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EY Private Perspectives: family businesses should consider opening doors to new sources of capital in order to build a long-lasting legacy.
In brief
This edition of EY Private Perspectives highlights why family businesses may choose to go public without diluting their long-term influence
An IPO can address the yin and yang of the family and their business obligations
The decision to go public is one only the family can make, and they must weigh the pros and cons before they reach it
Family enterprise owners face unique challenges as they balance their ambition to grow with the effort to build the family legacy. For family business owners to accelerate the growth of their business and strengthen their equity, they may need to seek new sources of capital. Many look for funding that will not dilute the family’s long-term influence, which is why they often consider going public.
With decades of experience helping companies go public, our IPO readiness assessment team can help you get ready for the big day — and beyond. Learn how.
An IPO can help a family business bring in external managers and transform corporate governance
Going public doesn’t mean a family cuts ties with the business. Far from it. Whereas private equity investors will take a seat in some advisory or supervisory capacity, with an IPO, the free float and the diversity of capital markets investors keep the family with a seat at the table and a steadying hand in the culture of the business.
By separating the principal (owners) from the agent (external management), the family can also bring greater scrutiny to decision-making at the executive level.
The family can maintain control where it matters most to them
The family can do this by designing the shareholder structure, including:
Legal form options - Some jurisdictions offer a variety of legal forms that separate principal and agent functions or capital participation and voting powers.
Country of incorporation - Depending on the country of incorporation of the IPO vehicle, different legal forms are available and different corporate governance codices apply.
Issue different share classes - Many publicly held companies offer different classes of shares with a different set of rights for shareholders. Family businesses can give one class of shares - the class of shares they keep for themselves - greater weight or super voting powers so that they can retain control of the company. This certainly benefits the founders.
An IPO is only one option which is appropriate for the yin and yang of family business
Each family business is unique, yet successful family businesses have some common traits that we call the “DNA of family enterprises.” Compared with other strategic options, such as selling the company to a competitor, or welcoming private equity as an interim investor, an IPO can address the yin and yang of the family and the business obligations. On the one hand, manage family assets, uphold family values and keep a structured family involvement. And on the other hand, provide outstanding business performance in operating results, with solid management mechanisms, and maintain control by the family.
Going public can balance the obligations between family and business. Compared with other strategic options, it often helps uphold the family legacy and structured family involvement while accelerating growth of the business and putting solid management mechanisms in place.
In this webcast, panelists discuss how raising new capital can be used to strengthen the business for generations to come.
Only Family can make the decision to go public for a family business
Going public is a very personal decision, even if the rationale is well informed and logical. In weighing your options, you’ll want to consider:
Pros
Easier management succession planning with higher attractiveness for many external managers working at C-level on a listed company with clear corporate governance
Better access to capital markets to raise money through equity and bond offerings
Private wealth diversifications opportunities with daily valuation of the shares at liquid stock markets
Keeping company culture and independence by having a diversified mix of public investors
Developing the company to a further stage and building brand with the funds and the attention of an IPO, and better bonding and attracting talent via share plans and increased public visibility
Cons
Time-consuming due to public disclosures and investor relations tasks
Total IPO floatation project costs and add-on costs associated with the ongoing requirements as listed company
Greater transparency with public disclosures
Pressure to deliver on your promises
Less entrepreneurial control, influence and power with new external shareholders
Summary
IPOs can be a great option for family businesses. An IPO can open doors to new sources of capital, accelerate growth, diversify wealth, and help reward and retain top talent, including the family members that have been so pivotal in the success of the company so far.
For founders, it can secure the family legacy for generations to come - something that often proves more valuable than anything else money can buy.
