High Net Worth Individuals (HNWIs) have tended to avoid investing in family businesses. This is a pity, as many family businesses represent sound and profitable investment opportunities. There are a number of obstacles in the way of such investment; but with reliable contacts, careful planning and sound advice these can be overcome.
Surveys of the two sides have shown both that many family businesses would not be averse to accepting outside investment, and that HNWIs are interested in investing in reliable family businesses. But how do the two sides get together?
One of the most common ways for the two sides to meet is through third-party introductions. The advantage of this is that the third party tends to be trusted by the family business and the HNWI. In personal and professional relationships, you are not going to set up a potential partnership which, should it prove unsuccessful, could ruin your own relationship with someone you trust. So whilst such an introduction could lead to a very fruitful partnership, the disadvantage is that it is random: it relies on someone who happens to know each partner.
One way to facilitate such meetings on a wider basis is by organising an event to enable business networking. This might be a conference, a presentation or a more social event, such as a dinner. The problem here is that many HNWIs will not attend such events, preferring to send a representative unless it is a small, elite event. Yet at small, elite events they are more likely to meet other HNWIs than they are to meet representatives of the sort of family businesses who might appreciate their investment!
If the contact can be made, then each side needs to understand in advance the expectations of the other. For example, an HNWI may well want a seat on the board of the business in return for their investment. It may come as a surprise to the wealthy would-be investor, but many family businesses are prepared to consider this. Where they tend to draw the line, however, is over the issue of control. Often, the investor is interested in taking a majority stake; and frequently the family business wants to remain just that: a family business, where ultimately control still rests with the family.
But if the HNWI accepts that this is the case, they may be relieved to know that there is another myth which can be easily overcome. There is a perception among HNWIs that no control also means no equity stake in a family business; but, again, this is often not the case. Many family businesses are prepared to consider offering an equity stake to the right investor.
There is one unknown factor in dealing with a family business which can frighten off a would-be investor: family rifts. There is the saying that, “you choose your friends, but you don’t choose your brothers”; this could also apply to choosing your business partners and, for some, means that you don’t work with the members of your family. But there are enough examples of successful family businesses to suggest that, as far as business risk goes, you would be unlucky to invest in a family business which foundered because of internal family disagreements. There’s a wealth of untapped family investment opportunities just waiting to be tapped.
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