When private equity firms look at acquiring family-owned and operated businesses, their best laid plans can be thwarted if they ignore the personal dynamics at play.
It’s only natural that private equity firms would be attracted to family-owned and operated businesses, especially ones that are successful but have plateaued. These enterprises can have terrific fundamentals but need precisely the capital and operational expertise that GPs bring to the table. But today, those firms need to do more than clean up a balance sheet and upgrade the operations. They have to drive growth.
The challenge is that driving growth at family-owned companies requires extra time to discover the key influencers inside that business and win their support, with a compelling message that allows them to embrace change. If that was easy to do, the owners would have improved their business already and wouldn’t be looking to partner with a private equity firm in the first place.
This effort starts at the very beginning, during due diligence. Chief Outsider’s Mary Doizé, a fractional CMO has worked with numerous GPs to drive growth at family-owned portfolio companies. She suggests that during the due diligence phase, GPs need to look beyond the formal roles of the various players to locate the true sources of influence.
Family businesses often mirror family dynamics; power and influence is informal and often subtle. The nephew’s the CEO, but he may defer to an uncle who’s the CFO. Additionally, in family operated businesses, employees become like family, especially if they were there since the founding. Doizé explains that these employees may not be part of the family, but might outrank actual family members when it comes to major decisions about the Company. In one case, the wife was COO, and the husband was CEO, but he did very little without her blessing. So those key influencers need to be identified and vetted.
“Just like actual families, family-owned businesses like to avoid confrontation, so they don’t hurt anyone’s feelings,” says Doizé. “They often err on the side of keeping an employee on staff, even if they have to move them to some less relevant role.” GPs need to be on the lookout for such situations, and if necessary, bake them into the valuation. Those growth estimates should factor in the company’s willingness to do what it takes to deliver them.
So any investment case has to build in time to sell the series of reforms and growth initiatives to the family’s key influencers first. Everyone likes the idea of more capital and improved operations, but few are eager to make the hard decisions and drive major change.
So Doizé often will work closely with those key influencers to stress the upside of having those difficult conversations and even personnel changes. “You need to offer a compelling vision that will make these challenges worth facing,” says Doizé. For one assignment, she scheduled weekly meetings with the co-CEOs of a family business to focus on how to navigate the marketing changes, which can feel quite personal to the owners.
Sales and marketing initiatives run smack into how a family feels about their business, and how they think the market feels about their business. If the business is an owner’s baby, they’re going to be sensitive about how it’s seen, and may be convinced they understand their company’s brand better than anyone else.
But Doizé points out that how customers and prospects think and feel about that business is what matters most. After all, we want our value proposition to be compelling to the potential buyer, not ourselves. Most times, that family owner isn’t relying on actual market data, but on their informal interactions with customers. It’s a gut feeling about the identity of the business. These enterprises rarely have dedicated marketing staff, so there can be real misconceptions about actual customer and market preferences.
Which is why Doizé takes the time to explain the need for unbiased research and a willingness to heed what the research says. “If you take the time to explain that this research is a way to unlock an enormous amount of value, they might be willing to adapt,” says Doizé.
And of course, as the branding and marketing initiatives get underway, GPs should stay close in touch with the owners to make sure they stay on board with the new direction. “At family businesses, there is a thin boundary between the personal and professional,” says Doizé. “And the personal elements can’t ever be disregarded.” All that diplomacy seems like an enormous amount of trouble for GPs, but they might be worth it.
“Investors don’t have to be afraid of family-owned businesses,” says David Harland, a Managing Director with FINH. “Warren Buffett argues that family-controlled firms are often more patient, less prone to hiding or dressing-up earnings reports and carry comparatively low amounts of debt.” And that extra time GPs spend managing the family dynamic, can also channel that family’s passion into taking their enterprise to the next level, one with the kind of growth that delivers a truly great ROI.