Unlocking Growth: Financing Strategies for Family Businesses –
the high net worth individual investor
Family businesses are the backbone of economies worldwide, renowned for their resilience and long-term commitment to success. These enterprises, often passed down through generations, cherish the values of family control and leadership. Yet, they also recognise the need for external influence and financing to propel their growth ambitions. In this article, we explore the delicate balance between family involvement and independence, the unique financing needs of family businesses, and the untapped potential of High Net Worth Individuals (HNWIs) as financing partners.
Family’s Firm Grip on Control
Family businesses are renowned for their tight-knit control, often deeply embedded in their DNA. In a recent survey,[1] a staggering 76% of family businesses reported maintaining a majority stake within the family. In some instances, family members wield complete authority, with 42% of companies boasting 100% family ownership. Further underscoring family influence, 71% of these enterprises appoint a family member as the CEO.
This level of family involvement isn’t just about business – it’s about shared values and legacies. Family members often perceive their businesses as more than profit-making entities. They are emotional attachments, serving as rites of passage for younger generations, nurturing a sense of belonging, and fostering stewardship for the long term.
Harmonising Family and Independence
While family control is fundamental, many family businesses recognise the value of external expertise and a fresh perspective. They acknowledge that non-family members can provide an essential counterbalance, contribute unique insights, and invigorate business growth. To achieve this equilibrium, a significant number of family businesses assemble boards of directors featuring non-family members. In fact, over half (52%) of the surveyed companies boast boards with less than half or no family representation, underscoring the importance of impartial input.
Moreover, 50% of these businesses have formal governance structures, often centered around a board of directors. The rest opt for less formal arrangements, with 20% adopting advisory boards to infuse independent viewpoints into their operations.
Unveiling the Financing Needs of Family Businesses
Finance acts as the lifeblood of family businesses, essential for their growth and survival. These enterprises, however, have unique characteristics that influence their financing needs and choices. Preserving equity and
control often tops their list of priorities. While some rely on internal profits or prefer self-financing, over 50% actively seek external financing.
In the short to medium term, their financing priorities revolve around organic growth, day-to-day operational support, and pioneering new products or services. However, their long-term aspirations are more ambitious, encompassing acquisitions, expansion into new markets, and diversification into different sectors.
Traditional Challenges in Financing
Traditionally, family businesses leaned heavily on bank debt as their primary source of financing. However, post-financial crisis, securing bank loans became increasingly challenging. Banks, in response to economic volatility, tightened lending standards, placing family businesses in a bind. Banks demanded extensive financial disclosures, which conflicted with family businesses’ desire for discretion and reluctance to share detailed information.
As a result, family businesses have had to diversify their financing sources. They’ve tapped into family wealth, sought support from other businesses, and sought investments from HNWIs.
HNWIs as Financing Partners: A Hidden Gem
HNWIs remain an often overlooked but immensely valuable source of financing for family businesses. These individuals tend to have long-term investment horizons, which align perfectly with the values and objectives of family businesses. However, misconceptions about equity and the potential for interference have limited their involvement. Survey findings reveal family businesses’ receptiveness to input from investors, including advice, industry knowledge, and even equity or board positions. This suggests that the issue of equity may not be as significant a barrier to investment as previously perceived.
In fact, private equity and venture capital are rated among the top three most important funding sources by nearly half of the surveyed family businesses. Those family businesses that have engaged with HNWIs have reported overwhelmingly positive experiences, highlighting the reliability and patience of these investors as significant advantages.
Overcoming Barriers to HNWI Investment
Despite the potential benefits of HNWI investment, family businesses still harbour concerns. The primary worries include fears of losing independence, stringent reporting requirements, and potential interference with management. However, family businesses that have engaged with HNWIs report largely positive experiences, suggesting that these concerns may be unfounded. The willingness of family businesses to offer equity is influenced by factors such as company size, location, and stage of development. Larger family businesses and those in emerging markets are generally more open to offering equity, particularly for long-term growth.
Education and Collaboration: Key to Success
Survey results indicate significant potential for partnerships between family businesses and HNWIs. However, obstacles, including a lack of awareness about HNWI characteristics and financing sources, as well as misconceptions, have hindered collaboration.To bridge this gap, family business associations and other economic bodies can play a pivotal role by providing education and facilitating connections. By doing so,
family businesses can unlock the growth potential offered by HNWIs, tapping into their long-term investment horizons and expertise to fuel their expansion and preserve their legacies.
Navigating Growth with Confidence
In conclusion, family businesses, deeply rooted in tradition, are increasingly recognising the need for external expertise and financing to drive their growth. HNWIs represent a promising source of capital for family businesses, provided that misconceptions are addressed, and collaboration is facilitated.
[1] Financing Family Business Growth Through Individual Investors. KPMG. https://assets.kpmg.com/content/dam/kpmg/pdf/2014/09/family-business-financing-growth.pdf
