When a family enterprise is run efficiently, it is very obvious from the outside, and potential investors can see the promised sustainability of the company, as well as the intended growth. Family businesses predictably attract investors who are interested in long-term projects. This is because successful family firms exhibit sustainable levels of growth and commitment that are a direct result of being a family. Family-owned firms breed a level of commitment that no other company can hope to achieve, as it is nearly impossible to hire in an employee who is as invested in the success of a company as a family member is with the legacy of a business that is a part of their heritage.
Investing in a family business
Outside investors must remember from the outset though that family businesses are not always all about driving for maximum profits at any cost. Family firms will sometimes trade high profit and growth tracks for options that ensure that the whole family is looked after. External investors need to remember that family enterprises are not like other companies, and while investors can expect to at least earn a market rate of return on their investment, they must be prepared to accept that control of how the business functions lies with the family.
The main reason that makes outside investors hesitate to invest in a family-run business is the fact that the business decisions often take more than just economic factors into consideration. The family component is often correlated with family businesses’ success in the market though – due to the strong link between the family and the need for the business to be a success, but this strong link can also cause bumps in the road for outsiders. The main obstacles that outside investors might face are:
- Often the investor’s idea on what the Return on Investment (ROI) should be versus what the family is aiming to achieve are very different in reality;
- Family businesses are often subject to the ideas and opinions of all family members, not just those members active in the business, and this informality can be a struggle for business-oriented investors;
- Investors may not be privy to the true dynamics of the family and how the business is run until it’s too late.
Outside investors and ROI
Outside investors in a family business should instead seek to change their mindset when investigating a family-run business as a potential investment opportunity. Rather than doing the traditional financial due diligence when looking into an investment, investors should spend some time doing “family due diligence” research. An outsider may never fully understand the true workings of a family business, as well as how much control they can realistically expect to have in the business, unless they take an unconventional tack.
External investors should examine the investment opportunity with less of a corporate mindset, and aim to understand the company more holistically. Investors should ask the family some tough questions to find out how the business is truly run. By focusing on family due diligence, a potential investor will be able to find out where the business owners stands on ROI, as well as what the potential successor’s view is. The investor should also examine how decisions are made, as well as whether nepotism is an issue, or if the family has a good succession plan in place.
The succession plan is of the upmost importance to a long-term investor, as they will need to know that the business will look as attractive in the next generation, as it does in this one. Although investing in a family-run enterprise can be a tricky path to navigate, if a potential investor understands the company’s ethos and operational workings from the start, then they can expect their investment to yield solid and sustainable returns.