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Family Businesses And Turbulent Economies - Building On Strengths

For many family run enterprises it may feel like over the past few years we have lurched from one economic crisis to the next, whether that be COVID, high energy prices or rocketing inflation.

Times are tough, but, while it may not feel like it when in the midst of it, family run businesses often cope with economic ups and downs relatively well. Indeed, our research suggests, that during COVID family businesses outperformed relative to other UK businesses. Perhaps there is something to be said for the modus operandi of ‘Succession’s’ Logan Roy, despite appearances! This article looks at the reasons behind the relative intrinsic resilience of family businesses and practical measures readers can think about in the current economic environment.

Sustainable Future Planning

To draw parallels of the hare and tortoise would be simplistic, but many family businesses have, by their very nature, had to endure ups and downs of the market. Legacy planning for family businesses must take a very long-term view and appreciate the natural ebbs and flows of the economy so as to help mitigate against inevitable downturns.

In concrete terms, part of family firms' resilience is their attitude to leverage and risk. Research suggests that family firms are typically less levered than non-family firms. Many would likely agree with Warren Buffett's adage that high levels of corporate debt are a Russian roulette equation - usually win, occasionally die. Family firms also tend to avoid risky 'bet the farm' M&A deals in favour of strategic, rational and deliverable bolt-on acquisitions, where synergies are much easier to achieve.

It is also helpful that the directors of family businesses are commonly also shareholders. It is not difficult for such individuals to 'think like shareholders' when they already are. Low turnover of key management positions also helps add to stability in difficult times.

How Can Family Businesses Adapt?

There are several practical things that family businesses can do now to take advantage of their strengths and help cope with the current economic environment.

One key element of this is adapting the business based on bespoke company-based assessments of exposure to current economic headwinds and emerging trends. Some of this will be adapting current practices - for example some of our clients are revisiting the frequency with which they complete their company forecasts and budgets to reflect the fact they can no longer assume stable interest rates. There can also be overlap with wider ESG initiatives within the business, whether that be moving towards having shorter, more local, supply chains, or, in the case of one client, installing solar panels on their factory's roof to help lower long term power costs and move towards net-zero.

However, it is likely that given the number of changes in the economic environment over the last few years that many companies are going to need to reassess how they operate, how much slack they have in their systems and what contingency plans they have in place to deal with disruptions.

Now may also be a good time to look again at the incentive schemes in place for non-family management. There are various tax-efficient equity schemes available to companies (e.g. EMI schemes or growth share schemes). Challenging market conditions can be a good opportunity to put these schemes in place - it is a time when businesses need committed management to help weather the storm and management can be properly incentivised by the prospect of serious growth when the company comes out the other side.

There are also lessons to be learned from the relative resilience of family run enterprises in previous downturns; ensure leverage ratios are kept under control and target bolt on acquisitions instead of apparently transformational M&A deals. Many family businesses may also find that given their relative over performance they are well placed to swoop on underperforming businesses or investment opportunities.

Ultimately each and every business will naturally be affected differently by turbulent economic times. Family run enterprises often, however, have strengths over others in the market and if they leverage their experience and adapt to new conditions they will be well placed to thrive as conditions improve.

About the Author - Charlie Hewlett is a Senior Associate at Boodle Hatfield


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