Family Business Needs to Manage their Capital Better

I ran an article on my CEO Newsletter which goes out to owner managed businesses and family businesses with the lead story headline:

Why 90% of Businesses in the USA are Still "All in the Family"

I got back many repsones asking about this number and whether Canada has that many owner managed companies. I tried contacting Family Business research centres and CAFE to get figures but Canada also comes in pretty high at about 75% of business owned by a family. I got an interesting reply from a finance expert in South Africa who said:

Because the returns are generally too low to cover a true imputed cost of capital (currently some 9% (3.5% risk free rate plus 5.5% equity risk premium) for an ungeared company) - markets would not stomach such underperformance....

So, do family businesses understand EVA or cost of capital? Is this why they benefit so much by partnering with the private equity teams who bring their market expertise to their business? My book, Money Magnet, will cover these points for owners and founders. Tom Deans, author of Every Family's Business, says that family businesses need to run their companies as if they did not belong to the family. This could also be a factor in why family businesses are not as efficient as they could be. Money Magnet will cover this controversial topic.

Canadian Finance Book Reviews and Web sites

Dig into this pile of book reviews and web sites reviewing the Canadian capitalist money scene.
Every Family's Business by Tom Deans is an entertaining, useful read if you own, have partial ownership or wish to have ownership in a family business.
The Digerati Life has a great article on how to make 10 ordinary things last longer.
Consumerism Commentary has a detailed article on 10 steps to break the credit card habit. Lazy Man and Money gives his thoughts on the middle class.
Quest for Four Pillars questions hedge funds - are we missing out?
Generation X Finance does a book review on Rich by Thirty.
Money Magnet is teaching family business owners how to find investors and get them to value their business at a high level.

For Private Equity, Is It Bleak?

What is the current bleak business landscape and downward fall of the markets doing to business? It does seem that the bottom of the market is being reached as the Times of London reported that Blackstone and CVC have put in a joint proposal to acquire 29.9 per cent of Mitchells & Butlers, the UK pub group whose shares have slide down after a property deal went sour.
Leveraged buyouts have been put aside with the growth of the credit crunch as financing has ground to a halt while banks are forced to work through a backlog of committed but unsyndicated loans.
However, buyout groups are carrying billions of dollars of funds and need to put their money to work, despite the lack of debt funding. Apollo, TPG and Blackstone also signed on to buy $12B of discounted leveraged loans from Citigroup, or 24% of the bank's $43 billion backlog of unsyndicated loans. This has probably set the price for other banks to begin to reduce their backlog. As the Time of London reports, "It calls the bottom globally, although it's a terrible deal for Citi. By calling the bottom, they create the bottom and if it works they unblock the system and the market starts to recover.”Blackstone, KKR and Carlyle have recently all closed new distressed debt funds and in Europe both Permira and CVC Capital have small debt businesses that are also starting to invest in underperforming leveraged loans.
In the meantime, private equity funds, including Apollo, Oaktree, Och-Ziff and Silverpoint are also digging through the market for attractive deals.
Here is Canada, with the closing of Jefferson and other funds, there is concern about private equity deals. This type of financial partnership is not the same as banking. It is high risk money.

Private Equity Flooded with Money

I got a phone call from a fund manager today. I was a bit surprised to get his attention as he normally only deals in public market companies but he tells me he has a new private equity fund and he needs to invest. This is good news for those family owned businesses or owner managed companies because it means they are more and more attactive to this unique type of capital. I wrote about private equity in my new book, Money Magnet which will help owners understand how to attrat and work with private equity.
With the big companies taking a hammering on the stock market, there is a diversion of money happening. The new direction seems to be private equity. I've had phone calls from companies setting up private equity funds as they have heard this is where the high returns lie.
In the USA, Private equity funds closed on a whopping $44.3 billion across 68 funds. While not nearly as huge, the venture capital markets also brought in new money beyond 2007’s totals by $1 billion to $4.9 billion. The data is based on information compiled by Private Equity Analyst, which is part of Dow Jones.
What's going on?
"The thinking in the USA is that if you are in private equity or venture capital, you are not tied up in the credit crunch," says John Loewen, Loewen & Partners, Toronto.

Venture Capital Country

You are entering Venture Capital country when you run a business with some revenue but still need to get a large sum of money to build a plant for that new client. The VCs (Venture Capitalists) are like the pioneers. They would take the big risks and maybe get to develop a ranch and farm, bring up a family and create a booming town serving farms and the stage coach passing through to the big city. Too often though, as Dennis Tobin said to me (he's a venture capitalist lawyer), the pioneer gets the arrows in the back.
It used to be thought that the first business in would get the big rewards but it is becoming clear that the people who come in after the pioneer actually get more reward. The moral of the story is try to be a settler, coming in after the pioneers have staked out the territory. But if you are an entrepreneur, I know you enjoy the thrill of the adventure so never mind – carry on - and watch out for those arrows.