How can family businesses survive COVID-19 pandemic?
It is with a heavy heart that I announce the closure of all our stores effective end of May. We are currently experiencing severe financial difficulties as a result of the mandated closure of our stores. This decision is a difficult one, but the family is left without any choice but to close permanently. After operating for almost 10 years and providing for the livelihood of 150 employees, we believe this is the only option left…
I received this heartbreaking letter from the head of a family business engaged in the food business. For the purpose of this article, let’s call him Fred (he requested anonymity).
Fred requested me to help him polish the letter he prepared, as it would be sent to landlords, suppliers and creditors. Fred already knows how this unfolding story will end, and at 55 years old, he is now contemplating on returning to the corporate world.
The threat is real
In a Forbes article (How Family Businesses Respond to a Pandemic) by globally recognized family business expert and author Professor Dennis Jaffe highlighted that “today’s pandemic crisis is turning everyone’s world upside-down in ways that couldn’t have been anticipated just a short time ago. After a half-century of observing and sometimes resisting the increasing pace of change and the many innovations disrupting our behavior, we are now encountering a situation that makes it impossible not to change. However, there appears to be no clear way to reasonably plan what to do next or how to manage the extent of the upheaval. Yet every day we must act and even make some tough choices—despite the lack of any reliable information about the best direction to take.” Fred represents the many casualties of this unprecedented event. Should this uncertainty continue, we should expect more closures in the coming weeks and months. In any economic downturn, SMEs are often hit the hardest. Drop in sales, budget constraints, reduced spending power of consumers, and inadequate preparedness for an upheaval can make it impossible for small businesses to survive. In many cases, this can cause companies without adequate planning to tumble, unable to bounce back. Fred’s business is among the 99.6 percent of micro, small and medium enterprises (MSMEs) in the country.
With uncertainty, recession is not far behind and the VUCA (volatile, uncertain, complex and ambiguous) world I have been sharing in my talks for years is now a clear and present danger. As a matter of fact, what we are experiencing is a super VUCA and the impact is expected to be terrifying.
It is here, and intends to stay for long so it is no longer a question of whether there will be a global recession—it is a question of how deep it will be and how long it will last? And Fred has decided to throw in the towel.
For family owned businesses, COVID-19 is an unexpected, disruptive event that will surely cripple hundreds, if not thousands of enterprises. Like in Fred’s case, we can anticipate all forms of losses covering financial, income and employment on one side and non financial losses such as a sense of helplessness, loss of power and control. Small and mid sized family-owned businesses are often unable to take a longer-term, strategic approach in running their businesses. In most cases, they are opportunistic, sales-savvy, and rely heavily on quick wins. Their business success hinges purely on sales. With the sudden closure of non-essential businesses as a result of the lockdown, entrepreneurs like Fred are the most vulnerable. My consulting firm, W+B Strategic Advisory Group, made a business continuity survey late February on what contingency measures SMEs have initiated, and close to 90 percent surveyed said that they were neither prepared nor equipped to deal with the abrupt impact of a virus outbreak. Respondents also said that measures to address wage, rental costs, and loan payments were there top three areas of concern. A majority of those surveyed also expressed the fear of losing their employees and that they were trying their best to avoid a situation where they will have to ask their workers to go on unpaid leave.
To families running businesses that have been affected by the pandemic, initiating a sudden and abrupt change can be a sensitive issue and a huge and emotional decision.
What is so difficult with change? When family owned businesses are being tested, a lot of issues are on the line, it can be the founder’s sense of duty or the desire to move forward despite the adversity, family pride, compassion toward employees, and the dignity of each affected family member. Tough decisions
With change, tightening of belts follow, and resistance surfaces. I have listed some recommendations and initiatives to help family-owned businesses navigate crisis situations:
1. Unity This is the best time for the head of the family to gather everyone so they are well informed about the current status of the business, the severity of the situation and challenges moving forward. Unity is key especially under a turbulent and uncertain period.
2. Vision It is critical for the family to reflect on the real essence of why they are all in business together. Why they chose to be an entrepreneurial family. In short, it important to revisit and discuss the family’s sense of purpose and core values that will help pull everyone together.
3. Leadership The business leader must take the lead and consolidate all qualitative and quantitative resources of the family in preparation for the disruptive impact the crisis will bring to the company. In short, active family members must prepare scenario analysis covering the worst- and best-case situations.
4. Planning It is important to specify the areas of intervention needed by looking at facts and figures and explaining what the immediate measures are necessary. This is the time for family members to contribute creative ways in mitigating the impact. A good example is for the family to discuss debt mitigating measures, cash flow management including austerity initiatives.
5. Profit and loss The company’s financial and cash position is the best source for objective decision-making, and transparency is key in having family members buy into the importance of addressing mounting expenses covering employee salaries, supplier credits, loans and expenses for the family.
6. Cooperation With recession looming in the horizon and sales struggling, the leader should open the floor for suggestions with regard to the kind of changes that are needed, and why there is a need to change. Discuss the pros and cons of every possible initiative. Because of the urgency, it is important that all family members cooperate, as they may have better ideas in navigating through rough patches.
7. Clarity of roles It is also equally important to identify the roles, scope of responsibilities and capabilities of each family member that will be affected by the change. There is no doubt that change will impact everyone. Therefore, each one must be able to understand how the change would directly or indirectly affect their positions inside and outside the business.
8. Decision policy The family must agree on how they intend to push for these major changes. A decision-making process must be formulated. Should the decision be based on voting (when the children are adults and actively working), or by the founder’s command, or the department heads’ recommendations? Should it require the majority votes of the family members or can it be relegated to the active family members via a Business Council?
9. Governance For big businesses, it is usually the Board of Directors that assumes the lead fiduciary role in managing the risks. For example, if the family business needs to cut back on operations, close some branches, or reduce manpower, any of these sensitive decisions can be made, for as long as there are agreed-upon family business policies.
10. Skills With uncertainty comes anxiety. It is wise to develop the skills of the family members through training and planning. Training is highly significant during the change process as it would psychologically, emotionally, physically, intellectually, and socially prepare family members to navigate the crisis effectively.
The severity of the COVID-19 pandemic is by far the biggest challenge for businesses big and small. Making irrational decisions can make or break the family and the business. Therefore it is important to keep in mind that this shocking event will all come to an end. How your family and the business emerge out of all this uncertainty will genuinely reflect just how well you were able to respond to such global crisis. INQ
The author is Executive Director of the Wong + Bernstein Group, an Asia Pacific based Strategic Advisory firm that specializes on Family Governance,
Succession and Next Generation Leadership.