Governance Implications of Attracting External Equity Investors in Private Family Firms

Abstract

While research has commonly assumed that business-owning families are concerned about the preservation of control, families are increasingly seeking cooperation with external investors to accomplish firm- or family-level goals. In this paper, we provide a conceptual configuration of the different governance scenarios that may arise when family owners attract outside capital. Combining two important family objectives—(a) to provide liquidity either to the family or to the firm, and (b) to cede or to retain long-term family control—we identify four scenarios with different governance implications and preferred types of external investors. Our analysis increases understanding of the evolving structures of ownership in private family firms, the effectiveness and efficiency of governance arrangements in family firm–external investor cooperation, and the increasingly heterogeneous private equity funding landscape.

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