Alibaba's record flotation last week will have made many family-owned firms wonder if now is the time to float part of their business. Indeed, Zanetti, the family-owned coffee business whose most famous brand is Segafredo, recently announced that it is to offer 30% of its shares to the market.
It’s not the only family firm to get involved in the current initial public offering boom. British retailer B&M, which was grown by brothers Simon and Bobby Arora, recently had a flotation that valued it at £2.7bn, putting it just outside the FTSE 100.
In Germany, the tech startup incubator Rocket, founded by brothers Oliver, Marc and Alexander Samwer, will list later this year in a deal that is expected to value the firm at $6.5bn. Fiat Chrysler plans to list in New York in the coming months.
We might see more family firms going to the markets for funds. In a recent KPMG report 49% of respondents, who were members of family businesses of all sizes from all over the world, said that they would consider offering equity in the company in the long term to raise cash, and 33% in the short term. That contrasts sharply with just 20% who said that IPOs or secondary share offers were their current preferred methods of raising money.
Family firms who do go down this route might well receive an enthusiastic reception.
David Avery-Gee, partner who specialises in equity capital markets transactions at law firm Linklaters, says: “There would be plenty of appetite for family-owned businesses.” Many of the businesses currently coming to market are owned by private equity firms who tend to have engineered them for maximum returns, and investors worry that they have been leveraged and are being sold at the top of the market. This is not always the case with family firms."
“If you are IPOing a family business, investors would certainly be interested,” says Avery-Gee. Another plus is that “the family will probably still be in there for the long-term and continue to own a huge stake of the business.” That would reassure shareholders, who would see the family involvement as “a key part in the equity story”. He adds: “Investors aren’t going to stand in the way of the family, that is part of why they want to invest in that company.”
Families might find that floating gives their firm a boost, too. “Being a listed company brings with it a certain prestige and confidence,” says Melanie Wadsworth, a partner who specialises in IPOs at Faegre Baker Daniels. “Suppliers might be sad that they are are not dealing directly with the founder any more, but they tend to think that it is a proper pukka company now.” Staff, too, can find it “incentivising” to work for a listed firm, she adds.
The downside? Put simply, that the family loses control. The London Stock Exchange requires that at least 25% of a public business is floated, and in early 2014 new rules came in saying that the firms must be independent of the family, and that decisions made by directors have to be in the interests of all shareholders. All the big stock exchanges are moving in this direction.
These days many stock exchanges only allow one class of shares, too. The days when you could own a tiny number of stock but still control the business through ownership of most of the voting rights – as is the case with the Murdoch family, for instance – are gone or going.
“That is obviously hard to swallow for some families, as their ethos has often been: ‘We run it this way, this is our business’, and making that switch can be very difficult,” says Jai Bal, a partner at law firm Wedlake Bell.
There’s a risk, too, that the family story which attracted shareholders might start to look like a romantic irrelevance once the markets’ animal spirits kick in. Any firm’s share-price can dip because of a general downturn and shareholders can want heads to roll, or things to change, and family members are easy scapegoats. “Any kind of sentiment like that goes out of the window pretty quickly,” says Wadsworth.
And once an IPO takes place, there is no guarantee that family members will keep their jobs. “You can’t bank on succession,” says Bal, or a job in the firm for family members. Gentlemen’s agreements about family presence mean nothing if investors feel someone else could get them better returns.
Even getting the firm ready for flotation can involve big changes. Some practices that are fine in a privately-owned firm are not acceptable for a listed one. For example, if the premises are owned by the founder and the business pays him rent, or if old customers get special discounts.
While it might be tempting to see an IPO as a good exit for the firm, it’s vital that there is a credible plan about how the money will be invested in the business. Saying that the founder wants to retire and deserves a fat pay-out won’t impress the markets.
And then there is the loss of privacy involved in flotation. “You suddenly find yourself with huge amount of information being publicly available, and that can be quite a difficult thing to get used to, says Wadsworth. “An employee with one share could insist on seeing the director’s share contract, for example.”
“In some cases the actual actual ownership structure of the family itself can become public,” says Bal. “That is something that many families don’t like.” In the case of a takeover, for example, a family might have to reveal who owns what proportion of the shares, which they might not want to do.
All of these negatives are strong, but the fact remains that an IPO is a good choice if comes at the right stage in the firm’s evolution. It releases capital, can help fund growth and is might feel better than getting into bed with private equity. If there is no successor, then it can be an excellent exit strategy. But if the family wants to stay involved, they have to realise that flotation radically changes the nature of the business.
A floated family firm is a very different kind of family firm.