The Role of Family Offices in M&A

Jacob Orosz Portrait
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

Family Offices: The Basics

What is a Family Office? A family office is a privately held company whose sole purpose is to handle the personal and professional affairs of a wealthy individual or family.

The Team: A family office consists of numerous professionals, such as investment advisors, attorneys, personal assistants, chefs, and others who assist the family with everything from organizing vacations and managing healthcare to planning charitable gifts and overseeing their investment portfolio.

Cost of Running a Family Office: A family office is generally only suitable for families with at least $50 million to $100 million in investable assets. A family office consisting of 5 to 10 professionals can incur $500,000 to $2.5 million in labor costs alone.

Managing Investments: One of the primary services family offices provide is managing the family’s assets and investments. One key investment area becoming more popular for families in recent years is the acquisition of privately held businesses.

Structure: Well-known family offices like Bezos Expeditions and Walton Enterprises employ hundreds of professionals (with extended employee “families” of thousands), but there are many smaller family offices across the US. There is no universal definition of the term “family office” – they conform to a wide variety of structures, as varied as the families they serve.

The Role of Privacy: The business of family offices is, by nature, discreet. Often, little is known about a given family’s private investment interests and deal sizes, their growth and strategy, or the investments they wish to target unless they choose to disclose this information themselves. To maintain their privacy, family offices rarely call themselves a family office. Wealthy individuals fly under the radar at the best of times, so information on family offices is limited, and generalizations are difficult to make.

Largest Family Offices

  • Walton Enterprises LLC ($224.5bn) – Walton Family, Walmart
  • Cascade Investment ($170bn) – Bill Gates, Founder of Microsoft
  • Bezos Expeditions ($107.8bn) – Jeff Bezos, Founder of Amazon
  • Mousse Partners ($89bn) – Alain and Gérard Wertheimer, Chanel
  • Ballmer Group ($85bn) – Steven Ballmer, Microsoft

The Family Office vs. Other Investors: Simply put, a family office is any firm that invests directly on behalf of its principal. Compared to private equity funds, venture capital funds, hedge funds, pension funds, and university endowments, family offices invest their own capital. This is the main difference between family offices and other institutional investors and bears repeating – family offices invest their own capital and not that of third parties. Many of the benefits of selling your business to a family office stem from this very distinction.

Types of Family Offices: Family offices fall broadly into two main types – single-family offices (SFOs) serving one individual or family, and multi-family offices (MFOs) serving more than one family. MFOs are more affordable thanks to economies of scale. Other types have emerged, such as embedded family offices (EFOs) and outsourced family offices (OFOs). Both offer flexible alternatives to the primary models.

Structures and Governance: A family office is essentially a corporation or LLC, or mirrors one almost exactly. The executive team (or C-suite) is employed directly by the entity, often with incentives and benefits tied to the profits and gains they oversee, while managers and support staff are employed in the manner of a typical firm.

History: While several wealthy families lay claim to being the first family office in the U.S., John D. Rockefeller is regarded as starting the first full-service, single-family office in 1882. Like the Morgans and the du Ponts in the same era, the Rockefellers required an office to manage their wealth, drawing on the worlds of investment, tax, and law to do so.

A Golden Age: Family offices have increased noticeably with each period of financial growth. The 1980s saw a massive swell, and when the list of global billionaires grew in the early 2000s, the number of family offices grew in tandem. Since the tech and start-up boom of the 2010s, family offices have again expanded in size and number. It would be difficult to point to a golden age for the family office – but with current total assets estimated to be over $20 trillion, we may be living through it now.

How Family Office Investments Succeed: While many family offices don’t have the pedigree of some private equity firms and can’t bring synergies to the table like strategic buyers, there are several ways in which they stand out in the middle market:

  • Experience: Many family offices have significant knowledge and networks in one specific industry.
  • Time Frame: Family offices can afford to commit for much longer time frames, sometimes for decades. As sources of patient capital, they present a viable alternative to the quick flip approach and can decide for themselves when to exit.
  • Decision Making: Family offices can often make quick decisions without seeking approval from any other party.
  • Flexibility: Most family offices offer more flexible terms than private equity firms, which are limited by the constraints of their fund and must target to exit within three to seven years.

Investment Strategy

  • Investment Policy: Not all family offices have a written investment policy. Some prefer to operate in a more agile manner, especially if they’re the key decision-makers in an acquisition.
  • Investment Process: The structure of family offices varies considerably. While some have formal investment teams, others invest on gut instinct.
  • Sectors: Many smaller family offices target the industry most familiar to them, where they can add value, while larger families branch out to other fields.
  • Management: Few family offices take an active role in the management of the companies they acquire. Therefore, it’s important that a strong team is in place to continue running operations or that the owner remains until a successor is in place. The family office’s desire to retain managers can impact the deal structures they propose. As they seek to align the interests of all parties, they may offer incentives for management to continue growing the business.
  • Relationships: Personal relationships are important to family offices due to their longer holding periods and play a critical role in the selection of the target company.
  • Holding Period: Family offices seek to preserve and manage their assets for the long term. Most don’t have a quick “buy and sell” strategy, and it’s not uncommon to see holding periods of over 10 years.
  • Team: Family offices have historically been run by investment managers who may lack industry or acquisition experience. As a result, families looking to make direct investments build out their teams by establishing an acquisition department composed of professionals with a background in investment banking, private equity, or corporate development. Many large family offices have teams similar in size and scope to that of medium-sized PE firms.
  • Club Deals: It’s common for family offices to partner on an investment in the form of a syndicate or “club deal.” Estimates suggest one-third of acquisitions by family offices are made via a syndicate.

Advantages and Disadvantages of Selling to a Family Office

Before deciding to sell your business to a family office vs. another type of buyer, you should consider what it’s like to work with one. The following is a summary of the main advantages and disadvantages to consider before partnering with a family office:

Advantages

  • Flexibility: They tend to be much more flexible, which manifests not only in the types of businesses they choose to pursue but also in their ability and willingness to structure the deal creatively and make decisions on their own exit options and timing.
  • Certainty of Close: They have access to a significant amount of capital, meaning they are less dependent on debt to close a transaction than other institutional investors.
  • Holding Period: Family offices usually employ much longer time frames than other institutional buyers and think in terms of generational wealth, as opposed to shorter-term quick flips.
  • Non-Financial Benefits: They often have deep industry experience and contacts. This is of prime importance to entrepreneurs who plan to continue working in their business, especially those who’ll retain some equity post-close.
  • Speed: They often move with greater speed than other types of buyers. Family offices are much leaner because many don’t have a formal mandate, investment committee, or third parties involved in the decision-making process and, as a result, move faster.

Disadvantages

  • Organization: There may appear to be a lack of organization due to leaner organizational structures.
  • Focus: The wealthier a family is, the more likely they are to have a diverse range of interests, and the more difficult it will be to attract and retain their focus.
  • Negotiating Leverage: Few family offices have to do a deal, and the majority have an infinite number of options they can pursue. If the deal doesn’t close, it’s unlikely to impact their lives or revenue. As a result, family offices are known to drag their feet and use their leverage to their advantage.

Considerations When Selling to a Family Office

Family offices differ significantly from other investors in the middle market. Selling to one presents unique considerations, especially to owners of family-run businesses.

