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Family business funding: the best options for growth

Business funding is often used by family businesses. Like any other company, a family business can use it to accelerate its growth, expand into new markets, open new premises, develop new products and more. The important thing is to find a funding option that is aligned with the goals of the family and to balance the aims of any potential outside stakeholders with the interests of family members.

 

Business funding options for family-owned companies

Debt financing

Debt financing is a common family business funding option. Bank loans are typically the first funding source for most small and mid-sized businesses, according to research by BGF. However, other special business lenders may also be able to help.

The clearest advantage of debt financing is that it involves no loss of control for the family members who run the business. However, when taking on debt, a business must also take on the responsibility of managing that debt. This requires meeting the company’s debt obligations as well as monitoring the overall debt level of the business and the wider credit market so that the business knows when to pursue debt refinancing and why.

It may be a good idea to seek advice about debt refinancing to understand the various options.

 

Equity funding

Equity funding means receiving finance in exchange for a share of the business. This may also be known as an equity sale. Equity funding is unlike debt funding because the transaction does not typically require the investee business to make ongoing repayments. This may allow the business to reinvest more of its cash flow into expansion.

Three common types of equity funding are:

  • Private equity. Private equity firms typically target established businesses where they see a potential for rapid growth. They are experienced investors who can often provide advice and expertise about how to streamline and scale a business. They often, though not always, invest in exchange for a majority stake in the company. Private equity investors are looking for a return on their investment. They may wish to exit their investment within a few years.
  • Venture capital. Venture capital investors are distinguished from private equity as they target earlier-stage businesses. They offer advice and guidance to investee companies to increase the company’s value and, therefore, the value of their investment. The investments made by venture capital firms are usually seen as riskier than those made by private equity, with the potential for greater returns should the investee businesses become very successful.
  • Patient capital. Patient capital is distinguished from private equity and venture capital in terms of its flexibility. Whereas some investors are obliged to provide returns to their shareholders within a fixed period, patient capital investors invest over a timeframe that suits the investee company. This may be a matter of months or many years. Patient capital can be used to finance a variety of growth strategies, including new product development, acquisitions and more. Patient capital is suited to a minority investment approach, in which the investee company retains control of key decision-making.

Before making any equity funding transaction, it is important to understand the objectives and approach of any potential partner. The crucial thing is to align the interests of the investor with those of the family. An important decision is, therefore, whether to partner with a majority or a minority investor. Many businesses choose to receive advice before making a decision about equity funding.

 

Government funding

In the UK, a wide range of loans and grants are available for companies looking to scale up quickly – usually in industries where the government wants to stimulate growth. Government funding can be beneficial for family businesses. In the case of grants, repayments are not required. In the case of unsecured loans, interest rates may be favourably low.

Government funding may not be suitable for all businesses. Competition, especially for grants, can be fierce, making it difficult to secure funding. Grants and loans from the government are also typically on the smaller side, meaning businesses with growth plans that require larger amounts of capital will need to look elsewhere.

 

Patient family business funding from BGF

Many family-owned companies find that the best way to meet their financing needs is through an intelligent mix of debt and equity funding. However, family businesses must take care before pursuing any funding avenue to ensure their interests are protected.

BGF occupies a unique position in the UK’s business funding landscape. We are committed to being a minority investor with an equity share that is typically between 10-40%. Our approach is to find management teams we trust and allow them to retain control over the important decisions. We invest across earlier-stage, growth-stage and quoted businesses.

We are in it for the long haul if that’s what’s required. Because of our unique funding structure, we can provide genuinely patient capital that flexes to the needs of our investee businesses, whether the investment period is 12 months or many years.

We also have the opportunity to provide significant amounts of follow-on funding to support investee businesses as they grow. We offer access to our huge Talent Network – one of the UK’s largest groups of board-level non-executives – who can provide board-level expertise.

 

BGF has provided family business funding to many companies

Many family businesses have received funding from BGF. They include:

 

Backed by BGF, Seasalt is a nationwide brand that makes clothes inspired by Cornwall's heritage

Seasalt 

Cornish clothes retailer Seasalt traces its history to 1981, when Don Chadwick acquired a small store in Penzance. In the early 2000s, his sons built the company into a nationwide brand, which is expanding globally with BGF’s support. We have invested £11.5 million.

 

Croom Precision Medical

BGF made a significant investment into Croom Precision Medical, based in County Limerick. Set up by Paddy Byrnes in 1984, the medical device manufacturer is now managed by his son, Patrick (pictured), who says the deal with BGF, “brought a confidence and professionalism to the management team that I wouldn’t have thought possible”.

 

Neil Pizzey, managing director of Amazon Filters

Amazon Filters

Founded by Mike Pizzey in 1985, Surrey-based filtration equipment manufacturer Amazon Filters is now run by his son, Neil (pictured). BGF invested in 2018 and is assisting the company’s governance. “A fresh pair of eyes has really injected some growth ambitions and helped us to focus on the future of the company,” says Neil.

 

Contact us today

We are committed to providing patient capital that allows businesses to grow on their terms and at a pace set by them. Our approach makes us ideal partners for many family-owned companies. To find out how we can propel the growth of your family business, contact our team today.

 

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.

BGF Insights 07.05.2022
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