When is the right time to seek capital for my business?
When you really don’t need it. Having capital gives you flexibility and is more likely to be available if you don’t need or want it immediately.
The process of securing financing invariably takes longer than anticipated. Traditional lenders can take months to evaluate your credit request, and more equity-driven approaches easily require a year or more to complete. Unforeseen headline events can also impact the availability of financing aside from simply your company’s performance.
The exercise of meeting the people and working through the process is also healthy for your business even if you never access the funding you’ve identified. Developing a financing plan will not only help you tell your story in a precise and forward-looking manner, but likely will lead to improved financial insights. You’ll also gain valuable intelligence about your competition, the value of your business in the marketplace, and the choices you have once you do need the money.
What should I do to position my company for growth?
- Develop a strategy for the future of your business. Couple it with a detailed execution plan. As part of that effort, identify the core competencies of your organization as well as your competitive landscape. How is your sector evolving—what are the threats inside and outside your business sector that could affect you?
- Include actions necessary to deliver on your strategy in your plan. What changes operationally will be needed? Identify those ultimately responsible for successful execution along with a timeline for implementation. Track your success in meeting key strategic initiatives and celebrate accomplishments and learn from missed opportunities.
- Communicate your strategy. You and your company’s leadership need to fully understand your strategy so it becomes reality. Put it in writing, update it at least annually, and communicate it to owners, managers, employees, and other stakeholders in a manner that is understandable, engaging and motivating to those you count on to make it happen.
- Finance for the future, not the past. Consider available capital another weapon in your arsenal, like a new product or territory, to ensure that your business can continue to grow successfully. It’s always a good idea to put cash aside, or raise money when you don’t need it, for planned initiatives or expansion opportunities that come along unexpectedly.
What should I look for when considering a partnership with another family-owned business?
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.
We’ve decided to invest in another family-owned business. Now what?
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.
Dan, CEO of his third generation, family-owned food distribution company, is interested in growing his business beyond its base in the southeast U.S. and has available capital. Pete’s business operates in California and other western states; as newly appointed CEO of his fifth generation business, he’s anxious to expand his family’s interests. Dan sees opportunity by strategically investing in Pete’s company. Pete is interested in growing his business but wants to ensure that the next generation—his son and daughter—maintains control of the business after his retirement. He considers another family business in his industry a better partner than the financial investors he has talked to, especially given their relatively short-term investment horizons.
Family-owned enterprises operate differently from other companies—business decisions take family dynamics, values, and goals into consideration—but, increasingly, that difference is also a strength, especially when considering investment options. Looking beyond traditional investments in stocks, bonds, or hedge funds, many family businesses are pursuing direct investments in businesses they already know: other family-owned companies. Doing “family due diligence” research can help companies like Dan’s confidently take the next step.
Here’s what you should know before investing in another family-owned business:
- Understand your own investment strategy. What are your anticipated time horizons and your return objectives? Dan, the CEO mentioned above, understands that strategic partnerships and joint ventures with other companies offer an opportunity to diversify his business’s operations, as well as expand into other parts of the country, reach new markets, and tap new sources for talent.
- Make sure key family members are aligned with your objectives. It’s critical to have open, honest conversations with family members—inside and outside your company—about their goals for the business, often the family’s largest asset.
- Understand the target company’s family dynamics, values and succession plan. Develop an understanding of the family dynamics that exist within the target company. This requires an appreciation of its current business and family governance structure. How are key decisions made? How do family members working inside and outside the business feel about another family business investing in their enterprise? Do family members get along? How well are their values and goals articulated and are they in alignment with yours? How has the target company addressed succession in the past and what plans currently exist for the future? Consider bringing in an outside advisor to objectively assess family dynamics in the target company.
- Consider the trade-offs you’re making regarding investing in your own enterprise. Are you compromising your company’s long-term growth by not investing in your own human capital, sales capabilities, or infrastructure? Asking this question and evaluating the answer is certainly valid. Investment in another family business should compliment your business plans; it may not limit direct plans for your own business.
- Training the next generation. Dan hopes that a strategic partnership with another family-owned enterprise will enable his son and daughter to develop and refine management skills that could ultimately make them more effective business leaders. Will investing in another family business create development opportunities for your next generation of leaders?
- Look for deals in an industry where your company already has expertise. How can you immediately leverage your knowledge, experience, and established networks to help your family company investment grow?
- Avoid business deals recommended by friends and fellow CEOs. While tempting to explore, these deals may not align with your business’s long-term objectives, family values and family core competencies.
Dan and Pete ultimately reached an agreement benefitting both of their family-owned enterprises: Pete’s company diversified into another market category; Dan’s business expanded its distribution power to the western U.S. and his son and daughter took on new responsibilities in the joint venture. Conducting a family “due diligence” enabled them to confidently take the next step.