April 10, 2024

The Benefits of Selling Your Company to a Family Office

By: James Carey
Executive Summary

For founders looking to take their businesses to the next stage of growth, it can be difficult to discern the differences between a private equity firm and a family office. While both offer advantages, a family office can be a great option for entrepreneurs who value partnership and culture, and who want greater flexibility across all areas of the partnership.

Many founders have an eventual goal to sell their company, but aren’t sure what options are available or how the process works. While venture capital and private equity firms are two potential buyers that commonly come to mind first, a family office can be another great option, especially for founders who want to stay involved but need additional support scaling their business to the next level.

Family offices have evolved significantly over the last decade. To help further break down the core differences between private equity and family offices, James Carey, Partner at Next Sparc, returned to the Morgan & Westfield M&A Talk podcast. James’ last discussion built a foundation for defining what a family office is and how it compares to a private equity firm. This latest discussion explores the benefits of selling your company to a family office.

What is a family office and what type of founder is the ideal fit?

Family offices can vary across the spectrum. However, at its core, a family office is an organization made up of a single or group of high-net-worth individuals that deploys its own capital to make direct investments in private companies. These direct investments are typically within a set of industries where the family office has had previous success.

Traditionally, family offices assumed a hands-off role in investments, acting primarily as investors. Over time, family offices have evolved, with many now operating as quasi growth equity firms, providing industry expertise, operational support, and strategic contacts to the acquired companies in addition to capital. This allows for significant opportunities for the portfolio company to scale rapidly.

A family office can be an ideal fit for entrepreneurs who have successfully grown their company to a certain stage but have reached an inflection point where additional capital and support is needed to continue scaling. Most importantly, the founder and/or management team want to stay engaged as operators during the next stage of growth.

What are the key benefits to selling your company to a family office compared to a private equity firm?

In recent years, family offices have become a very active buyer type for privately held, middle market companies. A partnership with a family office can offer founders greater flexibility, while still providing many of the same resources and expertise that a private equity firm offers.

1. Greater flexibility in deal structures

Private equity firms often have restrictions on how they structure deals due to regulatory constraints, fund mandates, limited partner agreements, and more. By nature, private equity firms also must assume a majority stake, providing them with the highest level of control. Family offices have no real restrictions with deal structures and can get creative on a case-to-case basis. They can also choose to take a minority or a majority ownership stake, depending on the goals of the founder.

2. Friendly capital allows for a flexible investment horizon

One of the biggest advantages of selling your private business to a family office is that they have a flexible investment horizon—often having no terminus point for holdings at all. In contrast, most private equity firms have fund-imposed limitations which dictate investment timelines. While a private equity firm may structure a deal to a 5-7 investment period, family offices can set timeline goals but move targets as needed, depending on the pace of growth and economic conditions.

Family offices invest self-committed, ‘patient’ capital. From the onset, there is less pressure with asset allocation strategies and investment timelines because family offices don’t need to return capital to anyone except themselves, meaning they can extend investment periods as necessary. This can be very attractive to founders who want to focus on business longevity and long-term, sustainable growth, not short-term profit.

3. Offer industry expertise with an operational mindset

Both private equity firms and family offices have a unique set of skills, resources, and operational functions that can help portfolio companies achieve growth objectives and maximize their value. Because both types of buyers have extensive experience within a specific industry, they can provide guidance and support on everything from marketing and sales to supply chain management.

At Next Sparc, our single source of capital is contributed by our founder, Len Pagon, and the three other partners in the firm, and demonstrates our own business successes and skill sets. Having grown and sold our own company, we’re able to relate with founders on their level and offer strategic and tactical expertise with an operational mindset.

4. Partnership and company culture are both valued

When evaluating a potential partnership as a founder, you may hear many analogies to the investment being akin to a marriage—and for good reason. While both family offices and private equity firms have embraced partnership as a core theme, it’s critical for founders to find the right cultural fit in a partner that shares the same values as your company.

At Next Sparc, we have genuine interest in partnership and want to help founders and management teams grow their businesses. We will only invest in a company if we feel that we can significantly impact the growth of the business and if we feel that we’re aligned culturally. While private equity firms, especially those that operate globally, invest in a significant number of companies per year, we are highly selective and choose to only work with those that we feel a deep connection and shared passion with.

The final takeaway

Finding the right investment partner can be a daunting process, but understanding the types of potential buyers can help you find the right fit. Family offices can offer flexibility, expertise, and a partnership mentality that may be aligned with your own goals and values.