Experienced Legal Advocacy

Family Office Investments in Small and Mid-Size Companies

| Apr 22, 2021 | Family Law |

Capital has been very inexpensive for over a decade. During that time, individual buyers, angel investors, private equity and venture capital firms have all jumped in to the acquisitions market with both feet, but family offices, who are certainly active players in the marketplace, have shown a bit more reservation about deploying capital in these times of high business turnover. Why? A conversation I had recently with another family office thought leader is instructive. There are a few basic reasons family offices have been less active than other players:

1. Family offices are generally a bit more conservative than other buyers in their approach. The dynamics involved in family office decision making often dictate that it will go through extra layers of consideration before a final green light is given on any deal. The needs of individuals within the family are often given significant consideration. There might be a step in the process to dig deeper into the question of whether a particular company and its place in the market really fits the family’s vision and its mission statement. The personalities of the individuals involved may dictate a slower, more reflective process as well.

2. Deployment of capital comes with a very different set of calculations. Family office investments are often made from the pool of past earnings and asset accumulation from the original business of the family. This is quite different than it is for other buyers. Individuals frequently go to the SBA looking to borrow for a deal. Private equity shops raise funds intended for deployment into new deals. The same is not commonly true of the family office. While SBA funding may sometimes be readily available for a deal, the borrowing covenants often feel more risky to a family office because they may have to put more assets at risk through personal guaranties. Most family offices, though some do, do not have private equity funds to dip into in order to make an acquisition. Thus, one way of another, the family office is likely to put a lot more at risk with any acquisition than alternative buyers would.

3. The structure of most family offices is built around management of liquid assets. Investment managers are focused on the stock market and that’s where most family office money is placed and where it is intended. It’s not at all that family offices aren’t also active investors in private companies, but it’s natural and easy for the family office to make investment decisions within the stock market, but to be much slower to make a large investment in a smaller company.

4. Finally, the strategic decision to buy a private company takes a level of concentrated energy it is difficult to garner from within a family office team. If you have one decisionmaker it’s much easier to target, identify and move forward with a buy decision and everything that involves than if you have five or six decisionmakers who have different ideas of what the best company to buy would be.

If you represent a company that is on the market and you’re seeking a buyer, the fact that there are large pools of cash available within the family office network makes them an attractive place to go to seek out a prospective buyer and it’s wise to look in their direction. If there is real interest, almost by definition they are going to be qualified. But by no means is it a guaranty that you will find a buyer from within that circle. Many times, interest is genuine, but tepid. Decision making can take a very long time.

I would never steer a seller away from the family office pool of potential buyers, but I would also advise gaining a good understanding of what it takes to get a deal done within a family office versus other buyers.

The overall pool of potential buyers has never been larger than it is today. Do everything you can to find the right one, the ideal match to fit your needs. The best and most likely buyers are those who are already doing something very much like you are, at least having an understanding of the space you work within.

Family offices tend to make both great partners and buyers when they are the right fit. Deals move along fairly quickly and without hiccups whenever your buyer is well qualified to begin with. But if the deal never gets to an LOI, it won’t get to closing. Be very clear and intentional in your conversations with a family office prospect. Both sides will be glad you did as you move forward.