Why Founders Should Explore Family Office M&As For A Strategic Exit

In recent times, entrepreneurs have been increasingly exploring family office M&As for a strategic exit. These private office investors have long-term investment strategies and offer flexible terms and conditions suitable for founders.

They offer proprietary deals and are often the first company to offer to purchase or invest in the startup.

Family offices are always on the lookout for viable opportunities in the low and mid-market segments. They are known to compete with private equity firms and strategic investors. And engage in bids for projects that have the potential to generate rich profits down the line.

Private investor companies, as family offices are also called, now have an in-house team of experts to guide their investments. These teams include professionals with expertise in spheres like legal, tax, accounting, and HR, particularly navigating M&A deals.

Leveraging this suite of resources, family offices are better positioned to bring crucial skill sets to the M&A negotiation table. Here’s why founders should explore family office M&As for a strategic exit.

Family Offices Have Unique Investment Strategies that Founders Can Tap

Profiteering from the investment is, undoubtedly, the primary objection of any investor. But, family office investors often deploy unusual strategies that align with their mission statement and vision.

Many families operate with altruistic and philanthropic goals where social causes are higher on their list of priorities. Since ultra-net-worth individuals and families set up private investment offices, they are often open to backing ESG startups.

They may also be open to backing startups underrepresented founders build or those that are driven by a specific mission. Some of the other reasons to approach family offices are:

Flexible Investment Policy

Most other investors, like private equity firms and venture capitalists, are accountable to their investor clients. For this reason, they typically operate according to a written investment policy. This policy outlines the criteria they must follow when selecting candidates for acquisitions.

However, family offices are more agile, and investors are the key decision-makers. As a result, they may back projects that appeal to them even if they don’t demonstrate high potential for profits.

Angel investors may also run such offices and opt to acquire a startup per non-financial approval criteria.

Moreover, investors could be veteran founders who have built and exited highly successful companies and are interested in supporting newbies. That’s why founders should explore family office M&As.

Open to Investing in Unusual Verticals

Traditionally, family offices preferred to invest in sectors that had the potential to earn exceptionally high returns with low risk. Real estate was one of the core segments they preferred to invest in. In recent times, private company investors have focused on high-growth verticals instead.

You will see more investments in areas like biotechnology, technology, AI, machine learning, and any other disruptive concepts. Unlike other institutional investors, their decisions are driven by the opportunities they identify.

Most investors target seasoned entrepreneurs with a track record of successful exits. However, family offices are open to backing upcoming founders from the younger generation to support their innovative thought processes.

Many startups with out-of-the-box concepts are quickly bought out by family offices. Founders should explore family office M&As if they have such business ideas. Software-as-a-service (SaaS), digital infrastructure, and other similar tech-driven sectors attract attention quickly.

Such investors could be open to purchasing the startup with significant capital but retain the entrepreneurs to continue running it.

Focus on Building Long-Term Relationships

Venture capitalists, private equity firms, and other investors are likely to remain invested in the company for a fixed interval. Their exit strategies are pre-determined when they divert funding into purchasing the startup.

Some are also interested in stabilizing the company to a point where it can earn a rich return. They may also buy out a business with the objective to sell it off piecemeal and make profits. However, family offices are open to remaining invested for an extended time, even over generations.

Their holding periods are driven by their interest in the concept or even the founders themselves. If your objective is to see your startup continue to thrive and scale, consider a family office M&A.

Unique Investment Process

Private equity firms and venture capitalists operate within the limitations of standard operations procedures that guide their due diligence. Typically, they have a highly specialized management team to head the investment procedures.

Family offices do have a management suite but often have members heading the team. They rely more on gut feelings and base their investment decisions on factors other than profitability. This is why they have a unique procedure for diverting funds to purchasing promising startups.

They may also be open to buying distressed companies and investing expertise and funding to have them up and running again.

Option of Getting Club Deals

Founders should explore family office M&As since they could potentially get club deals. Several family offices or smaller investors partner to form a syndicate by pooling their funds and purchasing startup companies. Close to 33% of family offices prefer to enter syndicates.

That’s because smaller offices would prefer to leverage the in-house acquisition expertise that their bigger partners have. This strategy increases the deal flow and allows them to access viable startups that have high potential.

Pooling their resources allows them to invest in more companies while taking advantage of the experience seasoned partners have. Although tis factor results in dispersed decision-making, club deals are a great option for entrepreneurs looking for M&A deals.

Keep in mind that in fundraising or M&A deals, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor on Facebook, with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

What Entrepreneurs Should Look for in Family Office M&A Deals

Founders looking for a strategic M&A deal no longer need to restrict their choices to corporate buyers. Or even partners in the mid-market segment. You can now explore a broader pool of potential collaborators, and family offices are also part of it.

Expect better terms and conditions and M&A deals that bring value to your startup. But here’s what to look for when evaluating acquirers and partners.

