Final Analysis: Out of Their Minds

| FROM THE PRINT EDITION |
 
 

When I moved to Seattle 22 years ago, I remember thinking I had never lived in a city where so many people had moved here not for a job, but for a sense of place. I had relocated from St. Louis, and I love St. Louis. But trust me: No one moves to St. Louis because it is geographically blessed, whereas hordes will move to Seattle precisely for that reason. Even during the 1990-91 recession, I kept encountering people who had moved here for the hiking, the climbing, the sailing. They sang the praises of the scenery, the temperate climate. They figured the career thing would eventually take care of itself. They wanted to live here because the place is so incredibly special.

A lot of people who don’t live here also think Seattle is pretty special. We know this because they pump $16.4 billion a year into the state’s economy and assure the employment of people who make $4.5 billion in wages.

How long that attraction continues will have a lot to do with how well we continue to promote Washington tourism. The state of Washington right now isn’t spending a penny on tourism promotion. A revenue-strapped Legislature shut down the state tourism office last year and eliminated its $1.8 million budget.

A makeshift private organization called the Washington Tourism Alliance is now the de facto promoter of state tourism. People who work in tourism created it, knowing that while Washington will always remain an attractive vacation option, it’s hard to compete with other inviting places that pump tens of millions of dollars a year into promoting their attractions. The thinking is that once we’re out of sight, we’ll quickly be out of mind.

At a public forum on travel and tourism recently, the sponsor of the event—a major bank—declared it had become the first financial institution in Washington state to join the Washington Tourism Alliance.

The announcement did not lead the 11 o’clock news. But it opened my eyes. “The health of the tourism industry does not just affect hotels and restaurants,” said KeyBank executive John Roehm. “The hundreds of attractions, retail and hospitality businesses, and the 160,000 people employed in this sector are our bank customers. They open checking accounts, they pay mortgages and they make investments. It is in our interest to ensure the industry survives and grows.”

That was my “well, duh!” moment. For some reason, we who live in this geographically blessed place don’t seem to think of tourism as an industry, at least not in the same way we think about airplane manufacturing, software development or even online retail. There’s no one going to a factory or an office building to “make” something. We seem to think it just happens. But if we take it for granted, it will go away.

In 1993, during an anti-taxation frenzy, Colorado voters apparently thought the same thing. They cut the state’s travel-promotion budget from $12 million to zero. Colorado’s share of the domestic travel market plunged from 2.7 percent to 1.8 percent. State funding returned about seven years later, but it took 19 years for Colorado to get back to the market share it had enjoyed in 1993.

In Washington state, the Alliance realizes it cannot continue relying on the kindness of strangers. Its ultimate goal is to persuade the Legislature to devise a promotion model that keeps travel and tourism a viable industry in Washington state. But until that happens, you may want to consider ponying up for a membership in the Alliance. After all, this is a special place. But, as Colorado quickly discovered, it’s not that special when an entire industry dries up.

JOHN LEVESQUE is the managing editor of Seattle Business magazine. Full disclosure: His wife is employed by KeyBank. 

Looking for high investment returns? Consider investing in a family business.

Looking for high investment returns? Consider investing in a family business.

 
 

Investors do not lack opportunities to deploy their capital, but being able to generate respectable returns is much more difficult. Part of the problem is finding unique investment opportunities with significant upside in a crowded market. The best option may be to put money to work in a privately-held company.

But private companies pose challenges when it comes to understanding their business, and analysis of the company may be fraught with pitfalls. Or it may be that investors are simply not aware of the opportunity in the first place.

There is, however, an important trend that is clearly discernable in relation to family-held businesses. Wealthy families and individuals are increasingly attracted to the idea of providing capital directly to family businesses as part of their overall investing strategy. And the attraction is reciprocated – family-owned businesses are increasingly open to the idea of wealthy families and individuals providing capital.

At Cascadia Capital, we are seeing a rapid increase in the practice of families investing in families, which can be a highly effective solution for both businesses and investors. Family businesses can be attractive investments, particularly for other family businesses, private companies, individuals, or family offices, which are wealth management companies investing on behalf of a single family or individual. Family run businesses often employ management styles that these investors understand well and can offer portfolio diversification without the hefty fees charged by private equity funds and investment firms; fees that, over time, can add up to millions of dollars.

According to a recent survey by the Family Office Exchange, about 70 percent of family offices now pursue this strategy of direct investing. This may be, in part, due to a shift by family offices seeking to bypass layers of fees and a lack of transparency and control that are inherent to the private equity fund model. Instead, many family offices now prefer to invest directly on a deal-by-deal basis offering more direct control, additional flexibility for longer-term holds, and lower fees. 

From the perspective of family businesses, a significant number are considering alternative solutions to meet their strategic objectives. In the event of a sale, an acquisition by another family can be a compelling solution compared to a private equity or strategic buyer transaction. And when seeking financing for business activities, direct investments from family offices can offer significantly more flexibility than funding from private equity firms that are beholden to rigid criteria and fixed investment periods.

 

The benefits for family businesses of having a direct relationship with their investors or buyers can be numerous. For example, if a family is looking to sell its business, family office buyers can provide liquidity and the opportunity for owners to exit without having to sell to a competitor. If a family is looking for additional financing to fund growth, direct family office investments can offer more favorable terms than other traditional sources of financing.

 Importantly, wealthy families and individuals are more likely to take a long-term view of their investment and are not constrained by exit strategies devised to maximize value within a given time period. Further, these investors often made their money owning and operating successful companies and, as a result, are more likely to understand the nuances and unique challenges of family run businesses. 

This investment trend, while also being experienced in other parts of the country, is gaining momentum in the Pacific Northwest. We are increasingly finding private direct investments to be an effective solution for our family-owned business clients and our family office clients.

Choosing the right investment partner is one of the most challenging decisions a family business can make. We have worked with many private, family run businesses to design long-term, flexible capital solutions and introduce our clients to suitable family office and private investors with common objectives.

 For family offices, like any investment opportunity, buying into family businesses can be very attractive, but it is not without risk. Prior to investing, proper analysis calls for extensive financial due diligence to ensure interests and incentives are well aligned in the transaction. Success depends on ensuring both a structural and cultural fit. We actively encourage family business owners and family investors to work with experienced advisors to carefully explore every available option before determining the best course of action.

Christian Schiller is a managing director at Cascadia Capital, specializing in advising family businesses. Cascadia Capital is a Seattle-based investment bank serving middle market clients, globally.