Family Offices Becoming More Prominent In Middle Market M&A

By Generational Equity

02/10/2020

The term “family office” has been in existence for decades. In fact, some family offices can trace their lineage back several hundred years. But the number of family offices has grown exponentially the last few years according to a recent article in Axial:

The number of family offices in the middle market continues to surge. There are at least 10,000 single family offices around the world, half of which were established in the last 15 years, according to a 2017 report by Ernst & Young. 

Why have they grown so dramatically in recent years? Again, according to Axial the reason is very simple:

“Family offices historically weren’t usually involved in direct investments. But increasingly they have begun to look for ways to avoid paying the standard 2 percent management fee and 20 percent performance charge.” 

On top of this, family offices traditionally were started by entrepreneurs in specific industries. Subsequent generations gained expertise in that industry and grew the business dramatically in many cases. Now they are recognizing that by making a direct investment in a company in the industry from which they came, this allows them to bring knowledge and expertise to the holding, most of which the original owner(s) would not have access to.

Another benefit we have seen to business owners that have family offices invest in them is the much longer hold time than traditional PE firms. In many cases family offices will hold their businesses indefinitely, which richly aids in building upon the legacy that the original founder created.

This is how Axial describes it:

Many business owners are drawn to family offices over private equity firms, for a number of reasons including the longer hold periods that family offices can typically support. Emphasizing this and other value-adds, like your family’s experience building and growing successful companies in your industry, can help tip the balance when businesses are considering multiple bidders.

For these reasons, more and more of our deal teams are establishing relationships with family offices in key industries to enrich the buyer lists they create for our clients. If you are entering the market without professional M&A guidance, you should seriously consider adding family offices to your list of targets.

Yet Axial points out a major challenge when considering family offices for your business:

Many family offices have traditionally made a conscious effort to fly under the radar when it comes to marketing and business development — they may not have a website or do any other traditional marketing.

I know that years ago when I began researching family offices that finding them at all was a big challenge and, even more so, to determine their investment mandates, size of acquisitions, and other key data. Although this has changed in recent years, and directories of family office groups are available, having a dealmaker at your side that knows how to find the appropriate ones, and speak their language, is vital.

One of the reasons for our success over the years is that our dealmakers are skilled in communicating with all types of buyers, including family offices. If you are interested in learning more about family offices and their viability for your business, you should set aside a few hours and meet with us at one of our exit planning conferences.

Although not every privately held company is a reasonable target for family offices, exploring your many options is vital.

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Carl Doerksen is the Director of Corporate Development at Generational Equity.

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