If you are thinking about selling your business and have thought about buyers, you are probably wrapping your head around strategic versus financial buyers. There is an interesting third category, often overlooked, that you can consider as well, the blandly named, family office.
What is a family office?
It usually is an organization set up by a very wealthy family to make private investments as part of managing that family’s wealth. Family offices are, in some circles, a trapping of the uber-wealthy and fall into the same class as having a private jet or superyacht. Bill Gates, for example, has Cascade Investments. The Pritzker Family (of Hyatt Hotel fortune, among others) has, at last count, eight different family offices. There are thousands of much smaller and less famous family offices in the United States, and given the inability to make outstanding returns in the stock market, they are increasingly interested in the returns involved in investing in smaller, privately held businesses.
Why do they create these?
As part of managing a family’s wealth, a portion of the total portfolio would be invested in high-return categories such as private equity. At a certain level, it makes sense for families to simply hire their own talent to make direct investments in companies, rather than working with outsourced private equity groups, which charge high fees and might not have the same investment strategy desired by the family. Family offices have recently hired very top-tier talent and rival many of the well-known private equity groups for sophistication and transaction resources.
So, what’s the difference between a family office and private equity then?
The biggest difference is that the family office brings “patient” or “sticky” capital – with no time horizon on when, or if, it might sell the investment. Private equity comes with a traditional 3-to-7-year hold. Family offices have no such timeline. They can hold onto an acquired business forever if it makes sense to them.
The potential upsides of selling to a family office
The family office is an excellent combination of an educated buyer with very flexible capital. Unlike traditional private equity, which is usually constrained by investment strategy established while raising capital, the family office has a LOT of flexibility on the type of investment it makes and how the investment is structured. Included in this flexible concept is the fact that family offices do not have to use debt in a transaction and pay cash at close. Not all of them do, but many have the ability.
Additionally, because they are part of a successful “family business,” they can be more attune to the needs of the seller involved in a family business. They tend to pay attention to the culture and the management team of the company. They can also bring some industry expertise to the table as they tend to invest in businesses that they understand.
Selling to a family office tends to work best for businesses that are most interested in keeping the business intact after a sale and not upsetting the apple cart. There is less chance of the business being moved, sold again, renamed, etc. when a family office is involved.
The downsides of selling to a family office
The concept of sticky, or patient, capital works for some sellers, but it can be inappropriate for other types of transactions. If, for example, you want to retain some equity in your business post-sale, or you are using the sale as a way to transition equity to a management team, you are very interested in the “second sale” that you get when investing with the short timeline of private equity. Family offices have limited cash out options for equity holders.
They tend to invest in industries they understand, which was listed as a positive above, but can be a negative too. In general, family offices have a hands-off management style for their investments, but they can bring their experiences in your industry into Board meetings and other interactions. Be especially wary of newly created family offices, which can be mercurial in their approach to investments.
Lastly, family offices are usually quite lean on the operations side of things and may not have the same resources to bring to a portfolio company that many private equity firms can make available. Private equity groups may bring operational specialists, advisors, HR professionals, and insurance and banking relationships to the table, while family offices generally do not.
Although family offices may have limitations, they offer many benefits and can be an excellent type of buyer to include in your sale process.