From the July 1997 issue of Entrepreneur

In the past few years, family businesses and private investors have begun taking sidelong glances at each other--something they've rarely done before. The reason: They're beginning to need each other.

The good news for family businesses is the investment capital pool is getting deeper, according to François de Visscher, president of de Visscher & Co, a Greenwich, Connecticut, company that specializes in finding capital for family-owned businesses. The soaring stock market of the past few years has netted investors sizable profits, which many have harvested. Reluctant to jump back into a pricey market, many investors are looking for new places to put their money. When they look at the numbers, they're finding family businesses may be the answer: At least 2 million family firms in the United States have revenues greater than $1 million, and 31,000 have annual sales topping $25 million.

And their growth shows no sign of slowing. Ideas of change and expansion are motivating second- and third-generation owners now taking over the businesses started by parents and grandparents. They're not as leery of private investors as their forefathers--and they need capital to turn their ideas into reality.

A History of Distrust

Family business owners typically reject the notion of sharing ownership with an outsider who doesn't know or appreciate the company's history or philosophy. It's not hard to understand why private investors have been viewed as wolves, ready to huff and puff and either blow family businesses down or take them over. As a result, when family business owners want to finance expansions or provide liquidity for transitions, most opt for internally generated funds or borrow from banks.

Private investors haven't been enamored with family businesses, either. Family firms aren't typically perceived as growth-oriented, according to a study of venture capital firms conducted earlier this year by Nancy Upton and William Petty of Baylor University in Waco, Texas.

Making the situation worse, family businesses' operating methods are not always designed to get the highest rate of return. These firms are often the employer of choice for family members and loyal longtime employees, whose salaries and capabilities may not be viewed favorably by investors. In addition, the firm's standing within the community sometimes holds greater sway at decision-making time than its stand on innovative procedures or fiscal belt-tightening.

Seeing Green

Enter a new generation of family business owners eager to make their mark. "If all the new generation needs is a capital infusion to fund a parent's retirement, I'd be very reluctant to bring a venture capitalist into the picture. But if the next generation's need for capital includes plans for substantial growth, that's another story," says Bob Goldstein, partner in Berger, Goldstein & Co., a Deerfield, Illinois, financial consulting firm specializing in family businesses.

If this new wave of family business owners chooses to infuse the business with money drawn from equity funding, they'll want to find equity funders who understand family businesses, are willing to take minority ownership positions, and who see this as a long-term partnering relationship with the family, says de Visscher. "The funders may be on the board of directors and they may serve as a dialogue platform for the family," he says, "but they would not be interested in running the company."

Despite such promises, many family business owners remain suspicious. "One of the hardest things we have to do when dealing with family businesses is convince them that we want to help them preserve family ownership," says Jeffrey McKibben of Saugatuck Capital Co., a Stamford, Connecticut, private investment firm specializing in family businesses. "We understand business issues, strategic risk and capital structure, but we didn't grow up in the business like they did. They know their customers, their employees and their organization. We don't want to get involved in their operations."

Before pursuing private equity funding, you need to be prepared. "Don't go into this type of venture without a thorough understanding of it--or without a business plan," warns Nancy Upton, family business expert and director of the Center for Entrepreneurship at Baylor University. She offers the following advice:

Attend family forum meetings where equity funding is frequently discussed, and learn as much about it as possible. You can find these meetings at family business centers connected with nearby universities.

Identify the equity funding group or groups that might be interested in your business by checking the latest edition of Pratt's Guide to Venture Capital Sources (Pratt) at your local library.

Find an intermediary. "If you just send an equity funding firm a business plan with a letter, you're one in a pile of 50," says Upton. "It's best to work through an attorney, accountant, banker or advisor who has a relationship with the firm."

De Visscher, whose firm maintains a database of private equity investors for family-owned businesses, says there's one thing family business owners should always keep in mind: "All aspects of the match must be compatible--philosophical, personal and financial."