Time Horizon: One of the major implications of the longer time horizon of a family office is that they aren’t compelled to exit again in any defined period and don’t operate under any artificial timelines, unlike private equity firms. This approach can better align with entrepreneurs who wish to stay involved in their companies. It can also have a tremendous impact on the business, which can now afford to stay focused on long-term objectives that may not have an immediate payoff, such as pursuing organic growth. Longer time horizons relieve management of having to prepare and execute an exit strategy just a few years down the line, as opposed to maximizing long-term profitability for the company. As a result, family offices aren’t constrained by investment cycles and accelerated liquidity plays and can remain stable, long-term investors.

Time to Grow: A longer time horizon allows the company’s management more time to implement growth strategies and ride out a volatile economic climate. It also removes the pressure on the family office’s management to sell companies arbitrarily due to time constraints, and they can continue owning a business as long as opportunities for growth remain.

Private Equity Response: Private equity firms have become attuned to the concerns around their shorter time horizon and have responded by creating “fundless” or “evergreen” investment vehicles or by investing directly into companies alongside their limited partners as co-investors without the limitations of a specified time frame.

Leverage (Debt): Because family offices are more focused on wealth preservation than capital appreciation, they tend to use significantly less leverage than PE firms.

Their Exit Strategy: Family offices have a strong appetite for healthy businesses that produce consistent profits and dividends, and unlike PE firms, they don’t always require a clear path to a highly lucrative exit.

Your Exit Options: While family offices offer many benefits, their ability to hold the business long-term can present a serious downside, as it results in limited cash-out options for other owners of the company. This can be a drawback for owners who wish to sell a portion of their company now and then achieve a second, possibly larger exit, a few years down the road. While this is a common exit scenario with PE firms, it’s far less common with family offices.

Incentives: Without a possible liquidity event in the future, it can be difficult to incentivize yourself and management to continue growing the business for the long term.

Re-Investments: Family offices are often willing to double down on their investments and aren’t limited from doing so by arbitrary, external demands. They also often have the cash to re-invest and don’t always need to obtain debt to continue scaling the company.

Target Returns: Because family offices are primarily focused on wealth preservation, they tend to demand lower returns.

Management Style: The management of businesses by family offices varies wildly. In most cases, families won’t micromanage their investments and prefer not to become involved in the day-to-day operations of the businesses they acquire. Rather, most will seek to add value if they can and step out of the way if they can’t.

Resources: Most family offices have a leaner staff than private equity firms and strategic buyers. They are also less likely to employ outside professionals or advisors to assist with their investments.

Relationships: Because most family offices invest for the long haul, they are particularly sensitive to the importance of the relationships in the companies in which they invest. Family offices will pay particular attention to the seller’s personality and ethics, especially if the seller will continue to operate the business. Likewise, the family will look to the strength of the management team and is commonly known for using personality tests and other tools to ensure long-term alignment.

Fairness and Decency: Family offices can be a pleasure to deal with. They are professional and accomplished, well-funded and well-resourced, and invariably decent and fair-minded in their dealings with the businesses they acquire.

Stability and Respect: A fluid, frictionless closing is the goal for all parties, and family offices offer many welcome traits in this regard. They’re long-termist, non-pushy operators who respect a seller’s outlook, their achievements to date, and the company culture they’ve developed along the way. Added to this, the time horizon and freedom from compliance and disclosure, and family offices become a no-brainer for many sellers.

Deal Structure: Family offices can be significantly more creative in their deal structures than other institutional buyers. Because they aren’t bound to third parties, they can afford to propose deal structures that flex and bend to meet the seller’s needs, which enhances their chances of a winning bid, even where their purchase price may be lower.

Introduction

Many business owners assume they’ll sell their company to either a strategic buyer or a private equity firm. While these comprise the majority of buyers in the middle market, there’s another buyer whose presence in M&A is increasingly felt – the family office.

For entrepreneurs looking to exit in the near future, deciding on the right type of buyer to sell to can be a challenge. Before you choose the best exit path for your business, you should develop an intimate knowledge of the advantages and disadvantages of selling to each type of potential buyer.

What is a family office? What role do they play in acquiring middle-market companies? How should sellers navigate their relationship with them? In this article, we answer these questions and more and guide you step-by-step through your relationship with family offices.

Family Offices: The Basics

What is a Family Office?

A family office is a privately held company whose sole purpose is to handle the personal and professional affairs of a wealthy individual or family. By forming a separate entity, the family can employ staff to manage investments, sign leases, enter into contracts, and perform other duties in their name while limiting the family’s liability and maintaining their privacy.

The Team

Full-service wealth management requires a coordinated team of professionals with expertise in law, insurance, investment, real estate, tax, and more. Such responsibilities are far more than any one professional advisor could manage alone, so an office and team of professionals are found to assist the family.

A family office consists of numerous professionals, such as investment advisors, attorneys, personal assistants, chefs, and others who help the family with everything from organizing vacations and managing healthcare to planning charitable gifts and overseeing their investment portfolio.

Cost of Running a Family Office

A family office is generally only suitable for families with at least $50 million to $100 million in investable assets. The full cost of the employees and executives typically employed by a family office can range from $50,000 to $250,000 per year, while a family office consisting of 5 to 10 professionals can incur $500,000 to $2.5 million in labor costs alone. For a family worth $100 million, this can mean 2% of their net worth per year.

Managing Investments

One of the primary services family offices provide is the management of the family’s assets and investments. One key investment area that is becoming more popular for families in recent years is the acquisition of privately held businesses.

The Structure of Family Offices

Well-known family offices like Bezos Expeditions and Walton Enterprises employ hundreds of professionals (with extended employee “families” of thousands), but there are many smaller family offices across the U.S. In my M&A career, I have interfaced with family offices consisting of just the principal and their advisor.

On the other hand, I have negotiated with a dedicated corporate development staff whose skills rivaled those of the most sophisticated strategic and financial buyers. That said, there is no universal definition of the term “family office” – they conform to a wide variety of structures, as varied as the families they serve.

The Role of Privacy

To maintain their privacy, family offices rarely call themselves a family office. Rather, they might call themselves a “private investment office” or similar generic moniker to protect their privacy.

The business of family offices is, by nature, discreet. Often, little is known about a given family’s private investment interests and deal sizes, their growth and strategy, or the investments they wish to target unless they choose to disclose this information themselves.

A Natural Caution

Family offices may own or control dozens of businesses, with hundreds of millions or potentially billions of dollars at their disposal, and they’re a frequent target for hackers and other bad actors. Wealthy individuals fly under the radar at the best of times, so information on family offices is limited, and generalizations are difficult to make.

Still, their appetite for acquisitions leaves a sizable footprint, and despite their desire for privacy, it’s possible to trace both individual family office interests and the wider trends and to notice certain investment theses from the outside.

Largest Family Offices

Walton Enterprises, Cascade Investment, and Bezos Expeditions are usually found among the top five family offices in the world, while the full listing of the top 10 is more open to fluctuation, depending on the ranking metrics. The following is a recent snapshot (as of October 2023) provided by the Sovereign Wealth Fund Institute (SWFI) and based on total assets:

  • Walton Enterprises LLC ($224.5bn) – Walton Family, Walmart
  • Cascade Investment ($170bn) – Bill Gates, Founder of Microsoft
  • Bezos Expeditions ($107.8bn) – Jeff Bezos, Founder of Amazon
  • Mousse Partners ($89bn) – Alain and Gérard Wertheimer, Chanel
  • Ballmer Group ($85bn) – Steven Ballmer, Microsoft
  • Waycrosse ($65.2bn) – Cargill and MacMillan Families
  • Fedesa ($55bn) – Giovanni Ferrero, Heir to Ferrero Group
  • The Woodbridge Company ($53.9bn) – Thomson Family, Thomson Reuters
  • Pontegadea Inversiones ($53.8bn) – Amancio Ortega, Founder of Zara
  • Dubai Holdings ($35.2bn) – Mohammed bin Rashid al-Maktoum, Ruler of Dubai

What Do Family Offices Do?

