When we take a business to market, we try to profile the type or types of buyers that are probable candidates to purchase the company. Typically, we would consider strategic buyers, which are usually larger companies in the same industry, Private Equity Groups (PEGS), Family Offices, and/or high net worth individuals. As Family Offices are becoming more common and more active in M&A transactions, we have elected to feature an article by an experienced M&A professional, Joe Sands. Joe is a member of Corporate Finance Associates, my investment banking network. I believe Joe provides an excellent commentary on the characteristics of Family Offices.
Consider A Family Office as a Potential Buyer or Partner for Privately Held Businesses
by Joe Sands
An Emerging Trend: Family Offices Seeking Private Company Investment Opportunities
There is a growing trend of family offices acquiring or investing in private businesses and the trend is picking up steam for good reasons including but not limited to:
- Direct investing provides Family Offices with the potential for superior returns, transparency, and control of their investments in private companies
- In some cases, private companies’ interests can be better aligned with a Family Office as an investor or owner than with a traditional funding source
What is a Family Office?
A Family Office is an entity that provides services to either a single wealthy family or multiple wealthy families. The Family Office (FO) is generally set up by the wealthy family (a family with assets typically in excess of $100 million and often in the billions) and ranges in the number of professionals employed and services covered. FOs invest in larger transactions and typically write equity checks of 3 million to 25 million.
The services provided by a family office are tailored to the family’s needs and can cover:
- Wealth management
- Investment management
- Private banking
- Accounting and tax management
- Other services such as travel, legal, bill paying, and security
The rationale for setting up a family office is centered around privacy, confidentiality, control, transparency, and a consolidated team working together without any bias or conflicts of interest. FOs invest across a wide array of domestic and international public and private securities as well as real estate. Collectively, family offices are estimated to hold assets in excess of $2 trillion.
Advantages for the Private Company:
- A FO’s primary objective is to preserve and grow wealth over the long term rather than selling their best investments quickly or using high amounts of debt in order to generate a high IRR of new investment funds.
- FO’s are more likely to hold a good investment for many years or even potentially in perpetuity and to be an ongoing source of growth capital for the company.
- FO’s are already running businesses and are sensitive to softer issues such as company culture, succession issues, impact on the local community as well as maximizing business strategies. Most have been through up and down economic cycles and won’t take short-cuts to preserve their jobs.
- The different investment objective of a FO can also manifest itself in less balance sheet leverage being employed which may be attractive to business owners who want to be sure of the future stability of the company. Many institutional investors focus on maximizing IRRs which can bring with it an interest in maximizing debt levels since the higher the leverage, the higher the return on the equity, everything else being equal. Most FOs, on the other hand, are more conservative on the use of debt in their acquisition financing.
- Finally, FOs are using their own capital and can therefore close on investments quickly without relying on bank or investment committee approvals.
When considering a sale or capital raise for a privately owned business, there are many types of traditional and non-traditional capital providers and acquirers. A well-thought-out strategy for each situation must be developed to engender a successful outcome. Doing so requires evaluating which types of investors to reach out to and including multiple types of investors. This will no doubt maximize business value as well as the ongoing operating relationship. Family Offices are a good complement to a robust investment banking process.
This month’s featured article is submitted by Joe Sands, with over 20 years as an investment banker, advisor, entrepreneur, and investor. Joe has relationships with family offices and has been involved in transactions involving start-up to multibillion-dollar businesses. Joe brings broad, in-depth experience that is greatly valued by clients, as well as their other advisors, in the pursuit of corporate goals. In addition to his general investment banking practice, Joe focuses on merchant banking opportunities, making direct investments in companies where he can provide valuable expertise or experience.
Joe can be reached at Corporate Finance Associates Los Angeles, (949) 457-8990, or by email at email@example.com
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the July 2017 newsletter)