February 10, 2023

Selling Your Company: The Differences Between A Private Equity Firm vs. A Family Office

By: James Carey
Executive Summary

Most founders assume they will eventually sell their company to a private equity group or a strategic acquirer, but there are other options worth evaluating, including family offices. A family office can be a great option for founders looking to stay on board to grow their business, preserve the company legacy, and work collaboratively with a hands-on investment partner.

Which buyer is the best fit for you?

For founders who are at an inflection point and looking to sell their mid-market business, figuring out the right buyer can be a daunting experience. Determining the best fit for your business depends on multiple factors, from your desired level of involvement staying on board, exit timeline, thesis for the investment, and how hands-on or hands-off the investor is after the deal closes.

To help break down the key differences between private equity, strategic acquirers, and family offices, our own James Carey, Partner at Next Sparc, guest starred on Morgan & Westfield’s M&A Talk podcast. While we’ve captured the key takeaways below, we also encourage you to take a deep dive by streaming the full episode.

What is a family office, and what role do they play in buying companies in the middle market?

A family office can take on many shapes and sizes, but ultimately can be defined as an organization made up of a high net worth individual (single family office) or a pool of wealthy individuals (multi-family office) that deploys its own capital to make direct investments in private companies. Family offices look to diversify their wealth by investing in different asset classes like real estate, private equity, and other nontraditional assets. 

Typically, for single family offices, the high net worth individual has built capital generationally over time or has had a liquidity event in which they’ve sold their business, and now they want to invest that money not just in the public market, but in the private market.

At Next Sparc, our family office acts and feels like a growth equity firm. We do a lot of what traditional venture capital and private equity firms do, making direct investments in high-growth, high-margin businesses. With that said, there are still key differences to take note of when evaluating your options.

What are the key differences between a private equity firm and a family office?

The biggest difference between private equity and family offices is the capital. A traditional private equity firm will raise a fund with multiple Limited Partners (LPs), which may be made up of endowments, institutions, pension funds, and/or high net worth individuals, who all contribute to the fund. This capital is then used to acquire a majority stake in a company and scale growth over a predetermined period of time. Private equity funds typically come with a traditional 3-to-7-year return profile where investors expect a return on their capital.

A family office brings “patient” or “friendly” capital with no time horizon on when it might sell the investment. With our own firm, we have a single source of capital contributed by our founder, Len Pagon, and the three other partners in the firm. With this increased flexibility, family offices like ours typically have the patience to make evergreen investments, waiting for the right company to become available or strong economic conditions to return, and we can structure the holding period to match a short- or long-term investment vision.

What do family offices and private equity firms look for in an acquisition and how is that different from a strategic acquirer?

A strategic buyer will seek to acquire a company in order to complement a business they already have, or to purchase a competitor in the market. Because a strategic acquirer is well-educated in the industry, they will likely require less training, but their main intent is to obtain the business assets. They often do not see value in transitioning over management teams or in retaining the company legacy.

If you’re a true entrepreneur at heart and you’re looking to continue to grow your business, partnering with a family office or private equity firm may be the better fit. In both avenues, the founder usually has the option to stay on to lead the management team and is also equipped with tools for growth by the investment partner.

At Next Sparc, we won’t partner with a business unless the founder, or the majority of the management team, is looking to help grow the business and reach a second liquidity event. Similar to a private equity firm, we are very hands-on and work together with the management team to implement operational processes, professionalize the business, hire key talent, and more. While we are a relatively small single family office, we are a professional office, meaning that our team is made up of operators with previous experience, so we look to provide input that can help the business scale.

The final takeaway.

Selling your business will be one of the largest transactions of your life, and understanding the types of buyers can help you achieve your business goals. Finding the right partner that will align with your objectives and culture can make all the difference.