Influence of internal factors on the use of equity- and mezzanine-based financing in family firms

The paper analyzes internal factors which influence the use of equity - and mezzanine-based financing instruments in German privately held family firms. Based on a sample of 195 surveys of family firms, we investigate the impact of family specific goals and corporate governance structures on the use of financial instruments such as retained earnings, private equity and silent partnerships. We find that family goals have a complex impact on the decision to use or not to use these instruments and parallel existing goals can result in diverging financing preferences. Furthermore, we find that the impact of corporate governance structures on financing decisions is mainly driven by the existence of an advisory board and the involvement of external managers in the management board. Our findings contribute to a better understanding of financing decisions in family firms and demonstrate the necessity to include family firm specific characteristics such as family goals and corporate governance structures in the analysis of financing decisions. --entrepreneurial finance,family firms,equity,mezzanine,retained earnings,private equity,silent partnership

Quantitative valuation of platform technology based intangibles companies

In the course of raising external equity, e.g. from venture capitalists, a quantitative valuation is usually required for entrepreneurial ventures. This paper examines the challenges of quantitatively valuing platform technology based entrepreneurial ventures. The distinct characteristics of such companies pose specific requirements on the applicability of quantitative valuation methods. The entrepreneur can choose from a wide range of potential commercialization strategies to pursue in the course of company development which is difficult to take account of in a quantitative valuation. By developing and applying a systematic map of valuation requirements in this context, we analyze whether the cost, market or income approach is suitable for platform technology based entrepreneurial ventures. We argue that all three valuation methods have drawbacks. Yet, the income approach fulfills most of the requirements and, therefore, is considered to be more suitable for the entrepreneur as well as external equity providers than other quantitative valuation methods. --entrepreneurial venture,platform technology,young venture valuation,quantitative company valuation,intangible assets,intellectual property,commercialization strategies,value extraction

Loss of control vs. risk reduction: decision factors for hiring non-family CFOs in family firms

Objectives: We examine decision factors of family firm owners for hiring a non-family Chief Financial Officer (CFO). We explore the perceptions of family firm owners towards external managers by analyzing how their family-specific and company-specific goals relate to the employment of a non-family CFO. Furthermore, we analyze the consequences of hiring a non-family CFO on financial policies such as the use of strategic financial plans and initiatives to improve relationships with external capital providers. Prior work: Prior research has acknowledged that the attitude to external managers is a major concern for family firms because of potential problems due to a separation of ownership and management. However, it was shown that non-family CFOs positively influence the operational performance of privately-held family firms. Little knowledge exists to date to explicitly link the decision to hire an external CFO to the goals of family firm owners. Approach: Our study is based on a survey of 237 small- and medium-sized privately-held German family firms in 2007. We use logistic regression analysis to test our theory-driven hypotheses on the relationship between family-specific as well as company-specific goals of the family and the employment of a non-family CFO. Furthermore, we use OLS and logistic regression analysis to analyze hypotheses on how non-family CFOs influence financial policies. Results: The results suggest that family firm owners are reluctant to hire non-family CFOs because of agency type of problems. They decide against an external CFO when their goal of independence and control is high. Furthermore, they do not seem to trust external managers to act in accordance to their goal of enterprise value growth. However, they seem to realize that non-family CFOs are likely to decrease financial risk through the provision of additional capabilities. Non-family CFOs are shown to influence financial policies and, thereby, to bring in value creating resources. Implications: Family firm owners can use the results to understand the relevant factors they should consider when employing an external CFO. In particular, they should focus on establishing incentive structures for external managers to follow goals of the family. Candidates for non-family CFOs are able to better comprehend the underlying objectives of family firm owners in the hiring decision. Value: Our findings are relevant to further disentangle the relationship between external managers and family firm owners. By applying both the agency theory and the resource based view, we are able to offer explanations for and against the decision to hire non-family CFOs in family firms. --CFO,family firms,financial policy,entrepreneurial finance,corporate governance

Private equity minority investments in large family firms: what influences the attitude of family firm owners?

This paper extends research in the field of private equity investments in family firms. It contributes to the literature by fundamentally analyzing the decision criteria of family firm owners for using minority investments of private equity investors. This type of financing might be of great interest to family firms, as the family firm owner is able to secure majority ownership and control over the family business. Likewise, minority investments might be attractive for private equity investors, as they are mostly not leveraged and therefore independent from capital market turbulences. Using data from 21 case studies, we identify challenges induced by the family or the business that lead to the phenomenon of private equity minority investments in family firms. We find that perceived benefits and drawbacks of private equity investments are influenced by business and family characteristics. Based on pecking-order theory, resource-based view and the strategy paradigm, propositions as well as a conceptual framework are developed. --private equity,minority investments,family firms,financing,managerial resources

Goal structures in family firms: empirical evidence on the relationship between firm and family goals

