The pandemic caused by COVID-19 continues to create both a public health crisis and an economic crisis around the World. As this article goes to publication, more than 240,000 Americans have lost their lives and many more have been sickened. And notwithstanding herculean efforts by many, as well as laws enacted to afford trillions of dollars of economic relief to impacted businesses and individuals, the impact of the Covid-19 pandemic on the U.S. economy has been severe.
The combination of the pandemic and advances in technology has changed the landscape for nearly every business. As a result, many businesses stopped generating much or all of their revenue overnight, sometimes permanently. Even the most thoughtful “contingency plans” could not reasonably be expected to have accounted for what this pandemic has wrought.
Families in business together have always faced unique challenges but the Covid -19 pandemic has created new and unanticipated challenges. Many family businesses have needed to reconsider such issues as (1) which family members are getting paid (and how much - and why)?; (2) whether dividends to owners should be paid - or used to retain key employees and preserve cash?; or (3) is the family focusing on the right opportunities – or should it pivot and focus on new opportunities that might make more sense through and after the pandemic?
Notwithstanding the challenges created by the pandemic, family businesses have certain inherent advantages that can enhance their ability to remain vital and successful. Often credited for their resiliency, family businesses are generally more effective at focusing on long-term business horizons rather than on short term profits and their consolidated ownership structures also tend to make it easier for families to adapt to rapidly shifting market conditions. These advantages can be enhanced by taking eight steps that are designed to help families remain vital and successful through these challenging times.
Step 1: Revisit Core Values. Successful companies often credit their success to their people. Highly engaged employees are energized, creative and committed to a company’s success. Those qualities, in turn, lead to more successful and profitable companies. High engagement starts with a commitment to shared values that, in turn, forms the foundation for a positive culture. Take the time to understand your company’s core values – and how they will be used to help prioritize and make difficult decisions.
Step 2: Revisit Governance. Family businesses benefit by establishing thoughtful governance structures that can help inform the choices they make in today’s fast changing economy. A great place to start is to establish both a Family Council and a Board of Directors that includes experienced non-family members.
Step 3: Revisit How Capital is Allocated. Capital allocation refers to how a company spends money, including through funding organic growth initiatives, acquiring other businesses or new assets, repaying debt, or through salaries and dividends. There is no “right answer” when it comes to capital allocation but it may be a good time to revisit your company’s competing needs for capital. How much capital should be returned to owners compared to being reinvested to grow core business opportunities and/or fund diversification? Should some assets be sold or idled? Should cash be conserved by instituting pay cuts and, if so, to whom and by how much? Should dividends be reduced? Should hard working employees receive bonuses? Finally, is your business in a position to help your community, either with cash, services or volunteer labor?
Step 4: Invest in the Future. Families that have remained in business over the generations continue to innovate. Without continuous innovation, a company’s products and services are at risk of becoming obsolete, particularly in an increasingly fast changing World. Consider how much – and what type of – tangible support your family business allocated to encourage innovation. I suggest developing clear rules to assess whether innovation related proposals are supported to help distinguish thoughtful and promising opportunities from “half-baked ideas.”
Step 5: Intentionally Nurture Emotional Support. A crisis like the pandemic can be frightening and destabilizing, causing tempers to flare, communication to breakdown, and conflict to erupt as individuals, forced to deal with so much uncertainty, might find themselves disagreeing about what to do and what not to do. Your family might find it helpful to discuss how its previous challenges were overcome and the lessons learned in doing so. And, of course, take time to celebrate holidays, birthdays and other important events together.
Step 6: Promote Healthy Lifestyles. Maintaining a healthy lifestyle is always important so encourage your family members and employees to take time to do just that. Consider instituting mindfulness training program as many businesses, including Google, Goldman Sachs and Spotify have come to appreciate the benefits of doing so to both individuals and their organizations.
Step 7: Revisit Your Succession Plan. Now is a good time to evaluate whether your business has someone in place who is capable of succeeding current leadership at any time. Succession planning is not easy, takes time, and requires families to ask themselves hard questions, including whether potential successors have the right qualifications, experience, and character to assume leadership if and when necessary?
Step 8: Revisit your Estate Plan. Regardless of whether an owner wishes to keep a business within her family or sell it, careful planning can help ensure that the business and family can be protected from large and unexpected tax liabilities. The Covid-19 pandemic may have significantly (even if only relatively temporarily) impacted the value of your family’s business, making it helpful to revisit your estate plan with your advisors.
Every family business is experiencing the effect of the Covid-19 pandemic in its own way. Strategies need to be customized as appropriate and the forgoing are only some suggestions to consider. With challenges come opportunities and this may prove to be a great opportunity for your Family to rally around each other, your business, and your community, act as an example for others within your industry, and make this a challenging but great time in your history.
For International businesses, view Family Business Planning & Expansion to the U.S. webinar.
See, e.g. S. Friedman, Family Business and Positive Psychology: New Planning Strategies for the 21st Century (American Bar Association Press, 2014).