Let’s pause for a moment and think about your family. Now let’s imagine that your family had a substantial quantity of wealth (maybe they do, in which case, we should probably be friends), and they wanted to invest that wealth into companies … startup companies to be precise. Wouldn’t that be awesome?
Welcome to the world of family offices, “the little-known money managers that run the fortunes of the world’s richest individuals … to team up with likeminded peers for direct investment in companies” (source). Now you may be thinking, I’m never going to run into these types of people. In recent years, family offices have become much more prevalent, especially in the startup and entrepreneurial scene. They’ve traded their traditional secrecy and instead have embraced venture capital like deals, but without charging the high fees generally associated with private equity or venture capital firms.
Okay, break it down for me. What exactly is a family office?
A family office is a private investment firm established specifically for the purpose of managing a family’s wealth.
So what exactly do they do?
Family offices allow wealthy families to directly invest their wealth in private companies or through other investments. Often, their investments are the result of entrepreneurial drive. Many made their money from starting companies themselves, which allows them to provide guidance and strategy, as well as investment. Until recently, they had used third parties to choose their investments (read, private equity firms). Now, however, they are choosing to invest more directly and gaining more control over their own investments.
In 2014, 77 percent of respondents polled by McNally Capital said they preferred direct deals over going through private equity firms. This is up from 59 percent in 2010.
In addition, family offices often have other responsibilities, such as managing the philanthropic pursuits of the family and their estate plans.
What are some reasons I would consider this?
As with any business decision, there are both pros and cons. Here are a few to consider:
- Long term partnership. For sellers (that’s you), you get a long-term partner with industry expertise. In other words, they built their own company and now they want to share that experience with you.
- Building a legacy. Family offices are often more invested in legacy issues, which gives sellers peace of mind, especially if you’re not planning to exit the business fully.
- Potentially lower fees. There could be lower fees because they’re investing directly, rather than through a private equity or venture capital firm.
- Less control and influence. Most family offices consider themselves passive investors. What does this mean? They typically want to invest, but not take over control of management and operations.
- Investment bias. Families often bring “substantial investment biases to how they want to invest the money” (source), which may lead to high risk investments, requiring a large amount of due diligence in advance of the investment.
- Flexible timelines. Because they’re controlling their own wealth, family offices can make quick decisions and alter timelines and investment deals as things occur. One example of this is their ability to hold companies for longer periods, allowing them the access to capital they need to fully realize their intended strategies and goals.
So these sound pretty great. Where do I sign up?
The most important thing you can do is really consider what you want from a sale or investment in your business. There are a number of factors to consider including:
What percentage of the business do you want to own?
How much say do you want to have in your business?
Do you want to exit fully or stay on board?
These are just a few of the things to consider when looking at investment and sale opportunities. No, it’s not an easy decision. But it’s an important one.