Family firms and private equity: partnerships
Private equity firms and family businesses can form well-functioning partnerships. In the pre-investment phase, a private equity firm must fully understand the family firm’s business vision and goals. Families are much more emotionally involved in their businesses so it is important they feel able to trust the partner private equity company. Therefore, the quality and reputation of the private equity investors is important for family firm owners, as well as the value they can bring.
Once they have invested, private equity companies extract value from a family firm’s operations mainly by removing all inefficiencies. They want to put together an effective board, supplying any talent that may be missing and strengthening systems and processes.
Mergers and acquisitions also come into play, as well as overcoming any resistance to change that may be present. Such measures can indeed result in increasing long-term value of the family firm.
Pitfalls of partnerships with private equity
However, some difficulties may also appear:
- Shifting to a meritocracy-based management could significantly increase expectations placed on family members who work for the firm
- There might be tensions between the new managers and long-term employees (the latter are often loyal to the family, not to the new bosses)
- A new ownership structure might result in the loss of certain intangible assets (e.g. special relationships with customers), thus weakening unique business advantages
Private equity firms also need to keep in mind that after the value from their involvement has been added to the business, the family often tries to recapture full ownership of its firm.
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