Growing, Financing, and Managing Family and Closely Held Firms

Course Number 1402

Associate Professor Belén Villalonga
Winter; Q4; 3 credits
10 sessions with meetings twice daily
Paper

Educational Objectives

Most companies around the world are controlled by their founders or founding families, including not only private firms but also more than half of all public corporations in the U.S. and Europe, and more than two thirds of public corporations in Asia. Closely held ownership and family control create unique opportunities and challenges for these companies that are largely overlooked in business education.

This course fills the gap by introducing students to the unique corporate finance, valuation, and governance issues faced by these companies, and to the ways in which value can be created for both the controlling and minority shareholders. These issues are analyzed from the perspective of different stakeholders in these companies, including family and non-family managers, family and minority shareholders, joint-venture partners, investment bankers, and private equity partners. The course includes both U.S. and international cases, on public and private firms, from a broad range of industries.

Career Focus

This course is designed for students who may be involved with family-controlled and closely-held firms in a variety of roles: as founders, as managers of a company owned by their family or controlled by another family (think Alan Mulally in Ford or Bill Perez in Wrigley and Nike); as advisors (investment bankers, investment managers, consultants, or board members); or as investors or business partners (family shareholders, joint-venture partners, private equity partners, and hedge funds).

Students who want to pursue a general management, consulting, or finance career have a high probability of working at or with a family-controlled or closely-held firm. Whatever their future role, students will find it useful to understand the uniqueness of these firms, why they may or may not want to be involved with them, and how value can be created and measured at these companies.

Course Content and Organization

The course consists of four modules, which address the following questions:

1. The value of family and closely held firms. What are family and closely held firms? How do they differ from widely held firms? And why, if at all, should we expect them to perform differently? How should we value controlling and minority holdings in privately held firms? How much is a vote worth? How should the cost of capital be estimated in closely-held firms? How should non-family executives be compensated in private family firms?
2. Financing growth in family and closely held firms. How can the company's growth be financed given family owners' reluctance to lose control? What do different capital providers, such as joint-venture partners, private equity partners, and public investors bring to the table? What do they want in return? How do different mechanisms for retaining control in excess of share ownership (dual-class stock, pyramidal ownership) work?
3. Impact of family control on management decisions. How does family control affect management decisions such as distributing cash to shareholders, capital restructuring, or corporate diversification? How do the interests of family and non-family shareholders differ and what mechanisms can be used to align them?
4. Intergenerational wealth transfer. How can family ownership and control of the family business, and wealth, be transferred from one generation to another in a tax-efficient manner? Should family management also be transferred? How do different estate-planning vehicles like trusts, foundations, and ESOPs work? How do family offices work?

Class discussions will be case-based and will benefit from the interaction with guest speakers. Most cases in this course require some quantitative analysis, providing students with the opportunity to apply and build on the valuation techniques learned in the RC finance courses.