Family Business Magazine’s recent article “Is it time for outside investors?” is a thought-provoking resource for any family business confronting the consequential decision to partner with outside investors. With significant economic value and the family’s legacy at stake, family business owners should carefully consider their personal objectives as well as those of other stakeholders before opening a seat on the family business cap table. As long-term partners and providers of flexible capital to highly entrepreneurial family and founder-led businesses, Author Capital has a distinct perspective on these and other issues raised by the article.
First, a tip of the hat to the authors (Begalla, Drexler, Quigley) for succinctly laying out the big picture decision tree for families. They offer compelling advice: “The right partner will align with the family’s and board’s vision for the business, as well as your personal vision and values if you stay involved.” And they lay out key questions families should ask along the way: “Are we the best owners for this business?”
Yet choosing between a trusted advisor and a long-term capital partner, whether to facilitate growth or succession, doesn’t need to be a binary decision. There exists a far-too-often overlooked model for partnership and outside investment that families should consider, one with roots extending as far back as medieval Europe, and whose advantages over traditional private equity are numerous: that of the merchant bank.
In today’s modern conception, a merchant bank offers a potent combination of advice and capital to businesses, but at its core, it’s all about alignment of interests, familiarity between people and partners, mutual understanding, optionality, flexibility, and trust. While Author Capital Partners is an investment-led organization, we leverage a traditional merchant banking model to deliver the best long-term solutions for family- or founder-led businesses and our investors.
Doesn’t advising distract from your investing or vice versa? Isn’t there a potential conflict of interest in advising a business you also wish to invest in? Doesn’t your advice and legwork in helping these companies make operational and governance improvements increase the value of the business prior to your investment, thereby setting a higher price if and when you do provide capital?
These are questions we hear frequently in a marketplace inundated by short-term oriented, formulaic private equity firms. But the reality of what family business owners need in a partnership is often very different, especially when you are dealing with the most human of companies (a family business) and the intangibles that transcend a family business (your legacy).
Simply put, businesses are all about people, and by engaging in an advisory relationship with companies with whom we hope to one day have the opportunity to be a capital partner, we get to know each other and earn trust through experience. It is, in a sense, mutual “pre-diligence”. Not on the forced timelines of traditional private equity due diligence or through an auction process, but on your timeline, and with real value delivered to you in advance.
In the same way we get to learn deeply about your business, your objectives, and your family (including the next generation where appropriate), you get to learn about us, our ideas, and the mutual benefit we can deliver. We’re in the trenches together working toward a common objective before a single dollar of equity is deployed. Said another way, the process de-risks a potential investment down the road for both parties.
Such was the case with a founder-led business we began advising in 2020, supporting the company’s growth by developing a pipeline of acquisition opportunities; establishing a highly experienced and diverse board of directors; and recruiting and onboarding an experienced CFO, whose financial planning acumen quickly added value to the company and enabled the co-founders to make data-driven operational decisions. It was in recognition of that highly productive advisory partnership, and the mutual trust that had been established first, that the founders invited Author Capital to provide equity financing to further support their financial and strategic objectives.
To be clear, this process takes time and focus, so we limit the number of companies we will advise at any one time. And it is not the only way that we will identify great family- and founder-led businesses to partner with, but we do think it is the highest quality path to a great long-term partnership, and one that family businesses looking for the next stage of growth should consider in taking on outside investors.