The services a family office provides are as varied as the families they serve. One ultra-high-net-worth individual (UHNWI) may need investment advice from a team of experts, while the next may only need lifestyle management and household support.

While many of these services can be provided by the office in-house, others may choose to delegate some of these services to outside professionals such as accountants, tax advisors, event planners, property managers, and so forth.

The following is a summary of the major services offered directly by a family office:

  • Accounting: Accounting is a major function of most family offices due to the complexity of their affairs and the number of entities and investments they hold. Family offices may handle the day-to-day accounting, payroll activities, and bill payments of a dozen or more companies.
  • Tax: Likewise, tax affairs for wealthy families are also often complex, relating to dozens of entities and a suite of investments. A significant amount of time and energy is therefore spent complying with tax law and completing tax forms and registrations.
  • Legal: Management of routine legal affairs and compliance is typically overseen by the family office’s corporate attorney, who may then outsource specific legal duties and tasks to outside law firms.
  • Investment Management: Most family offices are tasked with managing the family’s investment portfolio, which may consist of public equities, debt, commercial real estate, artwork, private equity investments, hedge fund investments, venture capital investments, and more. These services are often performed using a mix of in-house and external advisors. Most families’ investment style evolves over time as they become more personally involved and sophisticated, so they’ll bring many such advisors in-house.
  • Acquisitions: While acquisitions are normally handled by the investment manager, Chief Financial Officer (CFO), or Chief Investment Officer (CIO), they are a separate and central theme for us. Many principals are actively involved in any acquisitions they make because they want to stay connected to the industry in which they created their wealth and leverage their existing contacts, knowledge, or public profile. Most founders generated their wealth through entrepreneurship, so they often wish to stay involved in their industry through angel investments, sitting on boards, or making acquisitions.
  • Charitable Contributions/Philanthropy: Coordination and management of the family’s philanthropy, donations, and private foundations is an area of much-needed support for many wealthy families. For example, the Walton Family Foundation employs well over a hundred people to serve their philanthropic activities.
  • Personal Concierge/Lifestyle Management: Most family offices also manage non-financial matters for the family, such as household staff, travel arrangements, dining, and entertainment. Many also oversee private schooling, care of artwork, and concierge duties like personal shopping and correspondence.
  • Personal Property Management: Family offices often handle the management of a family’s personal residences, overseeing cleaning teams and interior designers, utilities and security, grounds maintenance, vehicles, and so on.
  • Education: Another important responsibility for many family offices is to educate the next generations in handling and managing their wealth and investments. This can often take the form of formal classes, tutoring, or lessons that the family office arranges.
  • Strategic Planning: Legacy planning and management (known as strategic or succession planning) ensures the family’s wealth transfer plan is well-coordinated and optimized for its legacy. This is done collaboratively with a team of advisors from each of the key disciplines.

Family Office Investments

As part of their growth and preservation strategies, family offices are seen to launch investment portfolios, including angel investments, private equity, venture investments, hedge funds, real estate, and, of course, investments in private businesses.

Passivity has been a hallmark of family office investment strategies in the past, such as in stocks or mutual funds. But as the super-rich have grown in assets and influence, there’s been a noticeable rise in more active investments among wealthy families. According to a survey by the investment banking firm UBS, more than two-thirds of family offices now view private equity as a key source of revenue for their investment portfolios.

Unlike wealth management firms, family offices count investment management as just one of their services to the family. Wealth managers and advisors are more specialized, but their value is diluted by their responsibilities to multiple other clients, which makes them less likely to give the family the personal and dedicated service they would get from having their own family office.

The Family Office vs. Other Investors

In simple terms, a family office is any firm that invests directly on behalf of its principal. Compared to private equity funds, venture capital funds, hedge funds, pension funds, and university endowments, family offices invest their own capital.

This is the main difference between family offices and other institutional investors and bears repeating – family offices invest their own capital and not that of third parties. Many of the benefits of selling your business to a family office stem from this very distinction.

Family office investment portfolios include angel investments, private equity, venture investments, hedge funds, real estate, and investments in private businesses.

Family Offices: The Stats

A recent Credit Suisse report found more than 50,000 individuals across the world worth more than $100 million. So, they believe family offices are more numerous than imagined, somewhere between 6,500 and 10,500 globally.

Thanks to family offices’ varying structures and definitions, not to mention their fondness for privacy and discretion, it’s difficult to pin down the specifics. If single-family offices and multi-family offices are counted together, the total may be closer to 20,000. Another survey found 79,000 distinct families.

One thing’s for certain: family offices invest with gusto. PricewaterhouseCoopers finds them making over 10% of all investments in startups worldwide, while their collaboration with other investors (or “club deals”) touches 90%. The amount of debt they carry is low, too, equal to about 17% of their assets, which means their participation in global markets is impressively non-leveraged.

Two Types of Family Offices

Family offices fall broadly into two types – single-family offices (SFOs) serving one individual or family, and multi-family offices (MFOs) serving more than one family. MFOs are more affordable thanks to economies of scale.

Family offices tend to start with a minimal staff of advisors or employees, growing as the family’s needs evolve over time. SFOs may begin extending their funds and services to other families or merge to form MFOs, while established MFOs may add to their numbers, too.

Single-Family Office

Single-family offices (SFOs) are established by a wealthy individual or family to manage their family’s wealth. Its staff of experts is tasked with growing and preserving the family’s assets, serving its diverse financial interests, and providing private, professional, and highly bespoke support.

In return, SFOs are costly to staff and operate and are best suited to UHNWIs, whom they sometimes service one-to-one. Tech entrepreneurs are a case in point, with Paul Allen (Vulcan), Sergey Brin (Bayshore), Bill Gates (Cascade), and Eric Schmidt (Hillspire) all founding SFOs to manage their fortunes.

The benefits of SFOs are largely features of their single-ness: their services are tailored to one family and unique to their needs, which reduces conflict and internal competition from similar families and even potential leaks and breaches of sensitive information. Centralization is also a key factor: keeping everything under one roof makes staffing, collaboration, and growth all the more possible and effective.

Multi-Family Office

Over time, as single-family offices grew larger and more akin to businesses in their own right, they began servicing the needs of additional families, hence the rise of the multi-family office (MFO). MFOs also arose as disparate consultants and wealth managers wished to unify in support of other clients.

Like any business, the more a family office can offer, the more it may scale and cost-share among its clients. This brings down overhead for the family and may save them money compared to operating a single-family office.

A multi-family office handles the wealth of two or more families. Its services remain the same as those of an SFO, while its consultants must tailor their advice and solutions across multiple families. The charge for an MFO is usually a percentage of investment assets under management (AUM).

In addition to sharing costs, the benefits of joining an MFO include the sheer variety of experts: arguably, the breadth of their activities, far from representing a conflict, actually brings significant added value to their insights and advice. Bigger isn’t always better, but the scale and fluidity of an MFO may ease staff management, collaboration between teams, and processes at every level.

