4 minute read 25 Mar 2021
Businesswoman holding tablet standing at windows looking over green space

How an IPO can strengthen family businesses for generations to come

By Martin Steinbach

EY EMEIA IPO Leader

Over 20 years of experience in the corporate finance field: IPO, M&A, private equity, venture capital and mezzanine finance. IPO thought leader.

4 minute read 25 Mar 2021

EY Private Perspectives: family businesses should consider opening doors to new sources of capital in order to build a long-lasting legacy.

In brief
  • This edition of EY Private Perspectives highlights why family businesses may choose to go public without diluting their long-term influence
  • An IPO can address the yin and yang of the family and their business obligations
  • The decision to go public is one only the family can make, and they must weigh the pros and cons before they reach it

Family enterprise owners face unique challenges as they balance their ambition to grow with the effort to build the family legacy. For family business owners to accelerate the growth of their business and strengthen their equity, they may need to seek new sources of capital. Many look for funding that will not dilute the family’s long-term influence, which is why they often consider going public.

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.

An IPO is only one option which is appropriate for the yin and yang of family business

Each family business is unique, yet successful family businesses have some common traits that we call the “DNA of family enterprises.” Compared with other strategic options, such as selling the company to a competitor, or welcoming private equity as an interim investor, an IPO can address the yin and yang of the family and the business obligations. On the one hand, manage family assets, uphold family values and keep a structured family involvement. And on the other hand, provide outstanding business performance in operating results, with solid management mechanisms, and maintain control by the family.

DNA Model for Family enterprise

Going public can balance the obligations between family and business. Compared with other strategic options, it often helps uphold the family legacy and structured family involvement while accelerating growth of the business and putting solid management mechanisms in place.

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

Summary

IPOs can be a great option for family businesses. An IPO can open doors to new sources of capital, accelerate growth, diversify wealth, and help reward and retain top talent, including the family members that have been so pivotal in the success of the company so far.

For founders, it can secure the family legacy for generations to come - something that often proves more valuable than anything else money can buy.

About this article

By Martin Steinbach

EY EMEIA IPO Leader

Over 20 years of experience in the corporate finance field: IPO, M&A, private equity, venture capital and mezzanine finance. IPO thought leader.