Six Fearsome Economic Challenges Family Business Owners Can Face Down

Family business owners always manage through uncertainty, but the current environment is proving bafflingly hard to navigate. Owners face the highest inflation since 1981. The Fed is sharply hiking interest rates to stop a wage-and-price spiral. But that could trigger a recession yet this year, most economists think. All this is occurring as hiring continues difficult and kinked supply chains further hamper business operations.

Whew! Facing these adverse conditions, how can business owners meet these challenges? At a recent Employee-owned S Corporations of America (ESCA) conference, executives from some of the largest ESOP companies in the country shared their views. Here are six business primacies they relayed:

1. In the short-term, rising interest rates present the greatest challenge. Chief financial officers need to focus on managing working capital and ensuring their company’s balance sheet is strong. Extending maturities to remove near-term financing pressures and hedging some floating rate exposure through swaps or a term facility can be wise moves.

2. The prospect of recession is the next most pressing problem, and corporate leaders said the steps they took after the first COVID-19 wave in early 2020 proved a dress rehearsal for steps they contemplate: Reduce costs quickly to preserve cash flow because of lower revenues. Ranking your most critical initiatives will help identify where to pare without jeopardizing essential functions. Reach out to lenders proactively and brief them on steps being taken. Lenders will appreciate this, and the goodwill will lay a foundation should you need to approach them for borrowing waivers or amendments.

3. Longer-term, inflation is most worrisome, and it may be difficult to corral since, as management consultant Ram Charon sees it, business leaders have lost the muscle memory of coping with surging prices, which they haven’t faced for nearly 40 years. Operating in a rising cost environment puts a premium on careful product pricing, controlling costs through deliberate purchasing, and managing working capital that includes keeping accounts receivables as low as possible. As Charon notes, CEOs must sound the alarm internally about inflation as enemy No. 1 to ensure the finance, HR, purchasing, marketing and other key functions respond in a coordinated way to inflation’s challenges.

4. Since employee engagement is especially critical in these stressful scenarios, convey to your employees how rising interest rates, inflation or a recession impact your business. Communicate your strategy for getting through tough times. This also is the time to solicit employees’ suggestions for realizing economies and courting customers.

5. As for talent and the intense pressure to find and land superior staff, your human resources team should work with your management team to identify and retain your highest performers. And, this may be a good time to pursue strategic talent acquisitions that would have proven impossible previously and to recognize that younger talent seeks personal and professional development to further their careers.

6. Successful CEOs will convene a “war council” of their top executives to demonstrate the urgency of the current moment and gain their perspectives on the challenges affecting your business. You need your leadership team to grasp the implications so they avoid considering their own specific silo and focus on the entire operation to get your company through a difficult period.

Directors and Advisors: Private company leaders encouraged reaching out to the board of directors and advisors for their perspectives. Ideally, your board will comprise directors with diverse skills and viewpoints. Some will likely have lived through previous recessionary cycles or past periods of inflation and rising interest rates and can share useful insights.

Strategic Planning: Putting aside day-to-day operations, participants consider it essential to step back and focus on what you see as the business’s future. If you have completed a strategic planning exercise, you will have thought through business goals and identified essential and secondary priorities as well as current and future risks. In stressful times, you will want to hoard capital that supports the most opportunistic initiatives and limit resources, or curtail lower priority or riskier projects entirely. If you haven’t completed such an exercise, doing so now will give you confidence in the actions you’re taking and limit reflexive but short-sighted actions that hurt the enterprise.

M&A: Rising interest rates and recessions typically lead to reduced deal volumes – and the deals done can be at lower multiples to discount current adverse business conditions and reflect reduced public company comparables. Yet, that said, high-quality businesses with strong financial statements and momentum can always find buyers. With all the economic headwinds, we are detecting longer sale processes driven by buyers diligence and sellers’ uncertainty. Note: For the good news in disruption, companies with strong balance sheets will find it pays to be a countercyclical buyer and source opportunities previously unavailable.

Finally, if you haven’t already, develop a strategy for safeguarding your interest in the business or for transitioning it to accomplish your and your family’s objectives. Developing a thoughtful plan takes time, and if you haven’t done so previously, this is the opportunity to start thinking strategically about maximizing the long-term value of the enterprise you have worked so hard to create.