“A lot of times, the owners don’t want an exit strategy,” said Jennifer Pendergast, executive director of the John L. Ward Center for Family Enterprises at the Kellogg School of Management at Northwestern University. “What they need is money. A lot of times, investors have realized the secret sauce is the owners. You’re giving up part of the value of the business if they go away.”
From the perspective of a wealthy family, there are pluses and minuses to the different ways of investing in family businesses.
Buying an ownership stake has the potential for unlimited appreciation. But since the investment is in a family business, not a public company, the investors have to understand the family and be comfortable with the way the family does business.
When investors agree to make a loan — what’s known as private credit lending — their returns are going to be capped at whatever was agreed to. But as a lender, not an owner, the investors don’t have to deal with any family issues.
“A lot of families are doing the debt infusion so they don’t have to wrestle with someone giving something up,” said Bobby Stover, the family enterprise and family office leader for EY Americas. “It’s easier to negotiate the terms for debt than an equity investment where you worry about dilution and ownership.”
A debt investor “can be a patient partner and not worry as much about the culture,” he said.
If something goes wrong, the debt investors are higher up in the rankings of who gets repaid, which means they’ll be ahead of any equity investors.
“If it goes well, no one complains and everyone is happy,” said Thorne Perkin, the president of Papamarkou Wellner Asset Management. “Where I’ve seen problems arise is when things are not clearly stated upfront. Someone says, ‘I want my money back,’ but the borrower says, ‘I don’t have the money.’ These things happen all the time.”
Article source: https://www.nytimes.com/2021/04/23/your-money/family-businesses-investments-pandemic.html
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