Family company owners are accustomed to navigating volatility, but doing so in the current context is proving to be bafflingly challenging. Inflation for owners is at its greatest level since 1981. To stop a spiraling wage-price system, the Fed is sharply raising interest rates. However, according to most experts, that might still lead to a recession this year. All of this is taking place as hiring remains challenging and supply chains that are clogged further complicate business operations.
Whew! How can business owners overcome these obstacles when faced with these unfavorable circumstances? Executives from some of the biggest ESOP companies in the nation presented their perspectives at a recent Employee-owned S Corporations of America (ESCA) conference.
They relayed the following five business fundamentals:
Here are some techniques to aid in these difficult times for family business owners, who must always manage through uncertainty.
1. How to manage the current economic climate and uncertainties for family company owners
Rising interest rates pose the biggest obstacle in the immediate term. The management of working capital and maintaining a healthy balance sheet for their organization should be the chief financial officers’ main priorities. It can be beneficial to extend maturities to alleviate near-term financing pressures and to hedge some floating rate exposure using swaps or a term facility.
2. The likelihood of a recession is the second most urgent issue
Company leaders indicated the actions they took in the wake of the first COVID-19 wave in early 2020 served as a practice run for future actions they are considering: Rapid cost reduction is needed to maintain cash flow due to decreased sales. Ranking your most important projects will help you decide where to make cuts without endangering crucial operations. Inform lenders up front about the actions being done by reaching out to them. Lenders would appreciate this, and the goodwill will create a solid base should you ever need to contact them for waivers or modifications of your borrowing obligations.
3. Inflation over the longer term is particularly concerning and may be challenging to control
Because, in the opinion of management consultant Ram Charon, corporate executives have forgotten how to deal with rising costs after not having to do so for over 40 years. Operating in a cost-increasing environment emphasizes the need for cautious product pricing, cost management through strategic purchasing, and working capital management, which includes minimizing accounts receivables. In order to ensure that the finance, HR, purchasing, marketing, and other important areas respond in a coordinated manner to inflation’s issues, CEOs must raise the alarm internally about inflation as enemy No. 1.
4. Explain to your staff how factors like increasing interest rates, inflation, or a recession
It could affect your company, as employee involvement is especially important in these difficult situations. Describe how you plan to get through difficult times. Additionally, now is the moment to ask staff members for ideas on how to increase efficiency and attract clients.
5. Your human resources team should collaborate with your management team
To recognise and keep your top performers in light of talent and the great push to hire and retain excellent personnel. In addition, this might be a good moment to pursue strategic talent acquisitions that would have been unthinkable in the past and to acknowledge that younger talent wants to grow personally and professionally in order to advance their careers.
Directors and Consultants:
Private company executives urged employees to seek the advice of the board of directors and experts. Your board should ideally be made up of directors with a variety of backgrounds and perspectives. Many people can offer helpful insights since they have likely experienced previous recessionary cycles or previous periods of inflation and rising interest rates.
Planning strategically: Participants believe it is crucial to take a step back and concentrate on what you want for the future of the company, setting aside day-to-day activities. You will have considered corporate objectives, determined primary and secondary priorities, as well as present and potential dangers, if you have engaged in a strategic planning exercise. In difficult times, you should set aside funds for the most opportunistic efforts, set resource limits, or completely stop working on lower priority or riskier projects. If you haven’t already done so, doing it now will boost your confidence in the decisions you’re making and help you avoid reflexive, detrimental business decisions.
M&A:
Rising interest rates and recessions often result in lower deal volumes, and the acquisitions that are completed may be at lower multiples to account for the present bad economic climate and reflect fewer comparable public companies. Having said that, high-quality companies with solid financials and a growing customer base can always find purchasers. We are observing longer sale procedures as a result of buyer diligence and seller uncertainty despite all the economic headwinds. For the good news in disruption, strong balance sheet corporations will discover it pays to be a countercyclical buyer and seek previously unattainable opportunities.
Develop a plan
If you haven’t already, to protect your ownership stake in the company or to transition it so that it serves your goals and those of your family. It takes time to construct a thorough plan, so if you haven’t started thinking strategically about maximizing the long-term value of the business you’ve worked so hard to build, now is the time.
