The model for sustainable family businesses increasingly involves outside capital

Family businesses will increasingly rely on outside capital to survive and thrive in the 21st century as what may have worked for them in the past in terms of securing their longevity will be less successful in the future.

“Quicker innovation cycles are placing pressure on family businesses everywhere,” says  Albert Geiger, managing partner of Munich-based family business network, AlphaZirkel. “Many of them will need outside capital to keep up with these cycles.”

Geiger reckons that selling minority stakes will be the preferred way of bringing in outside capital. “In the past, capital was provided by banks, particularly in the case of German family businesses. But banks everywhere are pulling back from lending, especially lending linked to risky innovation efforts.”

Traditionally, bank finance and internal cash flow were the favoured way of raising outside funds for most family businesses. But as banks pull funding and internal cash flow might not be enough to finance business development as innovation cycles speed up, family companies will increasingly look to sell stakes in their businesses to bring in much-needed finance.

Geiger says investors such as family offices, private equity funds and other family businesses are filling the gap left by the banks in the form of equity finance. And families are increasingly willing to accept outside equity, which has been confirmed by a recent study by AlphaZirkel, according to Geiger.

Not only do these investors provide capital, but they also bring in often much-needed management skills. “Investors will have a high threshold of management competency before they invest. They will want to see professional and good governance structures in place before they commit funds. In turn, this is forcing many family businesses to professionalize their management in order to appeal to investors.”

Geiger says this trend towards family businesses bringing in minority investors will help to sustain these companies in the future. “By selling a minority stake, family businesses will aid their transition and continue their success,” says Geiger. “It will bring them to the next stage.”