New Allies

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.

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This article was originally published in the July 1997 print edition of Entrepreneur with the headline: New Allies.

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