Other Types of Family Offices

Other types of family offices have emerged, such as embedded family offices (EFOs) and outsourced family offices (OFOs). Both offer flexible alternatives to the primary models.

Embedded Family Offices (EFOs)

EFOs sit within the family business, their assets and activities combined with those of the family business. They are not separate legal entities, unlike SFOs and MFOs.

Outsourced Family Offices (OFOs)

OFOs are networks of professionals and advisors who collaborate on the affairs of a family. One member of the group will often act as coordinator or executor, managing communication and processes across the team.

The defining nature of an OFO is their connectedness – despite being diffuse, they are authorized to consult and collaborate on the family’s business, a more fluid and productive approach than employing individual advisors.

Structures and Governance of Family Offices

A family office is essentially a corporation or LLC or mirrors one almost exactly. The executive team (or C-suite) is employed directly by the entity, often with incentives and benefits tied to the profits and gains they oversee, while managers and support staff are employed in the manner of a typical firm.

To paraphrase Tolstoy, all happy families are alike – but not happy family offices. They are unique to their families, and dealing with them is a non-standardized process. Whatever their primary focus, their teams vary depending on the needs, style, and net worth of the family in question.

Before founding an office, the family must be precise and deliberate about its goals and build its governance and structures accordingly. How will decisions be made? Which members have which powers or competencies? Who can be a shareholder, and can shares be disposed of in the family office? Such questions and more should be tightly regulated from the start.

Another key consideration is management structure. Often, leadership falls not to a family member but to an external manager – sometimes a CEO or executive familiar to the family from its early days. Alain and Gérard Wertheimer, current owners of Chanel, entrust the chairmanship of their family office, Mousse Partners, to their half-brother Charles Heilbronn, though this is fairly unusual.

The History of Family Offices

The First Families

Several wealthy families lay claim to being the first family office in the U.S., but John D. Rockefeller is regarded as starting the first full-service, single-family office in 1882. Like the Morgans and the du Ponts in the same era, the Rockefellers required an office to manage their wealth and drew on the worlds of investment, tax, and law to do so.

Du Pont’s three sons split the management of their late father’s gunpowder mill in 1934, a model that continues today in the division of investment, growth, philanthropy, and executive services.

A Golden Age

Family offices increased noticeably with each period of financial growth. The 1980s saw a massive swell, and when the list of global billionaires grew in the early 2000s, the number of family offices grew in tandem.

Since the tech and start-up boom of the 2010s, family offices have again grown in size and number. It would be difficult to point to a golden age for the family office – but with current total assets estimated to be over $20 trillion, we may be living through it now.

JP Morgan and John D. Rockefeller would perhaps not recognize the numbers, but they would recognize the management styles and structures with Rockefeller’s office still existing today.

The Future of Family Offices

The number of wealthy individuals who manage their assets in this way looks set to continue. The rise of the wealthiest “one percent” is fueling this growth in established and emerging economies worldwide.

The Mutual Benefits of Growth

As service providers tailor their offerings to the needs of family offices, their formation becomes smoother and more practical, and more family offices can grow and flourish.

Then, with their investment strategies developing over time, family offices take more interest in direct investments and M&A, generating higher and higher returns for the family.

Even private equity firms have begun emulating family office structures, with managers encouraged to roll out “long-dated” funds. Imitation and adaptation are indicators of serious competition. In short, family offices are the ones to watch.

Family Offices and M&A

Family offices have moved stridently into M&A in recent years. A PricewaterhouseCoopers survey found annual deal flow totaling $200+ billion in the last five years, while property consultancy Knight Frank pointed to a doubling in London office acquisitions by UHNWIs and family offices in 12 months.

Paul Carbone, co-founder of Pritzker Private Capital, tells Mergers & Acquisitions: “In times of change and challenge, the flexibility and the long-term perspective that families bring can allow them to compete and win even more effectively than in more stable markets.”

Let’s examine some key family offices in more detail.

Bezos Expeditions is the aptly named investment firm and family office through which Jeff Bezos, Amazon founder and aerospace pioneer, manages his personal investments. Established by Bezos in 2005 and based in Mercer Island, Washington, the firm invests in early to late-stage ventures across social media, innovation, transport, and business software.

It manages a portfolio of investments as high-profile as Airbnb, X (formerly known as Twitter), Uber, and The Washington Post, and as altruistic as the Bezos Center for Innovation, a $10 million immersive learning hub at the Seattle Museum of History and Industry. Large-scale recovery efforts are also within scope for Bezos Expeditions, which in 2013 funded the retrieval of two of Apollo 11’s F1 rocket engines from the Atlantic Ocean floor, now on display at The Museum of Flight in Seattle.

Cascade Investment, L.L.C. is the holding company and family office of Bill Gates. Cascade’s interests span hospitality, retail, transportation, and nuclear energy, while its share of Microsoft comprises less than half of Gates’ total fortune.

Alongside a suite of long-term holdings, Cascade makes majority or large-scale share purchases that place it squarely in M&A territory. It took a controlling share in Four Seasons Hotels and Resorts with an additional $2.21 billion in 2021 and maintains the largest bite of Ecolab Inc. and waste management firm Republic Services. Its steady share purchases in Berkshire Hathaway, the $300+ billion conglomerate, have made Gates one of the primary individual shareholders.

Koch Industries, Inc. was founded by entrepreneur Fred C. Koch in 1940 and has been chaired by his son Charles since 1967. This family office is the second-largest private company in the United States, employing over 100,000 people across 60 countries, while Charles regularly finds himself in lists of the 20 richest individuals in the world.

Koch Industries targets mostly manufacturing and electrical equipment, with interests in petroleum, chemicals, minerals, energy, paper, and pulp. Its major acquisitions include Infor, Invista, and Georgia-Pacific, the latter purchased for $13.2 billion in 2005.

MPL Communications handles the copyrights and business interests of Sir Paul McCartney, as well as 25,000 works it has strategically acquired, including songs by Buddy Holly, Carl Perkins, Frank Sinatra, the musical Annie, and standards such as “Stormy Weather.” McCartney, whose personal wealth has grown to $1.2 billion, formed McCartney Productions Ltd in 1969 when The Beatles’ interests began to separate. Headquartered in Soho Square, London, MPL’s picture department is headed by Sir Paul’s second daughter, photographer Mary McCartney.

MPL’s recent subsidiary, MPL Ventures, has begun making non-creative investments, including a stake in vegan chicken start-up TiNDLE, and in Audoo’s public monitoring device, which protects the copyright of artists’ music played in shops, gyms, cafes, and other public spaces. This investment was part of a club deal with other major artists, including Elton John and ABBA’s Bjorn Ulvaeus, and totaled $22 million at the last round.

Pritzker Private Capital manages the investments of the Pritzker Group, founded by Anthony and J.B. Pritzker in 2002. On the back of a holdings empire that has included the Hyatt hotel corporation, Superior Bank of Chicago, and the TransUnion credit bureau, Pritzker has also acquired Valicor Environmental Services, Bardstown Bourbon, chemical firm Vertellus, and a dozen other companies.

For specialization, Pritzker targets two core sectors: manufactured products and services such as transportation, facilities, and critical power. This simple focus allows Pritzker to “guide [their] new investment activity, but also to provide experience and knowledge,” according to the group.

