We are not about to predict when the pandemic will end. However, we are confident that it will end. And we do know that it is closer to being over today than it has ever been.
Two recent articles have reminded us that it is not too early to begin thinking about what the eventual end of the pandemic will mean for your family business.
- The first, entitled “More Wealthy Families Are Throwing a Lifeline to Distressed Businesses,” appeared in the New York Times a few weeks ago. Direct investment in businesses has been an emerging theme in the family office space since the end of the last recession, and according to the article, the trend is only accelerating in the current financial crisis. With public markets back at – or even above – pre-pandemic levels, patient families are seeking out the potential for more attractive long-term returns by providing capital to private companies that need a financial lifeline through the recession. Since many enterprising families possess unique industry expertise and insight, they may be better equipped to separate the wheat from the chaff when evaluating investment opportunities.
- The second, from the global accounting firm PWC, summarizes the results of a survey of 18 family offices: “Gauging the Deals Outlook for Family Offices.” According to PWC, nearly all family offices they spoke with are planning to make a strategic acquisition over the coming year, while only one-third plan to be sellers during that period. Of note in the article is the emphasis on proper and thorough due diligence processes for acquisitive families.
1) Positioning Ownership
Ownership is the ultimate “given” in family businesses. When did you as a board last review your family business’s shareholder list? If you were starting from scratch, which shareholders would promote your family business thriving over the next 10-20 years? If there is a difference between your “actual” and “ideal” shareholder lists? This is a uniquely favorable time to engage in intra-family transactions to get closer to the ideal ownership structure. The fair market value of ownership interests is depressed for many businesses, interest rates are at historical lows, and lifetime exemption levels and gift tax rates are relatively favorable. In short, this is a great time to ensure that the ownership of your family business is oriented toward tomorrow, not yesterday. Don’t miss it.
See our posts on the topic:
2) Evaluating Capital Needs and Sources
Family businesses have been very diligent in short-term cash and working capital management through the pandemic. But what about the longer-term? How much availability do you have on existing credit facilities? Are existing facilities sufficient for likely post-pandemic needs? Are family shareholders willing to provide additional equity capital to the business, either through direct contributions or temporary distribution cuts? Are there non-traditional financing sources that could be advantageous, such as joint ventures or similar structures? As noted in the two articles linked at the beginning of this post, disillusionment with the public markets could begin to open up new sources of competitively priced long-term capital for family businesses. The sources and structures may not be traditional, but as more investors look to put capital to work, opportunities for favorable access to long-term capital are likely to emerge for families that have a plan for how to put it to work.
3) Rebalancing Your Portfolio
If you were unburdened by your family business’s existing portfolio of operating assets, what would you want to own today? Are there legacy assets that are no longer a good “fit” with your family business? Are there other investors to whom such assets are more valuable? If so, do you have a plan for monetizing that incremental value? Conversely, is your family business puzzle missing some pieces that would make for a prettier picture? Like the family offices discussed above, are you evaluating investment opportunities that are either currently available, or likely to become available over the next 6 to 12 months? The dislocations triggered by the pandemic will result in attractive investment opportunities for family businesses that have their eyes open. Having a clearly defined hurdle rate, investment criteria, and due diligence processes in place is essential to ensuring that such acquisitions are productive uses of family capital.
4) Selecting a New Destination
Our GPS navigation systems are amazing. But when you get in the car, it can still be a bit cumbersome to input the address for a new destination; it is much easier to scroll through the list of previous destinations. But if you’ve never been where you want to go before, selecting one of the previous destinations saved to your system won’t cut it. The Great Disruption of 2020 provides a natural opportunity for you and your fellow directors to re-evaluate just where it is your family business needs to be going. What will the long-term ramifications of the pandemic be for your segment of the market? How will you need to change your interactions with suppliers, customers, competitors, and regulators? Are there secular trends that you can get in front of, and use to enhance the long-term sustainability of your family business? This is not the time to default to previous destinations. Selecting a new destination may be just what your family business needs for it to continue serving the needs of your family for generations to come.
Family directors have rightly been focused on keeping their people safe and healthy, and taking the steps necessary to help their businesses survive the pandemic. It will eventually be time to look ahead, however. When that time comes for your family business, what will you be thinking about? Contact one of our family business professionals today to help kick-start that conversation.
