Family Business and the Economic Downturn
Family Business and the Economic Downturn
Recession, stagflation, deflation, inflation, depression. These are all words used to describe the current economic conditions. While it is too soon to properly define our economic times, we are clearly in the midst of a significant downturn in the United States that will affect economies and citizens around the world.
Indicators of the distressed economy include a sharp drop in housing prices, a credit crunch due to the subprime mortgage debacle, rising unemployment, rapidly increasing oil prices, the falling value of the dollar, large trade imbalances, and expanding price inflation. A prolonged and unpopular war and a pivotal presidential election have amplified uncertainty in the U.S. Together these factors suggest a prolonged economic downturn (feel free to say recession) throughout 2008, with a full recovery that might not be completed until late 2010. Furthermore, the United Nations warned in a January 2008 report that this economic crisis will reach throughout the world. The U.N. urges governments and central banks everywhere to work together and not react as if this is simply a U.S. problem. As the most active capital market with the dominant currency, the U.S. economy affects developing countries as well as economic giants. According to the U.N., the economic crisis will have far-reaching social and political consequences that may even affect the vibrant economies of China, India, Brazil, and Russia.
As the economists, policy makers, and television pundits debate the duration and implications of the slowdown, our concern is how the slowdown affects family businesses. Conventional thought is that economic conditions such as recessions are devastating to family businesses. This assumption is partially correct in that family businesses in industries most affected by the downturn (e.g., housing-related industries, real estate, financial services, luxury retailers, and durable goods producers and sellers) will face dramatic decreases in demand and/or changes in consumer preferences. Other family businesses that have been able to survive in strong economic times with weak strategic planning, financial management, and governance infrastructure will find that their lack of discipline will lead to failure in tougher times.
Businesses where poor family dynamics are present also suffer in difficult economic times, which tend to exacerbate ongoing family conflict. Imagine, for example, a business run by one sibling or cousin whose relatives are not engaged in the business. If this group does not get along well, there will be a tendency to blame the relative in charge for poor financial performance even if the situation is outside of the leader’s control. Despite all these challenges to family businesses, economic hardships historically have been the greatest time of development, growth, and opportunity for family businesses. Family businesses tend to be more responsive and flexible than non-family counterparts, and their long-term outlook, willingness to invest, and commitment to building a legacy allow them to make the most of the opportunities presented in the marketplace of failed competitors and shifting consumer preferences.
In addition, recovery periods often serve as the birthplace for new family businesses. In the U.S., the development of new businesses historically increases during an economic crisis or during the recovery period. This happened in the postwar years 1946–1955, 1980–1987, and 1993–1999. While circumstances are different for each crisis, the fact is that newly found “necessity entrepreneurs” choose to be business owners and many create highly effective first-generation entrepreneurial family businesses.
Perhaps the greatest challenge to family businesses is how well their managers, directors, and owners, most of whom have never led a business during a sustained economic downturn, lead their businesses during tough economic conditions. From 1990 until 2007, there have been only two recessions, from July 1990 to March 1991 and March 2001 to November 2001. In each case, the economy suffered for only eight months before a turnaround occurred. We would need to look all the way back to July 1981 to November 1982 and November 1973 to March 1975 to find a downturn of more than a year in duration. The likelihood that a family business will have a team of managers, owners, and directors with experience to handle such times is becoming more remote each day.
Furthermore, even an experienced team may not be able to help, as the type of recession forecasted will be more complicated and dynamic than we have ever seen before. The question remains—will today’s family business leaders be successful in navigating these complexities? One concern is that our extended economic boom has led to tremendous wealth creation and management success, which has in some cases, fostered bad habits for management, unreasonable expectations for shareholders, and overconfident business leaders. Success often leads to complacency. When businesses begin to fail, reactive business patterns such as hunkering down and broadly cutting costs without regard for circumstances can be disastrous. In many cases, the best strategy may be investing in moderate-risk opportunities.
The picture painted in nearly every media outlet does not look too bright for the economy. Does that mean that we should just throw up our hands and give up? Certainly not.
Key drivers of capitalism are the expectations and attitudes of consumers and producers. Family business owners routinely indicate optimism in their businesses. One example is the 2007 Family to Family Survey, which indicated that 87% of family business leaders were highly optimistic over the next five years regarding their success. As late as January 2008, a National Federation of Independent Business survey found that while business owners are preparing for changes brought by a slowing economy, they are still cautiously optimistic about the future of their own business success. The problem now is that consumer confidence is fading and traditional government responses such as economic stimulus packages and central bank adjustments might not have the same impact as in the past. This highlights how different our economic environment is today and demonstrates the uncertainties that exist as to how to best manage the family business to ensure long-term survival.
In the next issue of FBA, we will share a list of tips for family businesses in times of economic uncertainty, along with some examples of family businesses that are learning to weather the storm and use their creativity and flexibility to take advantage of opportunities provided by the downturn. Stay tuned.