Walton Enterprises manages the personal and business interests of the Walton family, the wealthiest family in the United States. Sam Walton opened his first Walmart store in Rogers, Arkansas, in 1962, and today, the company owns 4,000 branches and 10,500 associated premises worldwide.

As well as handling around 50% of Walmart, valued at $150 billion, the company has acquired or subsumed supermarket chains around the world, including Woolco in Canada (converted to Walmart), ASDA in the U.K., Bompreco in Brazil, and a controlling stake in Massmart, which operates mainly in South Africa and the sub-Saharan countries. Walton also owns over 99% of the Chilean retailer D&S, with plans to purchase the remaining shares.

With current total assets estimated to be over $20 trillion, we may be living in a golden age for the family office.

Direct Investments by Family Offices

What are direct investments?

A direct investment is the act of acquiring an ownership interest in a business without the help of an intermediary such as a private equity firm, venture capital, or hedge fund.

Private Equity vs. Direct Investments

Approximately 80% of family offices hold an investment in private equity, with many allocating 10% to 25% of their total portfolio to private equity investments. By comparison, they may allocate 15% to 20% to fixed-income securities and 30% to 35% to publicly traded companies.

The typical family office makes a few investments in private equity funds per year and maintains active investments in around a dozen at a time. Larger family offices, of course, carry more investments. Given the wealth they control and the concentration of PE investments among their portfolios, their influence in the middle market is difficult to ignore.

Family offices whose primary goal is preserving their wealth may invest in private equity to balance their portfolios and diversify their risk. Those aggressively creating wealth are often more comfortable with industries closer to home, leveraging their sector experience to invest directly in private companies.

Fund vs. Investment Size

While it’s difficult to say how much a family may have under management and how much they plan to allocate to direct investments, the example below illustrates how their total capital could be allocated to each acquisition:

  • Capital Under Management: $500 million
  • Capital Allocated to Direct Investments: 10% = $50 million
  • Number of Desired Acquisitions: 5
  • Average Equity Injection per Acquisition: $10 million
  • Average Acquisition Purchase Price: $15 million to $30 million (the family office may use debt or a seller note to lever the transaction)

The Rise in Family Offices in M&A

The majority of family offices invest a portion of their wealth in alternative assets, such as the acquisition of businesses, real estate, and venture capital. They’ve historically invested in these assets through third-party intermediaries. When it comes to investing in businesses, most family offices have entrusted PE firms to invest on their behalf.

Passive to Active Investing

Investing through third-party intermediaries were passive investments for family offices. They offered no control over their investments, little flexibility, and carried hefty fees. At a certain level of wealth, it makes sense for family offices to build their own team to acquire companies directly to reduce fees to third parties and exert more control over their investments.

As family offices grow more sophisticated and professionalized, many find this route more compelling than investing via third parties. The trend has surged, with some estimating a doubling in the last 5 to 10 years, and the momentum is expected to continue. Family offices comprise about 10% to 15% of buyers in the lower-middle market, while a recent poll found that half intended to make more direct investments in the coming years.

Let’s look at the reasons for this change in more detail:

  • Control: By investing in companies directly, family offices can exert complete control over them, which may allow them to create value for the companies they acquire. Direct investing also provides them with transparency and control over which investments they choose to make. This is in contrast to many PE firms, which require their limited partners (e.g., family offices) not to be involved in the operations of the fund.
  • Flexibility: By making investments directly, family offices can react to changing economic conditions and fine-tune their investment strategy as they see fit. Many family offices’ investment thesis spans a much longer time frame than PE firms, whose funds have a finite lifespan of 10 to 12 years, with even shorter exit plans. Family offices may hold their investments in private businesses for decades, sometimes even across generations. The longer holding periods allow them more flexibility in executing strategic goals and planning their exit.
  • Reduced Fees: Most PE firms charge their clients a 2% management fee and a 20% performance fee (the “2 and 20 model”) and carry interest (a split of profits). By investing in companies directly, family offices can avoid the customary fees. In contrast, a recent UBS Global study of 360 family offices found they paid just 1.17% of their investable assets in total costs. While they must develop in-house experience and bear the cost of researching, transacting, and managing their investments, many find that doing so directly can be far more cost-effective, especially once their capital under management exceeds $500 million. Many smaller family offices are known to make direct investments, too.
  • Higher Returns: By reducing management fees, performance fees, and interest associated with using third parties, family offices can sometimes achieve higher returns.
  • Involvement: Acquiring a company directly allows the principals to become involved in the business hands-on if they wish. Many are former entrepreneurs with expertise in a specific industry and wish to leverage their experience and network. Doing so means another step in their entrepreneurial journey: getting involved with other entrepreneurs and helping them become successful. This allows the principals to not only meet their financial goals but perhaps also their altruistic ones.
  • Competitive Advantage: Many family offices are a preferred exit route for business owners due to their longer-term strategies and more flexible deal structures. As a result, they sometimes generate proprietary deal flow that is not available to private equity firms.
  • Value Alignment: Direct investments allow the family to align their investments more squarely with their values. The traditional barbell approach, in which families generate wealth on one end and then direct it into philanthropic activities, no longer applies. Family offices can design their investments to meet non-financial goals such as social or environmental work. Profits were once divorced from “doing good,” but many firms have learned they can be charitable and generate handsome returns.

Alternatives to Direct Investment

Co-Investing

It’s important to note that there’s more than one solution to the problem of high fees and the lack of transparency associated with PE investments. One popular alternative has been for family offices to co-invest directly alongside private equity firms, venture capital, or hedge funds. While co-investments can be made in debt syndications, bridge financings, structured financings, and equity investments, our focus here will be on acquisitions.

The distinction with co-investing is that the family’s investment is made in parallel with their partner, not through it. The primary advantage of co-investing for family offices is that they can leverage their partner’s resources, such as their experience, professional networks, resources (tax, legal, accounting), or proprietary deal sourcing.

Over recent years, more than 40% of the world’s family offices have co-invested in businesses on a regular basis. While this affords them a reduced fee structure, it doesn’t afford them the benefit of full control over a business, unlike a direct acquisition.

Angel Investing

Another popular alternative is angel investing, in which the family office makes an investment into a business in return for, say, a 10% or 20% stake rather than acquiring it outright.

While the traditional angel may invest $100,000 to $500,000 in a business per round, family offices often make much larger investments, perhaps in the millions of dollars. At this stage, family offices are competing with venture capital funds.

In a recent episode of M&A Talk, my guest Mac Lackey explained that he specifically targets family offices for investment because they offer more flexible terms and deal structures. Mac has founded and exited six companies, and the strategy has served him well.

How Family Office Investments Succeed

The demand for attractive acquisitions exceeds supply and is intense. Family offices must compete not only against PE firms but also with strategic buyers and potentially search funds. Everyone in the middle market is chasing the same deals.

To make successful acquisitions, family offices must fully commit to direct investments and build the right team of experts to manage them. They require the full suite of resources, including legal, accounting, and tax, to intelligently navigate this complex process.

