Allow us to interrupt the usual glad tidings enjoyed in December with a dousing of cold water. No, we aren’t about to embark on a full-on airing of grievances a la the great 20th-century philosopher Frank Constanza. Rather, the intent of our post this week is to wave a cautionary flag one last time this year before we enter the Christmas season over the next several weeks. As we begin to put a bow on 2022 and turn our attention to 2023, we suspect that the dreaded “R word” is on the mind of many of our readers as they contemplate the myriad challenges and obstacles their businesses will face in 2023.
While we are not professional economists and have no illusions of being so, those that have chosen to make their living by predicting the timing of fluctuations in the business cycle are in near unanimous agreement that the U.S. economy will enter a recession in 2023 if it has not done so already. Recent readings of The Conference Board Leading Economic Index® (LEI) for the United States suggest as much: “Indeed, given the LEI’s recent performance, The Conference Board projects that economic weakness will intensify and spread more broadly throughout the U.S. economy over the coming months with a recession to begin around the end of 2022 or early 2023.”
As a family business owner or director, now is the time to think critically about how your family business is positioned for a potential economic slowdown. This post offers a few practical steps family business owners and directors can take to ensure their business continues to thrive even if Santa brings us a recession this year.
One of our family business clients told us a long time ago that making good decisions is a lot easier when you don’t need the money. There’s a lot of wisdom in that maxim, given that sustained revenue and profit growth can mask inefficiencies in the day-to-day operations of your family business. When business is going well, it’s often easy to put off hard decisions regarding expense management. When you don’t feel like you “need” the money is typically the best time to make decisions in support of the long-term sustainability of the family business. If you wait until you feel the pressure in the heat of a downturn, making appropriate expense management decisions will be much more painful.
Balance Sheet Strength
Managing the balance sheet is a constant trade-off between efficiency and flexibility. We often write about the perils of “lazy” capital in family businesses, yet some financial flexibility can help sustain family businesses during economic slowdowns. Balance sheets can be fortified in advance of a recession by shedding underperforming or non-operating assets and using all or some of the proceeds to reduce outstanding indebtedness and build up a war chest of cash to sustain operations in the event of a downturn. Bankers prefer to lend money to those who don’t need it, so now could still be an optimal time to expand borrowing limits on lines of credit or re-negotiate loan covenants.
One oft-touted benefit of family businesses is the ability to maintain a long-term focus and avoid the short-termism that can afflict non-family public companies. 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. Now is the time for management teams and boards to carefully assess competitive and industry dynamics to identify what opportunities might arise for the family business to solidify its long-run competitive position during a recession.
The cyclicality of revenue refers to the sensitivity of a family business’s revenue stream to overall economic growth. Companies that sell non-discretionary goods or services exhibit less revenue sensitivity since customers need such products and services regardless of the economic environment. Demand for food, personal care products, healthcare, and similarly situated industries can soften during a recession as consumers trim budgets, but the sensitivity is muted relative to that for discretionary goods and services (automobiles, home renovations, leisure goods, etc.) that consumers can more readily forego or defer when belts need to be tightened. Examining the cyclicality of your family business’ revenue and employing strategies to manage this cyclicality is one practical step owners and directors can take to limit the company’s revenue exposure in the event of an economic slowdown.
We sincerely hope the next recession doesn’t start for a long time. You need to be prepared whenever it does start, whether in 2023 or later. As a family business director, you will probably never be able to make your business “recession-proof,” but now is the time to evaluate the prudent steps to prepare for the next downturn. Our family business advisory professionals have lived and worked through several recessions (and have the scars to prove it). Give us a call to discuss positioning your family business for the next one today.