Several pieces of research confirm that a hierarchy of financing preferences applies particularly to family enterprises. This hierarchical organization of means of financing, or pecking-order theory, establishes the preferences of an enterprise with, in decreasing order, self-financing, loans and the opening up of capital to investors.
Note that the constraints affecting the financing of family enterprises push them in the direction of more economic strategies: calculated acquisitions, alliances, as well as realignments. The example of Solvay, which acquired Rhodia after having disinvested non strategic pharmaceuticals, is a clear illustration of such a realignment. UCB followed a similar process; going from a dual pharmaceutics and chemicals enterprise it transformed itself into a leader in biopharmaceuticals through major acquisitions and disinvestment. De Dietrich is similarly a compelling example, since this family chose to exit from several sectors in which shareholding was reduced, in order to concentrate shareholding on a single sector. This operation equally allowed family members who wished to do so, to relinquish their stake in the capital, thus reducing the number of family shareholders from 300 to 150.
Bank credit being the main means of ‘outside’ financing for family enterprises, its increased shortage in the wake of the economic crisis as well as the tightening up of lending conditions has given rise to a search for other means of finance.
Major groups have increased recourse to the bond markets, but such means of finance is hard to access for small and medium sized enterprises. New vectors are developing, with the creation of funds bringing together bonds (or convertible bonds) of several companies, intended for investors, family offices, or even private individuals.
From family to family: the entrepreneurship financing cycle
In the beginning was the entrepreneur … and of course his or her family. Families are often among the first subscribers to the capital of new enterprises. But the assistance provided by families may also be of a different nature: via their contribution to the social capital (networks and reputation), they provide better access to financing via debt.
We can thus conceive an entrepreneurship and family capitalism development cycle. The entrepreneur (who may benefit from family capital) builds a business and then transmits it to following generations. The family may choose, at some point, to diversify the assets and make investments in parallel to the historical family enterprise. Or they may sell the business. In both cases, they can create a family office, i.e. an entity managing family assets and providing services to shareholders.
Family offices, more than other investors, are given to long term investment, particularly in other enterprises. Since family enterprises seek out long term partners in whom they can have confidence, not merely investors, family offices provide reliable investors for family enterprises, because of their closeness to the “family to family” culture.
Note that the cycle shown here doesn’t apply to all family enterprises; some family businesses prefer to remain highly focused (as in the case of Solvay, UCB and De Dietrich). Furthermore, the sale of a family enterprise does not always give rise to a family office; some families distribute sale proceeds among each of the members.
Source: World Economic Forum USA Inc., The Future of Long-Term Investing, 2011
For further reading
- ALLOUCHE J., AMANN B. et GARAUDEL P. (2007), « Performances et caractéristiques financières comparées des entreprises familiales et non familiales : le rôle modérateur de la cotation en Bourse et du degré de contrôle actionnariat », colloque annuel 2007 AIMS, Montréal.
- ANGELBLOG (2012), « Startup Funding – Sources and Sequence ». Available on this site.
- Bloch A., G. Stalk, N. Kachaner , 2012:, “What you can learn from family business”, Harvard Business Review, novembre 2012, vol. 90, n° 11, pp. 1-5).
- Blondel, C. 2012, Investissement à long terme et capitalisme familial, in Revue d’Economie Financière N°118, Decembre 2012.
- De Visscher F. 2012, The Plot does not change… only the theatre and the actors ! familybusinesswiki.org
- European Family Businesses, 2012, Families in Business for the Long Term.
- FERNANDEZ-MOJA M. et CASTRO-BALAGUER R. (2011), « Looking for the Perfect Structure: the Evolution of Family Office from a Long-Term Perspective », Universia Business Review, Cuarto Trimestre 2011.
- POUTZIOURIS P. Z. (2011), « The Financial Structure and Performance of Owner-Managed Family Firms: Evidence from the UK Economy », Universia Business Review, Cuarto Trimestre 2011, pp. 70-81.
- World Economic Forum, 2011 The Future of Long-Term Investing.