Twenty five years ago, the average CEO was pushing 60 years of age; today, the average age is closer to 54. What that means for the capital market is that exit horizons have shifted – and so have the strategies CEOs are using to sell their businesses.
In the early 90s, CEOs were considering more immediate exits as they were closer to retirement age. Now, the average CEO still has more than a decade left in the workforce. But with markets at an all-time high, many are looking for ways to take some capital out of their businesses without giving up total control.
Traditional acquirers don’t always make a perfect match for these situations, leading many of today’s executives to work with family offices. Here are 5 of the biggest reasons why:
They have longer investment horizons
One of the biggest advantages of selling to a family office is their much longer investment horizon. Most traditional investors — like private equity firms — are limited to 5-7 year investment timelines because of fund-imposed limitations. Since PE firms must return money to their GPs at the close of the fund, they are limited in how they can think about investments and what strategies they prioritize. As a result, many CEOs feel their PE-backers are too focused on the short term.
Family offices, however, are not limited to any specific timeline. This is because family offices do not have any fund structure; they are investing with their own money and can do so at their own timeline. They can hold companies for extended periods, allowing younger CEOs to stay on and grow the company or to sell with a much longer buyout period. This longevity is particularly appealing for CEOs that are not looking to exit entirely, but merely take a few chips off the table and begin planning for a transition.
They have streamlined decision making
Family offices tend to be more streamlined in their decision making processes. Since they are using their own money and are often investing within their industry of expertise, they feel more comfortable making quicker decisions and have more flexible internal operations.
In contrast, private equity firms often need to conduct robust due diligence processes and consider the interests of their GPs. These extra steps can add significant time and complications to the entire process.
They are a bit more hands off
Additionally, family offices are often not interested in taking over the management of the company. When they make an investment, it is usually to encourage the already-existing growth of the company. This makes them an ideal investor for an owner that is looking to stay on for another 5-10 years.
Private equity firms, depending on their strategy, can often be more heavy-handed with their management strategy. They may change the strategic direction of the company or bring in new senior management to better accomplish their goals. Similarly, strategic acquirers will often roll the acquired business into a larger company.
For a CEO looking to stay in place, the heavy-handed tactics can be a deal changer. Regardless of the investor, it is important to always discuss goals and expectations at the very beginning of the process.
They pay in cash
PE firms will often pay for a portion of their acquisitions with cash and will finance the rest using mezzanine or senior debt, ultimately transferring debt to the target’s balance sheet. While this leveraged buyout strategy can encourage rapid growth and better returns for the PE firm, it also entails a bit of risk. And often, since a CEO is attempting to reduce their personal risk by taking chips off the table, this can be a choice they’re unwilling to make.
Family offices, however, rarely use debt to finance their acquisitions. Instead, they prefer to pay in cash. This relieves the company from the debt burden often taken on by other types of financial buyers and leaves the company in a better position to weather future issues.
They have industry expertise
Most people prefer to stick with what they know; billionaires are no exception. As such, family offices tend to invest in the industry in which they made their fortune, providing an invaluable source of advice and market expertise for executives that stay on to run the company.
There are plenty of great reasons for companies, particularly those with younger CEOs and executives to sell to family offices. Ultimately, it’s an option that can provide more freedom for both acquirer and target. Family office participation in direct acquisitions has increased in recent years, and will only continue to increase as the ultra-wealthy seek new ways to engage with the capital market.