As the scope of COVID-19 continues to unfold, anxiety for families and individuals, as well as businesses, remains high. Many family businesses, like other organizations, have taken strong immediate steps to protect their employees, customers and communities by limiting non-essential work and transitioning to remote work. While these actions are vitally important, economic worries are also critical for businesses. Family businesses, like other firms, have shifted their mentality over the last several weeks from ‘how can we grow’ to ‘how can we survive.’

This mental shift was evident in the recently released COVID-19 CFO Pulse Survey which, as of April 13, 2020, reported that 82 percent of CFO’s expect that COVID-19 will decrease their company’s revenue and/or profits this year. While this data includes both public and private companies, the pessimistic tone from business leaders is clear. The more positive news is that in many cases, family businesses historically have been more resilient than other organizations when sharp, unexpected economic downturns occur. Family-run firms typically have been in business through multiple downturns and crises, which is the foundation for their consistent long-term strategic focus. When consulting family business clients during economic declines, there are three main areas that we’re advising to help brace for in the weeks and months ahead.

Employee Welfare

While enabling business continuity is important, one main priority for family businesses during these changing, challenging times is supporting their employees. Family businesses tend to have strong employee retention and loyalty; a sense of goodwill built up over time because they are potentially more inclined to take better care of employees and offer stronger benefits than traditional non-family owned businesses. Because many family businesses are fiscally conservative, most are in a good position to take care of their employees, even if it means that the owning family may need to suspend dividends or adjust compensation.

Additionally, because family businesses are not beholden to third party investors with quarterly earnings reports, they can make longer-term financial decisions that may result in some financial loss in the short-term but will likely benefit the company in the longer term, such as retaining top talent. This will help position the firm well for the reopening of the economy. Right now, we’re advising firms to think through employee contingency plans for the next six, 18 and even 24 months. 

We also have seen families take steps to disclose more information about the financial well-being of their business to their employees, in ways they previously were reluctant to do for privacy reasons. Clear communication and information are ways to help build trust and ease anxiety to these loyal employees.

Business Liquidity

Finding fiscal stability in the face of a tumultuous market should continue to be the main challenge facing many family businesses. Luckily family businesses in particular tend to be fiscally conservative and debt averse, which can help limit their exposure during economic downturns. However, a lack of debt alone does not mean immunity from challenges that may result in downsizing or business stoppage. There are several steps we recommend family businesses take steps to further maintain their liquidity, including:

• Taking advantage of government deferrals to income and payroll-related tax filings: The IRS has allowed an extension for both businesses and individuals for 2020, which allows companies to preserve liquidity. Many family businesses can take advantage of personal income extensions as they are flow-through entities. Additionally, the CARES Act provides for deferral of certain payroll related taxes until 2021.
• Identifying what payments can be deferred: Business leaders can look through cash flow budgets and plans to find sources of capital that they can free up, or even tap into family liquidity if needed. Many family businesses are deferring capital improvements and other projects not deemed essential. Confirming that you are matching inflows of cash with outflows is critical for managing through this period.
• Requesting an extension or deferral of interest payments from banks: The Federal Reserve triggers are helping family businesses negotiate interest and terms for existing debt and loans, helping to alleviate cash flow demands and are opening up options to plan for immediate needs and the longer term. Early indications from banks is that they are working with their clients to help provide adjustments to lending arrangements.

Family Liquidity

While many family business owners hoped that this disruption would be only a few weeks, they are now shifting their thinking to longer-term scenarios. As this pandemic may continue for several months, cash distributions to family members may be impacted. Some family businesses have made plans for situations where cash flow would be disrupted, including what other means of cash flow could buttress families’ financial stability. In an abundance of caution, we advise clients to consider the worst-case scenario, which we see right now as mapping cash needs for 24 months for family members, assuming there is no more cash coming from the business.

Transparency in communicating any changes, and the rationale for these changes, is essential as there may be family members on the board or in the C-suite of the business that may have more access to financial information than other family members. To overcome any knowledge gaps on such sensitive issues, we advise clients to try to keep everyone in the fold, and clearly explain any decisions to change dividends. While arguments cannot always be avoided, clear communication about decision making should help mitigate conflict, particularly during already stressful times.

The global implications of COVID-19 on individuals and business are causing stress and strain across areas of daily life. Leaders of family businesses are being forced to make agile business decisions to help protect employees and keep the company afloat. As the economic ramifications of this crisis continue to evolve, acknowledging and addressing challenges as quickly and nimbly as possible can help confirm that family businesses will survive the current climate, and position themselves to recover once COVID-19 is behind us.