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BGF explains: Is private equity the best way to grow a family business?

Private equity is a form of business funding in which a business receives capital from a private equity investor in exchange for a stake in the business. This form of funding can help a family business expand rapidly. Businesses may also gain access to their investor’s expertise or the expertise of the investor’s network.

Many family-owned companies consider private equity when looking to spark their growth. However, the business owners must be prepared to give away a share of their company and potentially dilute their decision-making power. For family businesses, this decision can feel like a big step.

Whether private equity is the best funding for your family-owned business will depend on several factors.

 

What is a family business?

A family business is one in which related family members have majority ownership of the business and take charge of day-to-day operations. Family ownership is a common business model in which stewardship of the company is typically passed down from generation to generation.

Family-owned businesses have many advantages stemming from the strong relationships between family members, leading to loyalty and stability. Family members are usually dedicated to the family enterprise and are willing to commit many years of service toward the success and growth of the business.

 

How can private equity benefit the growth of a family business?

External expertise

Family members may work for years or even decades within the family business. While this has many benefits in terms of stability, the business may need external guidance or expertise from time to time. Partnering with a private equity firm can be an effective way to introduce this expertise. The private equity firm may have considerable resources in-house to assist the business. The firm may also be able to introduce the business to talented, experienced individuals to serve as non-executive directors. Good advice can give family businesses the confidence and knowledge to make better decisions for their growth moving into the future.

Optimising operations

Family businesses often have unique characteristics reflecting the distinctive features of the family. Reorganising a family business from the inside can be challenging, which is why it can be helpful to partner with a private equity investor with experience in assisting businesses to become more streamlined. A private equity partner can help the company grow more sustainably and rapidly by improving efficiency in the business.

Guidance on succession

Succession planning can be particularly challenging for family-owned businesses. Private equity investors are well-versed in helping companies of all types manage leadership transitions. By working with an experienced stakeholder, family businesses may find they can secure the company’s long-term health.

 

Is private equity the right choice for a family business?

Potential disruption

There are some pitfalls to avoid when seeking private equity investment in a family-owned business. A change in ownership brings with it the potential for disruption. The impact may be particularly visible where the private equity investor becomes a majority, controlling shareholder. Some businesses may prefer to seek minority investment from a non-controlling partner, which typically involves less disruption.

Clash with the family culture

It is very important to find a private equity investor whose vision for the business’s future matches the family’s vision. A clash of ideas or styles between investor and investee businesses can cause many problems. It is wise to do plenty of research before agreeing to a deal. Family businesses can also benefit from having honest discussions internally about the future course of the business to ensure that any potential points of conflict are recognised and dealt with before the investor comes on board.

The difference in experience or expectations

Private equity investors have likely gained experience by investing in many other businesses. A family business taking on private equity for the first time is unlikely to have such a broad exposure to different management styles. This can lead to a mismatch that may make executing growth plans and strategies difficult. Again, plenty of pre-deal research can help the family and other stakeholders be as well-prepared as possible.

 

Family businesses backed by BGF

BGF has invested in many family-owned businesses. These include:

 

Neil Pizzey, managing director of Amazon Filters

Amazon Filters

BGF invested in this Surrey-based filtration equipment manufacturer in 2018. Founded by Mike Pizzey in 1985, the company is now run by his son, Neil (pictured). BGF’s support 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,” he says.

Paddy Byrnes (left) and Patrick Byrnes (right). the founder and present CEO respectively of Croom Precision Medical

Croom Precision Medical

BGF made a significant investment into this precision engineering business, based in County Limerick, in 2020. The company was set up in 1984 by Paddy Byrnes (pictured above, left, with his son, Patrick, who is the present CEO). The deal with BGF “brought a confidence and professionalism to the management team that I wouldn’t have thought possible,” says Patrick.

 

Seasalt, a family business based in Cornwall that is backed by BGF

Seasalt

BGF has invested £11.5 million in Cornish womenswear retailer Seasalt. The business dates back to 1981 when Don Chadwick acquired a small store in Penzance. In the early 2000s, his sons developed the company into a national brand, expanding globally with BGF’s support.

 

 

Smarter equity investment for family businesses with BGF

BGF’s priority as an investor is to back and support ambitious businesses and help them to succeed. Our “patient capital” approach is differentiated from conventional private equity in its flexibility and in the trust we place in the management teams we partner with.

We always invest as a minority investor, meaning the existing owners retain control over the growth direction of the business. We do not insist on inflexible exit timelines, meaning our investment period can stretch from a matter of months to many years. It is up to each business we back to grow at a sustainable pace appropriate for them.

As well as financial support, we offer expertise and guidance. Partnering with BGF gives companies access to our extensive Talent Network of board-level non-executives, who provide businesses with everything from interim leadership to advice and commercial insight.

If you’re interested in partnering with an investor that puts your growth ambitions first, 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 07.06.2022
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