, potential investors should be willing to lock up their investments for a significant period and make it clear that they would not be pushing for an early exit or panic if things go wrong.

Be sensitive about disclosure and reporting

A key draw for family businesses is that many high net worth individuals may have more flexible reporting requirements than banks or other institutional investors.

It says, “While tangible business factors, such as profitability and growth are highly important, be prepared to make allowances for the unique nature of the family business, where discretion and confidentiality are often highly valued.”

Get to know the family

KPMG notes that family members appear to be more open to the idea of offering equity and external expertise than non-family members working in family businesses.

It says, “The family should therefore be your first port of call and the focus of your relationship with the company. However, you will also need to allay the concerns of non-family members, who may feel threatened by an outsider with influence.”

Seek out younger family businesses

The survey suggests that the younger the business, the more likely it is to be open to offering equity.

According to the report, the first, second and third generation businesses are more likely to find the involvement of a high net worth individual attractive than, for example, a sixth generation company.

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