Addressing the 'missing middle': Financing growth

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Financing growth is a recurring challenge for the family firm, and an area of concern flagged consistently in our Family Business Surveys. In this year’s results, 76% of the respondents looking to grow significantly said they would be relying on their own capital, at least in part, to do that. Some have no doubt chosen to do this, preferring to finance themselves rather than relying on banks, or external investors who might want a measure of control.

As María Sanchíz, Family Business Leader, PwC Spain says, “In Spain, many family firms prefer to use their own funds – they don’t want to expose the firm by taking out a loan and they think the best place to invest their money is in their own company. But that presents a very real risk: if something goes wrong, all the family’s wealth is at risk, as well as the business.” 

“We were one of the first Indian firms to get PE funding in the late ‘90s, when India first opened up to foreign direct investment. But we thought about it carefully before we did it: we sat down as a family to discuss it because we knew things were going to change radically, and we’d have to be even more accountable, and willing to adapt. We also knew that PE work to a very different timescale to families: PE houses are looking for a quick return on their money, and I’m glad to say that every PE investor we’ve had has achieved a good exit price. That’s why our share price is so high: we do what we promise.”

Shobana Kamineni Executive Vice Chairperson, Apollo Hospitals, India

Some external providers of capital may be more focused on generating short term returns which may not fit the long-term perspective of the family business, so finding the right provider to fit the 'patient capital' model is key. However, using their own funds is not always a deliberate choice. Many family firms have been forced to draw on their own resources because other types of finance are either unavailable or too expensive. Again, robust strategic planning will help family firms bridge the gap to future growth, as this will help to determine whether the business has the appropriate capital structure and access to the funding it would need to take advantage of future opportunities.

The importance of aligning the business strategy with the owner and family strategy cannot be under-estimated. If there are many dependent shareholders with diverging needs and priorities, this may affect the willingness and capacity of the business to invest in new ventures or drive fundamental change.  Making the decision to go to the capital markets for funding, or look for other private investment, is a complex process with significant implications for the owners of the business, which demands exceptionally clear and comprehensive communications within the family.  

At a more immediate and tactical level, family businesses need to consider issues such as whether they can free up more capital for investment by ensuring they have optimised their working capital.

Furthermore, family firms need to ensure their funding is on the right terms, and that its source is secure if circumstances change, whether inside the business, or outside in the market. 

“Trio already has a strong financial partner in Sberbank, but a full share listing is the longer-term goal. The process of preparing for a listing will mean an even higher degree of transparency and discipline, which is only a positive.”

Uvarkina Evgeniya CEO, TRIO Group, Russia

Navigating the ‘no go zone’: Managing family wealth

by Stuart Morley, Head of Wealth, Private Clients, and David Smorgon OAM, Executive Chairman, Family Advisory, PwC Australia

Intergenerational wealth transfer involves a raft of personal family issues, and in our initial engagement with a family, we often find that the family is not communicating regularly on matters relating to improving, preserving and protecting the family’s wealth. There is, in effect, a ‘no go zone' where issues like wealth and ownership cannot even be raised. This leads invariably to different people having expectations and a different sense of entitlement, which in turn leads to fixed positions, jealousies, and potential conflict.  This ‘no go zone’ is alive and kicking even in the largest and wealthiest families. Many of these families have regular social events and get-togethers, but that’s not the same as sitting down to discuss the hard issues.

But it’s not easy for families to start the process: it takes courage to take this step. But doing so will ensure family harmony and continuity, make it easier to protect relationships, facilitate succession planning, and work together more effectively.  It’s a challenge to find the successful family formula, but it can be an even bigger challenge to preserve the family wealth.

There’s an old cliché that families make money in the first generation, enjoy it in the second, and lose it in the third. But there’s a good reason why that’s become a cliché: all too often it’s true.  There are all sorts of reasons why this happens – from over-leveraging to accelerate growth, to over-spending on personal lifestyles, to matrimonial disputes, to putting ‘all the eggs in one basket’.

Many family firms invest for the long term as they are not dominated by short-termism, unlike many public companies. But even where family firms diversify their balance sheet, they don’t diversify where they invest their wealth, which leaves them with a disproportionate exposure to one single asset.

There will always be forces outside your control that even the best planning won’t protect you from, be it a change in government regulation, obsolescence, technological development, market and product disruption, or sovereign and political risk. That’s why every fund manager will say you need to spread your risk, but too many family firms don’t apply this basic principle to the money they have in their own firm. Some of this is for emotional reasons – owners are understandably attached to the business they’ve built. If they weren’t, they wouldn’t have been a success in the first place. But it’s important to strip out the emotion when it comes to a wealth preservation strategy. So consider the ways in which you may be able to release funds for the benefit of the family, such as a partial sale, recapitalisation or bank loans.

Many family firms take the view that they will get higher returns from their own business than any fund manager could give them, especially after tax and fees are taken into account. And this can often be true. But diversification is just as important, to ensure long term and stable returns, and we often find owners shifting to this point of view as they near retirement and start considering the income they need to fund the lifestyle they want. That’s a good time to look at all the options, in the context of effective succession planning, and to achieve a successful transfer of wealth between the generations.

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Case studies

Learning as you grow: Strategic planning in Russia

Learning as you grow: Strategic planning in Russia

Trio is a Russian agribusiness company founded in 1997 by two entrepreneurs as a grain and sugar-trading venture. In 2003, the company ventured into the agricultural business. Today, Trio is a multifaceted enterprise, with turnover exceeding US$100 million, and is one of the leading suppliers of potatoes to Frito-Lay/PepsiCo. It has also diversified into grain, sugar, dairy and potato production.

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From private firm to private equity: The cycle of growth in India

From private firm to private equity: The cycle of growth in India

Apollo Hospitals is one of the leading hospital chains in India, with an international reputation and an outstanding track record in harnessing the power of new technology. The business was founded by Dr Prathap C. Reddy in the 1980s, when he returned from working in the US and saw how far Indian healthcare was lagging behind. He galvanised a group of doctors from across India and beyond to invest in a hospital, and it opened in Chennai in 1983.

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‘Changing the way the world sleeps’: Innovation and reinvention in the UK

‘Changing the way the world sleeps’: Innovation and reinvention in the UK

The Harrison Spinks bed business is now into its fifth generation with three generations still involved in the business. Harrison Beds spent the majority of the 20th century as a mid-range mattress manufacturer, with a solid reputation and solid returns, though very little real growth. Then the ‘90s recession hit and the business suddenly found itself in trouble.

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Breaking new grounds: Managing and mentoring in Canada

Breaking new grounds: Managing and mentoring in Canada

Mother Parkers is one of the largest coffee and tea suppliers in North America and can trace its roots back to 1912. With Paul and Michael Higgins at the helm of the family business, they have recently sought to professionalize the organization by bringing in a President from outside the family.

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Contact us

Peter Bartels

Global Entrepreneurial & Private Business Leader, Partner, PwC Germany

Tel: +49 40 6378-2170

Peter Englisch

Global Family Business and EMEA Entrepreneurial and Private Business Leader, PwC Germany

Tel: +49 201 438 1812

Siew Quan Ng

Asia Pacific Leader, Entrepreneurial and Private Clients, PwC Singapore

Tel: +65 6236 3818

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