The Opportunities and Nuances of Private Equity Investment in a Family-Owned Business
Private equity (PE) firms’ investment strategies vary greatly. Typically, they seek to invest in companies that have the potential to generate outsized returns. These investment strategies include leveraged buyouts, growth opportunities, industry consolidation, and distressed investments, among others. PE firms look for companies that will generate predictable cash flow, are scalable, have proven management teams, and have strong market positions with defensible competitive advantages.
Some PE firms invest in family-owned and operated businesses. These investments, often characterized by long-standing practices and personal stakeholder dynamics, present a unique set of challenges and opportunities. Navigating family dynamics, planning for succession, modernizing operations, and driving post-investment value creation are all critical factors in ensuring a seamless operational transition.
Valesco Industries is a Dallas-based investor that focuses on making majority and minority investments in select growth-oriented small and lower middle-market businesses engaged in manufacturing, value-add distribution, and business services. They have deep experience partnering with family-owned, founder-led businesses. We recently sat down with Heather Hubbard, Managing Partner at Valesco, to gain her perspective and discuss how they address challenges around transitioning a business from family ownership.
Q: What attracted Valesco to invest in family-owned businesses?
A: Family-owned businesses present a unique and attractive chance for outsized opportunity. I love working with entrepreneurs who had a great idea and developed it into a business that supports their family, the families of their employees and often, their entire town. These owners bring great ideas and instincts to the table and our partnership allows them to leverage our capital, network and operating advice to grow to be a bigger and stronger presence in their industry. We often help add management teams, financial acumen, and a strategic plan to add to the legacy that is already being created by these business owners.
Q: How do you typically approach the transition from a family-owned structure to a private equity-backed platform?
Valesco focuses on balancing change while preserving company values. This includes fostering growth through comprehensive strategy development, maintaining trust, and reinforcing the founding legacy during a shift to private equity ownership. We prefer to maintain continuity by supporting the ongoing involvement of a company’s founders or management. Legacy management often continues to remain engaged in day-to-day work or sometimes takes a more strategic board level role post our investment. As we recruit new team members and leaders while we grow the organization, we make sure that we find people with the right cultural fit for the company and its industry.
Q: What are some of the most significant changes you tend to implement within the first year of ownership?
A: Before we make an investment in a business, we sit down with management to develop a critical agenda prior to close. We want to make sure that the growth, changes, and innovations we envision match the vision of the management team and legacy ownership. The items that most frequently show up on our critical agenda are enhanced accounting systems and departments, key leadership in sales and operations where there are historic gaps, and better systems to run the operations of the business more effectively. It’s important that existing management shares our vision for the business prior to our investment as we often start some of these critical agenda items prior to the close of our investment. We have to move quickly to accomplish growth and operational objectives so that the company has the chance to benefit from these changes during our hold period.
Q: What are the key operational or financial metrics you focus on to drive value in family-owned businesses?
A: While we do have a set of key financial metrics that we track and that typically apply to all of our businesses including Sales Growth, EBITDA and Gross Profit Margins, Fixed Asset Utilization and Working Capital Efficiency, many other operating metrics vary widely from one company to the next. We have a large portfolio of manufacturing and distribution businesses, each serving a different industry with metrics that we specifically design for that business. Much of that KPI creation is driven from our critical agenda that we set at the beginning of the investment. We are looking to use metrics to drive operations so that we can have an objective view on the success of our company performance relative to the plan. Above all, none of this can be done without the right people. We typically start first with the historic metrics that the company’s leaders used to track performance and build upon that foundation.
Q: What’s one piece of advice you would give a family-owned business considering a private equity sale?
A: Know what you are looking to accomplish from a sale process. What is important to you in the future? Do you care about the company’s reputation in the community or industry? Do you want to make sure that the employees and their families continue to have opportunities? Do you want the opportunity to continue to make an impact or work in the business in some capacity? These are all just some of the questions you need to ask yourself before you start on a sale journey. There is not a one size fits all transaction or partnership with an equity partner. There is a lot of capital in the market that may look the same, but each group has a different approach to investing, structure and operational involvement. You have to find a partner that fits your vision for the future and helps you accomplish what you want, not just what is on their agenda.
Q: What’s a key lesson you’ve learned through your experience working with family-owned businesses?
A: No business is the same. They all deal with their own issues and challenges. The better equipped we are at the outset of an investment to fully understand the company, its culture, and the goals and motivations of the team, the better we can help those stakeholders accomplish their goals. This is above all, a people business. The capital that private equity provides looks the same. The more we can connect, develop and grow the people on our teams, the better outcomes we have.
Q: What is your “getaway” from the office?
A: I have three kids at home so my getaways on the weekend usually involve soccer and basketball games. When I’m not doing that, I love to get in a few hot vinyasa yoga classes each week. It’s a wonderful workout and a good chance to sweat out the stress of the week!
Q: What advice would you give for a young professional who wants to get into private equity?
A: Private Equity is a very competitive field with limited opportunities because there are very few open spots each year for new hires. Position yourself to be ready if that opportunity opens. Make sure your financial modeling skills are current and relevant at a minimum. The best thing you can do to prepare is to network early and often. Find firms in your desired area of focus or geography and get to know the people at the associate level or those with which you have an alma matter connection. Always ask, who are one or two other people I should know, at the end of every conversation.
As a Managing Partner at Valesco, Heather is responsible for the oversight and leadership of all the Valesco entities, their operations, and employees. She has direct involvement with portfolio companies through Board positions focused on strategic planning, acquisitions, corporate budget and finance, executive recruitment and development, and corporate growth. She is also involved in fund and LP management, the investment pursuit process, and the firm’s investment performance initiatives.