HNWIs investing in family business

HNWIs investing in family business

Many family businesses are their own worst enemy. Their desire to maintain full control over their company often limits their financing options. For them to grow and increase their profit, they need strong financing. So what are the options?

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Many family businesses are their own worst enemy. Their desire to maintain full control over their company often limits their financing options. For them to grow and increase their profit, they need strong financing. So what are the options? Private equity or corporate strategic partners, but these limit or reduce the family business owner’s control over the business.

However, the owner’s desire to retain sovereignty over their business does open the doors to partnership with high-net-worth individuals (HNWIs) who are willing to bridge the funding gap.

HNWIs are more willing to invest in exchange for a minority stake in the company, maintaining the family owner’s majority control. Not only can HNWIs provide a source of funding, they can also provide insights that are extremely beneficial to the business.

Why on earth would high-net-worth individuals want to invest in a family business?

Simple. For the same reasons families form businesses in the first place – shared values, long-term vision and a personal rather than institutional approach to business.

The second most important is a similar understanding of risk.
Other important factors are the likelihood of easier negotiations and the fact that family-owned companies represent an efficient mechanism for capital preservation. Many firms would be willing to offer an equity stake for the right investor.

HNWIs value the personal interaction with members, particularly at a senior level, as this also provides them with the opportunity of giving strategic input. They like the fact that decisions happen quickly, there is greater collaboration, and focus is on the welfare and success of both the organisation and the family.

Additional benefits of such investments, as cited by HNWIs, are that the owners of family-owned corporations tend to provide more information on the company’s progress, and funds tend to perform better in the long term as the company expands and new opportunities arrive.

“Family businesses are managed with a long-term view – this ensures strategic success. The agreement or deal with them is less complicated and has a personalized touch. These factors are highly attractive.” – German entrepreneur

Welcome to the Board

A big attraction for HNWIs is the potential of having a presence on the board in return for investment. However, the majority of these business owners are reluctant to relinquish majority ownership and control over their company.

What are the factors most likely to attract HNWIs?

  • High profitability
  • The potential for strong organic growth
  • Long-term capital appreciation
  • Their desire for a medium level of risk
  • Strong cash flows
  • High solvency

On the flip side, what would attract the business to an investor?

  • The investment, obviously
  • Long-term horizons
  • Industry expertise
  • Low levels of interference

So, are you in, or are you in? If you want to expand your family business and jettison it towards further success, then forming an alliance with a high-net-worth individual may be the way to go. It’s a win-win relationship on many levels.

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