The Covid-19 virus has dramatically altered the playing field for family-owned businesses. Almost all face challenges never considered just a few months ago. Some face real issues of liquidity and solvency. Capital markets no longer look the same nor as open. The very assumptions on which businesses have operated may be called into question. Now more than ever, many family-owned businesses are searching for new or additional sources of capital as well as expertise to navigate the reopening of the economy. One obvious solution is bringing in an outside investor. It is not a move to be taken lightly.
Pros and Cons
An outside investor brings a lot to the table. First, of course, is an injection of much-needed cash into the business. This capital can be immediately directed where it is needed most. Investors have connections to capital markets and other resources crucial to regaining business momentum or taking the business to a new level of prosperity. They bring a fresh set of eyes and ears to the conversation.
At the same time, an outside investor is just that – an outsider. A person not familiar with the family dynamics or structure that have made the business successful in the past. They may not operate in complete alignment with the core values of the business. Opening up the business to such an investor would sooner or later prove a mistake. And a costly one.
Finding the Right Investor
Finding the right investor must be prefaced with establishing why one is needed in the first place. Does the business need cash, expertise, clout or connections or all of the above? A firm’s attorney, accountant, or business consultant can help address these questions. If the answer is yes to one of any of these questions, then bringing in an outside investor may be the best route to go.
Vetting potential investors is the next step. The right investor must quickly grasp the challenges confronting the business. The investor will understand the importance of the family retaining control of the company and its operations; it means that the family is working together to keep things on track and make the business a success. A critical conversation must result in full agreement about the role and set of responsibilities that will belong to the investor. Above all, the investor must be in alignment with the core values of the firm. The time to avoid philosophical or operational differences in how the business is run is before they occur.
Bringing in an outside investor is a big step. Done right, it can provide the family-owned business with a sustainable competitive advantage.