Before a family business invites an outside shareholder

An outside shareholder will ask questions that a family business may have managed informally for years. Who can commit the company? Which arrangements involve family members? What happens when shareholders disagree about the use of profits?

Discussing those questions before a transaction gives the family more room to make considered choices. During negotiations, the same uncertainty can affect the timetable, the proposed terms and the confidence of both parties.

Agree what the family wants to retain

Start with the purpose of bringing in capital. Funding growth, providing liquidity to existing owners and financing a change in ownership create different discussions. Family members need a shared understanding of the objective before advisers prepare a proposal.

Explore the practical implications of an outside voice. Which decisions will the investor expect to influence? What reporting can the business sustain? How will the family handle a proposal that supports growth but changes a long-established practice?

These discussions should inform the negotiations. Legal advisers then need to translate agreed rights and responsibilities into the appropriate documents. A general preference to retain control is too imprecise to do that work.

Examine the business as an outsider would

Prepare a clear view of ownership and the entities involved. Identify where important assets, contracts, employees and liabilities sit. Explain the relationships between the operating companies and other family interests.

Review transactions involving owners and connected parties. Establish what arrangements exist, how they are documented and how they affect the figures presented. The aim is to let a prospective shareholder understand the business on a consistent basis.

Where a matter requires legal, tax or accounting interpretation, involve the relevant specialist early. Do not leave a structural question hidden inside a marketing presentation.

Test reporting before promising it

Take a recent month and assemble the information management would be prepared to give a new shareholder. Can the team explain revenue, margins, cash and material risks using consistent definitions? Can it identify the source of a number without rebuilding the analysis?

An illustrative group may report strong consolidated profit while its operating entities rely on repeated cash transfers from the owners. An investor will need to understand both the earnings and the funding pattern. One does not explain the other.

Use the exercise to identify gaps in the information and the work required to maintain it. Agree who will own the process after an investment.

Before approaching an investor, the family should be able to explain what it seeks, how the business works and how decisions will be made together. Preparation makes room for a more useful negotiation about the opportunity itself.

Nasaq Partners works with a network of experts on governance, strategy and execution. Explore our advisory services.