Family business CFOs are essential in black swan events like COVID-19

By Jane Hamrle

The changes in the world today are multi-dimensional and complex. Many factors were already in play at the beginning of 2020, but the COVID-19 global pandemic this spring was a black swan event that turbo-charged their impact.

Digitization is on the rise. Employers are migrating to the cloud in support of remote work. Geopolitical agendas have nationalized the pressure on global supply chains. Public health policies have altered workplace safety and environmental practices. The United States once again finds itself confronting racism and inequality with mass protests. Any one of these dynamics would have a significant impact on our future. All of them occurring simultaneously is causing unprecedented disruption and uncertainty for businesses.

Chief financial officers of family businesses play a key role in this shifting and unpredictable environment. They can make their organizations more agile and create stakeholder alignment. Here’s what family business CFOs should be doing right now to help their companies survive and thrive.

"Prediction is very difficult, especially if it's about the future." — Niels Bohr, Nobel laureate in physics

Today’s environment, framed by a global pandemic that few saw coming, is marked by volatility, uncertainty, ambiguity and complexity.

Traditional forecast methods, which are based on linear techniques and quantitative estimates of the future anchored in a set of historical assumptions, are insufficient. Applying more advanced modeling techniques enables businesses to become more agile and adaptable.

Advanced planning methods are especially useful in family businesses. Personal financial plans are closely tied to the underlying business performance. They must remain top-of-mind and be carefully integrated into financial overall projections. During times like this, the cash that family members have counted on for distributions and to fund key events such as retirements is needed to manage business operations.

CFOs who can quickly quantify the financial impacts as key assumptions change dramatically improve the quality and speed of decision making.

Scenario planning takes things a step further and is most effective when cross-functional team members are engaged in developing multiple views of the future. In this qualitative approach to forecasting, team members build scenarios that are probable as well as possible. When CFOs create scenario plans around what the future could look like, businesses make better informed decisions earlier and position the business to respond as changes unfold.

Developing several discrete views of the future allows business leaders to focus in one direction at a time. They are better able to organize, think through and consider how best to respond in each situation. Owners and executives are attuned to changes taking place around them and can more rapidly assess how these changes might affect the business. They can readily recognize and assimilate new information as it emerges.

Scenario planning provides a map of the future. It identifies the signals and emerging trends organizations should have on their radar. At the same time, it produces a range of outcomes and establishes boundaries. Decision makers are better able to comprehend exponential change and formulate proactive responses, rather than being boxed-in by reactive responses.

Another type of advanced planning technique uses “what-ifs” to identify the impact on certain variables and the impact to the overall forecast. For example, what if a key raw material is out of stock and the business is unable to replenish inventories to meet customer orders? This may cause costs to rise as shipments are expedited from other vendors, delayed fulfillment of customer orders due to unavailability of materials or disruptions to manufacturing schedules. All three variables could impact the forecast.

Advanced forecasting techniques such as scenario planning and what-if analysis are particularly important because business results can have a profound impact on personal finances. As business levels fluctuate, operating cash flow varies. Depressed levels of cash flow put pressure on funds available for share repurchases and liquidity to repay shareholder loans and make planned distributions. 

"Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard." — Warren Buffett

Regularly updated business projections incorporate the latest thinking and provide current views of the future. They enable family businesses to anticipate what’s ahead and quickly take advantage of opportunities. As businesses cycle, there is a natural need to reinvest and grow. Without these periods of reinvestment, businesses fall behind the market and are vulnerable to competitors.

Today, reinvestment isn’t just a “nice to have” — it’s necessary and more critical than ever to remain viable. Businesses across the board have been forced to invest in technology to support mobile working, reimagine supply chains, create or alter business models, and invest in other businesses.

Many of the investments made in the early weeks of the pandemic were done at lightning speed and were absolutely necessary so businesses could survive this crisis. Going forward, businesses across the board should continue advancing these initial steps in a way that allows them to be stronger and better positioned for the future. Organizations that are not looking for future opportunities to invest are at high risk of falling behind.

Business over the next few years will be dramatically different. The economy will come back, and when it does, family businesses should position themselves to take advantage of it.

