Is Your Family Business Ready for a COVID-19 Recession?

Planning & Strategy Special Topics

While we respect the fundamental divide between Wall Street and Main Street, the official end of the bull market for public stocks signals that Coronavirus-induced disruptions to the global economy are real and are expected to persist.  As the pandemic unfolds, the economic effects will eventually reach Main Street, where most family businesses operate.  The stock market tends to be the best leading economic indicator, so family business directors would do well to think about how best to position their businesses to weather the slowdown.

We are not predicting that there will, in fact, be an official recession, or even how long or significant the economic slowdown will be.  However, sluggish economic growth during at least a portion of 2020 seems inevitable at this point.  A little over a year ago, we asked our readers whether their family businesses were ready for the next recession.

Times of stress like the current period highlight some of the principal benefits of being a family-owned business.  Unlike public company managers and directors, family business leaders can respond to current circumstances with a long view in perspective, not worrying about next quarter’s earnings release.  That long view includes a focus on operating efficiency, balance sheet strength, and competitive dynamics.

Operating Efficiency

A great economy can obscure inefficiencies in your family business.  A slowing economy can reveal exactly where actions are needed.  From the perspective of a family business, this can be viewed as an opportunity rather than a necessity.  Improving operating efficiency is not about boosting next quarter’s earnings, but rather enhancing the long-term sustainability of the family business.  A slowdown can be an opportune time for making strategic investments in technology, systems, and processes that will pay dividends both during, and well after, the slowdown.

Balance Sheet Strength

It is more challenging to adapt the family business balance sheet on the fly.  Just as the best time to plant a tree is twenty years ago, the best time to secure favorable credit facilities is before everyone sees a slowdown coming.  Nonetheless, it is never too late to engage with your bankers to review covenant compliance and ensure that access to existing lines of credit will not be interrupted if and when needed.

The best way to enhance financial flexibility in anticipation of an economic slowdown is to identify unnecessary or non-operating assets.  Capital is precious in a downturn, and you don’t want to “waste” capital by funding assets that don’t actually support the operations of the family business.

  • Working capital: Have your cash collections been stretching out?  Do you have excess inventory?
  • Fixed assets: Do you have idle productive assets or excess warehouse capacity?  Is your administrative office space consistent with how work actually gets done these days (telecommuting, etc.)?
  • Other: Does the family business own assets that are really for the private enjoyment of select family members?  Now may be the right time for the business to sell those assets to the family members that actually use them.

The best way to enhance financial flexibility in anticipation of an economic slowdown is to identify unnecessary or non-operating assets.

Competitive Dynamics

Taking the long view, an economic disruption may present opportunities for patient family businesses to take advantage of industry dislocations by increasing market share or consolidating industry capacity.  You don’t have to outrun the bear as long as you can outrun the other hunters.  An economic slowdown can prove to be a prime opportunity to solidify your family businesses’ long-run competitive position.

It’s not for the faint of heart, but strategic acquisitions during a downturn often provide better long-term returns than those made at the top.  If a buyer’s market develops, do you have a strategic plan for what businesses your family business would want to acquire at opportunistic prices?

Conclusion

We hope that the economic slowdown triggered by COVID-19 is short and shallow.  Regardless of the duration and intensity, however, family business directors should view the challenge it presents as an opportunity to take the long view.  The reality of the coronavirus should cause all of us to change some of our ingrained personal habits not just to avoid infection in the near-term, but to live healthier lives in the long-run.  In the same way, family business directors should focus on taking prudent steps to manage not just the near-term economic slowdown, but to position their family businesses to thrive for future generations.