Like-Minded Partners

Small, family-run businesses, which have faced an uphill battle in securing financing since the 2008 financial crisis, are increasingly turning to individual investors for fresh capital.

In fact, the union of private companies and individual investors is not surprising considering that both parties share a desire for long-term growth with reasonable risk, according to a new study by KPMG.

“Many say that attracting this type of investment is challenging because of a lack of availability and difficulties in finding a partner,” the accounting firm writes.

The study, entitled Financing Family Business Growth Through Individual Investors, notes that the 2008 financial crisis and the subsequent recession tightened the availability of bank financing, prompting businesses to more seriously consider individual investors as a source of capital.

“The recession made investments from individuals more valuable for small businesses,” says Beverly Johnson, a KPMG partner. “Banks want more paperwork and more reporting than many family business owners are used to, and banks often do not look at the longer-term investment, so an individual investor is more attractive.”

The study, which looked at 125 family-owned businesses and 125 HNW investors, shows that 58% of family-owned businesses are looking for outside financing and 42% have received financing from high-net-worth individuals.

The report noted that individual investors have warmed up to the idea of putting their money into private, family-run enterprises—particularly if they can become part of the company brain trust.

“Family business owners are often looking for someone with family business experience and experience in their industry to provide assistance, as well as money,” Johnson says. “The question then is how much control does the investor want and how much are the business owners willing to give up.”

The survey shows that 72% of high-net-worth individuals take responsibility for at least half of their own investments and the majority (60%) are focused on long-term capital appreciation, which makes them well matched for investing in a family-owned business. Nearly half (44%) of the individual investors surveyed have invested in family businesses in the past and 95% say it was a positive experience compared to their other investments.

The survey suggests that family businesses are more amenable to offering equity to the right investors than commonly perceived. One-third say they would be willing to offer equity in the short to medium term and half say they are willing to offer equity for the long term.

Avoiding The Pitfalls
Investments from individuals as opposed to banks are not without their potential pitfalls, however.

The issue of transparency can be a stumbling block for both sides, says Amelia Renkert-Thomas, a joint managing director of Withers Consulting Group, which advises family businesses on governance and succession planning.

“These types of partnerships are definitely going to increase because there are a lot of worthy, growing companies that are too small to be covered by the public market,” she says. “Investors who have expertise in the business’s industry have a tremendous amount to bring to the partnership.

“However, the business owners are going to have to be prepared for a level of transparency that they may not be used to,” Renkert-Thomas cautions. “The investor is going to need a direct line of communication to the team running the company and they are going to want to talk with the family frequently, both before and after investing.”