James Phillipps looks at how private equity can help family businesses to unlock extra value within the family business to aid a future sale
The term often brings with it connotations of men in suits gutting established firms and heavy-handed management, but private equity can be a useful tool for families looking to increase the value of their company, with the medium- to long-term goal of selling out at a much higher price.
Family businesses have come into sharp focus among private equity firms attracted by their long-term orientation, belief in hard work and a no-nonsense approach. PAI Partners, one of the oldest private equity firms in Europe, said in May this year that it was specifically targeting family-owned companies, believing them to be a great source of value and growth opportunities.
Earlier this year family-owned dairy business Senoble bought back a 25% stake and regained full ownership from private equity firm 3i. This marked the successful completion of a partnership that the French company had sought out four years ago to help fund its growth plans.
While many families remain firmly opposed to involving private equity, Marc Senoble, the fourth-generation family business owner, believes it was crucial to the business's ability to almost double turnover from €630 million to over €1.1 billion.
"Leveraging its international network, in-depth sector knowledge and active partnership style, 3i played a fundamental role in our expansion in the UK and has fervently supported our development strategy in Europe," he says.
He hired in Francois Salamon, a former executive at family-owned Danone, who helped spearhead the firm's international expansion and it quickly made four acquisitions. Senoble consequently doubled its number of manufacturing sites from six to 12, and international business increased from 25% to 55% of total sales.
Dave Whileman, head of UK growth capital at 3i, says scale is key to dairy businesses and Senoble is now a major European player. "We helped them drive an acquisition strategy and then integrate those companies into the business. The partnership was very successful and they have now bought their stake back," he says.
While there are no plans for Senoble to presently sell the business, by engaging private equity, the company has substantially increased its value and attractiveness to
Over the last five years, family businesses have been increasingly receptive to private equity-funded growth capital, taking with it the benefits of the provider's expertise and international contacts. It can be used as an important step in preparing your business for an eventual outright sale.
However, experts warn that it is essential for business owners to take specialist advice before entering into any agreement as most private equity houses will expect a
significant say in the firm's strategic direction.
Crucial to ensuring the right fit between the firms is for both parties to be certain that their goals are the same.
"What is key is the alignment of interests," says Whileman. "It is essential that we understand the business and its culture. As such, all shareholders can build mutual trust and agree a strategy that will maximise growth and provide all with a successful outcome. Of course this outcome would include an exit for 3i, typically alongside other shareholders through a trade sale, management buyout or flotation. This happens at the appropriate time when the business starts a new chapter of its development and thus seeks a new appropriate set of stakeholders."
This may involve a long-term exit strategy for individual family shareholders or even a short-term capital injection. But for the companies to work in partnership their methods also have to be compatible and the private equity firm's first step will normally be to improve the professionalism of the business.
"This can be a shock to lot of family businesses as a very different culture is introduced to the business," notes Robert Kidson, a director and head of the lead advisory department at Tenon. "Family businesses tend to be run in a different way to suit their needs and while private equity can bring huge benefits, they expect the business to be run along highly professional lines."
As part of this, many private equity firms will look to take a seat on the board and bring in external management with credibility in the industry. Whileman says it is easier for family businesses to attract high-calibre individuals when there is private equity-backing as they know that the company has both the funding and the ambition to drive forward its development plans.
This can be a challenge due to the emotional attachment family shareholders often have with their businesses, admits Paul Marson-Smith, managing partner at Gresham, and is one of the reasons why his company often favours working with longer established second- or third-generation businesses.
"It can cause some excitement but the right family management appreciates the benefits that the incoming professional management brings," he says.
Often this can centre around an entrepreneur's acceptance that the business has grown to the extent that they cannot do everything themselves or need assistance to take the business to the next level, he adds.
Although the business founder or owner may well have proven themselves as a capable businessman, succession planning where their children are involved, and elsewhere where family members or friends are employed, will typically be vetted.
"If the best person to run the business is one of the offspring, that is fine. But we need to check it out," says Rob Donaldson, head of private equity at Baker Tilly. "There can also be an issue if the owner is taking a lot of equity off the table because you are concerned about how focused they will be on the business but putting in a management team ahead of the deal can offset this."
He points out that professionalising the business also often involves overhauling the operational structure of firms and putting in place the systems and expertise to deliver regular, regulatory reporting, for example.
"Some companies are run fairly informally without a formal chairman or board meetings, and in other businesses there can be a grey area between personal and company money, which is not appropriate," Donaldson adds.
Although what may be perceived as a large amount of change can be daunting, Whileman stresses that most of the deals he has carried out have typically had lead times of several months or even years. This ensures that a common understanding and trust can be developed so that change can be managed over time and under the control of the family, who he stresses remain in charge of the business.
"If you are inviting a professional investor onboard you are looking for more than just money, you are looking for real value add in the form of expertise, contacts and resources," Whileman says. Marson-Smith agrees, noting that although private equity practitioners need to be more flexible when working with family-owned enterprises, they are an invaluable source of deal-flow in the market.
He adds: "Family businesses are a very attractive segment of the market and the reason that we have been successful is that the essence of our business is about being in partnership with the management team and encouraging change through influence."
Any family business turning to private equity can expect change but picking the right investor that will work in partnership with the shareholders could well prove very lucrative and set the company up for an improved exit strategy without selling the family silver.