While many family offices don’t have the pedigree of some private equity firms and can’t bring synergies to the table like strategic buyers, there are several ways in which they stand out in the middle market:

  • Experience: Many family offices have significant experience and networks in one specific industry. This is often the industry in which the family first became wealthy.
  • Time Frame: Because family offices aren’t bound by the limitations of third parties, they can afford to commit for much longer time frames, sometimes for decades. As sources of patient capital, they present a viable alternative to the quick flip approach and can decide for themselves when to exit.
  • Decision Making: Many private equity firms must obtain approval from their investment committees before making an investment. Family offices, on the other hand, are often able to make quick decisions without seeking approval from any other party.
  • Flexibility: Most family offices offer more flexible terms than private equity firms, which are limited by the constraints of their fund and must target to exit within three to seven years. Limited time frames result in relatively inflexible deal structures that often don’t meet the needs of entrepreneurs.

Investment Strategy

  • Investment Policy: Not all family offices have a written investment policy. Some prefer to operate in a more agile manner, especially if they’re the key decision-makers in an acquisition. This characteristic underpins an important distinction between family offices and other investors. Because they aren’t bound by a written policy, they may act less rigidly, have more flexible investment criteria, and, as a result, better terms for the businesses they buy.
  • Investment Process: The structure of family offices varies considerably. While some have formal investment teams, others are led by the head of the family, who makes acquisitions alone. Many principals prefer to invest in feelings or gut instinct. On the other hand, there are a significant number of family offices whose management and expertise rival that of the most sophisticated PE firms. It’s difficult to generalize – each employs its unique approach.
  • Sectors: Many smaller family offices target the industry most familiar to them, where they can add value, while larger families branch out to related and, sometimes, unrelated fields. The Rockefeller family moved from oil speculation to distribution, refining, oil and gas, and then to banking, financial services, and real estate. On the other hand, some act more opportunistically, preferring not to limit themselves, free from the constraints of institutional investors. The fields they choose may depend on the younger generation and to what degree they’re involved in direct investments. They may be more comfortable with tech-heavy sectors and prioritize social and environmental projects.
  • Management: Few family offices take an active role in the management of the companies they acquire. For that reason, it’s essential to have a strong team in place to continue running operations or to retain the owner until a successor is in place. Some families refuse to invest in a company unless the founder or president remains, while many work with the management to implement operational improvements, professionalize the business, retain key talent, or add value by other means. Their desire to retain managers can impact the deal structures they propose. As they seek to align the interests of all parties, they may offer incentives for management to continue growing the business.
  • Relationships: Personal relationships can be more important to family offices than to PE firms and can play a critical role in the selection of the target company. This is partly due to their longer holding periods, but also sometimes influences their desire to become involved in the business. To quote the TV show Mad Men, “Half the time this business comes down to I don’t like that guy.”
  • Holding Period: Family offices seek to preserve and manage their assets for the long term. Most don’t have a quick “buy and sell” strategy, and it’s not uncommon to see holding periods of over 10 years. When evaluating potential acquisitions, they tend to focus more on the long-term sustainability of the business than short-term growth potential.
  • Team: Family offices have historically been run by investment managers who may lack industry or acquisition experience. As a result, families looking to make direct investments build their teams by establishing an acquisition department composed of professionals with a background in investment banking, private equity, or corporate development. Many large family offices have teams similar in size and scope to that of medium-sized PE firms. Some involve younger generations who may have roles on the acquisitions team.
  • Club Deals: It’s common for family offices to partner on an investment in the form of a syndicate or “club deal.” Estimates suggest one-third of acquisitions by family offices are made via a syndicate. Those who don’t have significant in-house acquisition expertise may partner with larger families to benefit from the size of their teams. Doing this not only increases potential deal flow and access to investments but also allows the families to pool their expertise and capitalize on one another’s experience. Of course, club deals can increase the complexity of execution due to the number of decision-makers involved.
  • Non-Financial Objectives: For nearly all investor groups, socially responsible investing is no longer rhetoric but action. Family offices are no different. They’ve learned to meet both their financial and non-financial goals, a trend that’s set to continue into the future.

A typical family office allocates $50 million to direct investments, with an average equity injection of $10 million.

Advantages and Disadvantages of Selling to a Family Office

Before deciding to sell your business to a family office vs. another type of buyer, you should consider what it’s like to work with one. The following is a summary of the main advantages and disadvantages to consider before partnering with a family office:

Advantages of Selling Your Business to a Family Office

Flexibility

One of the main advantages of working with family offices is that, on the whole, they tend to be much more flexible, especially when compared to private equity firms. This is because they don’t have outside investors or other third parties to please and aren’t bound by pre-determined investment timelines.

This flexibility can manifest not only in the types of businesses they choose to pursue but, most importantly, in their ability and willingness to creatively structure the deal and make decisions on their own exit options and timing. Do you happen to own a business that creates edible chocolate shoes? This might be off the radar for a PE firm or other institutional buyer, but it may be exactly the unicorn a family office is in the mood for.

This can be of great benefit to sellers, as many are unwilling to sell to a PE firm due to the presence of one or two inflexible or unacceptable terms in their letter of intent. A family office, on the other hand, can often restructure the deal to meet the seller’s needs.

Certainty of Closing

Another major benefit of selling to a family office is that they often have access to a significant amount of capital, meaning they are frequently less dependent on debt to close a transaction than other institutional investors.

Holding Period

Family offices usually employ much longer time frames than other institutional buyers and think in terms of generational wealth as opposed to shorter-term quick flips. Rockefeller Capital

Management, for example, was originally founded in 1882 and has now served multiple generations of the Rockefeller family.
For an extreme example, we can look to the ancient state of Japan. Kongo Gumi was founded in 578 with the construction of the Buddhist Shitennoji Temple in Osaka, Japan, which still stands to this day. The family wealth continues, too – they’ve built numerous buildings and castles over the centuries and are now serving their 40th generation, more than 1,400 years later.

While Western family offices can’t compare to the ancient histories of their Far Eastern counterparts, they’ll continue serving multiple generations to come. This is in strong contrast to private equity firms, whose typical holding period averages about five years.

Keeping the Name Alive

The holding period can be an important consideration for entrepreneurs who want a buyer to maintain their legacy, for owners whose name is on the door, or for those who care deeply about their employees and customers. While a shorter holding period won’t necessarily tarnish one’s legacy or name, the swing for the fences mentality that often comes with shorter time frames is inherently riskier. On the other hand, when you swing for the fences, sometimes you hit a grand slam home run, so it’s worth considering the tradeoffs.

The longer-term perspective that family offices consider manifests in a variety of ways. Most notably, it allows them to be more flexible because their decisions are less bound by time. Kongo Gumi, now in its 15th century of operations, likely doesn’t base its decisions on the short term.

A second benefit to consider is that a longer holding period naturally shifts one’s focus to the core value proposition of a business and to what extent it may be tenable in the long run. As a result, family offices tend to focus much more on the long-term viability of a business, as opposed to the ability to flip a business in a few years.

Non-Financial Benefits to the Seller

Another benefit of working with family offices is their often deep industry experience and contacts. This is of prime importance to entrepreneurs who plan to continue working in their business and especially those who’ll retain some equity post-close.

Imagine you’re in retail and you managed to sell your company to Walton Enterprises (Walton Family, Walmart), or if Cascade Investments (Bill Gates, Microsoft) or Bezos Expeditions (Jeff Bezos, Amazon) acquired your tech company. It’s likely they’d bring substantial sector experience, resources, know-how, and other priceless and intangible value to the table.

While financial value is fungible and, therefore, easy to replace, non-financial value is difficult to measure. It’d be hard to put a number value on the examples above, so it’s crucial that you take the time to adequately diligence any non-financial benefits you may receive before you commit to accepting the deal.

