Family office investment: make liquidity explicit

When I assess family office investment, I want to understand what happens if the business succeeds but nobody wants to buy it. That question is easily overlooked during a capital raise. Founders are presenting growth, investors are assessing returns, and both may assume that a suitable exit will eventually become available. Yet a profitable, growing company can still leave its shareholders with incompatible expectations about when, and how, they will receive cash.

I regard this as an investment design issue, not a problem to leave until an exit discussion. Before capital is committed, the parties should distinguish between their ambitions for the business and their requirements as owners. Those interests can coexist for many years without being identical. The terms need to accommodate that difference.

Family office investment needs a defined horizon

A family office may have greater flexibility than a fund with a fixed life. That does not mean its capital has no time horizon. A family can face changing distribution needs, succession, portfolio concentration or a revised appetite for risk. None of these developments necessarily reflects dissatisfaction with the company. They can nevertheless change what the investor needs from the holding.

I would ask more than whether the investor is comfortable holding for ten years. Could it remain invested without dividends? Would it support another funding round? What would happen if the expected sale were delayed substantially? A willingness to wait is useful, but it is not the same as a capacity to provide further capital or accept indefinite illiquidity.

Founders need to answer equivalent questions. Some want to build an enduring business and retain control. Others expect a sale to fund their next venture or provide personal financial security. Neither preference is inherently better. The difficulty arises when a transaction is agreed on the assumption that these preferences will converge later.

Separate the return from the route to cash

A valuation model can show an attractive return without establishing a credible way to realise it. I prefer to examine the routes to cash separately: distributions from trading, a sale to another investor, a company buyback where lawful and affordable, or a sale of the business. Each depends on different conditions. None should be treated as an automatic consequence of growth.

Dividends require distributable profits and available cash, alongside the appropriate approvals. A buyback uses resources that might otherwise finance operations or expansion. A secondary sale needs a willing buyer who accepts the rights attached to the shares. A sale of the whole company may require shareholders to surrender something they still value: control, employment or future upside.

The objective is not to guarantee an outcome that nobody can guarantee. It is to identify which routes are genuinely plausible, what could prevent them, and who bears the consequences. Where the investment case relies almost entirely on a future buyer paying more, I want that reliance stated plainly.

Test the terms against an ordinary disappointment

Deal negotiations often concentrate on exceptional events: fraud, insolvency or a spectacular exit. I also want the documents tested against a less dramatic outcome. The company performs reasonably well, misses its most ambitious targets, consumes more cash than planned and attracts no acceptable acquisition offer. This is where vague expectations can become persistent disagreement.

A small set of questions can expose the practical issues:

• Who decides whether earnings are retained or distributed?
• What happens if one shareholder cannot participate in further funding?
• Can an investor sell a minority holding, and to whom?
• What process applies if one party wants a sale and another does not?
• How are disagreements escalated before they interrupt the business?

I would expect the commercial answers to be agreed before lawyers are asked to translate them into enforceable provisions. Legal advice is essential, but drafting cannot resolve a commercial difference that the parties have declined to discuss.

Do not confuse protective rights with liquidity

An investor may negotiate consent rights over new borrowing, share issues, acquisitions and changes to the business. Those protections can be justified. They do not, by themselves, create a route out. A shareholder can have considerable power to prevent decisions while remaining unable to realise the value of its investment.

Equally, an apparent exit right may transfer an unreasonable burden to the company or founder. An obligation to purchase shares at a predetermined point deserves close scrutiny if the means of payment depend on uncertain future cash flows. I would rather see a workable process for seeking liquidity than a superficially strong promise whose exercise could destabilise the business.

The precise mechanisms will depend on the jurisdiction, corporate structure and negotiating position. Transfer restrictions, pre-emption rights, tag-along rights and drag-along rights should be considered together. Their interaction matters more than the presence of familiar labels in a term sheet.

Know who can commit the capital

The individual leading a family office discussion may not be the person with final authority. I want clarity on who approves the initial investment, who authorises follow-on funding and who can approve a sale. If those decisions sit with different people or committees, that is manageable. Discovering it during a financing shortfall is considerably less manageable.

The same discipline applies to continuity. What happens if the principal steps back, the investment director leaves or responsibility passes to another generation? An enduring relationship needs an institutional record of the investment rationale, agreed expectations and decision process. Personal trust is valuable, but it should not be the only place where the agreement exists.

Keep liquidity on the board’s agenda

Once the investment is made, I favour a periodic review of shareholder liquidity expectations, separate from the operating budget. This need not become an annual debate about selling. Its purpose is to identify changed circumstances early, while there is still time to consider alternatives without forcing the company into a hurried transaction.

The board must also keep its duties distinct from the preferences of individual shareholders. A shareholder’s need for cash does not automatically make a distribution or sale the right decision for the company. Good information and an agreed process make that distinction easier to maintain.

My preference is for investors and founders to discuss these questions while both remain free to walk away. That may slow the capital raise or reveal that an otherwise attractive partner is unsuitable. I would accept either result over an agreement that leaves its most consequential ownership questions unanswered.