Georges Noel is the director of research, public affairs and development at the European Venture Capital Association (EVCA).
Georges Noel explains why the disparity between the business philosophies of the private equity market and the family business world can be a strength at exit time
A survey in 2003 by the European Group of Owner Managed and Family Enterprises highlighted the fact that family-owned businesses account for more than 70% of jobs and between 55%-65% of GNP across the EU. Many of these businesses are or will soon be facing changes in ownership because of generational change, the need for liquidity or because they want to expand their operations substantially. In some cases, the founding families will sell out completely; in others they will retain a shareholding and may remain active participants in their companies' growth.
For many family-owned businesses, private equity is a source of finance for expansion and for support in strategic planning and development. This is not always recognised, partly because outside the major financial centres there is limited understanding of what private equity is or how it works. But also because private equity is often linked to large, high-profile deals and mid-market companies think this cannot be something for them. Finally, there is a perception that private equity firms enter family businesses with guns blazing, buying it dirt cheap, changing its name and management, and cutting loyal staff, before selling it on to a bigger player within three years, making a lot of money in the process.
Private equity providers raise money primarily from pension funds and institutions to invest in unquoted businesses, in return for shareholdings in those businesses. The investment period is usually between three to seven years, during which time they work with management to make the business more successful and a candidate for flotation or merger with a larger group.
There are a number of ways in which private equity can be involved in family-owned businesses, but the two most usual are buying a stake – not necessarily a majority stake – and investing alongside existing owners and/or management to help develop the business; and second, buying the whole company and bringing in additional management to take the business forward. In the latter case, many family-owned businesses are turning to private equity as an alternative to running down their operations or to being taken over by a competitor, although ingrained perceptions of the 'corporate raider' still present a psychological barrier for some families.
Many family-owned businesses operate in sectors where being local, having an established reputation and brand, and having long-standing relationships with suppliers and customers are key elements of success. It is worth making the point that changing any of these aspects rather than building on them is not in the long-term interests of the business or of the private equity investors. Names, headquarters, management, suppliers are only changed when they represent weaknesses rather than strengths.
All private equity houses have one criterion in common: they seek potential. Private equity firms tend to invest in companies with a high level of profitability before interest and tax, and which they believe have the potential to double or treble their operations over three to six years. While their ambitions are lofty, most private equity investors have the wealth of experience and good networks in particular market sectors to realise them, and are well-placed to assess the opportunities for growth in those sectors – think calculated confidence rather than shark-toothed asset stripping. At the same time, private equity investors will work with existing management if they believe they are the right people for the job – otherwise they will bring in new managers.
If you simply plan to sell the whole company to a private equity house or to orchestrate a buy-in team supported by private equity, the transaction can be relatively simple. More often, a part of the shareholding is being sold and various interests need to be met, so the structure of a private equity investment in a family-owned company can vary hugely. Flexibility is key and taking advice on valuation is critical.
There are many family-owned companies with no succession issues but that want funding and outside help, including professional management, for expansion. For these companies, it is important for the family to determine what degree of involvement they wish to have in the future. Relinquishing control is a big step. Private equity does not have to mean majority control but most private equity firms will seek sufficient involvement to ensure agreed business and financial plans are adhered to, corporate governance is sound and the right managers are in place to take the company forward. It is therefore vital that owners and financers are on the same side and share the same vision for the company.
Digging diamonds from coal
Two examples in different European countries can illustrate how private equity can help family-owned companies. Williams Lea was founded in 1820 as a printing business serving the financial community of the City of London. The company had a name for being at the forefront of innovation, being among the first printing companies in the 1970s to invest in computer-based technology and to offer overnight corporate finance printing. In 2002, the company established a joint venture in India and began a series of acquisitions extending its capabilities across the UK, diversifying into related service areas. By 2004, it was the UK's leading provider of outsourced document and print services to business.
Tony Williams, grandson of the first family shareholder in the company, sought retirement but both he and his management team realised the company needed new finance and some third party assistance to expand its international operations and take it to the new level of growth they believed it could achieve. The situation was complicated by a capital base that included, in addition to the five Williams family majority shareholders, hundreds of small shareholders who, or whose families, had been given holdings or options over 184 years.
Williams Lea explored various options and settled on private equity involvement through 3i, with whom they agreed a package that allowed small shareholders to realise their holdings, larger shareholders to realise some holdings while retaining a share in any upside, and management to pursue their objectives for growth.
Since then, the company has won a number of contracts in new sectors, made two UK and one US acquisition and further restructured the capital base. The UK business is growing at 20% per annum and the company has doubled its size internationally, becoming a leader in its field in Europe, the US and Asia. Both management and 3i see scope for further organic growth and acquisition.
An injection of intellectual capital
The second example is BBG, a German company that develops and produces foams, equipment and systems for the processing of polyurethane, particularly the encapsulation of glass and metal components such as sunroof panes in cars. BBG's owner, Oskar Braunsberger, founded the company in 1960 but by the end of the 1990s wanted to retire. Other family members were not interested in taking on the company so he began looking for a suitable successor, determined to keep the company independent and at its original site in Mindelheim.
BBG was a successful company with specialised knowledge of the cost-effective and reliable encapsulation of glass panes. It operated in a niche market with few competitors and had seen revenues and profits increase through the late 1990s. German private equity firm, BayBG, with expertise in management buy-ins (MBI), was known to Mr Braunsberger and invited to help solve the problem. They identified an experienced manager who wanted to develop BBG while maintaining its independence. He joined the company in 1998, acquiring a 61% stake and BayBG invested €1 million in return for a 39% stake.
BayBG helped BBG with pricing negotiations and drawing up the agreement and, after the deal's conclusion, helped establish an internal accounting and reporting unit for BBG. In addition, BayBG functioned as a sounding board for the company's strategic planning. Since then, BBG's revenues have risen from €4.1 million in the year prior to the MBI to €9 million in 2004; the company employs 55 staff (from 34 pre-MBI) and exports are up from 10% (1998) up to 60% (2003). Today BBG is the European leader in glass pane encapsulation systems for vehicles, with plans to move into its own dedicated company facility in Mindelheim in 2007. Mr Braunsberger, no longer involved in the business, has been able to watch the company he founded continue to grow successfully and remain both a local employer and independent. His only other option would have been to sell to another company, which would have meant the eventual closure of the Mindelheim site and loss of jobs.
As these examples show, private equity can be involved in a number of ways with family businesses at different stages of their development. From a family company's perspective, private equity could be one area that may not have been considered instinctively by business owners, but could reveal many financial and non-financial benefits for families seeking growth for their companies, and exit for themselves.