Perspectives from ISB

Like many family business owners, Phil Dudderidge reached the point where he wanted to take some value out of the enterprise that he had built up over more than two decades. Mr Dudderidge, executive chairman of the company, Focusrite, describes his decision to float it on Aim, the London Stock Exchange’s junior market, in late 2014 as “de-risking, from a personal standpoint”. Focusrite makes audio equipment for both professional and bedroom musicians. Mr Dudderidge, a former audio engineer for Led Zeppelin, bought the company’s assets out of liquidation in 1989.

The IPO route does not appeal to all family business owners, however. They can be reluctant to dilute family ownership, because of the potential loss of control, and stock market investors sometimes worry that the families might be too self-interested to ensure good stock performance. Despite the misgivings on both sides, there is evidence that an IPO can be good for both the family business and for its investors.

In Mr Dudderidge’s case, the decision to pursue a listing came as he approached “what might be called a retirement age”. He began to think about how best to pass on his family wealth, adding: “I’m not planning to retire but you never know when nature might decide these things for you.”

Weighing how to reduce his family’s ownership, he decided an IPO was preferable to a takeover by a competitor, because he did not want to sell the whole company. He also wanted to avoid bringing in a private equity investor because that route would not fit with the company’s debt-free business model.

Focusrite has performed well on Aim. Its share price has more than doubled since IPO, making it a positive example for those who argue that founder-owned companies perform better as public companies. Not every IPO experience is so smooth for a family business, however.

Those running or working with family businesses argue that when pitching for external investors, it is important to be sure of the investment proposition. “If you are taking your company to market as a growth stock, you have to believe your growth story and be confident that you can demonstrate [it] for years to come,” says Mr Dudderidge. His tips for a successful listing include picking your advisers carefully, and deciding whether you are offering share price growth or income to potential investors.

When family businesses do decide to bring in a private equity investor or to place shares with chosen institutions at IPO, it is important to make sure that any major external investors are a good cultural fit, says Elizabeth Bagger, executive director at the Institute for Family Business, a UK industry group.

Differences of opinion among family members on whether to accept external investors are common. One way to resolve such disputes is to set up a kind of internal share market to buy out relations who do not want to proceed to the public market, says Ms Bagger.

Source: Smith, Ian., January 29, 2018;

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