“Stepping into the buyers’ shoes”: Looking at the value of family firms through the eyes of private equity investors

• We examine what happens if families sell their business to private equity firms.
• Family influence or the lack thereof is conceptualized as a real option.
• Three mini-cases highlight the buyout decisions and related dynamics.

An increasing number of families are selling their businesses to private equity (PE) investors. A key question is what the family firm is worth without the family as part of the business. We provide a buyers’ perspective on the valuation of the family firm and argue that prior family involvement provides the PE buyer with a distinct landscape of real options that require consideration. While the buyer gains real options for external (economic) value creation as a result of family departure, family exit after the sale triggers a loss of family dependent real options, which may subsequently reduce economic value for the new owner. Consequently, these two opposing effects need to be considered when accounting for the central role of the family and whether these effects result in an increased or decreased valuation of family firms.