Dr Denise Kenyon-Rouvinez, head of International Family Business & Philanthropy at RBS Coutts, examines why you might take your family business public. Is it always IPO ever after?
in the markets in their search for yield. Accessing this liquidity through an IPO – following in the steps of companies such as Hyatt Hotels Corporation and Pandora, the Danish jewellery maker, which have become public over the past couple of years – can be an attractive proposition for family businesses looking to take their business to the next level.
Going public can prove to be a bitter pill, however, if the family is not prepared for the potential drawbacks of being in the public eye.
Why might a family business take the decision to float on an exchange?
Inflow of cash: Enhanced liquidity provides a fantastic opportunity to finance growth and expansion to aid the long term sustainability of the business. The potential windfall for the owners could also be used as seed money for a new business, to purchase a house or to provide some members of the family with financial independence.
Relieving family tensions: Like any family, family businesses have their own strains and stresses which can take their toll, especially in second or third generations. Family members may feel more at ease in the knowledge that they can always exit the business via a sale of shares, or increase their holding by buying some more through the stock exchange.
Improving the structure: When shareholders become too numerous and harmony is at stake, the health of a business can be improved by buying out some family members; the simplified ownership structure speeds up decision making, though this type of action needs to be dealt with in a highly sensitive manner.
Valuing the business: The clear and incontestable market value for shares provided by the stock market means that family members can avoid disagreements on pricing the business when buying out a shareholder.
Life as a public business
The fundamental reasons of going down the path of an IPO aside, being a listed company comes with a number of benefits and drawbacks which need careful consideration to ensure that a family is prepared for the reality of day-to-day life in the public eye.
A beneficial outcome is that the watchful eye of external observers, which calls for more discipline and diversity in the management team, can positively influence performance. A study in France over 10 years concluded that listed family business demonstrated performance superior to that of other listed businesses in every single year of the 10 year period; these findings are reflected across the world in similar studies. The company benefits from the external experience and wisdom of board members, there are also opportunities for talented, non-family members to make it to the top.
Many families would find the unavoidable loss of complete control a shock however, and have difficulty coming to terms with the increased scrutiny and lack of privacy. Regulatory compliance will require publication of quarterly and annual results, which may in turn increase the number of staff and necessitate a change of IT system. The business will face close examination from financial analysts, who will express their opinions on the running of, and the performance of the business.
The family may find their long term vision for the business is obscured by shareholders who focus much more on short term successes. Levi Strauss, a sixth generation family business from USA, encountered this in 1971, when it sold shares to the public. It went from a highly focused strategy to a diversified one which proved unsuccessful. The family decided to buy back all the shares at $50 per share, a high price but one they were willing to pay in order to regain control and freedom to set strategy.
Listed family businesses also do not have a say over who can and cannot purchase their shares. In 2010, Hermès balked when competitor LVMH acquired 17% of its shares. The family was quick to react and asked LVMH Chairman and CEO, M. Arnault, to back off from what they saw as an unfriendly move. But the fact is that once public, a family does not have much control over who acquires their shares and who does not; Hermès continues to fend off LVMH’s advances.
In order to mitigate the negative impacts of an IPO the family members must be proactive in their awareness and understanding of the consequences of an IPO, including loss of control. Family business experts can be consulted for their knowledge to aid in the preparation stage and to discuss options. A good strategy to minimise disadvantages of going public, for example, would be to take only part of the business public, keeping the rest private.
Communication between family members is vital, and all need to be actively involved in decisions around ownership. Meetings should be held for shareholders and family members to discuss the positive and negative aspects, where concerns can be voiced and questions answered. Making family members a part of the process can be a big factor in helping them to accept the decisions which are made.
Looking at an IPO objectively and having a complete understanding of the emotional implications are essential in order for the family business to enjoy the benefits of being a public company.