Tough economic times put family businesses to the test C

By Mark Green and Amy Schuman

D ECENTLY, a good friend confidl\ed in me that she's been waking up in the middle of the night worried about the economy and its effect on her family and business. She's not alone.

Business-owning families across the country are concerned about the economic slowdown. For many, the demands and tensions of tough economic times highlight even more clearly the need for trust and open communication between family members. These demands and tensions also emphasize the need for economic discipline, clear policies, and well-established systems of family and business govefnance.

Over the last 15 years of economic prosperity, the financial success of many family businesses has spawned a number of bad habits. A recent meeting I had with a client led to a discussion of the economic outlook in his industry-rising fuel costs together with a more competitive landscape have led to a shrinking bottom line. The natural tendency in tough economic times is to cut costs and consider letting some employees go. Upon further discussion with my client, it became clear that the family members management positions were reacting to the pressures without a clear understanding of the true cause of their financial troubles or the likely financial impact of their decisions.

I asked the founder of the business how he ran the business seven years ago, when it was growing rapidly. As expected, I heard that there were resular weekly meetings that included a review of the financials, in-depth analysis of budgets, revenue, and cost trends. My client admitted that as the business grew and profitability exploded, the budget process became less disciplined. Weekly meetings became monthly meetings, and then disappeared altogether. Further discussion also revealed that family tensions were ignored as the business grew and bank accounts expanded.

Suppression of family conflict did not resolve it, but only made it more deep-seated. This lack of financial discipline, combined with increasing tension in the family and a shrinking bottom line, were leading to a real challenge. Beyond economic discipline, families must have the discipline to stick to their policies and succession plans. Families can avoid creating additional tension at an already challenging time by enforcing discipline in all areas of family business planning.

Managing the intersection of the three systems present in a family business-familv. business. and owner- ship-is a key to family business success. Tough economic times create stress across the system. Business performance may suffer and tough decisions need to be made. Family conflicts, which are easy to ignore when the return from the business is good, rise to the surface during an economic downturn. Family members not in the business may blame those who are for not addressing financial problems sooner. Owners must deal with the possibility of cutting back on distributions or possibly even selling the busiNESS.

The tendency is to ignore policies and processes when times get tough. However, a sound family business infrastructure is even more crucial in tough economic times. But there does need to be some flexibility in policies and processes to address unforeseen challenges. Families must consider the long-term implications of breaking rules they originally made in the best interest of the business and family. Here are some tips for addressing a downtown:

Build or return to sound business management practices.

Tracking and enforcing responsibility for financial results is important in good economic times, but it is essential in a downturn. Creating a realistic budget to ensure that revenues will cover costs is also imperative. This exercise should consider what areas can be cut back if revenues shrink substantially. Once the budget is complete, create a process for tracking per- formance against the budget so that any changes in the environment faced by the business are identified quickly. Developing solutions in areas that are not tracking against the budget and then holding management accountable for delivering results (or alternative solutions if budget expectations are no longer realistic) are a natural outgrowth of the process. Last, but not least, it is critical in uncertain times to hold regular management meetings where the team can discuss changes in the business environment and also develop plans to address them.

Be prepared for lower distributions.

A business that has prospered over the years and always paid generous distributions or dividends to its shareholders may find it difficult to meet these payouts during challenging economic times. A family shareholder group that has taken the time and effort to learn about the business and the factors that make their dividends possible-rather than a shareholder group that has just accepted their dividend checks without any effort to understand what lies behind themwill be in a much better position to anticipate and adapt to changes in their dividends.

Stick to your employment policy. Many families require members of the next generation to work outside of the business for several years before they can work in the family business. However, when the economy slows and a well-paying, desirable job is tough to find, the family may be tempted to ignore its employment policy and hire young family members right out of college. The family may ask, "What good is having a business if we can't help the kids during tough times?" A valid question-but perhaps the members of the family would be wise to remember why they created the policy requirement in the first place. Most family members are able to make more significant and enduring contributions to their business after having a chance to learn in other work settings. Just because it's very difficult to find work, is that requirement no Ionger relevant?

Rather than simply ignoring the established policy, a family must seek ways to help young, inexperienced family members without abandoning its stated policy. There are many ways to accomplish this, and each family will find its own way. For example, the family business can help family members with resume development, interview preparation, or even introductions to possible employers.

Honor the succession plan.

A father or grandfather who has turned management of the business over to members of the next generation is often tempted to jump back into action during tough times. The family may welcome and encourage their involvement because of Dad's or Grandpa's history of success under pressure. Will the family allow the current leadership to lead or will there be too much fear for the family to place its trust in the next generation's leaders?

An "either/or" solution is not the answer. Finding a way to access the wisdom of the senior generation without cutting off the junior generation will be imperative. Combining the wisdom of the past with the talents of the present will be the key to success in these tough times.

A family's response to these economic times could be seen as a test of will and commitment. A family shareholder group may question policies and governance systems that were created during times of peace, calm, and even prosperity. Will the family stick with its policies, even if individual or collective suffering results in the short term? What will take precedence: the needs of the business, or the needs of the brother who requires his dividends for a mortgage payment or the sister whose daughter needs ajob?

All systems will begin to fray or fracture at their weakest point when the going gets rough and pressure starts to build. A family system is no different. Many family businesses are seeing and feeling more than a few cracks in response to increased economic pressure. By returning to the tried and true-strong governance, agreed-upon policies, family education-families can use the challenges of these tough times to become even stronger and more unified.

- Mark Green is an associate of the Family Business ConsuLting Group, Marietta, Ga. He can be reached at (800) 5 5 I -063 3 or green@ efamilybusinesscom. Amy Schuman is a principal of the firm and can be reached at (800) 551-0633 or s c human@ efamilybus ine s s.c om.

Reprinted with permission from The Family Business Advisor, a copyrighted publication of Family Enterprise Publishers. No portion of this article ma1, be reproduced without permission of Family Enterprise Publishers.