Framing investments in light of other cash needs puts into context the overall availability of capital. CFOs who take a holistic approach to integrating needs for capital rather than evaluating each on a standalone basis provide a broader perspective. They not only take into account the incremental investment but also include the implications on competing uses of capital. They are able to determine what the business can afford, how long the business will be affected and what the financing needs will be.

For family businesses, investment in the business can get complicated. For example, business opportunities often compete with dividend distributions and/or retirement funding for family executives. The needs and interests of all stakeholders throughout the process must be accounted for and communicated clearly.

Many NextGen leaders are eager to make investments in newer technologies such as integrated IT systems, digital marketing and remote work tools. The areas where they see opportunities are often at odds with predecessors who saw no compelling reason to invest. Today is different. Remote work and mobile capabilities are no longer nice perks; they are now requirements for day-to-day operations.

Positioning the organization for the future and considering various investment alternatives invites differing perspectives about what’s needed, what’s necessary and what’s best. It often sharpens focus and stimulates debate about the right path forward.

CFOs with the skills to frame issues objectively and facilitate discussions effectively (either personally or with the assistance of an outside expert) provide a tremendous value to family businesses. Framing the issues educates stakeholders up front and provides a common understanding as a starting point for discussion. Including data and analysis brings objectivity to the matter at hand — especially when used to justify recommendations. Meanwhile, the facilitated discussion provides structure to the conversation, balanced engagement across all stakeholders and tools to keep the discussion focused and on topic.

Stakeholder communication is essential to garnering buy-in. Its importance cannot be underestimated. Family patterns of communication range across the spectrum. The tendencies at one end lean toward high levels of engagement and may require stakeholders to spend more time listening to one another. Conversely, tendencies leaning toward passive styles of communication may require more open and honest dialogue.

Most family businesses have baby boomers at the helm, many of whom never expected to experience another financial crisis in their career — let alone with the speed and magnitude of this one. The severity of this downturn has created uncertainty in many succession plans and jeopardized others. Worried discussions about the timing and impact of succession are a justified response to today’s economic environment.

"A leader's lasting value is measured by succession." — John C. Maxwell

Some economists are forecasting a V-shaped recovery, while others anticipate a prolonged recession and recovery if the virus re-emerges in the fall. According to recent pronouncements from the Federal Reserve, economic activity may not return to prior levels for years. A prolonged downturn means a majority of today’s leaders may be retired before we see a bull market again. Additionally, the company’s need for liquidity while enduring a slow recovery may delay retirement plans.

However, there are steps that can be taken today to better position succession and ownership plans for the future. Opportunities do exist. This is an excellent time to have business valuations performed, especially for purposes of estate planning and ownership transfers. The government discount/interest rates are extremely low, capital gain and estate taxes are among the most favorable in history and economic conditions have lowered business projections. Lower valuations translate to a lower capital gain tax base. Applying lower tax rates and higher gift tax exclusion limits on depressed valuations has exponential benefits for business owners.

Because of low business projections and high uncertainty, this is not an ideal time to sell. However, it is a good time to restructure ownership of the business and minimize taxes on a potential sale.

Additionally, identifying and taking steps to make the business more attractive to a third party will not only improve the outcome of a potential sale but also benefit the business when ownership remains in the family.

Many are speculating that future tax increases will be unavoidable to pay down the federal deficits ballooning under government stimulus plans. These increases will not prove advantageous to family businesses. Estate and gift taxes are two areas heavily targeted for changes, and the impacts may be significant. Taking steps now to lock in elements of estate plans not only takes advantage of favorable conditions but also minimizes future uncertainty.

While everyone is reeling from the economic effects and uncertain forecasts caused by this global pandemic, it is critical that family business leadership teams act proactively and together. CFOs must seize the opportunity to show true leadership — displaying agility, thinking creatively and prioritizing clear communication among all stakeholders. There is also a role for a healthy dose of compassion and role-modeling resilience, as families face disrupted plans and delayed dreams at home and in their businesses.                    

Jane Hamrle is a former CFO of multi-generational family businesses, who started and ran a family office managing returns across a portfolio of direct investments. With more than two decades of experience in strategy, operations, M&A and finance, she advises clients on increasing shareholder value, improving operating company performance and maximizing direct investment returns (www.PrivateCompanyConsultants.com).

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.    

Article categories: 
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Issue: 
September/October 2020

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