Financing decisions in a privately held firm, and specifically the family-owned and controlled privately held firm, can be subtly complex in comparison to a publicly owned corporation with well distributed ownership. Whether it is a budding entrepreneurial venture, a growth-stage strategic expansion, or a well-established latter-stage concern, the private firm decision matrix must consider the balance of insider control, timely growth and expansion, and shareholder liquidity needs when making key financial decisions. As the family, business, and ownership subsystems evolve and interact at different stages of development, the needs and desires of the decision makers and various constituencies will change as well. In this course, we will gain a better understanding of the financing decisions faced by privately held firms, and the underlying forces which can greatly influence traditional valuation models and analyses. Family controlled firms make up a majority of business concerns throughout the world, and account for a corresponding majority of the World’s GDP. In the US, Family firms comprise 70% of all incorporated businesses, 60% of publicly traded companies, 33% of Fortune 500 companies, and account for about half of the US GDP [Poza, Family Business, 4th Edition].
While evidence has shown that family controlled firms fail at an alarming rate before the second and third generation owner/managers have completed their terms, those companies that do succeed for multiple generations often go on to outperform their non-family controlled counterparts. The issue for family firms is not simply survival to the fourth generation and beyond, but creating a blueprint to successfully navigate the family, business, and ownership cycles simultaneously and through time. Financial decisions, and specifically financing the family enterprise, plays a key role in attaining success and longevity. Financing decisions have a profound effect on the privately held firm beyond the obvious valuation issues. Key financial decisions are sometimes made in reaction to, or in anticipation of, a triggering event, such as a corporate financial crisis, a significant strategic deficiency or opportunity, an immediate need to address competition, or in the case of family businesses an exogenous event such as the generational transfer of control and equity. In other instances, owner/managers simply need to finance the daily operations and organic growth of their business. Whatever the case may be, issues of control, growth/expansion, and liquidity are often at odds when additional capital is required.
The course is directed towards students who are involved with the management of family businesses, either their own family's or someone else's, as well as towards students who interact with family businesses. The focus of this course is primarily on financing decisions faced by privately held family businesses. We will explore the family, business, and ownership issues found in family owned and managed companies to get a better understanding of how financial decisions are influenced.
Through lectures, case studies, student work experiences and guest speakers, we consider questions of control, growth, liquidity, and the evolving role of governance and the family office in the financing decisions of the family owned enterprise.
The course has the following objectives:
- Develop a system framework to analyze factors influencing family business financial decisions.
- Increase your understanding, effectiveness and commitment as a member of a family firm (either you own family’s or someone else’s) or as an advisor to such firms
- Identify the characteristics that differentiate a family business from other businesses
- Examine the life cycles of family businesses from the perspective of business, family and ownership
- Learn to identify and evaluate situations and problems in family businesses
- Examine best practices and explore emerging trends in family business management
- Develop family business competitive strategies
Craig Wo was a Columbia Business School faculty member from 2018 to 2020.