Expert Insights: What should I look for when considering a partnership with another family-owned business? We’ve decided to invest in another family-owned business. Now what?
July 11, 2018
Question:
What should I look for when considering a partnership with another family-owned business?
Answer:
You probably know the statistics: more than 2/3 of the world’s businesses are family enterprises, according to the Family Firm Institute, generating between 70%-90% of annual GDP. That makes them attractive investment partners. The characteristics of a healthy family-owned business are similar to other stand-out companies: a strategic plan and corporate vision that is effectively communicated from the board and CEO, to employees and investors; a strong market position and value proposition, a strong balance sheet and a functioning board of directors. Understand and appreciate how the family dynamic has impacted the performance of the organization externally and internally; for example the relationship between the family and key customers; the culture established by the family; and whether relationships between existing family shareholders can make the investment difficult to finalize. Most importantly, know oneself and have a game plan for how the investment partnership in your opinion should be structured and function moving forward.
Question:
We’ve decided to invest in another family-owned business. Now what?
Answer:
Spend time doing “family due diligence.” Family businesses are unique. Complete a traditional diligence review of the operation’s markets, customers, operations, and financial performance, but acknowledge where family dynamics play a role.
- Get to know the family’s distinct culture, values and ethos. You need to understand the unique identity of the business you’re investing in.
- Understand customer profiles and relationships intimately, as well as the underlying dynamics driving those relationships. These relationships may be linked to family members so try to meet key customers or accounts as early in the process as is practical.
- Appreciate the true nature of family ownership, with its formal and informal management styles, and create a plan to address these moving forward.
- Analyze policies to determine which you want to keep, modify or eliminate all together and decide how to make these changes with as little disruption to the organization as possible.
- Analyze financial performance similar to that performed by private equity investors – diving deep into market segmentation, sales performance by customer, product lines and geography to name just a few areas to eliminate surprises moving forward and to truly understand the opportunity at hand.
- Agree well in advance of closing the investment what role if any family members will continue in or assume in the entity going forward.
- Agree how the transition will be communicated both inside and outside your organizations. Communicate often and as a united “family” front.
