What does recovery look like for family-owned businesses?
As the COVID-19 pandemic took a significant toll across the business landscape, the impact was often felt acutely by family-owned businesses. These enterprises had to balance both the economics and their legacy as they made tough decisions such as layoffs, furloughs, and changing business models.
Now, with the U.S. economy appearing poised for strong growth this year, family businesses must take a long-term view to position themselves through the recovery phase and beyond.
Consider Herschend Enterprises, the largest family-owned themed attractions and entertainment company in the U.S., which recently became the majority partner and operator of Kentucky Kingdom and Hurricane Bay amusement and waterpark in Louisville, Kentucky. Georgia-based Herschend operates such attractions and entertainment brands as Dollywood and the Harlem Globetrotters.
Although the pandemic has been particularly hard on tourism and entertainment, Herschend is investing in a downturn to position itself for the future, instead of reserving capital for the owners/shareholders. Such actions are a hallmark of family enterprises.
Going forward, family businesses must continually balance the needs of multiple stakeholders. To foster better communication and planning, here are seven priorities to consider:
Weigh opportunities to sell — or buy — assets
Times of increased uncertainty and volatility often see increased buying and selling of distressed assets. Because families tend to be countercyclical investors, their conservatively managed balance sheets provide them with capital to invest with a long-term perspective on economic or business turnaround. Conversely, some family-owned companies have faced profitability challenges during the pandemic that accelerated the decision to sell.
Innovate and expand
While some family-run businesses tend to be traditional and conservative, many have found new ways of serving customers during the pandemic, which will likely be part of their business models in the future. For example, Lettuce Entertain You, a family-owned restaurant group, launched a virtual, soup-to-go restaurant to capitalize on the takeout vs. dine-in trend. It’s one of countless examples of family businesses — including some small operations — needing to adapt to survive.
Commit to purpose
As they weigh strategic decisions, family members should reexamine their sense of purpose. This is especially important when more is being asked of owners. Purpose may not change, but the way it is achieved may have to, including by restructuring assets. With clarity comes a sense of direction.
For example, during the pandemic many family businesses had to lay off employees for the first time. As one family business board chair told me, “We are committed to being a caring employer, but if we go out of business, we can’t employ anyone.”
The family business’s risk profile requires members to think objectively as owner/investors, with a long-term view of their capital structure. Decisions may include whether it is advisable to take on additional debt and, if so, how much leverage is acceptable. However, debt is not the only element of risk. Other considerations include whether to lock up capital in illiquid investments rather than keep it accessible for needs in the core business.
Set financial expectations
In times of change, families need to examine their financial expectations. During the pandemic distributions may have been reduced, sometimes dramatically, because of a decline in revenues and profits. Now, businesses may require capital reinvestment, which would reduce allocations to owners. Before taking such actions, family members need to consider what returns they expect (and need) going forward — another litmus test for their long-term commitment to the business.
Among family owners, succession is often a thorny issue since family leaders typically have extended tenures — potentially as long as 25 years — and passing the baton often means replacing one generation with the next. The subject of succession is becoming more urgent, in part due to Covid-19 and increased thoughts about mortality, as well as burnout from additional pressures. Amid rapid change, skill sets required rapidly evolve, which further informs the succession discussion: Is the right leader in place? Does the No. 2 person exhibit the skills needed to help the company thrive in the “next normal”? If not, is further development warranted — or perhaps a broader slate of candidates should be considered?
Look to the future
Post-pandemic, family businesses need to consider their employee base and culture. For example, what workplace practices will the business now support, such as remote work and reevaluating the need for office space? While family businesses tend to have strong, traditional cultures, the changes that had to be made in response to the pandemic (e.g., widespread remote work), may prompt them to reevaluate their workplace practices.
Family businesses face a world of change post-pandemic. Concurrent with planning for the future of the business, human relationships and family ties must be acknowledged in the decision-making, for the good of the business, its legacy, and its future.
About Jennifer Pendergast
Jennifer Pendergast is a clinical professor of family enterprise and executive director of the John L. Ward Center for Family Enterprises at the Kellogg School of Management. A career consultant and educator to family businesses, she specializes in strategic planning, family and business governance, family office structure, and facilitation.