Family-run businesses may have a reputation for being small compared to their corporate counterparts; however, seeing as family firms compose 80-90% of all North American business ventures, family-owned businesses can be a big area for strategic investment. In terms of internal culture, a study of 114 family companies and 1,200 other large corporations determined family-run businesses as significantly better performers in cultivating worker motivation and effective leadership. As a family-run investment fund, Emko Capital is particularly interested in partnering with family businesses in a way that adds value and respects each founding family’s legacy. Below are some of the aspects that can make a family business especially conducive to successful growth in a strategic partnership.
Emko is particularly interested in family-run firms selling for the right reasons, such as nearing a transitional point. The average age of control in a family company is 60.2 years; therefore owners nearing retirement or looking for a day-to day transition can become increasingly interested in exiting, especially if there is a lack of a succession plan in terms of future firm leadership. This provides the perfect opportunity for a strategic partnership to contribute value with the added insight of previous management’s experience operating the firm.
In order to obtain financing and leverage at an ideal rate, minimal firm risk in aspects such as cash flow volatility and customer concentration is ideal. Stable or growing revenues and consistent input prices in company operations help maintain recurring profits. It is also important to have an addressable and satisfied customer base; too large of customer concentration can pose additional instability and make it so deals must be structured creatively to mitigate the risk of a large customer leaving. Multiple years of financial data is crucial to deliver a proper valuation, which is why it is important the firm be in existence for more than 5-7 years. Such multiyear period financial information can reflect the longevity of the business through different periods of economic cyclicality. An additional bonus is if such financial data is clean and utilizes GAAP or is reviewed by accountants.
While every industry has its own relevant metrics and industry standards for quantifying its profitability and growth, Emko is especially attracted to firms where it can utilize industry expertise and operational efficiencies to add value. We search for growth levers built on the foundation of the firm that we can use to propel the company to further success. While a strong market position in industry is appealing, it is not always necessary if there is sturdy financials andstrong fundamental support for the firm’s product or services.
Unique Core Competency
Each business has its own distinct value proposition. The unique “X-factor” behind the firm can range from patented proprietary technology, strong market share, innovative logistics know-how, consumer passion for the product, or a collaborative work environment filled with employee cohesiveness. While some “wow” factors are more quantifiable than others, Emko must learn to identify this specific core competency special to the firm and harness it into the larger picture of the firm’s success.
The final aspect is denoted through a question mark as often times there is an intangible quality that can propel a strategic partnership to the next level. Passion for the project, engagement to each other’s concerns and trust in delivering accurate information are all essential fundamentals for a professional relationship. There is no standard recipe to developing a collaborative professional bond but establishing an authentic and open forum for constructive feedback can be transformative to successfully growing a business.
Putting It All Together
Each family held business has its own unique culture and organizational structure. During the strategic partnership, it is important to take the time to gain an understanding of these distinctive firm qualities and utilize them to the company’s advantage. Working with the owners to create a transition plan over time is a way to keep an organized and progressing timeline, as well as minimize unnecessary change to current employees. The goal of an effective strategic partnership is to improve strategic capabilities and operating efficiencies at the firm while also maintaining low levels of risk and sustaining a supportive corporate culture.
Are you a family-run firm looking to explore some options? Emko is filled with repeat entrepreneurs, so each business is approached with the utmost respect. Reach out and let’s decide together if we’d make good partners.
By Chelsea Virga