Lyn Calder: Investing in the family business
Lyn Calder, corporate finance partner and head of family businesses at Anderson Anderson & Brown (AAB), highlights the intricacies of investing in the family business.
I wear a lot of hats at AAB, one of which is leading a team that supports our family business clients, and another is a Corporate Finance partner, where I help clients to grow their businesses through investment, acquisition or refreshed strategic thinking.
These two roles don’t come together as often as I’d like because family businesses can often delay decisions that are more strategic than operational.
Why they do so is an interesting question and it varies from business to business. It could be a reluctance to change, or a desire to remain what we would call ‘a lifestyle business’, or the family dynamics may make the conversation seem too difficult.
I have seen examples of family business clients who have embraced change and impressively grown their enterprises, so my comments shouldn’t be taken as universal, but what is for sure is that even the most secure of businesses will falter eventually if they don’t invest for the future, and those that truly succeed will undoubtedly have implemented more than just small tweaks.
The key in my view is to build a governance platform that allows creative thinking and encourages investment in the business.
The investment could be in financial resources, or in time, incapacity to innovate, or in people, to name a few.
That doesn’t necessarily mean filling the leadership team with right-brain people but being open-minded to change and having a team with the ability to activate the strategy once agreed upon is crucial.
Often, family businesses rely on family members to fill the leadership roles, but if it’s the wrong person in the seat then this is harder from the get-go.
For many, the pandemic has provided unexpected opportunities for generations to hand over the reins, and the next generation coming through is able to demonstrate a vision for the future, implementing strategies that will take the business forward.
In addition, more and more family businesses are recognising that investing in external executives reaps rewards. This can be getting both the correct board and management structures to run the business, today and for the future, and also putting the right mechanism in place to incentivise these individuals.
High performing management teams often want ownership, or the opportunity to obtain equity in the future, and if this is not on the table in a family business then thought needs to be given as to how to offer a comparable package. There are various options available to do this, some of which are tax advantageous.
It’s well documented that family businesses are less likely than non-family enterprises to borrow money or take in third party equity to fund investment.
The commonly held view is that family businesses are more risk-averse and that the desire to protect the legacy can prevent a more proactive approach to funding growth.
Third-party equity takes this a step further than debt funding, with a perception that the owners lose autonomy and are answerable to other people who will have expectations of aggressive growth that could risk what has taken generations to build.
The good news is that there are more and more funders, equity and debt, who understand family business dynamics and are now reflecting this in structure, ongoing relationships and exit strategies.
Taking time to get to know potential funders can alleviate concerns and choosing the right partner for the business is key. The pros may well outweigh the cons.
Investment in innovation is another key attribute of many successful evolving family businesses. Whether it’s via new products, new production methods, automation or new ways to reach out to customers, keeping ahead of the new trends is crucial. Does the business have the right capabilities to allow it to innovate? Does it have the individuals to be able to do it?
This brings us right back to people again.
Investment, no matter what form it takes, is dependent on having a high performing team with one eye on the future.