Why invest in family-owned businesses?

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numi

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Hi, can someone please discuss what the general pro's and con's are for investing in family-owned businesses? Why may they be preferred investment opportunities over non-family owned companies? What are some issues associated with investing in these companies?

Also, more specifically, can someone please shed some light on the following:
- What do family-owned companies look for in a financial sponsor?
- What types of family-owned companeis are best suited for recapitalizations versus outright acquisitions?
- How do potential investors (LP's) view co-investing in family-owned companies as opposed to non-family owned businesses?

If anyone has recommended websites or literature concerning this topic, please let me know as well. This is a topic with which I have little familiarity so your guidance is appreciated.



Edited 1 time(s). Last edit at Friday, August 10, 2007 at 01:42PM by numi.
 
How large are these businesses? If they are small, they may be able to keep management costs down, because there's a lot more uncompensated labor going in to them. They may also be able to navigate conflicts within management more effectively because they are family.

On the other hand, if the family doesn't have years and years of management experience, they may not have an optimal mindset for how to grow the company (it is considered part of the family's identity, rather than a business that has it's own growth strategy and trajectory). Therefore a private equity firm might be able to grow the business if it can also bring on a management team to improve the managerial capacity (and if the owners don't balk at losing control over everything).

So I think it boils down to the expertise of the family. If they are highly knowledgeable business folk, it's probably an advantage to co-invest. If they are less knowledgeable, co-invest with intent to acquire. Just remember that family owned businesses are intimately tied up with a family's sense of identity, so you need to evaluate whether that identity is a forward-looking one (let's expand into new markets or production techniques), or backward looking (we've always done it this way, that's why we're Smithy Industries).
 
I almost bought an ice block factory in florida from a family. I found the listing on bizbuysell.com. They made giant ice blocks for corn farmers and for cruise ship sculptures.

It turns out the business was sucking, that's why they wanted to sell. But now that the corn crops going wild it might've been a mistakes. It had real assets (land, factory, machines), long operating history, and it was selling for 3x cashflow.

The deal with these things are you want to make sure they're selling for the right reason because they definitely know the business better than you.

The pros:

-sellers are always VERY negotiable
-sellers are sometimes open to nonrecourse financing
-you can find Warren Buffett type businesses with market caps in the $500,000 range! How cool is that?

The cons:
- you can get screwed cuz the seller always knows more than the buyer
- get the actual tax returns from the taxman and look at the actual take home checks of the management (family) because the actual books they give you will be bs.
 
bchadwick Wrote:
-------------------------------------------------------
> How large are these businesses? If they are
> small, they may be able to keep management costs
> down, because there's a lot more uncompensated
> labor going in to them. They may also be able to
> navigate conflicts within management more
> effectively because they are family.
>
> On the other hand, if the family doesn't have
> years and years of management experience, they may
> not have an optimal mindset for how to grow the
> company (it is considered part of the family's
> identity, rather than a business that has it's own
> growth strategy and trajectory). Therefore a
> private equity firm might be able to grow the
> business if it can also bring on a management team
> to improve the managerial capacity (and if the
> owners don't balk at losing control over
> everything).
>
> So I think it boils down to the expertise of the
> family. If they are highly knowledgeable business
> folk, it's probably an advantage to co-invest. If
> they are less knowledgeable, co-invest with intent
> to acquire. Just remember that family owned
> businesses are intimately tied up with a family's
> sense of identity, so you need to evaluate whether
> that identity is a forward-looking one (let's
> expand into new markets or production techniques),
> or backward looking (we've always done it this
> way, that's why we're Smithy Industries).


Hi virginCFA and bchadwick, thanks for the help. bchadwick -- as far as the companies that I am thinking about, I guess I'm referring to private businesses that generate revenues in the range of $50-150M annually, with EBITDA on the order of $10-25M. Because of the scale, most of them focus on one, at most two major product categories.
 
The ice factory was located in the florida cornbelt. The farmers require ice to transport their corn to market.
 
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