John Polizzi is a certified fraud examiner and a Partner at Gryphon Strategies. John works with institutional investors and private funds during their analysis of new opportunities. He also leads Gryphon’s asset investigation projects and has assisted Gryphon’s clientele in the identification of millions of dollars’ worth of collectible assets in the U.S. and abroad.
In recent years, private equity firms have become increasingly attracted to family-owned businesses. So much so that some firms have created investment funds strictly targeting family or entrepreneur-backed businesses. The reasoning behind this investment strategy is easy to understand. Family businesses are founded with a long-term vision and a focus on establishing strong customer relationships. In addition to these inherent strengths, family businesses continue to prove themselves as economic engines for growth. A recent study summarized that family businesses generate over 60% of the U.S. Gross Domestic Product (GDP) and create nearly 80% of all new jobs within the U.S. workforce.
Complimenting these advantages is a growing willingness on the part of family business owners to entertain private equity offers. A 2023 survey of 200 family owned businesses by PwC asked whether the owners would be open to a private equity investment. A resounding 90% of the respondents said yes. While this may be due to a changing perception of private equity partnerships or a greater flexibility in financing terms, other reasons for accepting a private equity investment may be more problematic.
Family Capital, a publication focused on the global family enterprise sector, reported that only 27% of family businesses have established plans for continued success following the exit of company founders. Additionally, the aforementioned studies note that only 30% of family businesses survive their first ownership transition and that nearly 50% of family business owners planning to retire within the next 5 years are without a proper succession plan.
With this in mind, diligent investors are routinely seeking more intelligence around family dynamics and potential succession plans of a business before closing on an investment. Although professional and reputational concerns over an investment in a family business can be situational, there are several categories and questions that a potential investor should take into consideration. Below, we break down some of the most common questions that Gryphon aims to answer when assisting clients with pre-investment due diligence into family-owned businesses:
| Succession Planning Are customers and employees loyal to the founder or the enterprise? What will happen when they depart? Is there a succession plan in place? If so, what is the reputation and skillset of the company’s future leaders? Are they prepared to run the business or will there be a loss of expertise? Are key stakeholders aware of the current succession plan and in agreement over the future of the company? | Company Structure and Policy Does the company have a formal set of policies and business practices? Is the company following standard accounting and human resource protocols? Is leadership taking steps to ensure the company is innovating and keeping up with industry standards? Is expertise and/or power concentrated within select individuals? What does this mean for the business and the private equity investor? Is there any evidence of self-dealing within the company’s leadership? Are founders utilizing company assets for personal use? Are there controls in place to prevent fraudulent practices? |
| Family Politics Are there any known issues between family members involved in the business? What are the family dynamics/causes of friction? How entrenched are problematic family members within the company’s operations? Where do these individuals see themselves post-investment? Is there a toxic culture within the company? Are there perceptions of nepotism amongst staff and clientele? Are stakeholders aligned or is there a dominant shareholder leading the company? Is there a way to foster collaboration between family members that do not plan to exit the business? | Overall Reputation How is the company viewed by employees, customers, vendors, and others in the industry? How does the firm compare to its peers? Has the company been subject to regulatory violations and/or past workplace issues? What was the cause of said issues? How were they resolved? Is there a perception that the matters were handled appropriately? Has the company been involved in prior litigation? How does that litigation impact the reputation and future business prospects of the organization? |
As a trusted advisor to private equity firms and alternative investors across the globe, Gryphon combines comprehensive public record due diligence with human source interviews to gather answers to these delicate, but crucial, questions. For more information on Gryphon’s services and expertise, please visit us at www.gryphon-strategies.com.