Company Values and Mission Statement

Before selecting the private company investors, you’ll research into their values, mission statements, and objectives for M&A deals. Typically, they are not open to divulging a lot of information about their internal structure, M&A criteria, and capital available.

Making generalizations about their processes is also not advisable since every family office is unique. What you can do is research the investments they have made before. Also, research the owners, their track records, and other publicly-available information.

Make sure your values align with the family office, and don’t hesitate to ask for proof of funds early on. Also, inquire into the incentives management teams receive, which could be counterintuitive to your goals from the deal.

Investment Sustainability

Most founders partner with private investment companies for their extended holding times. Especially if they intend to stay on as managers. Their objective is to leverage the capital to scale the company.

However, when selecting your investor, make sure they can sustain economic volatility and uncertain market conditions.

You’ll need investors to have complete faith and confidence in the startup to maintain their holding through market cycles. That’s how you can be sure the company is achieving its complete potential.

Without this assurance, you risk the investors pulling out even though the startup has lots of potential to scale. Don’t work under the misconception that all family offices stay invested for extended times.

The next generation of these investors tends to balance their financial and non-financial objectives. Be prepared for the likelihood of their exit at an inopportune time.

Percentage of Debt Invested

As a rule, family office investors prefer to use their own wealth instead of borrowing from the market. Their objective is to maintain and increase their wealth, and they are usually uninterested in taking on debt.

However, when evaluating the family investor for an M&A deal, you should inquire into the debt they have. Debt raises the risk factor since it accrues interest, and while the debt capital can help raise profits, potential losses are also a factor.

Founders who intend to stay on after the M&A deal should carefully examine the repercussions of the debt. They should be sure about how the debt will impact the startup in the long term, including its payment conditions.

Interest in Managing the Company

Present-day private investment offices have veteran and experienced founders in management who are interested in running the company. They may be open to offering expertise and networking opportunities to scale the company quickly.

Other family offices may only be interested in investing capital while allowing the founder to stay on and continue managing. In fact, having the seller stay on could be part of their approval criteria. When evaluating potential partners for the M&A deal, be clear on your goals and expectations.

Explore the possibility of working with your in-house team and the responsibilities you’ll have after the M&A deal. Check if you’ll retain decision-making capabilities, core talent, and other assets. Also, check for the value the investors will add aside from capital and funding.

Aligning the interests of all the participants and ensuring incentives to the management is crucial for the deal’s success. Don’t forget to check if the investor has a specialized acquisition team that will be directing the M&A deal.

When exploring the option of approaching family offices, you should start by doing the research. Check out this video, where I have explained the questions entrepreneurs should also ask investors. Use this information to assess the pros and cons.

Founders Should Explore Family Office M&As – Advantages and Disadvantages

Founders should explore family office M&As to sustain and scale their fledgling startups. However, before entering into the deal, be sure of the potential advantages and disadvantages and long-term impact on the startup. Here’s everything you need to know.

Advantages

• You can leverage their flexible approval criteria and terms and conditions. Family offices are typically open to discussing deal structures that favor the founder for the startup’s success. Especially when they intend to retain the founder as a manager.
• Family office investors are typically ultra-net-worth entities that are open to investing substantial wealth, which can work to your benefit. They don’t need to raise capital from external sources.
• Founders can expect long-term holding times that can even extend over generations. But as long as the investment generates value,
• M&A deals with family offices are suitable for founders who want to maintain their legacy. Consider this option if you want to keep your name on the door and ensure that employees keep their jobs.
• The extended holding time eliminates the fear of an unexpected exit. This factor gives founders the confidence to focus on the core objectives of the startup and scale it quickly.
• Family offices get the advantage of fulfilling their altruistic objectives while also building wealth. They can continue supporting deserving founders with their industry-specific expertise and networking channels. It’s their way of giving back to society.
• Entrepreneurs can leverage the freedom to grow the company with minimal investor interference. They don’t need to cede board seats or decision-making rights.
• Family offices focus on preserving wealth for future generations and not earning substantial profits.

Disadvantages

• Family offices don’t always have a management suite to handle their investments. They may rely on external consultants and advisors to direct their holdings. This factor can create unwanted issues for founders because of misguided interference.
• Private company investors typically have a broad portfolio of investments driven by their personal interests. Accordingly, they may invest in artwork, heritage property, antiques, yachts, and supporting communities. Their lack of focus on your startup can be a downside if you’re looking for expertise and guidance.
• Since private offices are not particularly concerned about potential profits, founders need to have a robust pitch deck to attract their attention. You can only target investors interested in your particular vertical or mission. This factor limits your pool of options when looking for M&A deals.

Founders should explore family office M&As since they can be beneficial for the startup and its long-term success. However, it’s advisable to do the necessary research and weigh your options carefully before approaching them.

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