Families in Business have more options than many realize when they desire to grow, expand, or transition the family business and still maintain control and the family culture. As Aaron Aiken recently explained during an on-line seminar with The Network of Family Businesses, Private Equity firms can provide a business family with additional options.
Aaron Aiken is a Senior Associate in the San Francisco office of Hanover Partners, Inc. Hanover Partners is a Private Equity Investment company that partners with privately held and family owned businesses. One of their goals is to support, develop, and grow companies over the long term in partnership with management.
Several key points Aaron highlighted regarding what a Business Family should consider included:
1. A family in business needs to discuss their needs, goals, and objectives as a family and as a business. There are more options than many families in business may realize – there is more flexibility than selling or going public. And the family does not necessarily need to disrupt the family, non-family employees and culture of the family and business.
2. Private Equity firms have different strategies and cultures – take time to talk other families that have worked with that particular Private Equity firm – Do Your Homework – find a Private Equity firm that takes a "stewardship view" of your family business and values your family’s culture.
3. Be realistic about the valuation of your business. Know what your emotional attachment to the business really is - may not need to ‘auction’ to get the full value – don’t be too low in your valuation with a Private Equity firm – there are options for the transition and estate planning
As Aaron explained, “In some situations the owner of the company may not be willing to or financially able to take the financial risk alone. By working with a Private Equity investor, the owner can take some “chips off the table”, monetize a portion of the value of the company and then share the risk and reward of future growth with experienced investor partners”.
This seminar can be viewed in the archives of The Network of Family Businesses at www.netfamilybusiness.com
regarding the first investor/second investor question, if they invested at exactly the same time, then the valuation would generally be the same. But, if second cash investor came in later, the valuation would (normally) be higher, so his $400k would buy proportionately less of the company. In other words, valuations and percents are not static. As for the lease question, I don't follow. In theory, a below market long term lease could be considered an "asset" but this wouldn't materially impact a startup's valuation, which is mostly driven off future potential of the company.
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