There’s nothing like a pandemic to make families think about their future—particularly when those families’ fortunes are tied to a family business. So it is no great surprise that so many family businesses have been talking about change recently.
According to a recent survey of family business leaders across the U.S., the vast majority of family businesses are experiencing significant change. Some (38 percent) are changing their employee structure and labor costs. Others (39 percent) are taking action to better manage their operational costs. More than 1 in 10 say they are reevaluating top management compensation.
It’s not that all family businesses were particularly hard-hit by the pandemic. In fact, outside of those whose primary industry is travel and tourism, many family businesses I work with have come through the pandemic stronger than when they went in.
Some (often those in home improvement, consumer products, grocery, and residential real estate, for example) have seen strong demand and profit growth throughout the economic crisis. Many family businesses have found ways to cut costs (talk of reducing office space is rampant), enhance productivity (both through staff reductions and increased use of technology), and tap into new growth opportunities (in their sector or in adjacencies).
Some family businesses have certainly struggled; others have certainly prospered. Regardless, every family business has faced significant and rapid change.
Why the urgency?
One of the great things about family businesses is they tend to take a long-term perspective; in part, their long-term view is what helped many family businesses successfully navigate through the pandemic. So the natural inclination may be to wait until the dust settles on this pandemic before making any big decisions about the family business.
Yet there are a number of very good reasons why you may not want to wait to plan for the future. The first is many founders and tenured CEOs of family businesses are accelerating their succession plans, largely as a result of the pandemic. I have talked with many family business leaders (baby boomers in particular) who believe their final legacy will be their handling of the pandemic. Succession planning is at the top of the agenda.
The second big reason for urgency is the regulatory and tax environment seems likely to change in the near future. And the rumored implications for high-net-worth individuals and family businesses could be significant. Societal trends suggest increased public appetite for "taxing the rich" to pay for government deficits and stimulus plans. Who gets taxed and how much remains uncertain, but it’s clear taxes will increase for the top income brackets.
Capture the opportunities
There are very positive reasons for reassessing the family business’s future. Those stimulus plans that may lead to higher taxes may also lead to very interesting growth and investment opportunities for family businesses. For example, should the federal government implement some sort of investment incentive around green energy projects as part of the economic stimulus plan, new and exciting opportunities could well emerge in the energy sector, renewables, and associated services.
There are also great opportunities to grow the business inorganically—through mergers and acquisitions. Some may find that, with valuations in flux and availability of capital high, this is an excellent time to snap up rivals, invest in new partnerships, or expand footprints. I’m working with several family businesses who are now looking to pick up assets in sectors that are fairly new to them but where they know their business acumen and processes can help create amazing value.
The point is, this is a great time for family businesses to be thinking about what they want to achieve as a family, what that means for the business, and how they plan to get there. Wait too long, and you may miss opportunities to proactively reshape the future; worse, you may find your future is out of your hands entirely.
Try these three tips
These types of conversations are rarely easy; however, they require a significant amount of thought, communication, and sophistication. When I work with family businesses to help guide them through the process, I often make three suggestions that—I hope—will help clarify and catalyze their thought process:
- Be inclusive. Particularly when dealing with multigenerational transition situations, try to be as inclusive of all stakeholders as possible. This may mean including all family members (regardless of their role in the organizational structure), other key stakeholders and investors, as well as advisers, lawyers, and asset managers, where applicable. Remember, being inclusive does not mean everyone’s opinion must hold the same weight. But it does mean everyone’s opinion is heard.
- Embrace change. Explore all opportunities for the family business—from entertaining minority capital or changing the debt structure through to expanding into new services areas or acquiring a new asset. Look for opportunities to drive continued organizational efficiency and enhance bottom-line growth through technology and process innovation. And explore how new markets and potential changes to the tax environment may create new opportunities for the business in the future.
- Let your purpose guide you. Many family businesses navigated the past year so successfully, in part, because they had a strong and clear purpose. At moments of indecision, it was the family purpose that became the guiding principle. If you haven’t already done so, figure out your purpose, both from a philanthropic and a business perspective. And then develop plans to execute on those philanthropic and business goals.
Is your family business still fit for purpose?
Ultimately, you may find your current structures, businesses, strategies and purpose are exactly what your family business needs to thrive in the new environment. You may find, through the process, you uncover new ideas and opportunities allowing your family business to accelerate its growth and achieve its objectives faster. Or you may find the time has come for radical change.
Family businesses need to be asking if they are still fit for purpose in the new environment. And they need to be asking those questions now.