Many founding family members have created their net worth through entrepreneurship. Principals often have deep experience in one industry and may have access to relationships and other resources not accessible to others. Even if you own a thriving independent record label, it’s likely that MPL Communications, founded by Paul McCartney of the Beatles, can bring even more marquee names to the meeting.

Many of these entrepreneurs’ wealth has been created from building the same types of middle-market companies as yours. This can be an enormous benefit to you if you want to retain some ownership moving forward.

Non-Financial Benefits to the Buyer

Many family offices also consider non-financial benefits when assessing a business, especially if they touch on areas of particular importance to any of the founding principals.

Family offices may value a business that’s good for the environment or one that creates positive social changes. If you own a business that offers benefits that are unlikely to be valued by financial buyers, then a family office may be the better fit.

On the other hand, non-financial metrics can lead to some family offices rejecting profitable businesses that conflict with their goals. You can capitalize on a family’s non-financial objectives by framing your business in terms of their passions.

Speed

One of the other major benefits of working with a family office is that they often move with greater speed than other types of buyers. Family offices are much leaner because many don’t have a formal mandate, investment committee, or third parties involved in the decision-making process and, as a result, move faster. Movement can be particularly swift when a principal endorses a potential investment.

While this is true the majority of the time, chasing too many opportunities with a lean staff is known to slow some family offices down.

Disadvantages of Selling Your Business to a Family Office

When working with family offices, you may encounter some unique challenges and disadvantages, including:

Organization

Depending on the size of the family office, there may appear to be a lack of organization. This is largely due to leaner organizational structures and less manpower than other institutions. If the principal is involved in the decision-making process, they can become a bottleneck due to multiple conflicting demands on their time. They might also appear to be running in several directions at once – understandable considering the size and range of their portfolios.

Focus

Most principals have a wide variety of interests. From unique real estate, to fine art, to yachts, to helping their local or global communities, they have a boundless appetite for pursuing their passions. The more interests they have, the more likely they are to let one go if it represents a clash or a drain on their time.

Between his family office and companies such as Amazon, Jeff Bezos has made well over 100 acquisitions. While not all family offices and their companies are this acquisitive, the wealthier a family is, the more likely they are to have a diverse range of interests, and the more difficult it will be to attract and retain their focus.

Unfortunately, a principal can also lose interest in your business if they’re already chasing dozens of other passions. The antidote to this, of course, is to always position your business to align as strongly as possible with the family’s deepest, unswerving passions and values.

Negotiating Leverage

Perhaps the most potent and expensive downside to negotiating with (note, not selling to) a family office is that they don’t have to do the deal. Open any book or read any article on negotiating, and one of the first concepts you’ll encounter is optionality. The fewer options you have and the stronger your need for a particular outcome, the weaker your negotiating leverage. Likewise, the more options you have and the stronger your willingness to walk away from a deal, the stronger your negotiating power.

When it comes to negotiations, the antidote is in a phrase you’ve likely heard, coined by Roger Fisher and William Ury’s 1981 bestseller Getting to Yes. That phrase is BATNA or Best Alternative to a Negotiated Agreement. It means you should work to secure the best alternatives to the negotiation you can and be willing to face any scenario you meet. You should want to sell but not have to sell. In other words, never let the shark smell your blood unless that is, you happen to be riding on a 1,000-horsepower jet ski.

Fortunately for them, few family offices have to do a deal, and the majority have an infinite number of options they can pursue. If the deal doesn’t close, it’s unlikely to impact their lives or revenue. As a result, family offices are known to drag their feet and use their leverage to their advantage. As the seller, the only cure is to likewise develop your options.

Family offices bring a range of benefits to the seller, such as industry experience, longer holding periods, swift decision-making, and flexibility.

Considerations When Selling to a Family Office

Family offices differ significantly from other investors in the middle market. Selling to one presents unique considerations, especially to owners of family-run businesses.

Family offices are now going toe-to-toe with corporate buyers on many deals. The more family offices compete for acquisitions in the middle market, the wider the pool of buyers, which can potentially result in a higher purchase price for the seller.

Let’s explore some of the major factors you should consider before selling your company to a family office.

Variety, Diligence and Transparency

It’s difficult to generalize about family offices, and investment styles differ greatly from family to family. To further confound matters, their structure, acquisition criteria, and shareholder mix are opaque at best and sometimes entirely secret.

While this article aims to be as specific as possible, you must spend time adequately researching and assessing your target family office to ensure your values and objectives align and that the family is indeed financially capable of closing on the transaction.

As a seller, you must also be on the lookout for investment firms who claim to be a “family office” for the associated cachet and privacy. When evaluating the financial qualifications of a family office, I recommend asking for proof of funds as early in the process as possible. I also recommend asking how their management team is incentivized, as some may mirror private equity firms’ incentive strategies, which can run counter to your investment horizon.

Time Horizon

While we explored the benefits of longer time horizons earlier, it pays to consider some of the implications these have on the deal process and subsequent ownership of the company.

One of the major implications of their longer time horizon is that they aren’t compelled to exit again in any defined period and don’t operate under any artificial timelines, unlike private equity firms. This approach can better align with entrepreneurs who wish to stay involved in their companies.

This can also have a tremendous impact on the business, which can now afford to stay focused on long-term objectives that may not have an immediate payoff, such as pursuing organic growth. It also relieves management of having to prepare and execute an exit strategy just a few years down the line, as opposed to maximizing long-term profitability for the company. As a result, they aren’t constrained by investment cycles and accelerated liquidity plays and can remain a stable, long-term investor.

Time to Grow

A longer time horizon allows management more time to implement growth strategies and to ride out a volatile economic climate. During periods of economic uncertainty, family offices may double down as a show of faith in management and the business.

This also removes the pressure on management to arbitrarily sell companies due to time constraints, even though they have significant unrealized growth potential and lots of runway left. A family office can continue owning a business as long as opportunities for growth remain.

Private Equity Response

Private equity firms have become attuned to this concern that family offices have longer time horizons and have responded by creating “fundless” or “evergreen” investment vehicles or by investing directly into companies alongside their limited partners as co-investors without the limitations of a specified time frame.

Family offices are designed to protect and grow wealth for future generations, which helps align them long-term with the companies they acquire.

But just because family offices have a theoretically infinite holding period doesn’t mean they will remain indefinitely. Just like PE firms, family offices can also act opportunistically. The difference is that family offices don’t have to exit in a defined time period, which is in stark contrast to private equity firms.

Leverage (Debt)

Because family offices are more focused on wealth preservation than capital appreciation, they tend to use significantly less leverage than PE firms. While leverage has the benefit of a disciplining effect and magnifying returns (and also losses), the use of debt increases risk. If you wish to remain with your company post-sale, you should carefully consider the implications of adding a significant amount of debt to your company and the impact this may have on your management team and the business.

Their Exit Strategy

Many family offices don’t need a defined exit strategy to buy into a company. If you own a business in an industry that has few attractive exit options, then a family office might be the most logical buyer. Family offices have a strong appetite for healthy businesses that produce consistent profits and dividends, and unlike PE firms, they don’t always require a clear path to a highly lucrative exit.

Your Exit Options

Before deciding to sell your company to any buyer, you should carefully consider how involved you want to be in your company after the sale. Your decision will have major implications in both the type of buyer you choose and how you decide to structure the deal.

