Perspectives from ISB

With the passage of President Donald Trump’s tax plan, family-business entrepreneurs seem to be getting a big bump in social investment and corporate growth. Yet this tax overhaul isn’t without its problems. Especially when it comes to the private-equity space, the plans to limit deductions on debt interest can actually hurt family-business entrepreneurs who rely on this forward-focused capital in order to innovate and expand. With both possibility and uncertainty on the horizon, family-business entrepreneurs need to better understand the resources that private-equity firms offer as they prepare to forge ahead.
Historically, many firms in the private equity industry suffered from negative reputations, which were based on companies that “stripped and flipped” investments. Those firms’ emphases on short-term returns — and disregard for stakeholders — gave many in the field a bad rap and led to some misconceptions that are contrary to what most PE investors actually accomplish for entrepreneurs and family businesses.

Still, some industry insiders believe that PE firms don’t support existing management teams or cultures at the companies in which they invest, while others are skeptical of PE investors because they have reputations for overleveraging companies. While PE firms are largely constrained by strict regulations from both the government and lenders, these fears are relevant.
Private equity investments can serve as catalysts for growth and product development for family-business entrepreneurs by helping bring precision and accountability to those companies. Family-business entrepreneurs often fail to govern themselves well, and their output suffers as a result.

On the other hand, PE firms understand the importance of good governance and can help such companies implement strategies such as a value-added and independent board of directors, audit and compensation committees or even conduct third-party reviews of existing strategies. As a result, the company’s leadership will be better equipped to identify risks and make smart, goal-oriented decisions within their marketplace.

Moreover, family businesses can benefit from PE firms’ expertise in the areas of strategic planning, financial management and controls and shoring up companies for sustained success. Most PE firms maintain relatively small portfolios, so they can invest significant resources into engaging their companies and working with them on value creation and long-term planning. By instituting top-to-bottom incentive programs, private equity firms can drive increased productivity throughout the organization.

Taking private equity can provide a great boon to your family business, but it is a major decision. The better you know your company’s strengths, weaknesses and goals, the more likely you are to find a partner that will help you achieve your vision.

Source: Johnson, Jeff., January 29, 2018,

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