Investing and allocating capital
What Should a Family Assess Before Investing Alongside an Operating Business?
Short answer. Assess the business and sponsor, then review the co-investment terms before committing capital. Clarify who controls decisions, how the family can monitor performance, and what happens if investors disagree. Find out how an exit works. Review the opportunity independently, understand fees and conflicts, and ask counsel to examine the legal documents.
Before investing with an operating business, assess the company and the relationship that will govern your investment. A co-investment offers direct exposure, though it may leave a family with limited control and added responsibilities. In my experience, the terms and working relationship matter as much as the business plan.
Understand the Company and the Co-Investment Structure
Clarify whether the family will invest directly in the company or through a special purpose vehicle. Identify who will make decisions and manage the investment, along with who will communicate with investors. Review how the proposed structure affects fees, expenses, information access, and control. If a fund sponsor sourced the opportunity, establish what work the sponsor has completed and what diligence remains for the family.
Assess the company's business, industry position, management, financial records, customer base, and capital use. Ask how the company plans to operate and grow, what could keep that plan from working, and what evidence supports its assumptions. Review the company and its industry position within reasonable access limits, taking care to avoid disrupting operations.
Set Expectations for Control and Disagreement
Co-investors may hold minority positions, which can complicate decisions. Discuss who can approve budgets, appoint or replace managers, authorize related-party transactions, and raise or distribute capital. Agree in advance how to handle disagreements and which decisions require investor consent. Differences in expectations about the company's direction can become costly after capital is committed.
Set out how the family will receive information and monitor the investment. Understand what reporting the company will provide, how often it will arrive, and who can answer questions. The family should also know what happens if the business misses its plan or needs more capital. Review the rights available to investors without control and the protections that can support a minority position.
Plan the Exit and Check Alignment
Discuss possible exit routes and when a sale might occur. Understand any limits on selling an interest. A family may have less ability to manage the investment or leave it than expected. Make sure the family's time horizon, liquidity needs, and appetite for hands-on work fit the arrangement. Consider whether the family and other investors agree on the intended outcome and the company's management.
Review any conflicts, including whether the sponsor or another investor has a different economic interest or authority over decisions. Document the terms before funding, and have qualified legal counsel review the agreements. For related context, see safeguards for a deal brought to the committee and how to assess an opportunity from a close contact.
Goals need to be aligned from very early on.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.