“A Trojan horse? No thanks!”

5 reasons why family businesses should consider private equity

At the end of December, Jeroen Neckebrouck successfully defended his thesis after five years of research into family businesses and private equity (PE). “Many family businesses aren't making full use of the potential of private equity”, says Jeroen. Is it because they fear what they don't know? Or are they worried that bringing a financial investor on board will be like inviting in a Trojan horse? For Koen Dejonckheere, the CEO of investment company Gimv, this was reason enough to invite Jeroen and his supervising professorsSophie Manigart and Miguel Meuleman, for a ‘meeting of minds’.

Gimv office
From left to right: Professor Sophie Manigart, Dr Jeroen Neckebrouck, Koen Dejonckheere and Professor Miguel Meuleman

Relatively little research into family businesses takes place, and this certainly applies when it comes to family businesses and private equity. It should therefore come as no surprise to learn that Jeroen Neckebrouck's research into the attitude of family businesses towards private equity was followed with exceptional interest by various players in the world of corporate finance, in particular by Gimv, a company we have worked with for years in the context of the Private Equity Chair.

“The water is still deep”

Jeroen Neckebrouck: “The water between family businesses and private equity is still deep. Managers are often concerned about joining forces with a private equity player: they fear they will lose control of their company in a very short time.”

Both Vlerick and Gimv wish to eradicate this prejudice, for the five reasons shown below.

1. Family values and private equity really can go hand in hand.

Jeroen Neckebrouck: “It's a picture which is often painted in the media: on the one hand we have the family and its values, and on the other the private equity player that wants to make as much money it can, as quickly as possible. This overly stark opposition is also fuelled by the fact that the positive aspects of a family business, such as stability, long-term horizons, company culture, rapid decision-making etc., are hard to quantify, in contrast to the hard financial figures. My research shows that this opposition just doesn't tie in with the reality.”

Koen Dejonckheere: “I am pleased that you have put this into perspective, Jeroen. Families also want these firms to put their money where their mouth is, and PE players need to pursue sustainability and corporate governance if they still want to be around 30 years down the line. If you can work towards a common goal with respect for each other, it should be perfectly possible to spend a few years working together. Clear agreements – on paper – make for good friends. But even then, the dynamic is still that of people working together.”

Jeroen Neckebrouck - Vlerick Business School
Dr Jeroen Neckebrouck: “The opposition between the family and its values on the one hand, and the private equity player that wants to make money as quickly as possible on the other, just doesn't tie in with the reality.”

2. Remember the benefit of heterogeneous shareholders.

Sophie Manigart: “The shareholder landscape is diversifying. More and more often, we are seeing family entrepreneurs investing in other family businesses. For some managers of family businesses, a combination of a family investor and a financial investor such as Gimv forms an ideal solution.”

Miguel Meuleman adds: “Research has also shown that the more closely a family entrepreneur identifies with their company, the more likely they will be to opt for another family investor rather than a financial investor.”

Koen Dejonckheere: “As an investment company, Gimv is a typical mid-market player. We generally work with entrepreneurs, which is why we usually tend to apply a heterogeneous shareholder structure. Depending on the path which the entrepreneur has taken, we will often find ourselves dealing with a very varied group of shareholders: the entrepreneurial team, possibly a management team and also other family or financial investors. We therefore need to believe in possibilities. Our work largely revolves around creating a ‘coalition of the willing’: a kind of bandwidth which takes the interests of all the shareholders into account. This allows us to focus on what connects us and makes us stronger, while still bearing the wealth of our mutual differences in mind.”

Miguel Meuleman - Vlerick Business School
Professor Miguel Meuleman: “The more closely a family entrepreneur identifies with their company, the more likely they will be to opt for another family investor rather than a financial investor.”

3. Don't underestimate the importance of change management.

Koen Dejonckheere: “A company which is ambitious in today's disruptive world and still wants to be around in five or ten years will have to face major changes. For a family business, it would already be a minor miracle if these major changes were to coincide with the family's economic climate. If you're not careful, the disruption might extend to the family or the family's financial situation could end up affecting the company.”

Sophie Manigart: “Attracting an external player not only allows you to bring capital on board, but also sector expertise and a party with experience of internal change procedures. An external shareholder will also help you to prioritise change management and innovation, certainly for companies which have always done well in the past and are therefore in danger of dozing off a little.”

4. Handing over your company is not the only solution.

Jeroen Neckebrouck: “If a transition to the next family generation is not (yet) possible, many managers of family businesses regard selling or winding down their entire company as the only options. They aren't sufficiently aware of the fact that they could also work with an investor before selling the company once and for all. This may be because people don't tend to start thinking about possible alternatives soon enough. And once they are nearing retirement age, they often tend to regard handing over the business as the quickest solution.”

Sophie Manigart: “That's why we have spent the past few years here at Vlerick focusing on transitioning companies, with selling them as just one of the options available. At the ‘Transferring or selling your company’ conference on 13 December, we presented Jeroen's thesis to entrepreneurs who were planning to hand over the reins of their business. Afterwards, an entrepreneur came up to me to say that on further reflection, he wouldn’t be selling his business after all and might opt to work with an investor for the time being to increase the company's professionalism.”

Koen Dejonckheere: “That doesn't surprise me. I would even say that in Flanders, more than half of companies are sold because the owners aren't aware of the alternatives. There are so many options for collaboration, either temporarily or systematically.”

Sophie Manigart - Vlerick Business School
Professor Sophie Manigart: “Here at Vlerick, we have spent the past few years focusing on transitioning companies, with selling them as just one of the options available.”

5. Private equity can offer a perfect temporary solution.

Sophie Manigart: “Take a complex family transition: when moving from one generation to the next, one child may wish to continue the business and the other may not. Not every family is in a position to buy out another family member. In that case, private equity can offer a temporary solution.”

Koen Dejonckheere: “Absolutely. Or if the economy isn't going well, we can offer a solution. For example, we invested in Vandemoortele when the company was suffering as a result of the financial crisis. We left 8 years later, and Vandemoortele is now entirely back in family hands. That wasn't exactly a typical PE deal at the time, but I am convinced that the parties we will work with in the future, as well as the paths we take together and our exit strategies, can take various forms. That's why it's down to us, as Gimv, to constantly evaluate our investment company. We simply owe it to all the companies we work with.”

Koen Dejonckheere - Gimv
Koen Dejonckheere: “I am convinced that the parties we will work with in the future, as well as our shared path and the exit strategy, can take various forms.”

Vlerick Exit Academy
The Vlerick Exit Academy will start on Tuesday 28 February. Over the course of 7 sessions, entrepreneurs can draw up their own exit plan. (This conference is in Dutch only).

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