While family offices offer many benefits, their ability to hold the business long-term can present a serious downside, as it results in limited cash-out options for other owners of the company. This can be a drawback for owners who wish to sell a portion of their company now and then achieve a second, possibly larger exit, a few years down the road. While this is a common exit scenario with PE firms, it’s far less common with family offices.

Remember Incentives

Time frames also come into play when designing an incentive scheme for the management team. After all, most equity holders, such as yourself and management, look to a liquidity event, such as a sale, to take advantage of the equity they accrued in a company. Without a possible liquidity event in the future, it can be hard to incentivize yourself and management to continue growing the business for the long term.

Re-Investments

Private equity firms often have limitations on the re-investments they can make in their portfolio companies. While your company may be on a strong upward trajectory, it may be precluded from doubling down and investing further due to the finite lifespan of the fund.

Family offices, on the other hand, are often willing to double down on their investments and aren’t limited from doing so by arbitrary, external demands. They also often have the cash to re-invest and don’t always need to obtain debt to continue scaling the company.

Target Returns

Because family offices primarily focus on wealth preservation, they demand lower returns. Private equity firms can be limited by how much they can afford to pay for a company because they must aim to meet or exceed their target internal rate of return (IRR). Several PE firms have told me they were at the limit of what they could invest and would fail to meet their target IRR if they made an investment. This occurs far less frequently with family offices.

Involvement and Expertise

Many founders are more comfortable working with other founders. If you’re looking to stay involved in your business after the sale, then it may be advantageous to work with a founder who has significant experience in your industry.

Note that the level of involvement of the founding members of the family office will greatly depend on how they’re structured and the degree to which the principals wish to be involved in the businesses they acquire. If in doubt, simply ask. Some family offices are operators at heart and seek to maximize the value of the businesses they acquire by becoming more involved, while other families take a hands-off approach. In the best cases, there are synergies between the family’s other businesses, which can add significant value.

Management Style

The management of businesses by family offices also varies wildly. In most cases, families won’t micromanage their investments and prefer not to become involved in the day-to-day operations of the businesses they acquire. Rather, most will seek to add value if they can and step out of the way if they can’t.

Most family offices have a relatively hands-off management style and prefer to manage the business at a high level by installing proper corporate governance structures, creating metrics to manage the business, and ensuring incentives are aligned between the family office, the management team, and employees. Newer family offices are less predictable and may be seeking to establish a set of processes and tools to manage their investments, and change may be more likely as a result.

Resources

Most family offices have a leaner staff than private equity firms and strategic buyers. They are also less likely to employ outside professionals or advisors to assist with their investments. Private equity firms are well-known for frequently bringing operational specialists, advisors, HR professionals, and insurance and banking relationships to the table, while family offices generally do not.

This approach carries both advantages and disadvantages. The primary advantage is that fees are lowered post-closing, which is a benefit if you retain some ownership of the business after the closing. Another advantage is that fewer people will be involved in the business, which may be appealing if you prefer to stay involved. On the flip side, the biggest disadvantage is a less extensive roster of resources, which are useful when quickly scaling a company.

Relationships

Because most family offices invest for the long haul, they are particularly sensitive to the importance of the relationships in the companies they invest in. While relationships are important to other institutional buyers, they are far more important to family offices, especially in cases where the principals may work to grow the business post-close.

Family offices will pay particular attention to the seller’s personality and ethics, especially if the seller will continue to operate the business. Likewise, the family will look to the strength of the management team and is commonly known for using personality tests and other tools to ensure long-term alignment. When selling your business to a family office, it pays to build relationships with anyone you interface with to make sure your objectives agree.

Soft Factors

Now that you’ve examined the finances, structures, and value alignment, it’s useful to consider the soft factors, which are the overlooked but no less significant advantages of selling your business to a family office.

Fairness and Decency

One such benefit is that family offices can be a pleasure to deal with. They are professional and accomplished, well-funded and well-resourced, and invariably decent and fair-minded in their dealings with the businesses they acquire.

Fair-mindedness is probably a feature of their dual nature – every transaction they make reflects not just a business but a family. So, they have little time for pedantic demands and tricky maneuvers, and intimidation and dishonesty are rare. Professional buyers, on the other hand, can be known for all of these, while less experienced buyers can slow the acquisition process with micromanagement or fuss-budget terms.

Stability and Respect

A fluid, frictionless closing is the goal for all parties, and family offices offer many welcome traits in this regard. They’re long-termist, non-pushy operators who respect a seller’s outlook, their achievements to date, and the company culture they’ve developed along the way. Added to this, the time horizon and freedom from compliance and disclosure discussed above and family offices become a no-brainer for many sellers.

A long-term investment means a close, committed relationship – which in turn depends on fairness and understanding between parties. It’s in a family’s interest to proceed equitably and to negotiate a post-close period that’s free from disruption, instability, and unnecessary change. Business owners who’ve invested their lives in a company will find family offices share those same values and treat everyone involved – from customers to stakeholders – with the respect that’s taken them this far.

Deal Structure

As well as becoming more ambitious and sophisticated dealmakers, family offices can be significantly more creative in their deal structures than other institutional buyers. Because they aren’t bound to third parties, they can afford to propose deal structures that flex and bend to meet the seller’s needs, which enhances their chances of a winning bid, even when their purchase price may be lower.

Family offices also employ a broad range of structures to incentivize and align the management team, creating an ownership mentality as opposed to an employee mentality. They will commonly grant the management team equity or create equity-like incentive programs to motivate them to continue growing the business.

Legal Structure

When it comes to how the transaction is structured from a legal perspective, most family offices use a typical two-tier holding structure like this:

Family Office Entity > Holding Company Entity > Acquisition Company Entity > Target Entity

The family office acquires the target through an acquisition company established for the sole purpose of acquiring the target. The acquisition is owned by an intermediate holding company held by the family office. While not a significant factor, this structure is worth bearing in mind to save any confusion later.

If you own a business with few attractive exit options, a family office might be the most logical buyer.

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Additional Resources on Family Offices

Annual Reports

  • Agreus Annual Global Family Office Compensation Benchmark Report
  • Campden Annual Family Office Report
  • Caproasia Annual Global Family Office Report
  • CitiBank Annual Family Office Survey Report
  • Deloitte Family Office Report
  • First Republic Annual Family Office Report
  • Hubbis Global Family Office Report
  • KPMG Annual Global Family Office Compensation Benchmark Report
  • PWC Annual Global Family Office Survey Report
  • UBS Annual Global Family Office Report

Books on Family Offices

Family Offices Database

Podcasts

Conclusion

Family offices are a dynamic force in modern investing and increasingly so in M&A. But the picture we have of them – the Waltons and the Rockefellers, Bezos Expeditions, and Mousse Partners – is only the start of the story.

If you and your business are fortunate enough to catch the eye of a leading family, it’s time to open the champagne – your success is now linked to theirs. But there are anything from 6,500 to 20,000 family offices worldwide, many of them smaller and no less capable of changing your life as an entrepreneur.

With the rise of the super-rich and structures and collaborators changing to accommodate them, family offices can only increase in number and influence. Armed with the insights and advice in this article, you’re now ready to communicate, collaborate, and negotiate with family offices and come away from your dealings with them in the strongest possible position.

Good luck – it’ll be an inspiring ride!