Mark Dye is a freelance journalist based in London.
International expansion of a family business raises all sorts of questions in the boardroom. But just how do shareholders factor in increasing capital demands while striving to retain family values? Mark Dye reports on the complexities of globalisation
There are two sides to every story and this is no different when it comes to family businesses looking at international growth. While there is excitement at the prospect of the opportunity and potential such a foray brings, it can be tempered by potential problems.
In fact, increased capital demands can place family shareholders under tremendous strain as they strive to deal with the added pressures placed on the business. In such a scenario it's important to know what kind of resources are at your disposal and just who you can trust to lead the business – get these two right and you're moving in the right direction.
In comparison to their PLC counterparts, family businesses often feel more secure about the flexibility they have both in terms of finances and market agility. But when these firms need additional funding, whether it's via a bank or through private equity, divisions frequently occur between family members who may have differences of opinion in how they see the business moving forward.
Steven Nicholls, a partner at private equity and venture capital specialists 3i, suggests that on top of the normal business issues such as strategy and implementation, family businesses considering international expansion should put 'risk profile' and 'resources' on their list of special considerations.
Offering a note of caution, Nicholls points out that it can also be difficult to find the right companies to acquire when taking this route, as most end up having to share future control and management of a business across a wider group of shareholders and managers. "Doing this in an overseas environment and a potentially different culture multiplies the risk," he says. "To pull all this together takes significant resources at both the management and financial level. Dealing with international scale and cultural issues in making the acquisition and post-transaction implementation is often much harder than people plan for."
Marjo Raitavuo, Chairman of Ensto Oy, a Finnish company known for its electrical systems and supplies, says businesses should always start out with an 'owner strategy': "I mean the discussion about the risks and how big the risks are, how to finance the expansion and who will be responsible as an owner for this," she says.
Once this happens Raitavuo believes companies need a business strategy that delivers answers on who is responsible for operations and whether they are trustworthy.
"In our company we have openly discussed with all employees, both blue and white collar, globalisation and what that means for our business. This is why I feel they better understand the situation, even the painful discussions," she says. "Everybody has to understand the big picture."
Raitavuo has also noticed a big shift in stance between the older and younger generations as the demand of capital needs have evolved and as a part of going global.
"I'm happy that today we have a huge range of possibilities for achieving and organising capital," she adds. "You have to be an investor, entrepreneur, owner and innovator – all at the same time. We have to be ready to take bigger risks and we have to be fast and flexible."
For these very reasons, having an investment partner with a local presence and knowledge should not be underestimated. Certainly Raitavuo recommends bringing in an investment expert to inform shareholders on the options for financial growth.
"Today there are many ways to increase capital. Ten years ago the situation was totally different. Mezzanine financing is one example," she adds. "If the company has over 100 owners, one possibility is to go public. If the family owns at least 25% of a listed company, I see it as a family business because with 25% you still have power within the company."
Finding the right investment partner can help considerably, as family-run Senoble knows. Back in 2004, 3i took a 75% stake in the company, France's third largest manufacturer of dairy products and fresh desserts. 3i then used its network of offices and investors across Europe to help Senoble identify a dozen acquisition targets.
But it's important to remember that going global impacts shareholders, too. The effects of increased capital demands upon family shareholders can vary significantly. Nicholls believes that those who rely on the income from their stake may see this significantly impacted upon by the cash needs of a growth phase in the business. Others, he says, may not be able to provide their share of the capital needs of the business and may find their position as a shareholder changing. "A new financial investor can provide the capital the business needs and maintain relative balance among the existing shareholders. In addition liquidity can be provided for shareholders who need it."
The general consensus is that common ambitions and goals are critical if an international growth agenda is to be achieved. Although the key challenge, according to Nicholls, is to create and facilitate an open and honest discussion where any issues can be identified and solutions found. "You can always flex the strategy or the growth plan but you will struggle to bridge a gap around needs and values," he says. Raitavuo agrees: "It is a question of communication."
When thinking about international expansion through acquisition it can often feel like there are no limits to the opportunity. But finding appropriate targets can be a difficult task.
"Following the initial approach you enter into the risky business of negotiating organisational and legal issues in a different language and legal framework or with people with a different cultural perspective," Nicholls explains. "You need to make sure you have input from someone who has first hand experience of these issues."
Someone needs to immerse themselves in the different cultures in order to spot differences between the companies. Cultural differences can lay at the roots of business failure.
Despite its benefits, advances in digital technology tend to keep employees stationed in offices and this is why Raitavuo believes it is all the more important to organise more meetings and social gatherings to forge unity between opposing cultures. "This is how you build up trust and brand today, not by too much business discussion."
International expansion requires a clear business strategy underpinned by a group of stakeholders who have a clear alignment of interest, understand the plan and have the business and financial resources to see it through, without underestimating the task at hand. Things are always harder, take longer and require more planning than you think. As Nicholls puts it: "The rewards can be significant – and this is reflected in the risks."