Scaling up: funding options for growing family-owned businesses

Funding options can be particularly challenging for family businesses because of the potential mismatch between the expectations of the funder and the family around control and exit. For any funding route to be attractive, the family will need to look behind the economics of the term sheet and consider whether the offer aligns with their long-term objectives and values.

Defining the “why”

Before diving into the options, the first challenge is to be crystal clear on the ‘why’: what does the business hope to achieve with the funding and is this the only way to get there? It’s important to be clear on this before entering into discussions on funding.

Debt vs. equity: the two main routes

The two main sources of funding are debt and equity. Debt involves borrowing from lenders such as banks, venture capital funds, private equity firms and family offices. Equity involves issuing shares to external investors in return for capital.

The trade-offs of debt financing

Debt is often perceived as the ‘cleaner’ option, it’s a one off contractual relationship with no long term value (in the form of shares) being given away provided the debt is repaid on time. That said, any loan will still limit to some degree the way in which the business is managed. Typical restrictions include restrictions on other borrowings, on the ability to sell or lease key assets and on the ability of the business to declare dividends (which are often relied on by family members for income).

The strategic value of equity

Although equity funding will result in some dilution of the family’s interest, this may be outweighed by the potential benefits. Equity investments tend to be longer term: there is no fixed schedule for redemption, unlike debt, and where there is an ambition to grow the business, issuing shares can be an opportunity to bring in investors who contribute experience, ideas and networks that support expansion. Equity can also be an effective way to retain and incentivise key employees, where they are able to make a capital contribution themselves. Of course, finding the right investor can be challenging, and the deal cost is likely to be higher given the scope of due diligence and bespoke documentation required, including revised articles and shareholder agreements, but with care and open dialogue, equity funding can be transformative.

Aligning values with capital

Family businesses are a unique ecosystem, delicately balancing ambition and legacy. They may be prepared to take a longer term view on commercial factors compared to other businesses, The most successful funding outcomes occur when the funder understands and aligns with those values, rather than cuts across them.

How we can help

Owning and managing a family business, or managing family trusts or a private office, presents unique challenges. There are always financial factors to weigh up but also family issues to consider. Our expert team are here to advise, please get in touch.