Backing the right management in a family office deal
Built on Chapter 11 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
When a family buys or invests in an operating business, it is really betting on people. In my experience, management risk is the biggest risk in younger companies. It is also the one families tend to check least.
Founders are not always CEOs
The person who writes great code, bakes great bread, or builds a great product is often not the person who should run a growing company. The founder has to grow faster than the business, or someone else has to step in.
Before investing, I suggest asking a direct question. Is this founder coachable? Would they accept a board seat or a different role if the company outgrows them?
Add a strong operator
Some companies have a visionary founder who is not a natural manager. A common fix is to bring in a chief operating officer or similar leader to run day-to-day work, even without the CEO title.
Many of the world's biggest companies have used this model. A founder sets the vision while a seasoned operator runs the machine. As a company grows, no single person can do it all, and a strong operator gives investors and customers confidence.
The lesson for families is to look past the CEO. Check the next layer of leaders too.
Talk to everyone
One family office executive who runs direct deals for a well-known family told me that everything comes down to people. That means the CFO, the sales manager, and the production manager, not just the person at the top.
His team talks to people across the whole company, from the newest hire to the advisory board. Then they check what they heard. More than once, that work has turned up facts that changed the price a lot.
Tools that keep management aligned
There are several ways to protect the family once the deal closes:
- Personal guarantees from the founders, especially in debt deals.
- Performance clauses tied to revenue targets.
- Board seats or voting rights for the family, sized to its stake.
- Staged funding released as milestones are hit.
The goal is not to control every move. It is to make sure leaders and the family want the same result.
Keep the family involved
Direct deals can also pull family members back into the business of the family. Sitting in on diligence, meeting managers, and seeing how markets are changing gives the next generation real education. Some executives who run these programs say the work is also a lot of fun.
Plan for the hard years
A family that backs a management team is in for the long haul. One family office leader I interviewed compared some stretches to chewing glass. His advice was to avoid businesses that depend on government subsidies or pending approvals where possible. Every outside variable you remove leaves your team with fewer excuses and more reason to push through.
Retention after the deal closes
Keeping good managers after closing is as important as picking them. Many owners who sell feel a loss of purpose, and key staff worry about what the new owners will change. Families that retain talent well tend to explain their plans early, keep the people who know the customers, and tie part of the leaders' pay to the long-term value of the company.
Some deals leave the seller with a meaningful stake in the business going forward, with a preferred return on that piece. That keeps the former owner pulling in the same direction as the family for years.
What to take from this
- Judge the founder on coachability as much as on talent, since growth will test both.
- Check the second layer of leaders before you invest.
- Interview people at every level of the company.
- Use guarantees, board seats, and milestones to stay aligned.
This page is general information, not legal or investment advice. Speak with a qualified attorney before setting guarantees or governance terms.
Questions and answers
What is the biggest risk in a young company? In my experience, management risk.
What if the founder is not a strong manager? Many investors add a strong COO or similar operator.
How do families check management? They interview people at every level and verify what they hear.
How can a family stay aligned with management after closing? Through guarantees, performance clauses, board seats, and staged funding.