Goal structures in family firms seems of particular interest to the field as the overall orientation and the objectives of family firms are determined in an area of potential conflict between the two subsystems of firm and family. We asked shareholders of German family firms to rate the importance of certain goals in the organization's management. By doing a principal component analysis on the ratings given, we identified four central categories of goals that permit a much more detailed analysis than would a simple differentiation between family-related and firm-related goals. The differences among organizations in the identified dimensions of short-term and long-term family goals, as well as growth- and value-orientated firm goals are then assessed in more detail. Among other aspects, we found the existence of an advisory board to be the strongest driver of goal preferences along these dimensions. Theoretically, our findings indicate that, depending on family firm characteristics, agency and stewardship theory are both useful in explaining the goals of the relevant systems of family and firm. --family firms,goal preferences,agency theory,stewardship theory

Influence of internal factors on the use of equity- and mezzanine-based financing in family firms

The paper analyzes internal factors which influence the use of equity - and mezzanine-based financing instruments in German privately held family firms. Based on a sample of 195 surveys of family firms, we investigate the impact of family specific goals and corporate governance structures on the use of financial instruments such as retained earnings, private equity and silent partnerships. We find that family goals have a complex impact on the decision to use or not to use these instruments and parallel existing goals can result in diverging financing preferences. Furthermore, we find that the impact of corporate governance structures on financing decisions is mainly driven by the existence of an advisory board and the involvement of external managers in the management board. Our findings contribute to a better understanding of financing decisions in family firms and demonstrate the necessity to include family firm specific characteristics such as family goals and corporate governance structures in the analysis of financing decisions

Loss of control vs. risk reduction: decision factors for hiring non-family CFOs in family firms

Objectives: We examine decision factors of family firm owners for hiring a non-family Chief Financial Officer (CFO). We explore the perceptions of family firm owners towards external managers by analyzing how their family-specific and company-specific goals relate to the employment of a non-family CFO. Furthermore, we analyze the consequences of hiring a non-family CFO on financial policies such as the use of strategic financial plans and initiatives to improve relationships with external capital providers. Prior work: Prior research has acknowledged that the attitude to external managers is a major concern for family firms because of potential problems due to a separation of ownership and management. However, it was shown that non-family CFOs positively influence the operational performance of privately-held family firms. Little knowledge exists to date to explicitly link the decision to hire an external CFO to the goals of family firm owners. Approach: Our study is based on a survey of 237 small- and medium-sized privately-held German family firms in 2007. We use logistic regression analysis to test our theory-driven hypotheses on the relationship between family-specific as well as company-specific goals of the family and the employment of a non-family CFO. Furthermore, we use OLS and logistic regression analysis to analyze hypotheses on how non-family CFOs influence financial policies. Results: The results suggest that family firm owners are reluctant to hire non-family CFOs because of agency type of problems. They decide against an external CFO when their goal of independence and control is high. Furthermore, they do not seem to trust external managers to act in accordance to their goal of enterprise value growth. However, they seem to realize that non-family CFOs are likely to decrease financial risk through the provision of additional capabilities. Non-family CFOs are shown to influence financial policies and, thereby, to bring in value creating resources. Implications: Family firm owners can use the results to understand the relevant factors they should consider when employing an external CFO. In particular, they should focus on establishing incentive structures for external managers to follow goals of the family. Candidates for non-family CFOs are able to better comprehend the underlying objectives of family firm owners in the hiring decision. Value: Our findings are relevant to further disentangle the relationship between external managers and family firm owners. By applying both the agency theory and the resource based view, we are able to offer explanations for and against the decision to hire non-family CFOs in family firms

Quantitative valuation of platform technology based intangibles companies

In the course of raising external equity, e.g. from venture capitalists, a quantitative valuation is usually required for entrepreneurial ventures. This paper examines the challenges of quantitatively valuing platform technology based entrepreneurial ventures. The distinct characteristics of such companies pose specific requirements on the applicability of quantitative valuation methods. The entrepreneur can choose from a wide range of potential commercialization strategies to pursue in the course of company development which is difficult to take account of in a quantitative valuation. By developing and applying a systematic map of valuation requirements in this context, we analyze whether the cost, market or income approach is suitable for platform technology based entrepreneurial ventures. We argue that all three valuation methods have drawbacks. Yet, the income approach fulfills most of the requirements and, therefore, is considered to be more suitable for the entrepreneur as well as external equity providers than other quantitative valuation methods

Private Equity Minority Investments in Large Family Firms: What Influences the Attitude of Family Firm Owners?

This paper extends research in the field of private equity investments in family firms. It contributes to the literature by fundamentally analyzing the decision criteria of family firm owners for using minority investments of private equity investors. This type of financing might be of great interest to family firms, as the family firm owner is able to secure majority ownership and control over the family business. Likewise, minority investments might be attractive for private equity investors, as they are mostly not leveraged and therefore independent from capital market turbulences. Using data from 21 case studies, we identify challenges induced by the family or the business that lead to the phenomenon of private equity minority investments in family firms. We find that perceived benefits and drawbacks of private equity investments are influenced by business and family characteristics. Based on pecking-order theory, resource-based view and the strategy paradigm, propositions as well as a conceptual framework are developed