Private equity (PE) has become a significant force in reshaping the landscape of multi-generational family businesses. These businesses, often rooted in tradition and legacy, are now grappling with the opportunities and challenges presented by PE investment.
Private Equity and Family Businesses: A Complex Intersection
Family businesses, which contribute significantly to the global economy, often face challenges such as succession planning, competitive pressures, generating personal liquidity, and a need for capital to scale operations. Private equity may offer solutions by providing financial resources and operational support needed for growth, modernization, or restructuring. However, these partnerships often come with significant trade-offs.
PE firms typically aim for high returns over a relatively short investment horizon. This can conflict with the long-term vision of family-owned businesses, where preserving legacy and maintaining a multigenerational presence are paramount. This turnover in the business can lead to a disruption of the culture that the family was founded upon. Further, deal structures with PE often demand a degree of control that may feel invasive to family owners, who are accustomed to making decisions autonomously.
The NFL: A Family Business Case Study
The NFL serves as a prime example of how private equity is reshaping even the most entrenched family business institutions. Many NFL franchises have historically been owned by families, often passed down through generations. This is in part due to the league itself having maintained stringent ownership rules which have limited the involvement of outside investors to preserve stability and continuity.
In August 2024, a pivotal shift occurred when the NFL franchise owners voted to allow a select list of private equity firms to acquire minority stakes in franchises, marking a significant departure from its long-standing ownership model.
For multi-generational family-owned NFL teams, such as the Chicago Bears or the Pittsburgh Steelers, private equity can offer a way to navigate rising franchise valuations, which have surged into the billions. These family owners, often faced with hefty estate taxes or the need to diversify their wealth, can sell minority stakes to private equity firms without losing operational control. This partnership model allows teams to fund stadium upgrades, invest in player development, or expand revenue streams with limited compromise of the family’s legacy.
Key Considerations for Evaluating Private Equity for Your Family Business
Changing Deal Terms and Impacts on Family Businesses
Private equity's influence extends beyond high-profile sectors like sports. Across industries, PE firms are reshaping the terms and conditions of deals, with profound implications for multi-generational family businesses:
1. Valuation and Multiples
Private equity's appetite for growth and need to deploy investor funds have driven up valuations across sectors, creating both opportunities and challenges for family businesses. On the one hand, families looking to sell can solicit multiple bids that often command higher prices. On the other hand, this same competition makes it harder for family businesses to acquire smaller companies as part of their expansion strategy.
2. Control and Governance
PE firms often require significant control mechanisms, such as board representation or veto rights on major decisions. For family businesses, this can mean a shift in governance dynamics, potentially diluting the family’s influence. While some families may welcome professionalized management, others might view it as a loss of identity. Implementing governance structures, formalizing leadership roles, and investing in key growth areas have become essential for family businesses hoping to thrive in this new landscape.
3. Short-Term vs. Long-Term Vision
PE investors typically operate on a five- to seven-year timeline, focusing on strategies that maximize enterprise value for a subsequent sale. This can lead to decisions that prioritize short-term profitability over long-term sustainability – often a big misalignment with the goals of family businesses.
4. Increased Sophistication in M&A
Private equity’s involvement has also elevated the sophistication of mergers and acquisitions. It is not uncommon to see deal structures that include earn-outs, contingent payments, and minority stake purchases, offering flexibility but also adding complexity and risk. Family businesses must navigate these structures carefully to avoid unfavorable terms. Private equity's influence extends beyond high-profile sectors like sports. Across industries, PE firms are reshaping the terms and conditions of deals, with profound implications for multi-generational family businesses:
Opportunities for Growth and Modernization
Private equity can provide resources and operational discipline that family businesses often lack. In certain cases, PE firms can help to invest in operational improvements, technology upgrades, and strategic expansions. This approach can help family businesses maintain competitiveness when working in a fast-paced business environment.
Balancing Legacy with Progress
Navigating the intersection of private equity and family business requires a clear strategy. Family businesses must evaluate how PE investment aligns with their values, culture and long-term goals and determine whether it can be a viable option.
For those family businesses for which PE does not align, those companies should be prepared to identify other ways they can make investments both in and on the company in order to remain competitive. By embracing innovation while safeguarding their legacy, family business enterprises can harness the benefits of fostering clear communication, aligning incentives with management and employees, establishing a formal governance structure, and involving trusted advisors who promote accountability and discipline to play a pivotal role in shaping the future of family businesses.
Is Private Equity Right for Your Family Business?
While private equity can offer several advantages to your business, it also presents significant challenges and trade-offs. Kreischer Miller’s Family Business experts provide guidance and specialize in helping family-owned businesses navigate the complexities they are faced with. If you would like to discuss how to determine whether private equity is right for your business, please contact us.