How an IPO can strengthen family businesses for generations to come

An IPO can help a family business bring in external managers and transform corporate governance

Going public doesn’t mean a family cuts ties with the business. Far from it. Whereas private equity investors will take a seat in some advisory or supervisory capacity, with an IPO, the free float and the diversity of capital markets investors keep the family with a seat at the table and a steadying hand in the culture of the business.

By separating the principal (owners) from the agent (external management), the family can also bring greater scrutiny to decision-making at the executive level.

The family can maintain control where it matters most to them

The family can do this by designing the shareholder structure, including:

1. Legal form options - Some jurisdictions offer a variety of legal forms that separate principal and agent functions or capital participation and voting powers.
2. Country of incorporation - Depending on the country of incorporation of the IPO vehicle, different legal forms are available and different corporate governance codices apply.
3. Issue different share classes - Many publicly held companies offer different classes of shares with a different set of rights for shareholders. Family businesses can give one class of shares - the class of shares they keep for themselves - greater weight or super voting powers so that they can retain control of the company. This certainly benefits the founders.

Only Family can make the decision to go public for a family business

Going public is a very personal decision, even if the rationale is well informed and logical. In weighing your options, you’ll want to consider:

Pros

1. Easier management succession planning with higher attractiveness for many external managers working at C-level on a listed company with clear corporate governance
2. Better access to capital markets to raise money through equity and bond offerings
3. Private wealth diversifications opportunities with daily valuation of the shares at liquid stock markets
4. Keeping company culture and independence by having a diversified mix of public investors
5. Developing the company to a further stage and building brand with the funds and the attention of an IPO, and better bonding and attracting talent via share plans and increased public visibility

Cons

1. Time-consuming due to public disclosures and investor relations tasks
2. Total IPO floatation project costs and add-on costs associated with the ongoing requirements as listed company
3. Greater transparency with public disclosures
4. Pressure to deliver on your promises
5. Less entrepreneurial control, influence and power with new external shareholders