Private Equity Investment – An Alternative to Management Consulting
Part 1: How do I institutionalize my successful family business?
As a financial services firm, we at Awad Capital often find ourselves intermediating between Corporations and Financial Investors. Actually a large proportion of our work is raising financing for companies and a big part of our investors are financial investors, either private equity or family offices.
In a previous blog, I wrote about the reasons why our clients sell their companies. As we spend more time with our clients and become their Trusted Advisors, we often uncover needs which go beyond financing and exit strategies. These are sometimes more strategic and have to do with the challenges of growing a successful business. Or they can be about getting the business ready for going public or for a full sale.
One powerful theme that has emerged, is how much value a private equity investment can add to a company. This value is maximized if the interests of the investors and management are well aligned towards value creation. And of course, choosing the right private equity investors is key, to ensure they bring more to the table than just capital. We have many such investors in our network and we can connect them with the right investment opportunities where their skills, whether financial or broader, can be best put to use.
What does a successful business need to do to become a great business and command a valuation premium in either the IPO or the M&A markets?
To transform a family business into a successful institution, many steps are required, but these all start with good people. Moving away from having the decision making on all topics being concentrated with a handful of family members, to it being delegated to a number of high calibre specialized professional team members is one of these. Key personnel required to institutionalize a family business may include:
In a family business, it is not unusual to see these functions non-existent or being performed by the founders or being staffed with significantly under-qualified people.
2. Systems and procedures
Once the right people are in place a set of systems needs to be implemented to ensure the correct decision making is taking place, and that best practice is followed for execution and reporting.
To protect the shareholders, including potential minorities, good corporate governance needs to be implemented. The role of independent directors is only starting to be understood by regional family businesses. Corporate governance is sometimes confused with the authority matrix. A wholesome corporate governance structure includes the authority matrix but also includes a much broader set of frameworks that ensure a sustainable functioning of the organization, taking into account the interests of all its stakeholders. This is of course crucial when launching an IPO or bringing in non-family investors. But it is important to realize that good corporate governance can also be a major driver of improved performance and profitability for fully family-owned businesses outside of the context of financing transactions.
4. Financial efficiency
With better people and processes in place, the stage is set to improve the company’s financial performance. This can take a multitude of shapes:
Finally, the time comes to take the company to the next level. Growth and expansion can take a multitude of forms:
A well-managed and profitable company is best positioned to grow profitably and with limited risks. Once the foundations are in place, exponential growth can follow with surprising ease.
6. Public relations
Now that the success is here, it is important to get the good news out. Strong public relations are crucial to achieving many of the company’s essential objectives:
This is a very long “To Do” List for any business leader who is already too busy keeping the business going. How can it be achieved? A very commonly followed route in our region and the rest of the world, is to call on external consultants to help implement all these changes:
Many of these service providers offer very valuable advice. But a few issues emerge:
Some of our most successful clients have been able to navigate these challenging transformations without spending a penny on external advisors.
Read about it in part 2 of my blog: “Private Equity Investment – An Alternative to Management Consulting. Part2: How our best clients get paid to multiply the valuations of their companies”
May 9, 2015
CEO at Awad Capital