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Family firms and private equity: a match or mismatch?

deminor NXT > News > Family firms and private equity: a match or mismatch?

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Family-owned businesses have unique characteristics that distinguish them from traditional non-family-owned firms, mainly prioritizing their long-term preservation for future generations.

One of the critical aspects of family-owned-businesses is maintaining a strong sense of family values and culture that is passed on from generation to generation. Shareholders in these businesses prioritize the succession process of their shares to ensure a healthy continuation of their “life’s work.” While family members may sometimes be suitable successors, this is not always the case. In such situations, shareholders must consider the possibility of an external party acquiring the firm. The question then arises whether family and private equity firms can be a match or not.


Potential family business acquirers

There are two main types of potential acquirers for family-owned businesses: financial acquirers and strategic acquirers.

Strategic acquirers, such as competitors, may not always be the ideal or preferred  choice for family shareholders. Therefore, financial acquirers, mainly private equity firms, can be a viable alternative for family owners who intend to exit or sell part of their company.

Private equity firms invest in companies that have strong growth potential, providing the necessary capital and expertise to help the company grow and succeed.


Private equity

A recent studies by Graves, Seet and Michiels* suggests that private equity-backed companies tend to increase management practices, productivity, and are consistently well-managed.

Despite the findings in this study, many family firms hesitate to use private equity due to concerns regarding a loss of identity and shareholder control. The private equity firm’s operating model of buying a business, improving it, and selling it for a profit can lead to this issue. Furthermore, family firms with a lower level of understanding of private equity tend to be less likely to sell their shares to these firms.

The same study shows that when family-owned businesses do decide to work with private equity firms, it is often for two main reasons: growth and ownership restructuring. Family business owners are more likely to consider using private equity financing for growing the business or restructuring ownership when their succession strategy entails relinquishing control (i.e., selling the business sometime in the future).

It should be known that private equity companies generally benefit family business shareholders by, for example, increasing shareholder value through leveraging their network, experience, industry knowledge, recruiting, digital transformation, and increasing its competitive advantage by merging with other companies.

That is not to say that it is all fun and games working with private equity firms. Negative private equity strategies sometimes include using extreme cost-cutting mechanisms and short-term focus to increase margins to reach their required IRR. These negatives can be mitigated by choosing and negotiating a good agreement with the private equity firm, preventing future conflicts.



In conclusion, family-owned businesses should not outright dismiss the option of selling to a private equity firm. Despite concerns about loss of identity and the private equity operating model, private equity firms can offer real value to family-owned businesses.

Therefore, when planning the succession of their business, family business shareholders should explore all options, including private equity financing. With good agreements in place a family business, private equity partnership can definitely be a match.

If you would like more information on family-owned businesses and private equity firms, please contact Jasper Durbin.

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