Making investment decisions for your family business

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Family businesses run on collaborative effort and collective decision-making. Collective decision-making is important to ensure that all family members are on the same page. It ensures that decisions are made keeping the needs of the business in mind. Family members not involved in decision-making will often start working towards personal goals instead of business goals.

Decisions on investment are of the utmost importance for any family business. Businesses need regular investments until the time they are able to generate enough cash to sustain day-to-day operations. This typically takes a year or two. In the interim, a constant infusion of investments are required to cover monthly expenses and operating costs.

Even when the business has attained sustainability, fresh investments may be required for growth plans. Some companies appoint a good financial advisor or an investment manager to make all their investment decisions. However, due to the costs of hiring an expert, many family-run companies handle this issue between the in-house decision-makers.

What are some of the possible funding options open to family-run businesses? All funding broadly falls into one of three options: debt funding, equity funding and non-recourse funding.

Debt funding

As the name implies, this is basically a loan. Businesses often find it difficult to get a loan until they can show a steady revenue stream. Loans are typically offered by banks or other financial institutions. Banks are hesitant to give a loan unless you can provide collateral and personal guarantees. For a business that’s starting out, this is often hard to do.

Equity funding

Equity investors become part-owners of the business. The owner sells a share of the business to the investor in return for the investment. Unlike lenders, investors lose or gain based on how the business does. The investor becomes a stakeholder in the success of the business.

Venture capital funds, large investment conglomerates, angel investors and crowdfunding are some options for equity funding. M1 Group of Lebanon is one such multibillion dollar, investment conglomerate. Headed by Taha Mikati, M1 Group invests in diverse businesses ranging from energy, oil and real estate to consumer fashion and retail. Investors such as M1 Group have helped many small family-run businesses to become large and successful companies.

Another advantage of equity funding is the ability of the business to tap into the investor’s knowledge base, both in terms of technical skills and industry networks. The business owner has the right to buy back the equity at a mutually agreed price once the business is profitable, thereby allowing the investor to make a healthy return on their investment.

Non-recourse finance

This is funding that does not require repayment. The funding is in the form of a grant. There are often strict requirements attached to grant funding. Non-recourse finance is ideally suited to the early stages of a business, to take it through proof of concept and proof of mark. Crowdfunding, grants and awards are the source of this funding.

Making investment decisions is critical to the success of your family business, so get your heads together and choose wisely.

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