Partner Content by Markus Weishaupt
I remember the first few years after the 2008 financial crisis, the hardships that both people and companies had to endure: bankruptcies, unemployment and tragedy for millions of family businesses around the world. Many lost out because of this disruption, but there were also some winners. With the sobering distance of hindsight, these winning family companies can be identified and categorised into three distinct camps, which can further serve as role models for navigating the current crisis.
The first category consists of those family businesses who created competitive business models, had up to date corporate and family governance as well as strong financial structures long before the dramatic events of 2008. Those independent companies were able to live the recession self-determinately. Their independence meant they could strengthen their relative competitive power and prove their resiliency in the process.
The secondary category of winners is composed of those family companies who learned from the harsh experiences of the financial crisis. They managed to survive through hard work, creativity, deep confidence in their own capabilities, calculated help from their mostly regional banks and trust from private investors. In the years since, they have succeeded in building vigorous companies, resilient business models, financial health and greater independence from debt capital, instead focussing on strong equity capital.
The third category of winners is comprised of those companies who survived the recession with luck in one way or another but did not learn from it. They merely enjoyed their survival and kept to their old ways of doing business, governing their company without making any changes in their strategy or business model.
Prepare for the Worst
A little more than a decade has elapsed between the crisis of 2008 and the COVID-19 pandemic, which brings us to the edge of a recession projected to be catastrophic. While family businesses of the first and second category will most probably survive again and emerge even stronger, the companies of the third category will suffer more. They will have more sleepless nights, more anxiety and more nagging doubts about their sustainability. Again, some will blame others for their difficulties, to avoid self-criticism. This time, however, they will find no unethical bankers to blame. The root cause of this recession is a virus so small it can’t be seen by the unaided eye, let alone taken to court. Again, some will try to escape their responsibility, apportioning blame out to their own or foreign governments. But some others will seize the opportunity to learn from the crisis they find themselves in – to become stronger and more resilient for when the next crisis comes.
Come Out On Top
We might not want to believe it, but the next crisis lies in wait. Therefore, family businesses need to make sure they are prepared for the future. They must grow strong enough not only to survive the next months and years but also be prepared for whatever crisis comes next.
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The following seven steps to multigenerational sustainability will help them get there.
1. Get your balance sheets in order. Bridge current financial needs with bank loans, private equity, crowdfunding or interested private investors. Also, define goals to increase your equity capital in future, promising to allocate the profits to reserves. Do not forget, the most successful family companies have equity ratios of 50 per cent to 90 per cent, allowing them to act independently, especially through tough times.
2. Cash is king. Corporate financial management and planning is key. When companies fail, they fail because of cash shortages. To avoid lack, set up professional liquidity forecasting. Make sure you have at least six months of cash excess to cover six months cost at any given time.
3. Customer-centricity. Family Businesses, as all other companies, find their right to exist in their usefulness to their customers. It might be time to sharpen your proposal, redefine your product features and revolutionise your services. Find differences your customer is willing to honour.
4. Company culture. Crises teach us that loyalty proves its power when things get tough. Investing in competencies and letting your team members participate as peers in the company’s development and decision-making are essential to maintaining that loyalty.
5. Invest in efficient corporate and family governance. Make sure decision-making is a lean process, especially under pressure, without losing quality or a sense of proportion. The adaption of your corporate and family governance logic could save the family business next time.
6. Lean on the next-generation. Crises can be an ideal time to hand over the leadership to the next generation. It’s not a call for the incumbent generation to leave the sinking ship, but if the next generation is eager to risk their full entrance in a crisis, it might be an ideal time to let them do so and prove themselves.
7. Broaden markets. Lately, pundits everywhere are declaring the death of globalisation – that local circuits are the only solution for our economic and social problems. Do not let them dissuade your efforts to internationalise. On the contrary, heighten your focus on getting your activities, products and services to the world. Geographically diversified companies are less likely to fail because crises rarely have a global impact, most of them are regional. The more regions you cover, the easier it will be to survive.