Governance Implications of Attracting External Equity Investors in Private Family Firms

Abstract

While research commonly assumes business-owning families are concerned about the preservation of control, more and more families seek cooperation with external investors to accomplish firm- and/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 - the objective to provide liquidity either to the family or to the firm, and the objective 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 contributes to an increased understanding of the evolving structures of ownership in private family firms, the effectiveness and efficiency of governance arrangements in family firm-external investor cooperations and the increasingly heterogeneous private equity funding landscape.