Navigating Alliances: Pros and Cons of Family-Run Businesses Partnering with Private Equity Firms

The collaboration between family-run businesses and Private Equity (PE) firms can be a powerful force, combining the legacy and values of a family enterprise with the strategic vision and financial firepower of institutional investors. However, this partnership comes with its set of advantages and challenges. Let’s explore the positives and negatives of family-run businesses working with PE firms.

The Positives:

Financial Injection for Growth

PE firms bring substantial capital, enabling family businesses to pursue ambitious growth strategies, expand market reach, and invest in innovation without solely relying on internal resources. As many entrepreneurs learn, growth takes cash.

Professionalization of Management

PE partners often introduce experienced executives and best practices in corporate governance, enhancing the overall professionalism of the management team. This can lead to improved decision-making and operational efficiency.

Strategic Guidance

PE firms provide strategic insights and industry expertise, helping family-run businesses navigate complex market dynamics. This guidance can contribute to more informed decision-making and sustainable long-term growth. PE firms are in the business of helping their portfolio companies experience explosive growth.

Diversification of Expertise

The collaboration introduces diverse perspectives, skills, and experiences to the leadership team. This diversity can lead to more comprehensive problem-solving and a better-rounded approach to challenges.

Access to Networks

PE firms often have extensive networks that family businesses can leverage for partnerships, collaborations, and market connections. This widened network can open new doors and opportunities. Our firm, for example, is a service provider to several PE firms, and we deliver sales effectiveness training, coaching, consulting, and voice of customer research. As a certified Scaling Up coach, we also help portfolio companies develop and refine their strategic plans to ensure they meet the growth objectives of the PE firm.

Succession Plan

Several of the companies we serve are family-run companies. We are finding second and third-generation children who wish to stop running the family business. Partnering with a PE firm will help those firms develop and execute a business transition to new ownership when the timing is right. This becomes a tremendous distribution of wealth event that often helps the founders retire while helping fund second and third-generation pursuits.

The Negatives

Loss of Control and Autonomy

One of the primary drawbacks is the potential loss of control for family-run businesses. PE firms typically seek a significant stake in exchange for their investment, diluting ownership and decision-making authority. From my experience, this is the biggest adjustment family-run businesses have to make. Before receiving investment, they often made decisions quickly based on their experience, gut, and intuition. Post PE investment, they now have a partner who wants to understand the business case and anticipated investment return.PE firms will support investments that increase the strategic value of the organization and make it more marketable in the future.

Short-Term Focus

PE investors often have a finite investment horizon, and their focus may be on achieving short-to-medium-term returns. This could clash with the long-term orientation often associated with family-run businesses. For example, the PE firms we work with often have a three to five-year growth objective.

Cultural Misalignment

Differences in corporate culture between family businesses and PE firms can lead to conflicts. Family enterprises might prioritize values and traditions, while PE firms focus on efficiency and financial performance, potentially causing tension. The good news is both parties want to scale the business profitably. The “how” often creates friction that must be navigated. The most significant cultural adjustment we have seen is the shift for many family-run businesses to a performance-based management culture.PE firms will help develop a strategic business plan and monitor and coach the execution of that plan. For many family-run businesses, this is often the first time some family members may be held accountable for the same performance metrics as others on the senior leadership team. Family members have always desired to grow. However, the PE firm will monitor and question plans that do not deliver the promised results.

Exit Pressure

The pressure for a timely exit and the realization of returns might force family businesses into decisions that conflict with their preferred pace of growth or succession planning.

Communication Challenges

Miscommunication or a lack of alignment on goals and expectations can arise, especially if there’s a disconnect between the family’s vision and the PE firm’s financial objectives.

New CEO and New Senior Leaders

In the dynamic business landscape, private equity investments often inject newfound vitality and resources into companies, propelling them to new heights. However, a crucial yet often challenging aspect of this transformative process is the founder’s departure from the organization’s helm. The skills to deliver the PE firm’s growth objectives may usually require new talent with experience scaling companies.
PE firms may recommend replacing other family members with more experienced ones—leaders with solid competencies in their area of focus. We prefer to upskill and train family members to build the skills required; however, if we find a family member who lacks the skills for their role and is not coachable, they must be replaced. This often creates a great deal of friction and angst.

While the collaboration between family-run businesses and PE firms holds immense potential for growth and transformation, it demands careful consideration of the trade-offs involved. By understanding the positives and negatives, companies can navigate this partnership more effectively, ensuring a harmonious blend of tradition, innovation, and financial success.

Let’s schedule a call if your company would like assistance adapting to the requirements of your PE investor.